How to Buy an Apartment Complex: Multifamily Acquisition 101

By Published On: November 4, 202210.6 min read

There are many financial and tax benefits to investing in an apartment complex, often marketed as an “apartment community.” An understanding of the different types of apartment complexes on the market, as well as some key questions to consider, will help position an investor for a successful acquisition process.

This article covers the advantages and disadvantages of investing in an apartment complex, a guide to the process, and the questions you can ask to better prepare for your search.

Why Invest in an Apartment Complex?

Multifamily, which primarily consists of apartment complexes, is traditionally considered one of the safest real estate asset classes. “Multifamily has proven to be a very strong investment over time. People will always need a place to live, and especially in these past three years, it has been a very good investment,” Uri Pearl, a Financing Expert at Lev, explained. While other asset classes have been riskier during the pandemic, including offices and retail, multifamily has remained a reliable investment. “So even the biggest landlords in the world like Blackstone are investing heavily in apartment buildings,” he added.

Brian Boyd, Owner and Managing Attorney at Boyd & Wills, PLLC added that part of what makes these investments so stable is that, “tenants tend to rent for years at a time. Rents tend to be stable and tenants pay regularly.”

The pandemic has also solidified multifamily as a stable asset class, as more people are renting for longer. Multifamily occupancy is expected to remain above 95% for the foreseeable future, according to CBRE. Meanwhile, as more people are working from home, office spaces have decreased in occupancy.

There’s another big advantage to apartment complexes: many tenants as opposed to only one or a handful decreases the risk a landlord is taking compared to other types of commercial real estate investments. “To give you an example, a retail property might have only one or two tenants, but if they leave, you’re stuck with nothing. Whereas an apartment building has multiple tenants. People always need a place to live,” Pearl explained.

The process of securing a tenant for residential property is also a lot faster and easier than securing other kinds of CRE tenants, such as an office or retail tenant where the process is more complex, time-consuming and typically involves negotiations and landlord spending on tenant improvements. Apartment leases are typically standard and straightforward, and apartments are often leased in a single day.

Potential Disadvantages of Investing in an Apartment Complex

There are also disadvantages to investing in an apartment complex that should be considered. Purchasing only one apartment complex will mean an investor will not have a diversity of asset classes or properties. If a neighborhood eventually becomes undesirable, it may become difficult to secure tenants for the apartment complex and rents will suffer.

Apartment complexes also come with higher maintenance costs compared with other property types, and these are paid entirely by the landlord. “The maintenance tends to be multiplied since each unit usually has its own air conditioner and appliances,” Boyd explained.

Managing an apartment complex requires more time and is not as passive as other types of CRE properties such as those with NNN leases. Even with a property manager, a landlord will still need to keep track of and oversee the property manager, as well approve unexpected expenses and changes in rental rates.

How Much Does It Cost to Buy an Apartment Complex?

There is no one-size-fits-all answer to how much it costs to buy an apartment complex. The cost will vary depending on the location, the number of apartment units and the quality of the building (whether it’s Class A, Class B or Class C).

According to Reonomy, the average sold price of an apartment building across the U.S. in 2021-2022 was $1,580,091. The median sale price was $238,400.

Types of Apartment Complexes

Multi-story apartment buildings have between five units and thousands. For example, this seven-unit apartment in Brooklyn, NY is four stories tall, 6,880 square feet and had a 100% occupancy rate at the time of our reporting.

Le Lignon in Vernier, a suburb of Geneva, Switzerland, is one of the largest apartment complexes in the world, containing 2,780 units.

Garden-style apartment communities are a growing trend across suburbs of the United States. They are apartment complexes that are spread out and usually not more than three stories high with shared courtyards and amenities like a pool.

How to Buy an Apartment Complex

Buying an apartment complex requires research, patience, diligence and financing. We’ve broken down the basic steps below.

Determine What You’re Looking For, and Your Budget

Before turning to online listings or trying to locate the perfect property, the first step is to determine the budget, what type of apartment complex you are looking for and the desired condition. Are renovations welcome, or should the property be stabilized? Do you want to fix and flip, or settle in for long-term income?

Research Potential Markets

Once an investor knows what they are looking for, they’ll be able to research potential markets.

The markets an investor searches for may also depend on the level of experience they have.

“For more experienced landlords who already have many assets under management, and have established a management company they work with, it’s much easier to buy out of their footprint to a place that they can’t easily get to,” Pearl explained. “For a first-time or an early buyer that has a little less experience, I would definitely recommend and suggest that they buy within a two to three-hour drive.”

It’s helpful to be able to get to the property easily when issues come up. “With your first property, there’s always going to be issues no matter what,” he added.

Find the Property

Once you have narrowed down the budget, size of the property and location, the next step is to start searching listings. LoopNet.com and Crexi.com are two websites with CRE listings. “These platforms are easily searchable and allow the user to put specific criteria into the search parameters to help narrow the results,” Boyd said.

An investment sales commercial real estate broker may also be helpful in finding a good deal, as they are often aware of listings that are not publicly available. Generally, the best deals will not be posted on the market.

“Off-market properties have the potential to be much better deals, but they require a lot more effort, research and persistence to find,” Boyd explained. “You would scope out the market you are interested in and if you find a property that you’re interested in, find the owner of the property and reach out to them directly.”

Of course, this approach will take patience. There is no guarantee the owner is selling, but many persistent investors do eventually have luck with this method. Forming relationships with landlords and agents will go a long way in eventually finding the right property.

Read our guide on how to find who owns a property to contact a landlord.

For First-Time Buyers: Create a Legal Entity to Hold the Property and Shield You From Liability

If you are a first-time buyer, you will need to establish the legal entities necessary to acquire a commercial property and protect yourself from liability. This step will require hiring an attorney.

Most CRE lawyers will recommend that you allow them to create a limited liability corporation (LLC) for you, and you might also need an LLC for the property itself. As the name declares, LLCs limit liability of your personal assets during many – but not all – worst-case scenarios, including the investment failing. It is relatively quick to set up an LLC with a lawyer, so you can wait until you find a property you are interested in purchasing. However, it’s important to note that lenders requiring a personal guarantee leaves your personal assets at risk regardless of whether you have an LLC set up.

If the acquisition is a joint venture (JV), attorneys will usually advise your business partner to have an LLC as well.

Research and Inspections of the Potential Property

Finding a property you are interested in is only part of the equation. The other part is to make sure it is a solid investment and a profitable one.

“It is critical to run the financials on the property to determine if the property will cash flow,” Boyd advised. “This is achieved by reviewing existing leases, rent rolls, maintenance reports, tax reports, and learning about other costs such as tenant paid utilities and landlord paid utilities.”

Speaking to the property manager will also help to learn more about the day-to-day issues of a property.

Read more about how to evaluate a rent roll of a property

Send a Letter of Intent (LOI)

Once you have found a property you want to purchase and that checks the boxes for initial research, the next step is to send a letter of intent to the owner. This is especially the case when working with an investment sales broker and exploring properties that aren’t listed on public websites. An investment sales broker should be willing to perform this task for you.

An LOI is a legal document, but it doesn’t bind you to a sale. It’s not the same as a purchase agreement. As the name suggests, an LOI is simply a method of showing the seller you are serious about considering a purchase and want to negotiate the business terms of a purchase

If you are attempting to buy the property for less than what it is listed for, your LOI may also function as a bid. Expect the seller or investment sales broker to return with a yes, no or counteroffer.

Finalize a Purchase and Sale Agreement (PSA)

If your LOI is approved, the next step is to send a PSA to the seller, which is a formal document typically prepared by the buyer’s real estate attorney who finalizes the deal. This document will include specifics like how much time the buyer has to complete inspections and a deposit amount as well as legal points such as representations and warranties. A seller will often negotiate changes before signing a PSA..

Conduct Inspections of The Property

The buyer will have a certain amount of time to complete inspections agreed upon in the PSA. The due diligence period is typically between 30 and 90 days. During this time, the buyer will be able to perform inspections and make sure everything the seller said about the property is true.

This is the time to order third-party diligence reports, including an appraisal of the property and a Phase I environmental report. You will also need to obtain a title commitment, and sometimes additional reports such as an updated survey and a physical condition assessment.

Secure Financing

Once the PSA is signed by buyer and seller, the next step is to secure financing (unless you are paying in cash). “It is advisable to meet with a banker to discuss the financial products available to investors for financing multifamily real estate. Understanding how banks finance commercial real estate is necessary to the investment’s viability,” Boyd said.

A mortgage broker will be able to help navigate the different financing options available and determine the best fit. The process of securing financing typically takes 45 to 90 days.

A broker will speak with a variety of lenders on your behalf, coordinate due diligence requests and present a term sheet for your approval. Once you’ve agreed upon a proposal, the lender will secure credit approval for the loan and issue loan documents.

Closing Day

The purchase will become fully finalized on closing day, when you will officially be the new owner of the property. A flurry of documents will need to be compiled, signed and scanned or sent to the lender and title company — ideally a day or two in advance. The title company will provide a settlement statement for all parties to agree upon, reflecting the movement of all funds at closing.

Typical items include:

  • the purchase price (less any deposits received)
  • prorations for taxes
  • rents
  • and perhaps other items:
    • lender charges
    • any invoices needing to be paid such as legal bills or third-party reports

Review the settlement statement carefully to ensure all items are properly reflected and any charges to be split between buyer and seller are as agreed.

Buying an Apartment Complex Can be a Profitable and Secure Investment Opportunity

Among commercial real estate properties, apartment complexes offer many advantages. In addition to being part of a stable asset class, they also reduce the risk for the landlord by diversifying income sources from multiple tenants. For investors with patience and time, finding an off-market apartment complex may be worth the effort to achieve higher returns.

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