Why it’s not so scary to buy an apartment building. Here’s exactly what you’ll need..
We have a saying at Keller Williams, “people grow into the conversations you create around them.” We call that one of our BOLD LAWS and this particular “law” presented itself to me during an interview on my podcast that I conducted recently.
Buying an apartment building as a way to level up from buying your typical residential 2-4 family can be daunting, but as I embark on my journey over the next year to purchase my first, I can reassure that everything in life is extremely daunting when you’ve never done it before; until you do it.
After all, if we have intentions of searching for the ridiculously lucrative benefits that lie within real estate, we eventually have to start handling bigger and better deals. They say cash is king, but I beg to differ.
Cash FLOW is king.
Apartment buildings (20, 50, 100+ units) are where you really start to see serious cash flow and this article will discuss what you’ll need as you embark on your journey.
“But Austin, I don’t have anywhere near the amount of money or credit I need to buy an apartment building?”
Ideally, the 4 main things you’ll need is Money, Credit, A great Deal and Experience – and here’s the secret, you personally don’t need to have all the criteria. If you need to find partners to help you in the areas that you lack, so be it. Just please understand that no good deal will go unfunded and teamwork makes the dream work!
Money, and Credit
First and foremost, as with any purchase involving a loan, money and credit will play an important role. Most commercial loan minimum down payments are 20% and they like to see some forms of collateral (cash, assets, etc.)
When establishing an LLC, if you have partners, there will be a Guarantor, or point person, in which the bank will take a look at their financial situation and run their credit. To be clear, it will NOT show up on your personal credit report, but the bank will need someone to feel comfortable that the debt will be repaid. If your LLC has an established business profile and credit history, the banks can work with that.
If you do not have these items, it will be best to bring on a partner who does. Again, no GOOD deal will go unfunded.
There is an absolute abundance of money and investors looking for deals. It’s the product, in this case real estate, that has a scarcity element to it.
A Great Deal and Experience
Imagine finding your dream home, being a first time home buyer and then having your bank tell you “we’re not going to give you a mortgage because you have no experience buying a home, and on top of that, we don’t like the home”
Soul crushing.
In the commercial lending world, you won’t be able to get preapproved for a mortgage and then go spend that money on whatever property you would like, similar to residential funding. Commercial lenders have to “like” the property you’re attempting to buy. What does that mean ?
Commercial lenders want to know, for certain, that they and the buyer and going to make a desired return on investment. Commercial lending is ASSET based lending. Lenders want to see a positive cash flow on a monthly basis that can cover the mortgage and more. Seeing that, they know the building can be a profitable investment for all parties and are more willing to lend on that specific deal. Banks will deny potential borrowers if they see that the buyer’s won’t be making any money on the deal, even if the bank has the opportunity to make money with fees and interest.
Lenders also like to see experience. You’ll have more negotiating power when you or your team can demonstrate that you know how to purchase and maintain your commercial investments and have a running history of transactions. Experience isn’t the most important criteria, but it can definitely affect your conversation with a lender. If you’re just starting up, it’ll be wise to partner with someone who has experience both for lender qualifications and for property management after the deal closes.
All that to say…..
You may have credit, but no cash, found a great deal, but don’t have the experience. That’s not enough to stop you from pursuing opportunities. You have something unique to bring to the table and your partner(s) will be there to pick up the slack.
Do you have to start with a 100-unit building? Probably not. It’ll be easier to start off with a 8, 10, or 16 unit and then scale up from there. The possibilities are endless and the more I work with investors who are buying these types of buildings, it only makes the itch that much more aggressive.
Bigger deals, bigger mindset, bigger life!