How to Invest in Apartment Buildings: A Step-By-Step Guide

Looking to invest in commercial real estate and don’t know where to start? Your first thought may be to invest in single-family homes. These units are less complex to acquire and easier to manage. However, if you want to maximize your cash flow and build long-term wealth, consider investing in apartment buildings.

Understandably, you might find the entire process too daunting, considering the level of complexity involved. Nevertheless, you don’t have to be an experienced investor to buy an apartment complex.

In this guide, we share insightful tips on how to invest in apartment buildings so you can better understand the process and begin your journey armed with the right information.

Top Benefits of Investing in Apartment Buildings

It’s human nature to be skeptical about an investment that requires large amounts of capital, and for good reason. After all, you don’t want to put your money into something that doesn’t offer decent returns.

As with any investment, you’d like to know how you stand to benefit. Apartment investment offers numerous benefits to investors:

Soaring Demand

Demand for affordable housing will always be high, and apartments offer the most affordable housing option. This creates an opportunity for would-be investors like you to earn a good return on investment (ROI).

Property Appreciation

In a steady market, apartment complexes consistently appreciate value. This lowers your investment risk. And, given the routine inflation, holding on to the property for a long period increases your odds of enjoying higher returns.

That’s not all. Investors who add value to properties by upgrading systems and finishes, or generally improving the property can gain great returns when selling it.

Scalability

Investing in apartment buildings can fast-track the growth of your investment portfolio. Consider this: You have $1 million and are torn between investing in real estate or stock. You opt for apartment buildings and end up investing in four properties that require $250,000 as down payments.

You use the cash flow from the properties to repay the mortgage. A few years down the line, you’ll be worth four times your investment capital. Now imagine repeating this cycle, and you can see how your real estate portfolio will have grown over time.

Access to Loans

The best part about investing in apartment buildings is that you can access various financing options, from banks, credit unions, or other financial institutions. You’ll basically need to raise a certain percentage (say 3%) of the property value to qualify for mortgage financing. Of course, there are other requirements that financial institutions consider before they can lend you money.

Alternatively, you can secure a hard money loan through a private capital investor. This type of loan can be helpful if you need an urgent loan within a comparatively short time. For example, you may have spotted a prime property and need to act fast. A commercial hard money loan will come in handy in such a situation.

Hard money loans in Los Angeles can also be an ideal source of capital if banks or other lenders are not an option. Maybe the bank rejected your application due to a poor credit score or insufficient income history. Regardless of the reason, commercial hard money investors don’t look at all these details. Your property acts as collateral. All they need is assurance that you’ll repay the principal plus interest as agreed.

Source of Passive Income

Once you invest in apartment buildings, and the property starts generating cash flow, you can sit back and collect rent payments without much effort. This is especially true if you hire a property manager to oversee the day-to-day operations and maintenance of your property.

In other words, you can keep doing your day job and still enjoy recurring income on the property.

Opportunities for Additional Income

Large apartment buildings serve hundreds of people who require certain services and amenities. This allows apartment owners to generate supplementary income from sources like coin-operated laundry machines, ATMs, pet fees, renting parking spaces, and vending machines.

6 Best Ways to Invest in Apartment Buildings

According to Realtor.com’s chief economist, Danielle Hale, rental demand is expected to continue to rise in the coming year, 2023. And with excessive demand, rent prices will keep increasing. The fact that the real estate rental market size is estimated to reach $3476.58 billion by 2026 is reason enough to push you to invest in apartment buildings.

But how do you find funding to get started? Here are some common ways to invest:

1. Purchase an apartment building yourself

You can buy an apartment complex as a solo investor. While it’s the most intimidating strategy, the rewards are unmatched – you get to keep all the profits.

Before going solo, here are a few things to keep in mind:

• You make all decisions, which requires knowledge and experience in matters like collecting rent payments, maintenance work, resolving tenant conflicts, etc.
• You’ll take on more risk. This can put a lot of pressure on your finances, and if you are not careful, you can lose your money.
• You’ll need to research properties by yourself, find a trusted broker, analyze and review deals, and understand the types and classes of apartments, among other things. If you aren’t well-versed in real estate, all these can seem overwhelming.

If you don’t feel comfortable or aren’t prepared to deal with the complications and demands of apartment investment, consider other options discussed below.

2. Partner up

Buying apartment buildings with partners is an excellent option, particularly for new investors, for various reasons:

• For starters, this strategy allows you to combine your respective capital and invest in properties you couldn’t afford on your own.
• It allows you to seek out investment partners with more experience and skills in real estate.
• You get to split responsibilities and commitments based on your strengths, making it easier to manage the properties.

Now, how do you find the right investment partner? A good place to start is to ask your real estate agent if they can connect you to potential real estate partners. Alternatively, you could check out local investment groups on Facebook to see if you can connect to someone with whom you share common investment interests.

Having said that, there are some caveats with partnering up:

• You won’t be the boss, meaning you have to make compromises to accommodate your partner, some of which you might not like.
• The wrong partner could mislead you intentionally or not due to inexperience or malice.
• If you partner with family or friends, you risk hurting your relationship outside of investing based on your decisions about the property.

If you are not for partnerships, you still have other viable options.

3. Syndication

Real estate syndication is an arrangement where individual investors pool their finances together to purchase properties. The syndicator (person running the syndication) allows multiple investors to join in on an investment opportunity and is responsible for making all the decisions.

The investors, known as limited partners, in this case, receive passive income from their investments. Syndicators make money via rental income and property appreciation, just like any other real estate investment would.

Choosing syndication as a way of investing in an apartment complex has its benefits:

• Access to larger projects and assets
• As a syndicator, you’ll use less money out of your pocket
• Reduced risk
• A great source of passive income

4. REITs

A real estate investment trust (REIT) is a company that owns, operates, and manages real estate investments, including apartment buildings. Investing with a REIT allows you to reap the benefits of property investment without the hassle of ownership, like collecting rent or screening tenants, as well as maintenance work.

Once you invest in a REIT, you become a unit holder with an indirect hold on the REIT assets. These companies can be publicly traded on the stock market, which is more like purchasing stock in any other company.

5. Real Estate Fund

 A real estate fund is a form of mutual fund collectively used to invest in real estate companies. Real estate fund offers a way to diversify your real estate investment portfolio. While REITs pay out regular dividends, real estate funds provide value through property appreciation.

There are three types of real estate funds:

• Real estate exchange-traded funds (ETFs) own shares in real estate companies and REITs and trade like stocks on major exchanges.
• Real estate mutual funds are professionally managed investment vehicles, which can be passively or actively managed.
• Private real estate investment funds are focused on those looking for a large amount of capital.

Real estate funds are a less risky investment option due to the level of diversification they offer.

6. Crowdfunding

Nowadays, many people are turning to crowdfunding to generate capital to invest in businesses, including apartment buildings. With crowdfunding, you request the general public to help you raise capital to purchase real estate projects.

While it may sound similar to syndication, the key difference is the number of people involved. Syndication entails a small group of investors, while crowdfunding sources small sums of money from a large group of interested individuals, usually via crowdfunding platforms like Kickstarter, LendingClub, and GoFundMe.

Crowdfunding has several benefits:

• Low-risk ventures
• Straightforward investment process
• No need to apply for a mortgage

Closing Thoughts

Generally, apartment buildings are excellent investment options, with huge returns on investment. Having said that, you must exercise caution when evaluating a property before signing that sale agreement.

And as we’ve pointed out, you can buy an apartment complex without spending money out of your pocket. Simply find a reliable private capital investor who can lend you a hard money loan to purchase that property you’ve been eyeing.