Finding The Ideal Apartment Building For Sale
When it comes to apartment investing, half of the battle is determining the right apartment building to invest in. No matter how skilled you are, choosing the wrong property will generally lead to a negative investment outcome, whereas a great property can be profitable, even for the unskilled investor. However, the ideal property for one investor may be a terrible choice for another, depending on a variety of factors, including your investing experience level, net worth, and personal time constraints.
In this article, we’ll take you step-by-step through the property selection process, helping you to refine your apartment search in order to find the apartment building that best matches your individual investment objectives. Plus, we’ll walk you through how to find both on-market and off-market apartment deals. Get ready, because we’re in for an exciting ride.
Determining Your Apartment Investment Objectives
Before starting the search for your ideal apartment building, you need to know what you’re looking for. Otherwise, you’ll waste your time, and, just as importantly, the time of the investors, brokers, and other professionals you’ll need to work with during the apartment selection process.
So, before devoting hours staring at an MLS and spending late nights crunching numbers, you should answer some vital questions, including:
What return are you looking for? Knowing your return on investment objectives is perhaps the most fundamental question to answer. Investors generally actively buy apartment buildings because they think that their investment can outperform other types of investments, such as stocks and bonds, or passive real estate investments like REITs or crowdfunding deals.
There are a variety of ways to measure return, including cap rate, cash-on-cash return, IRR, and equity multiple, and you should be familiar with all of them as you underwrite various apartment buildings as potential investments. This is even more important if you are bringing in other investors into your deal via apartment syndication. It’s also important to note that your return may be slightly different than your investors, as you will typically be charging them a purchase fee, an asset management fee, and a disposition (sale) fee.
Plus, if your investment does particularly well, you may receive an outside proportion of the profits if you set up a waterfall/promote structure as part of your deal. For example, if your investors agreed, you could arrange to receive equal returns on your capital investment in the deal up to 12%, 25% returns of all returns above 12%, and 50% of all returns above 16%.
How much can you realistically invest? 5+ unit apartment buildings generally start at $500,000+, so if you or your investors don’t have at least that amount of capital for a downpayment on a $500,000 loan-- that’s $125,000 at 75% LTV, you may want to look at a single-family home or a 2-4 unit building, which is technically not considered a multifamily dwelling.
What kind of loan can you qualify for? The vast majority of apartment investors use loans to finance their investment properties, and for a good reason. Leverage on your property can greatly increase your overall return in terms of cash-on-cash return or IRR and allows you to purchase much larger and more expensive properties than if you had to pay 100% cash.
In many cases, you may want to look for the property that fits the type of loan you want, not the other way around. For example, most banks, CMBS, Fannie Mae, HUD, and Freddie Mac multifamily lenders will only offer loans for properties that are in good condition and stabilized. This means a property often must have at least 85-90%+ occupancy and a debt service coverage ratio (DSCR) of 1.20x.
The better the property condition, in general, the higher LTV, lower DSCR, and lower rates you’ll be able to get, which means higher overall returns for you and any investors you bring along. However, this doesn’t mean you can’t take a Class B property and make value-add upgrades to increase rents and overall returns. For the loan types mentioned above, borrower net worth is also important, but if your net worth is low, you can typically bring a higher net worth sponsor into the deal.
What’s your risk tolerance and investment strategy? We just discussed investing in higher-quality Class A or Class B properties in order to get the best financing available, but that may or may not be you or your investors’ ideal investment strategy. If you’re a more experienced investor, willing to take on more risk, and have previous rehab or construction experience, you may want to invest in a distressed property with a higher vacancy rate.
This generally requires hard money financing, which is generally offered at much higher interest rates than bank or agency loans and is full-recourse, meaning that the lender can come after your personal property if you default on your loan. Of course, if you successfully stabilize and rehab the property, you can always refinance with a better bank or agency loan later on.
Determining the class and condition of a property looks simple, but it can be tricky. What may look like a B+ property may actually have a 15-year-old roof, no central heating or AC, and appliances from the 80s. Never trust what you see on your MLS, and always look closely before taking something as fact.
As a side note, you or your investors may also be interested in investing in affordable housing, which is an entirely different ballgame and deserves an entire article on its own.
What markets do you want to invest in? Some investors are committed to investing close to home so they can self-manage, or, at the very least, keep a close eye on their property. This may be a good idea for some, but it can also be extremely limiting, particularly if properties, where you live, are overpriced or there isn’t much supply. In addition, many lenders don’t want borrowers self-managing their own properties and prefer outside, professional property management properties to do the job for you, so if your reasoning for investing nearby is self-management, that may not always be an option.
The world is a big place, so if you’re not obsessed with managing close to home, it's a good idea to hone in on at least 5-6 major markets, and perhaps at least 2-3 submarkets within those markets in order to hone your selection process. However, don’t exclude markets you haven’t thought of either-- you never know where a great deal will pop up.
How to Start Looking for Apartment Buildings
Now that you (hopefully) know what you’re looking for in an apartment property, it’s time to start looking for and underwriting properties. The first step in finding potential multifamily investments is the most obvious, and that’s checking out properties on an MLS. This is where you’ll find the most multifamily properties for sale.
Common MLS offerings include:
Loopnet: By far the most popular commercial MLS, Loopnet typically provides the widest array of properties of any MLS on the market. Investors can search buildings by elements including:
Property Type: Property types on Loopnet include multifamily, retail, industrial, restaurant, shopping center, healthcare, hospitality, residential income properties, and more, though you’ll want to choose multifamily.
Price: Generally, you’ll want to set your minimum price at $500,000 to $750,000+, with the maximum tailored to your specific investment objectives and abilities.
Location: This can include states, cities, metro areas, or even individual zip codes.
Building Size: Denominated by square footage, not particularly important for multifamily.
Lot Size: Typically not important, generally leave blank.
Units, Rooms, and Beds: Leaving this blank may be a good idea, but it can also be smart to shoot for properties over 10 units in order to reduce the amount of income loss risk you’ll face if an unexpected vacancy occurs.
Cap Rate: It may be useful to screen out properties with extremely low or extremely high cap rates, as they may respectively be either very unprofitable or highly risky, though you might want to leave this blank.
Year Built: If you’re a turnkey investor, you may want to choose properties built, after, say 1980-1990, but it’s often best to leave this blank too, as it generally does not factor in major rehabilitations since many older properties can be brought up to Class A quality with enough TLC.
Investment Type: Here you can decide to include or exclude auctions, pending sales, and triple net (NNN) leases, though triple net leases will not be a factor for multifamily assets.
Apartment buildings listed on Loopnet will often, but not always, include a property’s cap rate, its NOI (sometimes with a breakdown of expenses), rents per unit, number of units, occupancy rate, and the property’s appraised value for tax purposes. However, many do not, so if you see something you really like, you’ll have to contact the broker for more information.
In addition, generally have to look up the property tax millage rate for the individual county in order to calculate the exact tax burden. Keep in mind that the property value for tax purposes may increase significantly upon purchase upon re-appraisal. Sometimes, there will also be a link to an offering memorandum (OM) for the property, including information such as the potential to raise rents to local market prices.
As mentioned previously, don’t take anything you see here at face value, especially cap rate information. If you get serious about a property, you’ll need to do some serious digging to discover the truth about the property’s condition, occupancy, operating expenses, and potential tax burden.
In addition to manually searching properties, you can also set Loopnet to automatically send you updates when properties that match your specifications pop up. In general, you can use many of the same qualifiers on the other MLS options we’ll mention below.
In addition to Loopnet, other popular commercial MLS options include:
Apartmentbuildings.com: ApartmentBuildings.com is an MLS that only lists apartment buildings, which can help you avoid all the noise of a general MLS like Loopnet.
CREXi: CREXi is perhaps the fastest-growing MLS on the market, currently offering 130,000+ properties for sale across the U.S.
CityFeet: Another popular MLS service, CityFeet mainly focuses on office building listing. However, it does provide a substantial amount of multifamily listings, generally in large metro areas.
Showcase: Showcase is another larger commercial MLS service. Like Loopnet, Showcase is owned by commercial real estate firm CosStar. Showcase currently lists more than 1.4 million properties for sale or lease, including a wide variety of multifamily assets.
Getting in Touch with Apartment Brokers for On and Off-Market Deals
Developing good relationships with commercial real estate brokers in areas you’d like to invest in can be a challenge, but it’s often worth your time. Brokers are busy people and generally only get paid on commission, so you’ll need to approach the process with care and consideration to avoid wasting their time. In addition to helping you select listed properties, a good apartment broker can also help you identify juicy off-market deals which may better fit your investment needs.
If you know someone who works in or invests in real estate in one of your target markets, ask them to refer you to a quality broker. If not, cold calling, LinkedIn, email, Facebook, or Instagram messages also work well.
Here are a few tips for dealing with brokers:
Do Your Research: If you want to ask about a specific property, make sure you’ve read all the existing documentation about it so as to not ask redundant questions.
Consider Paying for Advice: If you want to “pick their brain” for more than a few minutes, ask if you can pay them a consulting fee. Many will be happy to accept $100-$150 to share the details, trends, and red flags often seen in their area, but others may be willing to talk for free if they know you’re serious enough to pay them.
Ask For Off-Market Deals: If you don’t like anything you see in the area, ask the broker if there are any off-market deals they know about in your target area.
Be Honest: Be honest about your interest and ability to purchase a property. Everyone makes honest miscalculations sometimes, but the last thing a broker wants is to waste days or weeks negotiating a deal only to find that you have little to no equity to invest and no way to get adequate financing for the subject property.
Ask For Referrals: Don’t be afraid to ask for referrals. If you’ve treated a broker with respect, and especially if you’ve paid them a consulting fee, they’ll likely be willing to refer you to brokers specializing in other nearby submarkets, or other professionals you may need, such as a quality commercial mortgage broker, a trustworthy real estate lawyer, or a good title company.
Finding For Sale By Owner (FSOB) Apartment Buildings
Sometimes, apartment building owners want to forgo the time and expense of working with a broker and will list their apartment building as for sale by owner (FSOB). These listings are more likely to be found on niche sites like Craiglist. Sometimes, an owner will simply put up a sign in front of the apartment building, however, this type of advertising can be difficult for you to detect unless you’re doing driveby scouting in your area of interest.
Contacting Apartment Building Owners Directly for Off-Market Properties
Another excellent way to identify a potential deal is to contact an apartment building owner directly, even if there is no evidence the building is for sale. This can be especially effective if you are looking for a distressed property to rehab, as an owner may be eager to part with it. Common signs of distress include overgrown grass and poor landscaping, boarded-up windows, and roofing issues. However, directly contacting owners can work well for both turkey and value-add scenarios as well.
In general, a property owner is less likely to want to part with a building if they’ve recently bought it, as it won’t have appreciated much. You can generally look up in a county title database when the property was last sold, as well as whether there are any title issues involving the property. You can often find the owner via calling the property management company, but if they won’t release the owner’s information, it will also likely be in the title record.
Sometimes, the owner’s company is listed in the title record instead of the owner’s name. If this is the case, you can generally look up the main officer or owner of corporations or LLCs on your state’s corporate directory website.
Overall, the more you know when talking to an owner, the better equipped you’ll be to negotiate. Many owners may say they’re not interested, but it still can be a good idea to leave your contact information with them; you’ll never know when that could change. In addition to calling owners directly, you can also send them traditional mail, or attempt to contact them via email or social media.
Finding Apartment Buildings Through Online Marketing and Other Methods
In today’s world, real estate investing has gone digital, and there are a wide variety of ways to network with other investors, brokers, and other individuals who may know of great deals, whether on-market or off-market. Some examples of online networking can include:
LinkedIn: As the world’s largest social network for business professionals, LinkedIn can be a great way to network with other real estate investors. You may want to add to your profile that you’re an active real estate investor looking for off-market deals. While LinkedIn is probably the best major social network for real estate investors, you can always try Facebook, Instagram, and even TikTok to share what you know about investing, educate others, and show that you’re open to new deals.
BiggerPockets: BiggerPockers is the internet’s largest community specifically intended for real estate investors. There are tens of thousands of active members, and, by becoming an active investor, asking questions, and offering advice to others, you can grow your reputation on the network and potentially get insider information of off-market properties. There are many examples of individuals meeting on BiggerPockets and eventually becoming business partners in real estate syndications.
Mastermind groups: Individual investor “gurus” or educators often run private real estate networking groups where members can support each other, ask questions, and potentially collaborate on deals. Some groups are free, but most charge a monthly fee. Before joining a group like this, make sure that it’s actually being run by a reputable and active real estate investor and has a fair amount of active members that are actually doing deals, and it isn’t just composed of armchair theorists. You don’t want to waste money on expensive groups that do you little good, but becoming a member of the right group can potentially give you the edge you need to identify great deals.
Real Estate Investing Clubs: If there’s a real estate investing club in your area, you may want to consider joining it. Some clubs require that members be accredited investors, or that they actually invest a minimum amount in deals each year, so not every group may be right for you. In lieu of official investment clubs, you can also attend meetups to meet more investors and get more exposure to great deals.
Finders Fees: Some aggressive investors even offer a finder’s fee (typically paid upon closing) for non-broker individuals that can locate a great off-market property with highly specific elements, for example, Class C properties with 100+ units selling for less than $6 million in a certain market. You can share this information in any of the groups or networks listed above.
Building A Personal Brand: If you want to get serious about investing, it can also be ideal to use the networks and sites listed above to create your own personal brand. As previously mentioned, educating others is a great way to increase your credibility and expand your abilities to network. In addition to posting information, consider writing articles on a personal blog or even starting a podcast. You can also use paid advertising to expand your brand and amplify your organic content creation efforts.
Finding The Perfect Apartment Building Isn’t Easy, But It Is Worth It
Whether you’re looking for your first apartment building or your twentieth, it can be a challenge to find a deal that fits your individual needs, especially when the market is hot. It's not underheard of for investors to take the time to underwrite 100 or even 200 properties before putting in an offer. In many cases, the best deals aren’t on the market, so you’ll need to get crafty, utilize your network, and put the word out there if you want to give yourself the best chance of finding a great deal.
While looking for the right property can be tough, it can also be a fun process. The more care you put into finding the right property, the fewer headaches you’ll experience down the road. Plus, with more experience, the process becomes easier, as you develop more relationships and have a better idea of what you’re looking for. If you've read this far, it’s time to stop reading and start looking for your next multifamily investment-- you never know what you might find.