Is Buying an Apartment Complex a Good Investment?

Buying apartment complexes has allowed several real estate investors to enhance their fortunes dramatically over the previous century. But, before becoming great investors, they were all novices looking to buy their first multifamily home. This essay is a wonderful place to start if you wish to follow in their footsteps and buy your own apartment complex. We'll walk you through the fundamentals of apartment investment and teach you all you need to know to get started. Of course, when it comes to multifamily real estate investing, information is power, so don't rely solely on this article; rather, use it as a starting point for your study.

Is Buying an Apartment Complex a Good Investment?

It's critical to weigh the pros and cons of investing in multifamily properties when considering whether to buy an apartment complex (and which type to buy). While we'll go over the benefits and drawbacks in a standard pros and cons format, it's also possible to look at apartment investment through a different lens, examining the risks, benefits, and time commitment required. To put apartment investing into perspective, it should be compared to other types of investments, such as stock in a well-known corporation.

For example, if we compare buying a 10-unit apartment complex for $2 million to buying stock in a blue chip firm for $2 million, we can safely assume that buying the building will need more effort and potentially greater risk. However, due to the fact that most apartment complexes are purchased with loans, there is the opportunity to make a big profit. Instead of spending $2 million on a similar apartment complex, an investor could put it toward a 25 percent down payment on a $8 million apartment complex.

Apartment Investing Strategies and Holding Periods 

It's critical to figure just how long you expect to keep a multifamily property when you buy it. Investors in commercial and multifamily properties typically pick between two strategies: a short-term value-add/fix-and-flip plan or a longer-term buy-and-hold plan. Short-term investors often hope to purchase a property, make modifications and adjustments that will boost the property's net operating income (NOI), and then resell the property for a profit within 1-5 years. Buy and hold investors, on the other hand, often intend to keep the property for the long term, perhaps 20-30 years, while benefiting from the annual income it generates. They may then sell the property or, in some situations, pass it on to their children.

While the length of a projected holding time may vary depending on investor preferences or market conditions, it's still critical to develop a strong strategy before investing. Prepayment penalties (fees for paying off your loan early) and whether to take out a fixed-rate, adjustable-rate, or hybrid adjustable-rate loan must be considered by investors who know they'll only be holding on a property for a short period of time. Long-term buy-and-hold investors, on the other hand, may be less concerned about prepayment penalties and, if possible, will seek longer-term fixed-rate loans.

Though both short- and long-term holding periods can be advantageous, if you're investing with one or more partners, be sure everyone agrees on when the property should be sold. For example, an investor who wants to flip a house in 18 months shouldn't invest with a partner who wants their interest in the property to be passed down to their grandkids.

Investing Near Your Home

While buying a multifamily property near your current home isn't always the best decision, there are certain advantages to doing so. For one thing, you're probably already familiar with the local market, so you may know something that other investors don't, giving you a leg up. Furthermore, if you live nearby, it is easier to check your property in person, making things more convenient, especially if you conduct your own property management.

Finding a Commercial Real Estate Broker

This is especially true for multifamily loans from Freddie Mac, Fannie Mae, and HUD, as these loans typically require more documentation and an application process. Debt advice firms often charge 0.75 percent to 2% of the overall loan amount, which may appear high at first but, in our experience, is a good investment. Of course, we do it for a living, so we may be biased, but securing the appropriate loan can save you a lot of money in interest payments, prepayment penalties, refinancing expenses, and other expenses over the duration of your investment.

Qualifying for a Multifamily Loan

As previously stated, the great majority of apartment complexes are purchased using borrowed funds. Debt raises leverage, which means that the less money you put down, the more relative profit you'll make. Consider this: would you rather put down $4 and receive $8 in return, or would you rather put down $1 and receive the same $8 in return? The second choice is preferred by most savvy investors because it allows them to reinvest the remaining $3 in similarly successful ventures. While interest and fees can make apartment loans pricey (meaning your $8 could be closer to $6.50), the appropriate loan might allow investors to earn from a property tenfold more.

However, you must first be accepted for a multifamily loan. Various lenders and loan types have different approval standards, but in general, applicants will require good credit (660+ is best) and a down payment of 25-30% of the overall loan amount. In addition, the property's debt service coverage ratio, or DSCR, must be between 1.25 and 1.30x. This means that the building's revenues must be at least 25-30% more than its annual debt payments.

Recourse vs. Non-Recourse Apartment Loans

It's critical to ascertain if a loan is recourse or non-recourse before moving on to individual loan categories. If a loan involves recourse, the lender has the right to seize your personal property in order to collect on an outstanding obligation. Home mortgages, for example, are entirely recourse in most states. Many commercial real estate loans, on the other hand, are non-recourse, meaning that the lender can only repossess the loan's specific collateral (such as an apartment building) and cannot pursue a borrower's personal assets, such as their home or car, to repay the obligation.

Almost all non-recourse loans, however, include conventional "bad boy" carve outs, which state that if a borrower engages in particular "bad boy" behavior, such as purposefully misleading the lender, the loan will become a full-recourse financial instrument.