There are several ways to go about buying apartment buildings – ranging from on-market deals purchased through a broker, to off-market deals that an investor finds on their own.
In this article, we look at the different approaches you can take, then give an abundance of tips on how to buy your next apartment building off-market.
Buying an apartment building is a much different endeavor than buying other asset classes, like stocks, bonds or other securities.
Apartment buildings cannot be bought and sold with the click of a button.
There’s typically a long due diligence period that people embark on to find apartment buildings that meets their investment objectives.
In addition to the due diligence phase, there is a subsequent period of contract negotiation, inspections, financing and appraisals before even reaching the point of closing.
One of the ways to speed this process along is by finding off-market apartment buildings likely to sell and getting directly into contact with the owners of those properties.
Anyone interested in investing in apartment buildings should start by asking themselves the following questions.
- What is my budget?
- What type of apartment building am I looking for?
- How many units would I prefer?
- What markets do I want to invest in?
How you answer these questions will influence your approach for finding apartment buildings for sale – including whether it makes sense to work with a broker vs. finding a property on your own through an off-market transaction.
What is your budget?
Prior to searching for apartment buildings, investors should ascertain a realistic budget.
How much can you afford to invest yourself?
Are you planning to pay cash or finance the property?
Unlike single family rentals or condos, apartment buildings often require substantial down payments – how will you pay for that down payment?
Apartment investors often bring on partners. Some will raise money from friends and family, others will raise funds to invest in apartment buildings.
Be cognizant of how much money you’ll need to buy the property, including any money that will be needed to make value-add improvements, and factor this into the budget when considering how to raise funds.
Recent changes to federal regulations have made it easier for investors to raise capital via online crowdfunding, and many CRE sponsors are pursuing this avenue to raise capital.
If you are going to raise equity to help buy apartment buildings, be sure to clearly define who will be general partners (active investors) and limited partners (passive investors) and the roles of each.
What type of apartment building are you looking for?
There are many different types of apartment buildings to invest in, for instance, Class A, Class B, and Class C multifamily properties.
Class A tend to be the newest and/or renovated to top condition.
These also tend to be the most expensive apartment buildings and often attract attention from a wide range of investors, including institutional investors like insurance companies and pension funds.
Class B and Class C properties tend to be better value-add plays for those looking to buy apartment buildings and eventually, renovate or otherwise improve.
How many apartment units are you considering?
Apartment buildings can have as few as two units and as many as 400+ units.
In order to narrow your search, it is important to consider how many units you feel comfortable investing in.
Of course, how many apartment units you buy will depend on a number of factors, including your purchasing power, the type of apartment building you’re looking for, and the markets you want to invest in.
Another factor that investors often overlook is whether they plan to self-manage the apartment building or whether they intend to hire a property manager.
It may be possible to self-manage a smaller apartment complex, but those who want to invest in larger apartment buildings may want to consider finding a property manager to run day-to-day activities.
The more units in a portfolio, the harder the portfolio becomes to self-manage.
Which markets do you want to invest in?
Sophisticated CRE investors often refer to apartment building opportunities as being in either a primary, secondary, or tertiary market.
Primary markets are generally larger cities with real estate in prime downtown locations. Think of Manhattan, San Francisco, Los Angeles and Miami.
Secondary markets are on the periphery of primary markets, such as outlying neighborhoods in larger cities or slightly smaller, but still very vibrant cities like Austin, Nashville and Atlanta.
Tertiary markets are typically farther out from the urban core and generally attract less interest from established investors.
A few things to consider when evaluating markets:
First, know that cap rates in primary markets tend to be more compressed than those in secondary or tertiary markets, which are considered riskier places to invest in apartment buildings.
That said, apartment buildings in secondary and tertiary markets tend to be more affordable than those in primary markets.
Of course, all of these questions are intertwined. For example, your desire to invest in a primary market may influence the size or condition of the apartment building you are able to invest in.
You might only be able to buy a duplex in a primary market, whereas you might be able to afford to buy a 20-unit apartment building in a tertiary market.
Finding the Right Asset
The questions above help steer investors as they set out in search of apartment buildings.
Essentially, these are the parameters within which an investor must work when considering various apartment buildings for sale. Now they can begin the actual quest.
Typically, when buying an apartment buildings, you have three distinct ways that you can go about doing so.
Option 1 is to work with an agent who can find properties for you.
Option 2 is to search through listings and find a property yourself.
Option 3 is to search off-market properties and spot those likely to sell.
Option 1 – Work with an agent.
Technology has made it easier for people to buy and sell commercial real estate online, but there is still a strong case to be made for working with a CRE broker.
CRE brokers earn their living by connecting buyers and sellers, so they always have to have their pulse on the market.
They’re monitoring transactions, market trends, and keeping an eye on the major players – including any newcomers to the market.
One of the benefits to working with an agent is that it frees up your time.
Depending on activity in the market, there could be many apartment buildings listed for sale at any given time.
Rather than you having to filter through these different opportunities, your broker will do the legwork and will only bring you those that fit your investment parameters.
Yet agents work with many clients, and you may not be their only client looking to invest in apartment buildings.
That agent may just as easily bring a deal to another client before you if there’s more at stake.
For instance, when a 20-unit apartment building comes to market, that agent may bring the deal to their client who has a 2,000-unit portfolio because they know that client has significant resources to purchase the 20-unit property quickly and for cash, thereby increasing the likelihood of a sale.
Your agent may only bring that 20-unit property to you after having already offered it up to other clients first.
Option 2 – Search and find an apartment building listing yourself.
As an alternative to working with a broker, some investors prefer to conduct their own apartment building search.
There are two ways to go about this: on or off-market.
Searching on-market often means scouring the internet for MLS-listed properties. Several websites provide information about on-market apartment buildings for sale, including:
- LoopNet, one of the nation’s largest commercial real estate platforms featuring MLS-listed properties. LoopNet is also a good resource for investors looking to pin down comp data when evaluating apartment opportunities.
- CREXi, another national platform that features multifamily properties ranging from 3-units to 200+ units in size.
- Craigslist is used to buy and sell all types of goods, including commercial real estate. Owners often list their properties on Craigslist prior to listing on MLS or with a broker, so it can be a valuable tool for those looking to find off-market apartment buildings for sale.
Option 3 – How to find off-market apartment buildings with Reonomy.
Locating off-market properties is more challenging than navigating MLS listings.
This is why so many investors turn to Reonomy, which has property, building, and owner information for more than 4.3 million multifamily assets in the U.S.
Investors will want to begin their search by filtering specifically for multifamily properties, as shown below.
You can then narrow your search for properties within a specific geography, within a certain price range, with a certain number of units, etc.
Essentially, just plug in the investment parameters that you outlined above to narrow your search results.
The results will show you both on-market and off-market properties, including when the property was last sold.
Understanding the breadth of the building stock will allow you to begin reaching out to the owners of off-market properties with the intention of striking a deal.
Here’s how this might work in practice…
You want to invest in a 50+ unit apartment building in Brooklyn Heights, New York. You adjust your search criteria accordingly.
Now, you look through the results for potential opportunities.
For instance, Reonomy provides data about loans on the property, so you can see when the last mortgage was originated and for how much.
You can compare the mortgage amount to the property’s value. You may find an off-market property where the owner is highly levered, meaning they have a high loan-to-value (LTV) ratio on the building.
This could be a sign that the owner is in some sort of financial distress.
Perhaps the property has depreciated in value, or perhaps the lack of equity is making it hard for the owner to invest in routine maintenance.
These are signs that the property owner may be interested in selling, and represents an opportunity to buy an off-market apartment building.
Getting in Contact with the Seller
Once you’ve identified an apartment building of interest, the next step is getting in contact with the owner to begin the negotiation process.
If you’re working with a broker…
Getting in contact with the seller should be relatively straightforward if you are working with a broker. If the property is listed on MLS, your broker will likely reach out to the owner’s broker.
If the broker has found you an off-market opportunity, they can use any of their company’s tools (including Reonomy) to located that owner’s contact information for you.
In either case, when working with a broker, your agent will be the one contacting the seller – not you.
Getting directly in contact with off-market owners…
If you’ve decided to find off-market apartment buildings on your own, you’ll need to find the owner’s contact information on your own as well. Reonomy is highly valuable in that respect.
Reonomy has aggregated contact information for apartment building owners across the country.
For example, you’ve now found a 50+ unit apartment building in Brooklyn Heights and want to reach out to the property owner to ascertain their interest in a sale.
Reonomy will unlock owner information, including the owner’s mailing address, home/work/cell phone numbers, and even their email addresses. Now you can reach out to the owner directly.