How to Buy an Apartment Building

When many of us hear the words apartment building, several images come to mind. We think of the leasing office, leasing managers, floor plans, leasing contracts, rents, utilities, and noisy neighbors. Essentially, we think of an apartment building solely as a place to live in with rent payments due on the first of every month. However, if the words "buy an apartment building" were heard, most of us would run screaming in the opposite direction with frightening images of investment banks, attorneys, fair housing laws, lengthy sales contracts, million-dollar commercial loans, corporate entities, business taxes, shady tenants, hefty down payments, and lawsuits. As it is true that buying and owning an apartment building involves huge amounts of cash, hundreds of tenants, and property issues; it is not the nightmare that most of us imagine it be.

Difficulty:

Moderately Challenging

Instructions

Things You'll Need

• Financial calculator
• Note pad
• Clip board
• Laptop computer
• Cellphone

1. Master the recourse loan market to buy an apartment building

   Master Recourse Loan Financing - You must first master the recourse loan market before you venture to buy an apartment building (this will be discussed later). You can do this by attending commercial loan seminars in your local area. You can also talk to loan experts in the field who will be more than happy to share their knowledge. Buying an apartment building is essentially an easy task. There are no personal qualification requirements, no credit checks, and no prior experience needed to embark in this type of business venture. As far as the ownership is concerned, you don't have to chase after tenants for past due rent, get up in the middle of the night to fix toilets, or worry about filling a vacancy when one of your tenants moves out. There is always an onsite property management company that takes care of those issues for you. Your main obligation is to make sure that the management company takes care of your building. In the meantime, you earn lots of cash in both profits and interest; you have more free time to do other activities; and if the building collapse, you suffer no personal liability (provided your building is financed with a non-recourse loan).

2. Master the commercial analysis math formulas to buy an apartment building

   Master the Commercial Analysis Math Formulas - You will need to learn some basic strategies that will assist you in doing so successful. To begin, it will be extremely helpful to master the commercial analysis math formulas. You will need these formulas for all of your commercial real estate purchases whether they are office buildings, apartment buildings, warehouses, or self-storage units. The formulas are listed below.

   Annual Rents - Annual Expenses = Net Operating Income (NOI)
   Net Operating Income (NOI) / Purchase Price = CAP Rate
   Annual Rents - Annual Expenses - Annual Debt Service = Cash Flow
   Cash Flow / Down Payment = Cash-on-Cash Return
   Total Financial Benefits / Down Payment = Return-on-Investment (ROI)
   NOI (Sale Price by CAP Rate) + NOI (Value Lift by CAP Rate) / CAP Rate = NPV

   For more details about these formulas, feel free to read "How to Invest in Commercial Real Estate for Future Wealth and Security" in the resource section below. As a note, you can purchase commercial real estate property analyzers on the web that will do all of the computations for you.

3. Do a search to buy an apartment building

   Do an Apartment Building Search - You will need to do an apartment building search. There are several methods that you can use to search for apartment buildings nationwide. The first and probably the most effective is a web search. By typing in the words "apartment buildings for sale" on Google, you will find lots of sources for your apartment building search. Another good source might be your local newspaper under the real estate classified section. You may also try contacting real estate attorneys for information that they might have access to regarding such sales. Also, you might even consider using the services of a commercial real estate broker. They always have a good inventory of apartment buildings that are currently up for sale. However, keep in mind that if you decide to hire a broker, you will be required to pay sales commission at closing, which will decrease ultimately increase you cost.

4. Obtain financing to buy an apartment building

   Obtain Financing - You must get adequate financing to buy an apartment building. As was mentioned in an earlier section, the best loan for these types of purchases is called a non-recourse loan, also called non-recourse debt. A non-recourse loan is debt that is secured by a pledge of collateral (typically the property) but for which the borrower is not personally liable. If the borrower defaults, the lender can seize the collateral but the lender's recovery is limited to the collateral. Therefore, if you default on such a loan, the lender can take back the property but by law is not entitled to hold you personally liable for the outstanding loan balance. Non-recourse debt is typically used to finance commercial real estate and similar projects with high capital expenditures, long loan periods, and uncertain revenue streams; and is usually carried on a company's balance sheet as a liability, and the collateral is carried as an asset. Therefore, you would not be required to qualify by virtue of your income, credit worthiness, or personal references. However, any commercial property that is valued at less than $2.5M at purchase will not be eligible for non-recourse loan financing. This would then require you (the borrower) to personally qualify for a recourse loan.

5. Buy an apartment building as an investment

   Include Apartment Buildings in Your Investment Portfolio - You will want to add apartment buildings with your other financial investments. More people annually are beginning to look very closely at apartment buildings as a viable investment vehicle. It has created wealth for a host of individuals, and has helped them to become financially secure. Therefore, you should include apartment building ownership as a quality investment.

Tips & Warnings

• Get training. There are numerous sources on the web that are designed to teach you about buying apartment buildings. Take advantage of what they have to offer.

• Learn the math. You will need it do figure out potential profits.

• Find good mentors.

• Keep learning as you go.

• Join commercial real estate focus groups.

• Stay away from real estate boot camps. They are usually conducted by so-called gurus who make their profits through boot camp sales, but have no experience buying apartments.

• Don't take the plunge until you are sufficiently trained.

Resources

• USLandCo Creative Real Estate Investing Resources
• Buy Your First Apartment Building -- An E-Course For Apartment ...
• Dave Lindahl's Apartment Riches | How to Buy an Apartment Building ...
• How to Invest in Commercial Real Estate for Future Wealth and Security