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How to Buy an Apartment Building

by Ted Karsch on August 5, 2008 · 9 comments

  

With the US Dollar falling and rising inflation many individual investors are looking for alternative methods to preserve and grow their capital. Apartment buildings are starting to receive a lot of interest from many investors who have little or no experience in the world of commercial real estate. Investors are now attracted to apartment building investments because of their relative security, positive cash flow and growth potential. These new investors are hungry to learn how to buy an apartment building. However, the first time buyer should do his necessary homework before actually investing his hard earned money in a multifamily property.

The last thing a new investor should do is to buy the first apartment building deal that comes across his table. In fact, in my role as a commercial property finance consultant, as soon as I hear that the investor I am speaking with has never bought or managed a multifamily building previously AND that this is the first deal that he or she has ever looked it, then I know immediately that it is a deal that will never get done. I don’t even have to look at the rent rolls or the income and expense statements. To many readers this may sound cynical or brash but it is simply the truth. And it has nothing to do with the intelligence of the investor it just simply has to do with the fact that banks will not lend money on an apartment building that is not or will not soon become profitable.

Many beginner commercial real estate buyers are under the assumption that they will somehow be able to convince their commercial mortgage broker and the commercial mortgage bank underwriters the property is such a great deal at the purchase price because there is a new mall scheduled to be opened down the street or that the neighborhood is undergoing revitalization or because a big employer is moving into the city. All of this may be true but a bank will not generally lend money on an apartment building unless it is already profitable and the bank will usually want to see at least a 20% down payment. And I don’t blame beginning investors for believing what they do. Many real estate agents and property owners will say just about anything to get a building sold. The job of the real estate agent and the property owner is to get the property sold for the most amount of money that the market will bear.

The first time apartment building buyer needs to be aware of the fact that the real estate agent selling the multifamily building represents the seller’s best interest and not his or hers. For this reason it is imperative for the first time investor to have as much education and knowledge going into the deal as possible. The first skill the buyer must have to separate the junk deals from the deals that will be profitable, cash flowing apartment buildings. He or she should begin by taking all or some of the steps below:

  • Get a book education first. Learn about the industry and terminology by reading many commercial real estate investment books Stay away from the books that over promise and under deliver. It if seems to easy to be true then you know that it is.
  • Develop your analytical skills. You need to be concentrating on Debt Service Coverage Ratios, CAP rates and Internal Rates of Return. You don’t want to be thinking emotionally about the investment. This does not mean that you should eschew creative financing and acquisition strategies. It just means that these strategies and methods should be firmly based and tested in the real world.

  • Network and forge relationships with commercial real estate professionals and investors. Every major metropolitan area has at least one very active real estate investment club.
  • Build a “master mind” team of advisers that will help you evaluate your investment decisions. This team could include attorneys, accountants, appraisers, realtors, mortgage brokers, business men and other entrepreneurs.
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{ 9 comments… read them below or add one }

Ryan Waggoner August 6, 2008 at 6:24 am

I guess the main question that I have regarding this is whether it’s feasible to purchase an apartment building with some kind of creative financing. Specifically, something like a 80/15/5 deal or something, where the seller carries back a second.

My situation is that I have a small portfolio of residential properties with great performance, but my equity is tied up in those properties and now is a good time to be buying, not selling. I really want to buy something larger, but is the bank going to allow something like the situation above, assuming the numbers are solid?

I see a lot of stuff about reading (I have), assembling a great team (I am), but I see less about coming up with $160k to put 20% down on an $800k apartment building. How can you get around that?

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Trevor Mauch August 6, 2008 at 5:00 pm

Hey Ted,

Great article. Completely true… I used to work in commercial lending and many buyers come in with grand thoughts on how the financing works. Banks like to see buyers with “skin in the deal” and will require some kind of money down.

But…

That’s when you’re buying using regular bank financing… and bank financing is only one way to buy an apartment building.

Ryan, I bought my first apartment building when I was 21 (I’m 26 now) with only about $500 bucks out of my own pocket… had the owner carry back almost the entire note (I borrowed another $10k from a private lender).

So… yes there are creative ways to buy property… especially when the seller is at or nearing retirement age and doesn’t want to manage properties anymore… and wants a tax deferred stream of income.

Find sellers who have owned the property for more than 10 years, talk to them, make them feel comfortable that you can and will repay the note, and structure a seller carry that works for both of you.

With all of these baby boomers selling nowadays… there are all kinds of deals like this on the market (believe me… I see them weekly).

Good luck… and great article Ted!

Cheers,

Trevor
Trevor Mauch

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Farok December 31, 2009 at 9:54 am

You say that you meet sellers quite often who are willing to carry, I am finding out that sellers are reluctant to carry at the properties that I am looking at with a good cash flow.

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cedar city real estate August 7, 2008 at 1:18 pm

I agree with developing your analytical tools. Knowing how to analyze good deals in real estate is essential, especially with commercial real estate.

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Commercial Mortgage Loans - MasterPlan Capital LLC - Glenn August 7, 2008 at 9:51 pm

In this market it is very hard to find a bargain or even a good deal on an apartment building that has positive cash flow. Smart property owner are not selling profit making buildings into a weak market. Why would they?

Virtually all my loans in the multi-family space are refinancing today. It’s just very tough to make the numbers work on purchase loans in this environment.

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Michael September 25, 2009 at 2:58 pm

I am 26 with perfect credit. I have a grandfather that is willing to loan me 200k to put as a down on an apartment building. I am hoping to buy in orange county and was wondering where do I start looking. Is there a good site with good listings?

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Nate November 9, 2009 at 11:11 am

Michael – A good website for locating apartment buildings in Orange County (and elsewhere in the US) is loopnet.com. Also, I would highly recommend partnering with a local commercial broker; my recommendation is Pat Swanson w/ Colliers (email: [email protected]). Pat is extremely professional and will work very hard to produce results for you. A lot of the properties he found for me weren’t listed on any website.

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James Gray April 19, 2010 at 1:32 pm

hey folks my story is i grew up poor my whole life i’m also only 20 years of age i saved up 10 grand to finally move out on my own working at mcdonalds instead of moving out on my own losing money everymonth and living in a aprtment i thought maybe i could buy my own apartment but how ? i dont wanna be poor my whole life and my goal in life is to be rich but how should i approach my next step in life like the author from poor dad rich dad says you need to buy assets for generating income each month how can i get that with only 10 grand saved up ?
.-= James Gray ´s last blog ..By: Farok =-.

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Angelo Evangelatos September 9, 2012 at 12:49 pm

Hi,

I’m 22 and have been carefully scrutinizing my credit for the last three years since I began venturing in the credit world. I am also saving to be able to put my down payment on my first building in the next few years after I graduate. I will most likely partner up with my landlord who has seen me grow up and owns 12 buildings; he recently said that he will help me get started and co-sign.

I would like to not go into this business blindly and would like to ask for two bits of information: first, a few websites that listproperties in Los Angeles that get listed, and second a list of titles for the most recommended books (your recommendations) on learning the lingo and mathematical basics of the industry. This would be great homework for me for the next few years!

Thank you in advance.

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