Commercial Real Estate News / Investing / Small Apartment Buildings for New Investors

Small Apartment Buildings for New Investors

Published: 09-01-23 Category: Investing

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The outside of a small apartment building.

Buying small apartment buildings for sale can be a great first exercise in multifamily investing. With average annual multifamily returns of 8%, small apartment investing can proffer both passive income and valuable multifamily investing experience.

Here, we'll cover the basics that new investors should know when buying small apartment buildings for sale. We'll discuss how multifamily purchases work, the types of apartment buildings you can buy, and the potential returns of multifamily investing.

Let's get started.

How Does a Multifamily Real Estate Purchase Work?

Generally speaking, here's how a multifamily real estate purchase works: The owner buys the building, including the land, residential units, and any building common areas. The owner can then lease and rent out the individual units to tenants who pay monthly rent to live there.

The owner of the multifamily building is responsible for the general maintenance of the units and of the building's common areas. They're also responsible for managing the property, finding tenants, and ensuring legal compliance for multifamily accommodations.

Typically, multifamily owners pay a property management firm to handle day-to-day operations and tenant communications.

What Are the Types of Small Apartment Buildings?

The term ‘small' is somewhat subjective, but smaller multifamily buildings usually fall into one of these categories:

Duplexes/Triplexes/Quadplexes. Duplexes are the smallest type of multifamily property and consist of two separate units in a single building. Many investors convert owner-occupied, single-family homes into duplexes and rent out the extra space. Triplexes are the same except with three units rather than two, and quadplexes have four units.
Apartment Complexes. Multifamily buildings with five or more units are apartment complexes. Complexes can be low-, mid-, or high-rise as well as low-, mid-, and high-density. High-density apartments are more common in urban areas and low-density complexes are more common near suburbs.
Townhouses. Townhouses are somewhat of a mix between single-family homes and apartments. Townhouse units typically have multi-story floor plans, like single-family homes, but are often part of a larger structure that contains other townhouses.
Condos. Condos can have layouts similar to either townhouses or apartments. The main difference with a condo is that the resident owns the unit instead of renting it. Residents can purchase units from the building owner instead of leasing it for a monthly rate.

Investors can also find mixed-use buildings that might have separate commercial and residential units. These kinds of buildings often have commercial space on their ground floors and residential units on their higher floors.

How Can I Buy My First Small Apartment Building?

Small Apartment Buildings for New Investors

Unless you have deep pockets, you'll probably need a commercial loan to buy commercial apartment buildings. You can search for a loan for a commercial investment property through traditional channels, like a bank or private lending institution. You can also seek investment financing through Peer-to-Peer (P2P) platforms that directly connect lenders and borrowers, such as Yieldstreet.

Depending on the type of building, you may be eligible for a government-backed housing loan. FHA multifamily loans are available for owner-occupied multifamily units with two to four units. Multifamily investors may also qualify for government-backed loans for acquiring and rehabilitating low-income affordable housing.

Regardless of where you're looking to buy small apartment buildings, you should work with a commercial real estate broker. Brokers have expert knowledge about the real estate financing, buying, and leasing processes, so they can help you find investment properties, negotiate sales transactions, and market the property to find your first tenants.

How Much Does It Cost to Buy Small Apartment Buildings for Sale?

In 2022, the average per-unit cost of multifamily accommodations was $212,181, representing an 11.2% increase from 2021. Like any type of property, the value of small apartment buildings for sale depends on the city and state.

Below are average multifamily sales prices in various large markets around the US:

Los Angeles: $2,566,384;
New York: $6,883,012;
Chicago: $2,008,365;
Philadelphia: $1,906,894;
San Antonio: $746,555;
Atlanta: $3,952,406; and
Louisville: $1,670,700.

Various factors can affect the cost of apartment buildings, including location, building materials, tenant amenities (e.g., gym, pool, recreation areas), and the total number of units.

How Profitable Are Small Apartment Buildings?

One of the best features of investing in small apartment buildings is they provide an extremely consistent stream of month-to-month revenue. So, even if you're not netting a large profit between your mortgage, taxes, maintenance, and insurance, you almost always have consistent cashflow.

According to data from iProperty Management, the average one-year net ROI on a single apartment unit is $8,190, while the average annual rental income per apartment unit is $9,976. Low-rise and low-density apartments typically have lower operating costs but charge lower rents.

Cap rates for apartments in the US have averaged about 7% for the past decade, which is higher than the 5.5% average cap rate for single-family homes. In other words, multifamily investing can be more profitable than single-family investing.

Are Small Apartment Buildings a Good Investment?

Yes, small apartment buildings can be a great investment because they provide a relatively low-cost way to get into multifamily investing, and demand for housing is relatively inelastic.

Aside from consistently passive income from rent, apartments appreciate in value as multifamily rental demand rises. Multifamily financials have also remained strong through the first half of 2023, after experiencing record-highs during 2021 and 2022.

Of course, investing in small apartments for sale has its risks. Maintenance costs can vary from month to month, and it might be hard to sell physical real estate during a market downturn. If you're having trouble finding tenants, you may have to make some lease concessions to attract renters.

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