How to Buy an Apartment Complex

Thinking about taking your real estate portfolio to the next level? If you’ve had success with single-family rental properties, you may be eyeing bigger opportunities—and an apartment complex might just be the next logical step. 

But buying an apartment complex isn’t just about scale. It’s a major commercial real estate purchase that requires careful planning, strong lending partners, and serious due diligence. If you’re wondering how to buy an apartment complex and what it takes to secure financing, here’s a step-by-step guide to help you navigate the process with confidence. 

Step 1: Know Why You’re Investing 

Buying an apartment building can be a good investment for long-term wealth. Unlike single family homes, apartment complexes generate multiple streams of rental income and offer economies of scale—from shared maintenance costs to bulk upgrades. Plus, because leases tend to be one year or shorter, you can adjust rental rates more easily as interest rates or market conditions shift. 

Many real estate investors also look to apartment buildings for the tax incentives. Residential apartment complexes qualify for a faster depreciation schedule than most other commercial property types, giving you some extra tax-time flexibility. 

Before diving in, ask yourself: 

• Are you ready to manage a larger number of tenants? 
• Do you plan to hire a property management company or manage the building yourself? 
• Are you interested in long term cash flow or hoping to reposition and sell? 

Your responses can guide whether you’re prepared for the responsibilities—and the rewards—that come with apartment investing. 

Step 2: Understand What You’re Buying 

An apartment complex is a multifamily property with five or more units. That distinction is important because it changes how lenders assess the loan and how you assess the opportunity. 

There are four basic types of buildings, often referred to as classes: 

• Class A: Newer buildings (under 10 years) with high-end amenities. 
• Class B: Slightly older buildings, but still in good condition and with fewer amenities. 
• Class C: Usually 20–30 years old buildings that may need renovations. 
• Class D: Older buildings in lower-income areas that are higher risk and have greater rehab needs. 

If you’re new to investing in an apartment complex, a stabilized Class B or Class C property might offer the best mix of affordability, upside, and manageable risk. Keep in mind, however, that renovations can be a lengthy process, often taking a year or more, since most upgrades must be scheduled around lease expirations or completed between tenants. 

Step 3: Run the Numbers 

To make a sound real estate investment, you need to evaluate the financials thoroughly. That starts with understanding the property’s income and expenses: 

• Rent rolls: A list of current tenants, lease terms, rent amounts, and deposits. This shows your existing cash flow and tenant history. 
• Occupancy rates: How many units are filled and paying. 
• Vacancy rates: Expected empty unit percentage, which is often between 5 and 15%. 
• Net operating income (NOI): Your income after expenses. Use this to estimate your cap rate and compare to similar properties. 

You’ll also want to consider operating costs: maintenance, utilities, insurance, and repairs. An older building with plumbing or roof issues can chip away at profits fast. Don’t forget to factor in shared utilities, which may require implementing a RUBS (Ratio Utility Billing System). 

Step 4: Choose a Lending Strategy 

Here’s where things get real. Most buyers don’t purchase apartment buildings with cash—loans for apartment buildings are the norm. But financing a commercial apartment complex is very different from a standard home loan. 

Your main financing options include: 

• Traditional bank loans: Offered by banks or credit unions; usually require strong credit and a 25% down payment. 
• Agency loans (Fannie Mae/Freddie Mac): Designed for multifamily housing; competitive terms but strict guidelines. 
• Bridge loans: Short-term loans that allow for purchase and renovation before refinancing. 
• Private lenders: Less strict than banks but often come with higher interest rates. 
• Seller financing: Sometimes an option if the seller owns the property outright. 

Lenders will focus heavily on the property’s ability to generate income. Unlike a home loan where your personal finances take center stage, commercial real estate lenders prioritize whether the rental income can cover the debt. The common formula to determine whether your investment meets this threshold is as follows: 

Gross Rents – Expenses = NOI, and using this formula, NOI should comfortably exceed your mortgage payment by a minimum of 20-25%. 

Step 5: Get Prequalified and Gather Documentation 

Getting prequalified for a loan helps define your budget and shows sellers you’re serious. Most lenders will require: 

• A credit score of at least 660 (higher is better) 
• A down payment of around 25% 
• Personal financial statements 
• Rent rolls and operating statements for the property 
• Your real estate experience (especially with rental property) 

Commercial loans are commonly amortized over 25 to 30 years, provided that they do not exceed the property’s remaining economic life as determined by appraisal. However, these loans often carry shorter terms—such as 5, 7, or 10 years—which results in a balloon payment at maturity. In most instances, lenders will also require a recourse loan, making the borrower personally liable if the property’s value is insufficient to satisfy repayment. 

A mortgage broker or multifamily lending advisor can help you explore the pros and cons of different loans, gather paperwork, and identify lenders who specialize in loans for apartment buildings. 

Step 6: Do Your Due Diligence 

Once you’re under contract, it’s time to begin a thorough due diligence process. Some items will be ordered directly by the lender, while others fall to the buyer to arrange. This is the stage where many deals fall apart—or are saved by careful preparation. Key items to line up include: 

• Appraisal: This is typically ordered by the lender to establish market value using the income approach, sales comparison, and/or cost approach. Buyers may also choose to order their own appraisal in advance or obtain a Broker’s Opinion of Value for additional perspective. 
• Physical needs assessment: This involves a detailed inspection of the building’s systems and structural requirements. 
• Environmental assessment (Phase I): This is required and ordered by the lender to identify potential contaminants or hazards. If issues are found, additional Phase II or III testing may be required. 
• Property survey: This confirms the property boundaries, identifies easements, and highlights any title-related concerns. 

Conducting due diligence helps ensure you are not taking on hidden liabilities and provides negotiating leverage if issues are uncovered. 

Step 7: Close the Deal and Plan for Management 

If everything checks out, you’ll close on the property and finalize the loan. But this isn’t the finish line—it’s the starting point for your new role as a landlord or property owner. 

Will you be managing the building yourself, or will you hire a property management company?  

The answer depends on your time, experience, and the size of the property. Professional managers handle leasing, repairs, rent collection, and more, freeing you to focus on scaling your investments. 

Don’t forget to plan for capital reserves. Even a well-run property needs ongoing repairs, upgrades, and tenant turnover expenses. 

Final Thoughts 

Buying an apartment complex is not a decision to take lightly. But for real estate investors with the right financing strategy and a solid plan, it can be a good investment that generates rental income for years to come. 

Take the time to learn the market. Study similar properties, consult experienced investors, and work with lending partners who understand commercial property financing. Whether you hold the building for 30 years or reposition and sell in five, investing in an apartment complex can help you build wealth beyond what’s possible with single-family homes. 

And like all big opportunities, success starts with one smart step. 

This article was first published on October 20, 2020.