How to Buy an Apartment: What You Need to Know

Buying an apartment can offer the benefits of homeownership without the space or maintenance demands of a single-family house, but the process isn’t always as straightforward as buying a traditional home. Depending on the property, you might be purchasing a condo, buying shares in a co-op or even acquiring an entire apartment building as an investment. Understanding how these ownership structures work, what they cost and how to finance them can help you decide whether buying an apartment is the right move.

If you have questions about how an apartment purchase can affect your long-term financial plan, consider talking to a financial advisor.

Can You Buy an Apartment?

Yes, you can buy an apartment, although what you actually purchase depends on how the property is structured. In the U.S., individually owned apartment units are commonly called condominiums, or condos. Buying a condo generally gives you ownership of your individual unit along with a shared interest in common areas such as hallways, elevators, recreational facilities and outdoor spaces.

Some apartments, particularly in cities such as New York, are organized as housing cooperatives, or co-ops. Instead of purchasing the apartment itself, a co-op buyer purchases shares in a corporation that owns the building, with those shares providing the right to occupy a particular unit. Co-op boards may also impose financial requirements and require prospective buyers to complete an approval process.

It is also possible to purchase an entire apartment building as an investment property. In this case, the buyer owns the building and typically earns income by renting individual units to tenants. Financing, insurance, taxes and property management can differ substantially from buying a single apartment for personal use.

Beyond the purchase price and mortgage payments, apartment owners may need to budget for homeowners association (HOA) dues or co-op maintenance fees. These payments can cover expenses such as building maintenance, insurance, amenities and common-area repairs. Buyers should also review the building’s financial statements, rules and potential special assessments before making an offer.

The “Rent vs. Buy” Decision

Perhaps the biggest factor in deciding whether to rent or buy is the length of time you expect to stay in your new apartment. Generally speaking, if you don’t anticipate living there for at least five years, renting is likely to be a financially wiser move.

If you plan to live there for five or more years, compare how much you are paying to rent with how much you could be paying to own. A mortgage payment will generally be less than rent, assuming the place you want to buy is similar to the place you’re renting. That’s because your landlord is paying the same as you would for principal, interest, taxes, homeowners association fees, and repairs, plus a little extra for profit.

Still, there’s more to owning than the payment. To buy something, you’ll have to put up more cash than you would need to sign a lease. The biggest outlay will be for the down payment. The amount required for this depends on the type of mortgage you get and potentially even where the home is located.

Most government-backed mortgages insured by the Federal Housing Administration (FHA) call for a low down payment of at least 3.5% of the purchase price. Veterans may even be able to get a $0 down payment loan through the Department of Veterans Affairs (VA). For a conventional loan not backed by the government, you’ll be expected to put down 20%.

For example, if the apartment you want to buy costs $200,000, you can expect to pay $7,000 for a 3.5% FHA down payment. On the other hand, a conventional lender will want $40,000, or 20%, down.

You’ll also need cash for closing costs. These pay for the survey, appraisal, home inspection and title insurance, among other costs. Closing costs on a $200,000 home can total a few thousand dollars. You may be able to include closing costs in the loan amount, although this will increase your mortgage payments. You can’t usually borrow the down payment, however. You’ll need to have that in cash.

Calculating What You Can Afford

Now it’s time to see how much you can afford to pay. Start by figuring out your debt-to-income ratio. To do this, add up all your monthly debt payments, such as credit cards, car loans, student loans, child support payments, alimony, and your estimated mortgage payment.

You can then divide this figure by your monthly income and express the result as a percentage. If your total monthly debt payments come to $2,000 and your monthly income is $5,000, you’ll divide $2,000 by $5,000. The result is 0.4, or 40%.

Lenders use this debt-to-income ratio to determine how much payment you can afford to make on a monthly basis. They will usually look for a debt-to-income ratio of no more than 43%. If you find yourself above that mark, it may be tough to qualify for a mortgage. You can improve your debt-to-income ratio by planning for a lower mortgage payment. That usually means buying a lower-priced apartment.

SmartAsset’s mortgage calculator can help you simulate the entire process above. All you need is the full price of the home, the size of your down payment, the type and length of the mortgage you’re getting and the interest rate you expect to receive. Don’t neglect other costs, though. These include property taxes, homeowners insurance and possibly homeowners association fees. All of these costs combined can add several hundred dollars a month to your payments.

Buying Into Condos or Co-ops

An alternative to buying an apartment might be buying into a set of condominiums or a co-op, which physically is set up similarly but can be quite different to manage. When you purchase a condominium, you are buying a unit in a building. That means you will share the costs of running the building with other condo owners. Purchasing a co-op means buying part ownership of the corporation that owns the building. Rather than a specific unit, you’ll own shares in the corporation.

Mortgage lenders have different requirements for condo and co-op loans. For instance, they may want to see that a condo association has enough money in the bank as financial reserves to cover any needed repairs or maintenance. Some lenders are reluctant to make co-op loans because they can’t repossess the unit if you have trouble making payments. So if you’re looking for a loan then you may find an apartment or an affordable single-family dwelling to be a better option.

Getting More Help

Would-be apartment buyers can get help navigating this home-buying journey from a licensed real estate agent. An agent can help with questions about pricing, taxes, fees and communities. At the same time, he or she can provide valuable insight into how to negotiate with sellers.

You can even integrate a financial advisor into your homebuying experience. These individuals will often work together with real estate agents to ensure that the decisions you’re making are aligned with your overall financial goals. Plus, they can answer your questions about what you can afford and how much of a loan you can target.

Bottom Line

Buying an apartment can mean purchasing a condo, acquiring shares in a co-op or investing in an entire apartment building, depending on the property and ownership structure. Before buying, consider the purchase price alongside ongoing costs such as mortgage payments, property taxes, insurance, HOA dues or maintenance fees, as well as the property’s rules and financial condition. Comparing these expenses with other housing or investment options can help you decide whether an apartment purchase supports your financial goals.

Tips to Improve Your Finances

Although financial advisors typically deal with shaping your investment strategy, they often can handle much more than that, such as helping you with buying an apartment. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
A well-thought-out budget is the first step toward achieving full control over your finances, especially when you’re thinking about buying property. If you’re finding it difficult to begin the budgeting process, SmartAsset’s budget calculator can offer a few suggestions that will start you off on the right foot.