In the first article in our series about buying an apartment building, we reviewed whether a multifamily investment was a good fit for your portfolio. If you’ve made it this far, that’s great! Now it’s time to start talking numbers. Just what does it cost to purchase an apartment building?
Average Cost of Buying an Apartment Building
Any building that’s more than four units requires a commercial loan. Apartment complexes can cost millions of dollars or more if you’re looking to buy enormous buildings with hundreds of units. However, plenty of smaller complexes are larger than four buildings while remaining affordable to investors.
The following table shows the average cost you can expect to pay for an apartment building.
(Data from Reonomy)
Review Your Financial & Personal Criteria
We examined the four class types in step one, but how do you choose? It’s imperative to objectively evaluate your personal and financial abilities and goals before investing in an apartment complex. Here are five pieces to get you started:
- Number of Units: The higher number of units that an apartment building has, the more time, energy, and finances you’ll be required to provide. If you’re looking to generate a second source of income or supplement existing funds, finding buildings with six units or fewer is recommended.
- Understand Loan Qualifications: The vast majority of apartment buildings are purchased with loans. Approval criteria vary with different lenders and loan types. Still, in general, borrowers will need good credit (660+ is usually ideal) and between 25-30% of the total loan amount as a down payment. In addition, the property itself will have a debt service coverage ratio (DSCR) of 1.25 – 1.30x. That means the building’s income will need to exceed its annual debt service by at least 25-30%.
- Risk Threshold: While every investment carries a certain amount of risk, even a relatively safe venture can be riskier for an investor with an unstable financial situation. Come up with a clear amount that you’re comfortable risking. This number will impact the type of apartment complexes you can consider.
- Level of Ambition: This goes hand-in-hand with the level of risk. When exploring properties, it’s common to overestimate just what you’re willing to pour into a complex financially and personally. Take a step back and determine how much work and time you’re willing to put into the property immediately after closing and for the next few years of owning it. If you’d rather pay contractors for touch-ups like painting and flooring, make sure to include these charges in your final calculations.
- Return on Investment (ROI): When investing, ROI on an apartment building is generally more important than the sale price or monthly expenses. A property with higher upfront expenses may generate a higher profit, while a low number of costs doesn’t guarantee a higher ROI. The bottom line can depend on size, expenses, income, and your upfront investment amount.
Where Does the Revenue Come From?
Now to the most important question, where exactly is the money coming in? How can I calculate my ROI?
There are four primary ways to make money owning an apartment complex:
- Rental Income: After you’ve covered your monthly expenses, what’s left over is cash flow that you can spend or reinvest.
- Property Appreciation: This is generally where the majority of the revenue is made when owning an apartment building. In the last ten years alone, the value of apartments has rapidly grown, offering excellent kickbacks to investors. Some buyers buy a building that breaks even on cash flow with rent because they’re confident in its appreciation value.
- Leverage: If you borrow a million dollars from the bank at 4% and use it to buy an apartment complex with an 8% ROI, you can profit from the difference. Times this by millions of dollars, and you can see where the numbers compound.
- Tax Benefits: Real estate is one of the most tax-advantaged investments because you can depreciate your investments and write off the interest you pay on your mortgage.
With all factors taken into account, it’s common to expect between a 4 – 10% ROI when you purchase an apartment building.
Another Step Toward Financial Freedom
Investing in multifamily buildings is a huge step in achieving financial freedom. Moving away from single-family rentals and partnering with a real estate syndication like 1 Vision Capital ensures that you’re working with experts in the field whom you can trust to make your money work for you. Visit our website for more information, or give us a call at (830) 326-9181.