Can you just buy a $1m apartment building?
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Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
2yYes, I went from two flips and two duplexes to a 30-unit community and the later is so much easier. Getting one unit at a time was not going to meet my goals.
25 Replies
- Member since 2023 · 158 posts · 96 votes2y
The cap rate is your key initial indicator for "profit" but when you evaluate properties, bear in mind that many times the current expenses are inaccurate for a variety of reasons, the most likely of which is deferred maintenance which will come back to bite you later. You'll find that landlords play all kinds of tricks to ask top dollar for the property.
Unless you have the capital to cover those unforeseen expenses, your best bet, as a new investor, is to buy a new property. Although, those will likely have much lower cap rates, and for reason, they have very low maintenance which makes them more predictable investments. Couple that with solid tenants and you have a winning formula. Although, you can expect for the investment to pay for itself in about 10 years vs 5.
Once you have some cash reserves and feel a little more confident in your abilities, then go looking for higher cap rate properties that will provide a higher return. I have a good friend who's turning millions a year in fixer apartments, nationwide. He has a formula that works and just applies it to properties that meet his criteria. Once you have some experience, you can use the same approach, if you wish.
Good luck on your journey.
Cheers
- 2yBjorn AhlbladPro MemberInvestor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
If you know how to underwrite and the numbers work you can. Don't worry about cap rates-provided you know how the numbers work. All the best!!
- 2yLogan LaperriereBusiness MemberReal Estate Agent · Grand Rapids, MI · Member since 2023 · 333 posts · 124 votes
Quote from @Joe Carr:
So hypothetically if you had the money for a down payment of 25% on a $1m apartment building. Which is $250k. Say it has 15 units, and makes $1k/unit. Could you just straight up invest in an apartment building? And skip having to look through tons of houses all the time sorting through hundreds of houses for 10 years and ending up with 15 individual houses that might make you $500/unit. I set up a google spreadsheet and a website that shows apartment buildings for sale. I’m just calculating the simples parts of it, total cost, down payment cost, #units, unit income, and amount of time to pay off down payment and pay off the whole building. I’ve looked at three buildings so far, they they usually take 17 months to payoff the downpayment, and 5~ years to pay the whole thing off. I’m just wondering if there’s any error in my thought to this.
Yes, you can buy a $1,000,000 property for your first investment. Investors tend to start out with smaller deals because they either want to gain knowledge and experience, or they lack the capital for a larger deal. Keep in mind that the taxes becoming uncapped will have a large effect on your numbers if the property was purchased previously at a much lower price.
As others have said, investors tend to make their numbers look great when it is time to sell a property. Look for deferred maintenance, accurate vacancy rates, taxes, and maintenance/cap ex. just to name a few. I would recommend continuing to educate yourself on the local market prior to your first property acquisition. If you choose to purchase a 15 unit property for your first deal work with a knowledgeable Realtor, and have a property management company manage the property for you. Good luck with your investing journey!
Sure you can. Its just more/different stuff to learn about / manage. Have you figured out your financing? You can't use a conforming residential loan since its over 4 units so its not residential. Usually commercial financing may have a 30yr amortization, but a 5 year term. You going to be good 5 years to qualify for a new loan? There are 30/30 loans out there I hear now, however...
Watch out for your capex. It much bigger generally. Thats a lot more parking lot to repave as opposed to a small driveway. Roof? or roofs? What are the condition of how many water heaters and/or hvac systems? Is there an elevator that has to be certified annually? What about the fire suppression system? Fire alarms? Since its commercial, what other building codes / inspections do you have to deal with? Trash disposal?
I haven't done commercial. So, maybe I'm just fear mongering. Its just a different class of investment.
- Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes2y
Yes, I went from two flips and two duplexes to a 30-unit community and the later is so much easier. Getting one unit at a time was not going to meet my goals.
If you found a million dollar 15 unit building that rents for $2,000/mo per unit ($360k/yr) and shows a profit of $180k/yr (it “makes” $1k per unit per month)) you should probably just buy it and relist it for $2M. That’s still a 9 cap and probably would be the cheapest building in any non-war zone neighborhood.
Most of the 4-plexes I see for sale are $600k+ and you’re lucky if they “make” $100/mo per unit, but most don’t.
You should definitely buy that building assuming it's not falling a part or in a war zone. Heck you could exchange the equity in 1 SFR for the downpayment on one or 2 of them. I'd buy 3 or 4 and call it a day. Job done. But if I could make a quick million flipping them I probably couldn't hold on very long.
But it will be a lot more work than SFR and if you ever want to sell it will be an all or nothing situation. You probably can't get 30 year fixed financing either.
Quote from @Bill B.:
If you found a million dollar 15 unit building that rents for $2,000/mo per unit ($360k/yr) and shows a profit of $180k/yr (it “makes” $1k per unit per month)) you should probably just buy it and relist it for $2M. That’s still a 9 cap and probably would be the cheapest building in any non-war zone neighborhood.
Most of the 4-plexes I see for sale are $600k+ and you’re lucky if they “make” $100/mo per unit, but most don’t.
You should definitely buy that building assuming it's not falling a part or in a war zone. Heck you could exchange the equity in 1 SFR for the downpayment on one or 2 of them. I'd buy 3 or 4 and call it a day. Job done. But if I could make a quick million flipping them I probably couldn't hold on very long.
But it will be a lot more work than SFR and if you ever want to sell it will be an all or nothing situation. You probably can't get 30 year fixed financing either.
well this is a hypothetical property. but it is very similar to the market im near, Lansing MI. and the avg rent cost is $1,101. how much is actually made from that after expenses? 50%?
Sorry, my mistake. You used the word "make" which to me means profit. If I ever said one of my SFR "makes" $1,800/mo I'd mean it rents for $2,200 and I have $400/mo in expenses.
If this building rents for $1,000/unit, that’s $15k/mo in income. $750k at 7% is a $5k payment with $4,400 in interest. So take $10k and subtract every expense you can think of and see if there’s anything left. I don’t know if there’s any truth to the 50% rule but if there is you should “make” $2,500/mo.
- 2yLogan LaperriereBusiness MemberReal Estate Agent · Grand Rapids, MI · Member since 2023 · 333 posts · 124 votes
Quote from @Bill B.:
Sorry, my mistake. You used the word "make" which to me means profit. If I ever said one of my SFR "makes" $1,800/mo I'd mean it rents for $2,200 and I have $400/mo in expenses.
If this building rents for $1,000/unit, that’s $15k/mo in income. $750k at 7% is a $5k payment with $4,400 in interest. So take $10k and subtract every expense you can think of and see if there’s anything left. I don’t know if there’s any truth to the 50% rule but if there is you should “make” $2,500/mo.
5k is about right for $750k principal and interest at 7%. Then deduct taxes, insurance, maintenance, cap ex, vacancy, utilities, trash, lawn/snow, etc. If you are able to "make" $2500 a month, $30k a year on a $250-300k investment is a pretty decent cash on cash return.
- 2yJoshua ChristensenPro MemberReal Estate Broker · Albuquerque, NM · Member since 2015 · 285 posts · 232 votesJoe, there are a lot of great comments in here. We had a 16 unit (recently sold) that was purchased in 19 for 925k. Close to what you're looking at. It took 15 months to break even monthly. Then we dealt with multiple vacancies and non payment issues. And ultimately after debt service it netted around 20-25k a year. We sold it in October on owner finance and now we clear just shy of 5k per month without mgnt heartache.
Quote from @Joe Carr:
So hypothetically if you had the money for a down payment of 25% on a $1m apartment building. Which is $250k. Say it has 15 units, and makes $1k/unit. Could you just straight up invest in an apartment building? And skip having to look through tons of houses all the time sorting through hundreds of houses for 10 years and ending up with 15 individual houses that might make you $500/unit. I set up a google spreadsheet and a website that shows apartment buildings for sale. I’m just calculating the simples parts of it, total cost, down payment cost, #units, unit income, and amount of time to pay off down payment and pay off the whole building. I’ve looked at three buildings so far, they they usually take 17 months to payoff the downpayment, and 5~ years to pay the whole thing off. I’m just wondering if there’s any error in my thought to this.
Im a fan of multifamily and you need to know your numbers and make sure you have solid reserves for CapEx and bad debt in the initial 12-18 months. You dont want to be in a situation that you cant cover the debt.
There are local lenders who will do 25 and 30 year loans on multifamily. You have to ask around, but we have seen them. Washington Federal has a 30 year option and a couple of our local credit unions as well on a deal this size.
They may ask for your experience. If this is your first, a local property manager will satisfy their experience requirements t at this level. - 2yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
I know what you're saying, I'd say do both. Start with a house hack and work to build a portfolio, while ALSO looking into apartment buildings.
Also - you said you don't want to "sort through hundreds of houses for 10 years and ending up with 15 individual houses that might make you $500/unit"
That's a killer portfolio - that's $7500 a month in net income. So there's nothing wrong with that.
The problem with buildings of ANY size is that the demand has pushed margins down - on single families and apartment buildings. So I'd get ready to put some real time and effort into it either way.
- 2yNicholas L.Pro MemberFlipper/Rehabber · Pittsburgh · Member since 2018 · 6k+ posts · 5k+ votes
did you partner on the 30-unit?
- Property Manager · Member since 2022 · 196 posts · 125 votes2y
Anything over 5+ units in a building is generally considered commercial residential at that point. This means that the lender/bank is going appraise and provide a loan based on the NOI of the property and not necessary the stated "value" of the asset from comps and so forth.
A 15 unit building with 50% vacancy and below market rents will be cheaper than the exact same building that has a 15% vacancy and has the rents at market rate.
You totally could jump right into bigger deals but you must keep this in mind. It depends on the strategy you want to deploy. However you could raise capital from investors for the downpayment on a building that has the value add opportunity. You then stabilize the asset. Do necessary repairs/updates. Fill vacancies. Increase rents to market rate. THEN approach a the lender and refinance your loan to cash out the added equity to recoup the initial investments and ideally some cash for you to repeat this process.
It's worth noting, the bigger the deal you take on at first you will be going through trial by fire. The caliber of investors, contractors, lenders, agents, and red tape you will work with will be much higher at that level. If you don't have the skillset to run the play then these people WILL run you over and take your lunch. It's very possible you just have to be self-aware to what your strengths and weaknesses are as you go through the process.
Also, as you take on bigger deals the network you use to execute the deal have less patience for you. They assume if you're swimming in that pond - that you do indeed know how to swim. They will be less tolerant of ignorance, errors made, and will not care if you don't know what you're doing.
Hypothetically you potentially could, if you can find a property that meets a lender's underwriting guidelines, and a lender willing to lend to someone without experience in that asset class. However 5+ units will be commercial and all of the commercial lenders I've worked with want to see experience on behalf of the operator, so you'd have to find a way around that. I went pretty quickly from a house-hack to a couple 4-unit buildings up to an 8 unit apartment building. You could perhaps find a lender that doesn't have the experience requirement (I don't know of any but they may exist), or partner with someone who has the experience to check that box.
But the underlying reason that lenders will require experience before financing a 5+ unit building is that they are more difficult to operate and higher risk, so don't overlook that. I ended up selling my 8 plex and reverting back to focusing on smaller buildings in better locations. Made a nice profit on it in the end, but the monthly cashflow returns I had anticipated were often hamstrung by tenant and capex issues, and the operating side was kind of a nightmare due to the location/ tenant base.
Also just FYI, most apartment buildings of that size in my market are requiring more than 25% down to qualify for financing currently, due to interest rates and tighter underwriting guidelines with lenders due to market conditions. Commercial lenders want to see the cap rate higher than the interest rate, which has been tricky in decent locations recently. Most MF deals I've been underwriting lately only pencil out to qualify for financing with 40-50% down, in my market at least.
- Rental Property Investor · Doylestown, PA · Member since 2008 · 1k+ posts · 1k+ votes2y
Starting out smaller is generally smarter as you don't have experience and every mistake you make is that much more expensive. I am a huge fan of bigger deals. The bigger the better. But you need to have deeper pockets. One of my properties needs a new rooftop HVAC. I'm looking at $80,000. I'm due for a parking lot resurface at another property. Last time I got a quote pre-2020 it was $40,000. Can't even imagine what the quote will be now! That being said, the rents coming in are a lot bigger too but once in a while something big comes up that you didn't have projected in CapEx and that's when you need to have the ability to access alternative funds temporarily. Line of credit....your own bank account, a refi of another property etc. But in the long run, bigger deals can get you to financial freedom much faster than the smaller deals. They both work but the smaller deals just take a longer time frame and more hours per week from you.
- 2yMichael SmytheBusiness MemberReal Estate Agent · Metro Detroit · Member since 2023 · 4k+ posts · 3k+ votes
Yes, but... (see all the other answers)
Logical Property Management4.9464 Reviews - Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes2y
Quote from @Nicholas L.:
did you partner on the 30-unit?
No partners. I used cash flow from flips, other properties, other investments, and W-2 savings for the down payment.
- 2yAlecia LovelessPro MemberMember since 2019 · 3k+ posts · 2k+ votes
@Joe Carr Hypothetically you could do this but it might not be the best option. After 3 years of small investing, 1-4 units I bought a mismanaged, poorly maintained 8 unit at a bargain price last April because I was aggressive and other buyers weren’t. The selling agent showed the property numerous times and then never officially listed it. After a month I had my buyers agent make an “off market” offer on it of the full price the buyers wanted which they snapped up. I suspect it would have sold for at least $200,000 more if the agent had gotten the listing done correctly.
I’ve had to put in a new heating system which by the time we’re done will be around $45,000. I do expect to recover this cost though because once it’s installed the tenants will begin paying for their own heat.
All in I’ve put in around $75,000 in cash after closing. However, the building is now worth close to $900,000 in value of more as opposed to what I paid for it which was half that.
If you can buy an apartment building for $1,000,000 with 15 units expect it to need work. Or to have really low rents somewhere that’s not appreciating much.
As you get more experienced in real estate you can learn to spot bargain properties that are truly a bargain and weed those out from the ones that are just going to be money pits. Starting out I’d recommend buying at least one solid investment property that you can learn from that doesn’t cost an arm and a leg to get into.
Your lender will dictate the amount of cash reserves you need, as well as cash for taxes, cash for insurance up front, cash for lender required fix ups to make the loan,
You will also have acquisition cost cash needs (for instance Inspection fees, contractor walk through fees, etc...) and your portion of the closing costs.
Because you are a newbie the lender may want 30% down.
You will also need operating capital to be a landlord. Unit turns, booting out non paying renters, accounting fees, legal fees, tax preparation fees, et cetera...
So against 1 million, 250,000 might be close, But your lender will ultimately be the dictator on many things cash related.
You might want to begin to explore lenders and see what type of interest rates they offer, if they have buy downs for rates, in other words how much cash will you need to do business with that lender to be able to close on the property of your dreams.
Good Luck!
- Rental Property Investor · south carolina and michigan · Member since 2023 · 348 posts · 226 votes2y
Lot of hypothetical here.
to build a property like your talking would be 2.25mm.
To buy one for a million seems like a falacy to me unless it is severely vacant and has a lot of issues.
In my opinion the 15 unit $1mm thats financial viable, occupied and has bankable acceptable repair reserves is like finding a unicorn.
of course these deals happen all the time but they are not long term gainers but typically get done with a 1031 investor.
Quote from @Nathan M kiefer:
Lot of hypothetical here.
to build a property like your talking would be 2.25mm.
To buy one for a million seems like a falacy to me unless it is severely vacant and has a lot of issues.
In my opinion the 15 unit $1mm thats financial viable, occupied and has bankable acceptable repair reserves is like finding a unicorn.
of course these deals happen all the time but they are not long term gainers but typically get done with a 1031 investor.
looking at listings for apartment building seems to avg $70k/unit. and the avg rent in the city is $1,101. one building i see is 14 units $30k/unit and looks find on the inside pictures. there could be units in really bad shape that their not showing. since theres only a few photos of the inside. but does $70k/unit align with $1,101 rent?
- Rental Property Investor · south carolina and michigan · Member since 2023 · 348 posts · 226 votes2y
we use $50k per thousand as a calculation so for us a unit that is $70k should rent for $1400 mo..
Quote from @Nathan M kiefer:
we use $50k per thousand as a calculation so for us a unit that is $70k should rent for $1400 mo..
ok so whats the falacy then?
- Rental Property Investor · south carolina and michigan · Member since 2023 · 348 posts · 226 votes2yAt 1100 rent v 1400 your 300k over value on 1mm???
Quote from @Joe Carr:
Quote from @Nathan M kiefer:
we use $50k per thousand as a calculation so for us a unit that is $70k should rent for $1400 mo..
ok so whats the falacy then?
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