How to Buy an Apartment Building Complex in NYC

An apartment complex might be what you’re looking for if you’re an investor looking to make a significant capital investment. Generally categorized as any residential property with five or more units, apartment complexes can be a great way to scoop up multiple rental units at once. However, unsurprisingly, a purchase like this will be more complicated than investing in a single-family property.

This guide will give you everything you need to know about purchasing an apartment building complex in NYC.

1. Decide If Buying an Apartment Complex is Right for You

Let’s be clear: purchasing an apartment complex is daunting for even an experienced investor. Beginner investors would be cautioned to stay well away from these purchases until they’ve acquired a few years of experience in real estate investing. Even then, a decision like this requires carefully weighing the pros and cons before moving ahead.

Pros of Buying an Apartment Complex

• Recurring Income – Provided the deal is right, and the finances are sound, an apartment complex can bring in a lot of recurring income from multiple tenants, leading to a positive cash-on-cash return.
• Diversified Income – Even if one unit is vacant, you’ll still have others to generate income to ensure you can cover your operating expenses and bring in a positive cash flow.
• Lower Per-Unit Maintenance – Apartment complexes benefit from economies of scale, meaning you can reduce maintenance costs on a per-unit basis by spreading the costs around.
• Revenue-Based Financing – Financing an apartment complex is mainly based on the financial performance of the building itself, not the personal finances of the buyer. This can be highly advantageous for investors with a low FICO score.
• Valuation Based on Rent Rolls – Since the investment’s value is based on the financial performance of the building, you can increase its value by raising rents.

Cons of buying an Apartment Complex

• Intensive Management – Being responsible for managing an entire building can be a lot for any person to take on. Most investors deal with this by hiring a property management company that will cut profits.
• Requires a High Down Payment – Unsurprisingly, purchasing an apartment complex can be one of the most expensive real estate investments you’ll ever make. The down payment can be more than $400,000, meaning you’ll need plenty of reserve cash in store.
• Less Tenant Care – Having many tenants at once means you will have less time to check up on them or give them special attention. This can result in a higher turnover rate than you might be used to when managing single-family condo properties.
• Difficult to Sell – If you or a partner investor want to exit the investment at any time, this can be a long and complicated process. Having other more liquid assets that can be sold in an emergency should be considered a necessity before getting involved in an apartment complex investment.

2. Learn about the Different Types of Apartment Complexes

Apartment complexes come in several different types, usually classified as follows:

• Class A – Ten years old or fewer buildings, usually with high-end amenities such as pools and fitness centers.
• Class B – Buildings up to 20 years old with fewer amenities but in good condition.
• Class C – Buildings up to 30 years old with little to no amenities need renovation.
• Class D – Buildings over 30 years old typically have low-income subsidized housing units, no amenities, and require extensive renovations.

3. Determine Your Budget

Every investment begins with an assessment of your budget. Remember, you’ll likely need a minimum down payment of $400,000 to secure financing for a deal of this magnitude. Make sure you have more than enough cash on hand. When determining your budget, consider your risk threshold and the return on investment (ROI) you seek. Large buildings with lots of rental units can generate more income but require a larger upfront investment and increase the management level required.

4. Get Pre-Approved

Getting pre-approved for a mortgage should be considered a primary step before you start looking at properties. Get all your financial paperwork in order and start making inquiries with different lenders to find the best rates. Ideally, it would be best if you tried to get approved by at least two other lenders to improve your options. Remember, you can always choose a different lender once you’ve found a suitable property. Getting pre-approved is just a way to assure the seller that you’ve already been financially vetted and can put your money where your mouth is.

5. Hire a Real Estate Agent

Real estate agents know the market better than anyone else, and when you’re considering a deal as complex as this, you’ll need their professional expertise. In addition to having access to one or more Multiple Listing Services (MLS) that list all the properties currently on the market, agents can be incredibly helpful in assessing each property to ensure you make the right decision for your needs and budget. Once it’s time to make an offer, they’ll handle all the negotiating with the seller’s agent and set the groundwork for a smooth transaction that protects your best interests.

Start making inquiries and arranging interviews to find the best agent for your needs. They should have plenty of experience and a good record of closing on apartment complex transactions. Make sure they also know the areas that you’re most interested in buying in, and take the time to understand what you’re looking for. Ask around about them and have them provide at least three positive references from previous clients. A good agent can distinguish between a closed deal and a lost one. On the other hand, a bad agent can torpedo a deal in a single meeting.

6. Evaluate Potential Properties

Now that everything is in place, it’s time to start looking at what’s on the market. Your agent should be able to come up with a list of potential properties that match your needs and budget. Keep your ears to the ground, as there may be some off-market properties that haven’t been publicly listed yet.

After viewing a property, have a system for evaluating each one. Take into account the state of the property, potential repairs and costs, your expected net-operating income (NOI), cap rate, and cash flow. You’ll also want to evaluate the building’s financials, rent rolls, vacancy rates, and cost per unit to ensure it is a viable investment. Properties with many defects can be more affordable but require ongoing investments to renovate and get them ready to receive tenants. Have a firm understanding of how long such renovations will take and when you can expect to see a good ROI.

7. Make an Offer

Making the right offer requires understanding the current market value for similar properties in the area. Your agent can perform a Comparative Market Analysis (CMA) to ensure your offer is fair. You’ll also want to include a few contingencies to protect yourself, such as an inspection contingency, an appraisal contingency, and a mortgage approval contingency. While these may reduce the strength of your offer, wavering them can open you up to many risks if something goes wrong in the deal.

Once the seller receives your offer, they will usually respond within 24hrs to confirm that they have received it. After that, they have three options: either accept the offer as it is, make a counteroffer, or go with a different offer assuming one. If they make a counteroffer, expect a bit of back and forth until you can come to a deal that satisfies both parties. Your agent and the seller’s agent will typically handle all of the negotiating as buyers and sellers rarely meet in person.

Keep in mind that in NYC, real estate deals are non-binding until both parties have signed the purchasing contract. Once both parties have signed, you are now both locked into the deal with no way out that isn’t covered under the agreed contingencies. Backing out of a deal for any reason not covered in the contract or rider can result in either a lawsuit that forces the transaction to proceed or a collapse in the deal that causes the buyer to lose their deposit.

8. Finalize the Deal and Secure Your Mortgage

Once reaching an accepted offer, it’s time to finalize the deal by completing your due diligence, signing the purchasing contract, and securing your mortgage.

In NYC, a qualified real estate attorney must handle all property closing. If you don’t have one already, start making inquiries into attorneys who have handled apartment complex purchases. In addition to scheduling the closing, provide a closing costs statement; your attorney will conduct your due diligence to ensure the property doesn’t have any liens. Make sure you have title insurance, as it will protect you if the title company misses something in their search and leaves you holding the bag on an unpaid lien. You’ll also want to hire a licensed home inspector to investigate the physical state of the property to ensure you know what you’re buying.

As for your mortgage, you can either return to one of the lenders that previously gave you preapproval or go with a different lender if you find one offering a better rate. You’ll need to undergo an in-depth assessment of your finances as part of the underwriting process. The building will also be assessed through an appraisal to ensure it can cover the loan amount in the event of foreclosure. If all goes well, you should receive your mortgage approval letter and permission to proceed with the closing.

9. Select a Property Management Company

Large apartment complexes with more than five units are often too much for anyone to manage independently. You will almost certainly need to hire a property management company that can oversee the day-to-day running of the investment. They’ll be responsible for screening tenants, maintaining the common areas, and handling any complaints and disputes from the tenants. It’s a year-round job requiring a lot of hands-on attention, so you must ensure you pick the right management company.

Make some inquiries and ask for quotes from several management companies. Look into other properties they’ve managed in the past or are currently managing. Have any recurring problems come up in each property they’ve managed? What has their turnover rate with tenants been like? What about their vacancy rates? Have any of the properties they’ve managed come down in value? In short, do your due diligence and make sure your chosen management company is up to the task.

10. Stabilize Your Investment

Depending on the current state of the property, it may take a few months or even years to get it running. Hire a contracting company to oversee all repairs and renovations. You’ll also want to ensure the building’s finances are in good order. Assuming you’ve done your homework correctly, you should immediately see a positive cash flow once you start bringing in tenants. A well-managed apartment complex can essentially run on autopilot, leaving you free to pursue other investments or even another apartment complex purchase.

Final Thoughts

Purchasing an apartment complex can be an excellent investment that makes easy profits. However, there are a lot of pitfalls to avoid, and you don’t want to end up with an investment that becomes a money pit. Follow the steps above and always be wary of any risks above what you can tolerate.

If you’re interested in acquiring a building as your next investment, then arrange for a consultation with a local NYC real estate agent. They can talk you through how the current market is performing and what opportunities you can expect to find based on your needs and budget.