Commercial Residential Apartment Complex-Purchase

[Arthur Voskanyan]

If you wanted a commercial property, a residential building apartment complex of 10+units, what are some things to consider? How is the lending process? Does it work the same as for residential homes? In terms of conventional loan options, and is it easy to get a loan for like a $2Million property with 20%DP? Also, what are some other expenses that an owner is responsible for? What type of insurances is a must? As the complex owner are you allowed to set your own rent and even seller finance each unit? Can you set up your own HOA amounts for residents? Can you add amenities like; Large complex pool installation? Do you need permits to remodel the complex? Also, in terms of cash flow, profit making, would it be worth buying such a commercial investment? Rather than having 10 individual residential units all around in different places? Wouldn’t it be way more profitable to own a complex? Assuming it’s a class B or A area, with high occupancy rates, good neighborhood, location, and past record of solid income stability? Thank you in advance for all responses! Arthur Voskanyan

[Jon Holdman]

Are you talking about an apartment building or a condo building?  I assume you're talking about apartments where you own the building or complex and lease them to individual tenants rather than a condo project where you would sell the units.  But a couple of your questions are not relevant for apartments but are for condos.

I'm no expert on this.  I have looked at small apartments quite a bit, made offers on a couple but never bought one.  But I see you asked this question twice, so maybe we can get some responses.

Maybe. You may need to go higher than 20% down, perhaps 25-30%. A lot depends on the deal and the "debt service coverage ratio" (aka DSCR or DCR). This is the NOI / (debt service i.e., loan payments). The higher this ratio the better. Usually has to be 1.2 or something higher than that, though this varies a lot based on the lender's guidelines, the property and the area. You won't get 30 year fixed rate financing, either. This type of loan will typically be a balloon loan or ARM, with a longer amortization. For example, 20 year amortization, but due in five years. So the payments are calculated as if its a 20 year loan, but after five years you have to pay it off. Or there will be ARM terms that allow the rate to be changed periodically. There are often pre-payment penalties.

The usual things for a rental - taxes, insurance, maintenance, capital items (e.g., new roofs), property management, legal, accounting.

Sort of.   Yes, the owner of an apartment complex sets the rents.  But really the market sets the rents.  You can't just arbitrarily choose them.

See, now you have me confused.  These are condo questions, not apartments.

Depending on zoning and building issues, yes, you can make improvements.  You absolutely need permits for work that requires permits, and that's most stuff beyond paint and flooring.  Further, multi unit buildings are usually held to stricter building codes.  Things like escape lighting and sprinklers.  And these are more strictly enforced than for houses.  A failed inspection can result in property being deemed uninhabitable and your tenants could be kicked out with little notice.   Several years ago I had a member contact me about just that situation.

Here again, maybe.  There be economies of scale at larger sizes.  Not so much at 10 units.  At 50 units (or some such, IDK the exact number), you can have a full time manager.  But, these complexes, especially A and B complexes, tend to be pretty pricey vs. rents.  I've looked at a number of deals (not very seriously) for nice complexes and wonder how anyone makes any money on them.  OTOH, I've looked at C buildings and the numbers look pretty attractive.