The Beginner’s Guide to Flipping Apartment Buildings

By on July 10, 2015

I’d like to introduce you to Conor Flaherty – a guy with a wealth of experience in flipping apartment buildings, single family houses. He’s an expert in an area that I’ve always wanted to learn more about – so I’ve asked him to give us a the low down on how this all works.

What’s so great about dealing with large apartment buildings? I think it’s the fact that in many ways, it’s similar to dealing with a small property (like a single family house), but the numbers and profit potential is compounded, like a regular rental property on steroids.

I’ve asked Conor to give us a detailed overview of how these opportunities are found, financed, bought and sold. Take it away Conor!

Flipping an apartment building is a different animal than flipping a single-family home. The main difference stems from the way these buildings are valued.

Most single-family homes are valued with the comparable (or “comp”) method. This method takes similar homes that have recently sold and uses them to establish a value based on their similarity to the subject property. In other words, if the house next door sold for $100 and is exactly the same as yours, then your house should also theoretically sell for $100.

Apartment complexes on the other hand,  are quite different because their sale price is usually based on a “cap rate” basis.

A cap rate (aka – Capitalization Rate) is calculated by taking the property’s Net Operating Income (NOI) and dividing it by the purchase price of the property. To put it plainly, a cap rate is the annual return on the property before debt service. When you are flipping an apartment building, you need to keep your primary focus on the NOI of the subject property.

Now, this is not to say that the property’s aesthetics and location aren’t important (because they can make a big difference). For example – there could be two properties that produce the same NOI, but if one is in a good area and looks great and the other is in a war zone and looks decrepit – the nicer building is likely to sell for a far lower cap rate than the one in the war zone. Thus, a property’s cap rate can also be an indicator of risk. The higher the cap rate, the higher the risk.

An ugly property in a terrible neighborhood would need to offer a much higher yield because it presents much more risk than the nice one. As a general rule, you want to sell for the lowest cap rate possible, and buy for the highest cap rate possible.

In this post I’m going to outline the process I use to flip, or re-position, an apartment building.

Sourcing The Deal

Finding good deal is always hard whether it be a single-family house, a condo, an apartment building, or even a new car. The key is to understand the market you are buying in so you can decipher what is a good deal and what isn’t. The best way to do this is to find a good real estate agent or broker. The way I do it is to go on and see which agent has the most listings in the market that I like. Think about it – sellers are probably using this person for a reason!


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