One of the biggest concerns for a lot of people right now is moving from the renter's life to that of a homeowner. Since many people don't need or simply don't want a large single-family home, many wonder about buying an apartment. Since the vast majority of people that live in apartments just rent them, countless people are unaware that you may also be able to buy an apartment.
You can buy an apartment just as you would a conventional single-family home, and it can be much smarter financially since you are building equity in the property. Buying an apartment is slightly different than buying a house, such as residency and down payment requirements for loans.
There is a lot to consider if you're thinking about buying an apartment, and it's important to look at the big picture before you commit. There are down payment and potential loan requirements, as well as the primary consideration of whether it's better for you to buy than to rent in the first place. We're going to take a close look at what it means to buy an apartment instead of renting one and what exactly that may entail.
Can You Buy An Apartment Instead Of Renting
Absolutely. You can buy an apartment instead of renting, thereby becoming an official homeowner. Before you jump in, however, there are some things you'll need to consider. The first thing is the question of if it's right for you to buy instead of rent right now.
To answer this, you'll first need to ask yourself how long you plan on staying in the apartment overall. In most cases, particularly if you're getting any kind of first-time homebuyer tax credit or FHA loan, you must reside in the property you buy for a certain number of years or risk forfeiting either the loan or a portion of the tax break.
Generally, planning to stay for four years or less means you should probably just rent for those few years until you're ready to buy. If you plan on staying for at least five years, buying the apartment may be on the table. To determine the cost-benefit of renting versus buying in these situations, compare the rent that you'll pay (along with any forecasted rent increases and inflationary effects) to the potential cost of ownership. In most cases, the mortgage payment will be considerably less than the monthly rent, and you'll be building equity in the property.
There are also other considerations to take into account regarding home ownership, and they go beyond the simple monthly payment for your home loan. In order to buy a property, even an apartment, you'll need to have a certain amount of cash on hand for the down payment, which will certainly be more than is needed to just sign a yearly lease.
In some cases, such as a government-backed FHA loan, the down payment can be as little as 3%, but 3% of the purchase price can still be a significant sum. A conventional mortgage lender may require as much as 10% down to even consider the loan and may require additional mortgage insurance unless you're coming to the table with a 20% down payment or more.
Then there are the closing costs to consider. Closing is the formal finalization of the lending and property transfer process, where you officially take possession of the home. These costs will generally cover things like the property survey, the home appraisal and inspection process, title transfer and insurance, and more. On an average property with a modest purchase price, the closing costs can still be several thousand dollars, which can be a deal-breaker if the buyer isn't prepared to cover them or there isn't an agreement in place for the seller to pay them.
What Do I Need To Buy An Apartment
Before you buy an apartment, you'll need to figure out what type of apartment building is right for your needs. The type or size of the apartment building will also impact what type of loans you'll be eligible to take out for the purchase. For example, if you are going to apply for an FHA loan that is backed by the government, you'll need to stick with properties that have four or fewer units.
This will limit your searching to duplexes, triplexes, and fourplexes, as any buildings with more units than that will require a commercial loan and will not be eligible for FHA funds. If you've never owned an apartment before, this is a good thing since you'll likely have to manage the units yourself until you have the cash flow to hire a property manager.
Once you know what type of apartment building you're looking for, the following will guide you through the rest of the process.
Understand & Define Your Budget
Make sure you have a strict limit on what you're going to spend on buying your apartment, and be sure you have sufficient cash left after the purchase to make repairs and upgrades as needed. What you don't want is to have all units except for your home vacant because they aren't in the proper condition to attract tenants.
Be Able To Forecast Your Cash Flow
There are countless rental property cash flow calculators online; use one to ensure that you are creating an accurate model of your potential cash flow from your apartment. This will also help you find the ideal building to fit your needs and budget.
Choose Your Rental Market
If you are buying your first apartment, you should make sure you know your market well. This will likely mean sticking with your local rental market and using a cash flow calculator on some of the available buildings to see if the income model suits your needs. This is crucial if you're planning on living in one of the units since you probably don't want to uproot your whole life to go live in a rental market you aren't familiar with.
Get Pre-Approved Well Ahead Of Time
Compare several lenders and their corresponding offers before you choose one. You may even want to get pre-approvals from more than one, just so you can have more detailed quotes once you find a property that you feel is ideal. This will also show the seller that you are motivated and qualified.
Once you have a pre-approval or two, it's time to start personally visiting prospective properties in your chosen market. You can use popular real estate apps or any other method you find suitable to browse available properties. Be aware of the requirements that your chosen loan type may require when shopping, such as being in habitable condition and whether foreclosures or other distressed buildings are eligible.
Make An Offer
If you find an apartment that you feel is ideal and checks most or all of the boxes on your needs & wants list, you should make an offer. Remember that this is a business transaction, so try to leave your emotions out of the equation, and be sure that you have thoroughly evaluated the potential profitability of the building, assuming you'll be living in one of the units. If the building has serious discrepancies from their listing but still fits your needs, don't hesitate to make an offer that's lower than asking, even if it's lower by a significant margin.
Inspect The Building Thoroughly
Make sure you get a solid inspection done of every important part of the building. Inspections are relatively standardized, but make sure there is an extensive analysis of the roofing, plumbing, electrical, HVAC, and foundation. These are often the most costly to repair or replace, and if they fail inspection, it can drastically affect your cash flow forecasting and profitability models.
Lock In Your Financing
Bring your final deal and offer information back to the lenders that pre-approved you, and compare the final rate and term offers on the loans. Once you have compared all of the data, pick a lender, supply your personal financial information and statements, and get your formal approval.
Once you have your formal approval, all that's left to do is complete closing paperwork and take possession of the building. Now you can move in and begin making sure your remaining units are ready to rent and start generating your cash flow.
How Much Is A Down Payment On An Apartment
Depending on the value of the apartment building you're looking at, you may need anywhere between 3% and 20% for a down payment. On some smaller duplexes, this may only be a few thousand, while on larger triplex and fourplex buildings, you may need a down payment in the tens of thousands just to satisfy FHA requirements of 3%.
Knowing What It Takes To Buy An Apartment Can Make You A Homeowner & Property Manager
Buying an apartment isn't much different than buying a conventional home. While there are some additional considerations, if you're smart about it and keep your emotions off of the negotiating table, you could end up with a property that pays for itself in just a few years. Not only can you finally be a homeowner, but you can simultaneously become a landlord and property manager.
Keep reading: Second Home vs. Investment Property
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on Forbes, The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.