Trading Rent Payments for Equity: How to Buy an Apartment

You’re not ready to give up city living just yet. After all, it would be tough to walk away from being able to walk to everything. Apartment living works for your lifestyle. But hammering out those monthly rent checks isn’t working for your long-term plans to build financial stability.

Apartment living with a little more permanence is possible. Many people are getting the perks of homeownership without the prickly responsibilities of white picket fences by purchasing apartments instead of single-family homes.

While many of the same rules and processes apply whether you’re buying a two-story dream home in suburbia or a two-bedroom oasis in a metro area, putting your claim on an apartment is its own real estate journey. We talked to the experts and poured through the data to help walk you through the steps to buying an apartment, including how to get started, financing your apartment purchase, the differences between condos and co-ops, and all the questions you need to ask before closing.

The interior of an apartment that was recently purchased.
Source: (Condos CCSCA / Flickr via Creative Commons Legal Code)

Examine your goals and finances

You’ve decided you want to stop paying your landlord’s mortgage without jumping to a house with a quarter-acre lot in the suburbs. How can you be sure that it’s really better to rent than to own? First, you need to determine if you have enough money for a down payment to buy an apartment in your specific market. If you’re looking at a conventional loan and you can’t put down 20% of the purchase price, you’ll likely have to pay for private mortgage insurance to protect the lender in case you default.

If your credit score is too low to secure a good rate from a private lender, you may be able to get a government-backed loan from the Federal Housing Administration (FHA), which is generally more lenient about credit scores. The downside is that with FHA loans, buyers will pay a 1.75% upfront mortgage insurance premium at closing, no matter the amount of your down payment. If your down payment is less than 10% on an FHA loan, you’ll pay mortgage insurance for the lifetime of the loan.

The secret that many people don’t know about buying an apartment is that there’s a good chance your new monthly mortgage payment could be lower than what you pay in rent. However, that doesn’t automatically make buying a better decision. You’ll be paying upfront costs like your down payment, closing costs, property fees, and property taxes. With this in mind, if you’re thinking of shaking the dust from your current city off your feet at any point within the next five years, you might not build enough equity or resale value to recoup that money, so it might be better to keep renting. Here’s the quick checklist for how to determine if you’re ready to buy:

  • Check your credit score. You’re entitled to one free credit report each year from all three bureaus. You’ll generally need a score of 620 or higher to qualify for a conventional home loan, although many lenders like to see a score of 680 or higher. The threshold is 580 or higher for FHA loans, but you may qualify for an FHA loan with a credit score as low as 500 if you have a 10% down payment. You should also be looking at your credit report(s) to spot errors that are harming your score. A higher score can set you up for better interest rates and loan terms that can make your loan less expensive.
  • Determine your debt-to-income (DTI) ratio. This is basically how much money you have coming in versus how much you have going out in monthly minimum debt payments. Typically, lenders like to see a DTI of 45% or less (though some buyers can go up to 50%), including your monthly mortgage payment.
  • Figure out how much “apartment” you can afford. The general rule financial experts swear by is that your monthly mortgage payment should be 28% or less of your monthly gross income.
  • Get preapproved or prequalified. Prequalification is a quick estimate of how much home you can likely afford. Preapproval is a more in-depth look at your finances that lenders use to determine how much they will lend and at what interest rate. This step really serves two purposes. The first is that you’ll know exactly how much you can afford based on a lender’s assessment. The second is that many agents prefer to work with preapproved clients.

Find a real estate agent

You won’t be going on the journey of buying an apartment on your own! You need an agent who is entrenched in the local market when making such a niche housing purchase, so you’ll want to take some time to do your homework. First, look for an agent who really knows the area. This is someone who routinely closes sales in the specific area where you’re looking.

When browsing agent profiles, look at the properties listed under “recently sold” on their websites. An agent who solely works with single-family homes may not have a full understanding of apartment-specific considerations you should be aware of.

It’s also a good idea to spend some time interviewing agents until you find one you mesh with. While the hope is that lightning strikes soon after you begin looking for your dream apartment, the truth is that you could be working with your agent for months.

Know what you’re buying

When looking at apartment options, the waters can get muddy when you’re trying to differentiate between condos and co-ops. While they may look identical in some cases, they’re not interchangeable. In fact, co-ops can sometimes make you feel more like you’re interviewing for a job than purchasing a home.

A few high rise condo buildings located in a busy city.
Source: (Isaac Benhesed / Unsplash)

What is a condo?

Purchasing a condo means purchasing a unit. This can look like anything from the top floor of a skyscraper to an attached-home style. When you buy a condo, you own everything within your walls. You’ll likely be paying monthly condo fees to share the cost of running the building and grounds.

Fees

While condo fees may not seem fun, they make life easier for most people compared to the cost and hassle of maintaining a house with a yard. Things like lawn care, snow removal, repaving, and pool maintenance are typically folded into any condo fees or HOA fees that you pay. Some condo associations even lump services like garbage collection, heat, electricity, sewer, and water into condo fees. Be aware that the one fee that isn’t folded into your condo fees is your property tax.

Condo fees can range from $50 to thousands of dollars a month, depending on your location, the amenities offered, and the type of property. While low condo fees may seem like a bargain, there’s something important buyers should know. What does it mean if a condo charges rock-bottom fees?

“If you have very low homeowner association dues, that means you [may be] opening yourself up for a special assessment because you don’t have enough reserves,” shares Sam Mansour, a real estate agent with John L. Scott in Lynnwood, Washington.

A special assessment occurs when a condo board doesn’t have the reserves to finance a necessary repair project and must collect the money from owners. The bottom line is that saving money on monthly fees can be costly in the long run.

Resale certificates

Another tip from Mansur is to ask the homeowner association to provide a resale certificate. This is a set of documents that covers the association’s rules, regulations, recent activities, and current reserves. More importantly, it also covers life expectancy for big maintenance projects like the roof. While not every state requires resale certificates, it’s something that every potential buyer can ask to see to ensure that the condo’s finances are in good order and there is enough money in reserve. Remember, if the condo does not have enough money in reserve, you’re on the hook to pay a potentially expensive special assessment.

Neighbors, subletting, and selling

When you own a condo, you’re going to get to know your neighbors. It’s just the nature of the game when you have a shared interest with the other people who live in your complex. You and the other condo owners will elect a board of directors tasked with representing the owners. The board’s job is to ensure the standards of building management, establish and maintain fiscal policies, and pass and uphold rules and bylaws.

Some of those rules will likely be around subletting. This is something Mansour believes is really important for apartment buyers to know about before committing to a property. While subletting might not be allowed, a condo works very much like a single-family home when you want to sell. You’re usually free to simply list your condo on the open market.

What is a co-op?

A co-op, or a housing cooperative, is actually a legal corporation consisting of shareholders. The corporation owns every part of the dwelling’s interior, exterior, and common spaces. As a buyer, you’re actually purchasing a share of the dwelling instead of owning your own unit. In addition, as a shareholder, you will participate in voting and decision-making for the corporation.

Cooperative structures differ and include a market-rate co-op, limited equity co-op, and group equity co-op. The market-rate co-op is most like a traditional condo setup in that you can sell your shares to another buyer at the current market value. A limited equity co-op limits the amount of profit a shareowner can earn, and with a group-equity co-op you generally won’t build equity on your initial deposit or share purchase, but you will usually get back your full, initial capital contribution when you sell.

Co-op ownership comes with an obligation to share the burden of maintenance and fees with all other shareholder-tenants. In some cases, a cooperative will hire an outside company to manage the property. There’s also typically a board of volunteers in charge of collecting fees, overseeing maintenance, and managing occupant concerns.

Whether you ever see co-ops for sale during your search may depend on where you live. Co-ops are much more common in crowded cities like New York City.

The interview process

The process of purchasing a co-op can feel intense. That’s because there’s a rigorous application process and board members actually screen new residents prior to welcoming them.

Financing co-ops

As you’ve probably guessed, buying into a co-op can be more complex than purchasing a condo. First, co-ops often have their own requirements for down payments that can override lender requirements. In many cases, the minimum down payment a co-op will accept is between 20% and 50%. Co-op boards also tend to have liquid asset requirements and they’ll dig deep into your finances and payment history to ensure you’ll be able to afford your purchase.

Since you’re not actually buying property with a co-op, if you’re going to get a loan for your purchase, you’ll get a share loan. Not all mortgage companies will finance co-op purchases, but lenders that do will look closely at the co-op’s financial documents to vet its financial viability. What’s more, the select lenders who do work in this arena may be more apt to provide loans for market-rate cooperative purchases to protect their investment, selecting a limited- or group-equity co-op may further limit your financing options.

Subletting co-ops

Finally, it’s important to choose between a condo or co-op with a lens on whether you’d ever consider renting your property in the future.

“If you own a condo, you [may] have more right to rent that condo,” shares Mansur. While renting out your co-op is possible in some buildings, it’s often a complex process and each co-op will have its own subletting policy. For example, a co-op may require that a shareholder must live in a housing unit for one to three years before they can sublet. What’s more, co-op boards can set limits on how long you can sublet and will ask to approve potential subletters.

When it’s time to sell, co-ops provide less flexibility compared to condos. Your co-op board will need to approve of your potential buyer before you can make a deal.

A balcony of an apartment building that was a must-have for the buyer.
Source: (Sigmund / Unsplash)

Create a list of must-haves

Once you’ve taken care of investigating your credit score, getting your down payment together, and lining up your financing options, the “dreaming” part begins. While this is the fun step of buying a home that most people fantasize about, it’s a phase that comes only after you have your ducks in a row. So first, it’s time for list-making!

While you can get the basics down on your own, consider refining your list of “must-haves” with your real estate agent. They see what people love and hate about properties every day. They can also help you to be realistic about whether you can have everything on your list.

Features

Determine what you need to be happy in a home. This is important because it will help your agent narrow down properties without wasting your time (or theirs) on showings and open houses that will get a hard pass from you because they are missing your big features. Here’s a look at some features to consider in an apartment:

  • Price range
  • Square footage
  • Outside access/balcony
  • Number of bedrooms
  • Layout
  • Full eat-in kitchen versus efficiency/galley kitchen
  • Walk-in shower versus tub
  • Sun exposure
  • The floor the unit is located on
  • Energy efficiency

Location

Create a search area with your agent. Take into account things like your commute, neighborhood preferences, and your desire to be close to certain landmarks. Don’t be too quick to commit to a property that’s farther from your nucleus just because it’s cheaper. Make sure to do a mock commute to your office to see how long it actually takes, and determine if it’s something you’ll be able to handle multiple times per week.

In addition to having a preference for the floor you live on, you may want to have “yes” and “no” lists regarding things like views, nearby street traffic, and elevator access. What seems like the perfect apartment could turn into a hassle if you didn’t realize that daily garbage collection takes place at the dumpster right outside your window.

Amenities

Condos and co-ops often offer a host of different amenities, such as concierge service, exercise facilities, swimming pools, and common areas. Consider which are most important to you. Generally, the more amenities an apartment offers, the higher the HOA or co-op fees will be. The must-have apartment amenity for many people is parking. Decide how important private parking is to you based on whether you have a car and what the public transportation situation is like in the area. If you host frequently, you should also find out about the availability of guest parking.

Do a research marathon

Once you have your sights set on a particular apartment, it’s time to dig into the details. Read all bylaws, rules, and regulations that are in place to make sure you’re not caught by surprise after you move in. You should also know what questions to ask before you make an offer. Here’s a cheat sheet of the big ones to get answered:

  • How old is the building? (This can be important for things like anticipated maintenance costs and resale value.)
  • Is there security?
  • How much is monthly maintenance?
  • What do maintenance charges cover?
  • What is the policy for special assessments if the reserves aren’t there to fund a big repair project?
  • Is parking provided and is it included in the monthly fees?
  • What’s the pet policy?
  • What are the subletting policies?

While most people think of purchasing a home as a time when their financial information is being scrutinized, buyers have the same right to inquire about financial statements. You need to know if you’re buying into a financially healthy dwelling before you make an offer. In fact, your lender may require financial statements and reserves from a condo association or co-op before approving your loan.

A view from the balcony of a new apartment.
Source: (Ostap Senyuk / Unsplash)

Make your offer

Once you do your research and find the one, it’s offer time. This is where your buyer agent’s expertise shines. Your agent will help you to make a competitive offer, and while the response is out of your control, your agent will be there to guide you through the next steps.

Now what?

When a seller accepts your offer, the countdown to closing begins. There are quite a few steps involved before you sign on the dotted line. In addition to submitting your earnest money deposit and ordering a title search and insurance, you’ll schedule an inspection to look for undisclosed structural or cosmetic problems.

For apartment buyers, there’s actually an extra step to this. You’ll need to get inspections for both your unit and the entire building. Based on what your inspector finds, you may need to renegotiate your offer. Sellers will sometimes compensate you for things that need to be updated or fixed in the unit as part of closing. Again, this is where an experienced agent is going to guide you.

Additionally, you’ll complete your mortgage application, order an appraisal, and receive your conditional loan approval. Your agent will also schedule a final walkthrough before closing day. The walkthrough is your chance to make sure everything is in order and any agreed-upon repairs are complete.

Glide (hopefully) through closing

Closing is often less chaotic than most people anticipate. By now, all of the hard work has been done. Your agent will guide you through everything you’ll need on the big day to close on time. The list of paperwork includes your mortgage note, transfer tax declaration, escrow disclosure statement, and deed. Once all the paperwork is done, you’ll get the keys to your new apartment, and you can move in!

Are you ready to buy an apartment?

The reward of buying an apartment is that the city you already love can finally feel like home. An apartment is a great way to put down roots, build equity, and enjoy that pride of ownership on your own terms. If the market in your city is a mystery to you, sitting down with a local agent for a chat can make it all clear! The perfect fit will put the city you love right outside your door without the need to keep throwing rent checks out the window!

Header Image Source: (Dima Shishkov / Unsplash)