10 Ways to Buy a Small Apartment Building

To buy a small apartment building, you first have to know exactly how to get money for a rental property. So, we’ve gathered here the top ways you can find funding for your first rental.

Article Summary

• You can use business lines of credit, SBA loans, bank loans, hard money loans, home equity loans, real estate crowdfunding, REITs, seller financing, investor partnerships, and even credit cards to buy a small apartment building.

Business Lines of Credit 

Typically, business lines of credit function similarly to credit cards. The lender gives you a set amount of money. Then, you can draw money from that set-away stash as needed. Our Northern Virginia property management company weighs the pros and cons as:

Pros:

• You can use the money to buy a small apartment building on demand.
• Plus, you will only owe interest on the money you end up spending, not the initial lent amount.

Cons:

• Business lines of credit usually have short repayment periods, which will force you to gather repayment funds in a fast-tracked timeframe.

Small Business Administration (SBA) Loans 

SBA loans can be used to help small businesses start their business or grow it, pay for day-to-day expenses, buy a small apartment building, or other costs of operating a business. While private lenders provide these loans, they’re securely backed by the government’s Small Business Administration.

Pros:

• SBA loans have longer repayment periods.
• Also, SBA loans can have lower interest rates.
• Both smaller and larger loans are offered.

Cons

• SBA loans can have long approval waiting periods.
• They require a down payment.
• Usually requires collateral.
• Has stricter qualification standards.

Traditional Bank Loans

Many people think about these loans first when they hear about how to get money for a rental property. Their qualities are as follows:

Pros

• Low interest rates, often below 7%.
• Can easily be eligible with a good financial background (like your credit score)
• Has long terms, lasting decades
• Can be a good fit for people with ideal debt-to-income ratios

Cons

• Has stringent financial requirements, so can have barriers to entry for people with a less-than-ideal status
• Approval can take months, which can delay your investment plans.
• Your property must be in good condition. This can disqualify people who want to use their loan for a house flip.

Hard Money Loans 

Hard money loans are short-term, asset-based real estate loans.

Pros of Hard Money Loans

• Flexible uses—you can use them for nearly any real estate purpose
• Smaller time commitment than traditional real estate loans
• Takes little time for approval, typically within a few days or weeks

Cons of Hard Money Loans

• Lenders may require higher interest rates and down payments than other loans do.
• Loans are secured by your property. Due to that, if you cannot sufficiently prepare for repayment, you may have to give up your property

Home Equity Loan

In terms of how to buy your first rental property, there’s also a home equity line of credit (HELOC). This loan type is solely for homeowners who want to use their home’s equity to buy a small apartment building.

Still, HELOC policies and requirements are usually harder to navigate than other loan options, so that’s something to keep in mind.

Pros of Home Equity Loans

• You’re given a long time to repay, usually up to 10 to 20 years
• You don’t need to pay any down payment as long as you use your own equity
• HELOCs can be deducted from your tax returns

Cons of Home Equity Loans

• To be eligible for a HELOC, you must own a home
• Interest rates are not fixed, so they can change as the market changes
• Typically, HELOCs require you to pay yearly expenses, like maintenance, transaction, and other fees

Real Estate Crowdfunding

With real estate crowdfunding, multiple investors pool together funds to collectively buy a small apartment building or portfolio of them. This method allows you to have a stake in a property without putting down too much money on it.

Pros:

• Your partial stake in the property allows you to have a more passive investment.
• Because you have a limited stake in the property, you also have a limited say in what happens to the property.

Real Estate Investment Trusts (REITs)

If you want to invest in real estate without the burden of owning it, a real estate investment trust (REIT) may be your solution. REITs are investment tools that let individuals invest in profit-making real estate asset portfolios without actually owning said properties. Typically, you can access them through stock exchange trades.

Pros

• REITs can be a great way to slowly dip your toe into the real estate industry and see how the inner workings of investing happen.
• They are easily accessible for people who participate in stock trading.

Cons

• REITS generally offer less returns than property ownership can provide. So, if you want to accumulate wealth quickly, this may not be the best way to do it.

Seller Financing

For other options in how to buy your first rental property, private seller financing is one method. Here are the specifics of it:

Pros

• Private sellers can sell to you directly, without the usual exhaustive purchase processes.
• They may offer lower price tags on their properties than companies would.

Cons

• This method has fewer regulations regarding seller behavior, so you will have to choose sellers carefully.
• Higher interest rates can be required.
• Agreement terms may not be ideal for buyers, compared to traditional mortgages.
• If the buyer doesn’t make their payments, the seller could default on the mortgage.

Investor Partnerships

Additionally, you could team up with investors to split the different aspects of property ownership. The pros and cons could look like this:

Pros:

• The other investor could handle the financial aspects of ownership

Cons

• You will bear the burden of overseeing your property (unless you get the help of a property manager)
• Since you’re entering a long-term business agreement with them, you will be stuck if you find they’re unsavory in any way

Credit Cards

Surprisingly, some people buy a small rental property with credit cards. This can have its own unique effects:

Pros

• Again, you can buy a small rental property directly, with no middleman required.

Cons

• If you can’t pay your credit card bills or your credit card is canceled, you will be in for some very heavy payments and debts.
• In particular, in the event of a cancellation, you must pay your entire property amount immediately.

Manage Your Rental Property with PPM

You can use HELOCs, hard money loans, seller financing, and other methods to buy a small apartment building. By employing these methods, you can jumpstart your career as an established real estate professional.

After you learn how to buy your first property, then actually buy a small apartment building, managing it comes next.

You will likely learn that managing a property and its tenants is no easy task. It requires hours of dedication, problem-solving, and sacrifice. However, there is a way to avoid this outcome. You can hire a professional property management company to handle these burdens for you. We can handle:

• Repairs and maintenance
• Rent collection
• Evictions
• Marketing to tenants
• Property inspections
• Legal compliance

…and more!

So, call us today to secure a truly passive investment.