When the idea of buying a home comes up, many people imagine a sweet house with a white picket fence: the classic American dream. But in truth, purchasing a home can mean buying an apartment, especially if you are a city dweller, or it might even include buying an apartment complex, where you can both live and earn some rental income.
Apartment living can be perfect for those who love urban life, singles, small families, and empty-nesters. However, it’s not only in cities that you will find apartments: There are beach condos, suburban and rural buildings that house more than one family, and other options available. Wherever it may be located, owning a complex can be a way to enjoy the apartment lifestyle and make money. Typically, an apartment complex is defined as a residential property with five or more units.
Here, you’ll learn the full story on real estate options that may be available when you’re considering the purchase of an apartment complex.
First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.
Condo vs Co-Op
If you are considering becoming an owner and resident of an apartment complex, you will likely encounter the terms “condo” and “co-op.” Both a condominium and a housing cooperative involve multi-unit buildings, but there are key differences between a condo and a co-op. It can be important to understand these points upfront.
When you buy what is known as a condo, you own the unit. The exterior of the units and land are usually considered common areas, owned collectively.
If you buy into a co-op, you don’t own your apartment. You purchase shares or an interest in the entire building. So, you don’t “buy” a co-op apartment; you become a shareholder in the corporation that owns the co-op.
You’ll usually sign a contract or a lease agreement that allows you to live in one of the co-op units.
Both condos and co-ops answer to an oversight body. For condos, it’s a homeowners association. For co-ops, it’s the residents who own shares in a nonprofit corporation that owns the building.
When it comes to buying and selling, the co-op association can influence the deal. Most require a prospective buyer to be approved by the co-op board.
💡 Quick Tip: Mortgage loans are available with flexible term options and down payments as low as 3%.*
Here are some of the key differences for residents of co-ops and condos:
• Co-ops tend to cost less per square foot and often have lower closing costs. But some lenders aren’t keen on co-ops or require higher down payments. And some co-op documents outright prohibit financing.
• Co-op monthly fees tend to be higher than condo fees. A co-op shareholder’s fee could include payments for the building’s mortgage and property taxes, security, amenities, and utilities.
• Condo owners pay property taxes on their unit, which may provide them with a tax deduction.
• With a co-op, the monthly dues for maintenance include the property taxes associated with the units, technically owned by the corporation, which receives one property tax bill. Each resident’s portion of that bill is tax-deductible.
House vs Apartment
If you are pondering whether to buy an apartment complex or a house, consider some of these key lifestyle differences.
• Unlike a co-op apartment or a condo, houses stand alone, and some folks prefer that breathing room. Hey, communal living isn’t everyone’s cup of tea.
• Along with the home, the owner owns the land that the home sits on, as well as any detached structures on their property like a garage or pool house.
• Similar to a condo, homes may require HOA fees that cover costs relating to security, maintenance, and access to any amenities in the neighborhood.
• A house typically will cost more than a condo or co-op apartment, but it usually appreciates faster than a condo. However, in hot housing markets, an apartment or an apartment complex could prove to be an excellent investment.
• With a house, there’s that yard to mow. Then again, you can have your own garden. With an apartment complex, you may or may not have common outdoor space, whether a courtyard or a roof garden. If it is part of the property, as the owner, you will be responsible for its maintenance.
💡 Quick Tip: One answer to rising house prices is a jumbo loan. Apply for a jumbo loan online with SoFi, and you could finance up to $2.5 million with as little as 10% down. Get preapproved and you’ll be prepared to compete in a hot market.
Finding the Right Real Estate Agent
While buyers can search for an apartment complex on their own, professional help is often a smart move.
Whether you’re a first-time homebuyer or a seasoned one, listing your top priorities can help an agent narrow down the options. Examples of things that could be important to you:
• Proximity to work or school
• Local crime rates
• Parking, traffic, and transportation
• Nearby amenities (gym, grocery store, shops, etc.)
When choosing a real estate agent to work with, it can be smart to speak to a few and ask them key questions to determine if they’ll be a good fit.
Think of it as a job interview and review their qualifications, learn more about their area of expertise, and find out how much it’s going to cost to work with them. Some questions worth asking are:
• How many clients do you currently work with?
• How many apartment units/complexes have you helped clients buy?
• Do you have references?
• What is your availability to show apartment buildings?
• How quickly do you typically respond to emails and phone calls?
• What are your fees? Do you have a network of professionals who can help with other aspects of buying and owning an apartment complex?
Recommended: Buying a Multifamily Property With No Money Down
Renting vs Buying an Apartment
Renting is not always cheaper than buying, but at the same time, any type of homeownership comes with added costs that renters don’t have to incur.
Before deciding whether to buy or rent, it’s best to ask yourself some important questions. And then you might want to check out a rent vs. buy calculator.
There are many calculators available, but they can only provide a loose idea of what may be a better deal long term, so that’s worth keeping in mind. Each calculator will have a different methodology.
Obviously, buying an apartment complex brings a different set of financial obligations and expenses to the table. Consider those vs. potential rental income carefully.
Next, take a closer look at the responsibilities that come with buying an apartment complex vs. just a single apartment.
Why Buy an Apartment Complex?
While the practicality and value of buying an apartment complex will depend on each person’s needs, goals, and financial situation, there are a few ways to tell if buying a multifamily building is a good opportunity.
• Income. You can earn rental income as an owner of an apartment complex. If you live in one unit and rent out the others, you will have a form of passive income coming your way.
• Wealth building. When you buy an apartment complex, you may well be building your wealth long-term as your equity in the property grows and its value potentially increases over time.
• Tax incentives. You may benefit from mortgage interest, depreciation, and other deductions come tax time.
• Supplemental income. You may be able to earn additional funds via providing laundry machines, parking spots, and the like.
However, you must also consider these obligations:
• Time and energy. You will likely have to invest a significant amount of time in shopping for and purchasing an apartment complex. Not only are you considering whether there’s a unit you yourself would like to live in, but you must also think about the real estate investment you will be making.
For instance, is the building structurally in good shape? What kind of capital improvements may be required in the future? And if you do become an owner, you will either need to find and hire a management company or be on-call for tenant issues and repairs 24/7 yourself.
• Funding. Buying one apartment can be pricey enough. Buying a multifamily building? More so. You will need to spend time getting your financing in order, and also recognize that you lose the liquidity of, say, cash in the bank or investments when you purchase real estate.
• Ongoing expenses. You must have an operating budget and be ready to finance the maintenance issues that are bound to occur. Also, as residents move out, you will need to expend time, energy, and resources to re-rent units. And what if an apartment sits empty for a while? Can you handle that in terms of cash flow?
• Liability. If an accident or crime were to occur at the property, you could be liable. It’s important to understand, prepare for, and protect yourself in the event of such incidents.
Steps to Buy an Apartment Complex
Soon-to-be apartment buyers will want to understand that getting their finances in order and securing a mortgage loan are some of the final steps toward the goal.
1. Do Your Research
Before you go shopping or apply for a loan, it’s important to understand the responsibilities of owning an apartment complex and to know the four different types of buildings, from Class A (best condition and amenities) to Class D (likely older and in need of repair).
You will probably want to learn more about the housing market and cost of living in areas you are considering. You want to feel comfortable that the area you are investing and living in is stable or on the upswing to protect your business interests and enhance your daily life.
2. Develop Your Budget
Purchasing an apartment complex can involve a six-figure down payment and a positive financial standing. You will also need to have worked through the cash flow implications of owning a multifamily building, including a budget for maintenance and reserves for unexpected expenses.
3. Get Preapproved for Your Loan
Finding the right financing may require a different path than getting preapproved for the purchase of a single-family home. You will need to find a lender who serves borrowers for multifamily properties. It’s likely you will need to have detailed financials prepared for this investment as well.
Don’t be surprised if you need up to 30% as a down payment, and recognize that your financial projections may count more toward your mortgage approval than your credit history.
Recommended: How to Afford a Down Payment, Step by Step
Pros and Cons of Buying an Apartment
If you are thinking of buying an apartment complex and living in one of the units, consider the upsides and downsides.
First, the pros of buying an apartment complex:
• Income. As an owner/tenant, you should be bringing in a stream of passive income which can build your personal wealth. This can be enhanced by offering additional amenities to tenants, such as laundry facilities or onsite parking.
• Wealth growth. You will likely build equity in your property, and the value of your building may increase over time.
• Tax deductions. As the owner of an apartment complex, you may be able to claim deductions and depreciation on your taxes.
• Convenience. In terms of your own residence, apartment life appeals to many who want an urban lifestyle or the ease of maintaining a smaller footprint.
On the other hand, consider these potential negatives:
• Expense. Buying a multifamily property will likely require a hefty down payment and an ongoing investment of funds to operate and maintain the building. You may have to cover loss on income also if, say, a tenant moves out and it takes several months to re-rent the unit.
• Time and energy. Maintaining your property, its financials, and tenant needs 24/7 is a major commitment. It’s not a simple side hustle in most cases!
• Liability. If someone were to be injured on your property or a crime were to occur, you might be liable.
• Lack of flexibility. As a resident of an apartment, you may lack the opportunity to customize your home as you could with a single-family house. You probably can’t add another bathroom or expand the kitchen much, for instance.
Tips on How to Buy an Apartment Complex
If you think buying an apartment complex is right for you, follow these tips to help make your ownership dreams come true:
• Do your due diligence. Scrutinize not just the structure and its mechanicals but also its financial records. You may want to review copies of leases and tax returns and have an appraisal done.
• Consider your financing carefully. You might get financing from the seller, a commercial bank, or a private lender. You may want to look into what are known as non-recourse loans which, if you were to default, would not allow the borrower to seize your personal property. These loans are typically costlier than recourse loans but can be a smart move for some borrowers.
• Get the right support. You’ll likely want to be advised by a real estate attorney with experience in this realm, and you may want to interview and hire a property management company to help you handle the sometimes constant demands of owning an apartment complex.
Are you ready to buy an apartment complex and possibly live in it? If so, it’s wise to be aware of the differences between a condo and co-op building, the financing and expenses involved, and how it may impact your cash flow, tax returns, and net worth. When securing financing, not all lenders will offer funding for multifamily properties, so it’s wise to shop around. If, however, you are simply shopping for an apartment in a building that someone else owns, you’ll likely have a more streamlined path (and many lenders to consider) as you pursue homeownership.
Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.
Is it profitable to buy an apartment complex?
Many factors determine whether it is profitable to buy an apartment complex. You will have to consider the cost of the property and its financing, maintenance expenses, the local housing market, occupancy rates, and many other variables. As with any business venture, it may or may not be profitable.
What questions should you ask when buying an apartment building?
When buying an apartment building, it is important to understand the condition of the building and improvements that will need to be made in the future, current and past occupancy rates and rents (ask to see leases), and the tax returns of the current owner (to know what the cash flow is likely to be like). It’s also wise to personally inspect each unit and request an appraisal.
How can you make money when investing in apartments?
It is definitely possible to make money when investing in apartments, but it’s not a given. You will need to have the means to afford the purchase, manage cash flow successfully, understand the rental market in your area, and keep up with maintenance and other liabilities while turning a profit. Working with an experienced, highly recommended real estate attorney and management company may contribute to your success.
*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.