What Investors Should Know Before Purchasing an Apartment Property
Investing in an apartment complex is one of the most time-tested ways to build wealth. In fact, multifamily investing has an incredible array of benefits, including cash flow, the ability to finance properties with a limited amount of money down, and incredible tax benefits (just to name a few). However, apartment investing isn’t always sunshine and daisies; investors have to put in a lot of hard work to make sure their properties turn a profit. In this article, we’ll discuss some of the major pros and cons of owning an apartment complex. That way, you can make a more informed decision as to whether acquiring a multifamily property is a good fit for your personal investment needs.
The Benefits of Apartment Complex Ownership
As we just mentioned, apartment ownership can have a wide variety of benefits. Some of the most substantial benefits include:
Cash flow: While some types of investments, such as dividend stocks and annuities, provide some degree of payments to investors, they generally don’t hold a candle to the amount of cash generated by apartment buildings.
Leverage: Apartments have the massive benefit of allowing borrowers to put down around 20% to 30% of the sale price while financing the rest over a 25-30 year amortization period. In general, stocks, bonds, mutual funds and other types of investment opportunities offer nothing of the sort.
Tax Incentives: Multifamily real estate is an ideal investment from a tax perspective. Not only can investors take substantial mortgage interest and depreciation deductions, but they can also often deduct travel and utility costs, as well as other expenses.
Equity growth: Just like a single-family home, as time goes on, an investor will generally build up equity in their property as their mortgage is paid off. In addition, equity will increase if the property itself increases in value.
Syndication/partnership potential: While most stock or bond investors invest by themselves, apartment complexes are an ideal investment for groups. By teaming up with other investors, you can purchase larger and better properties, maximizing your potential profits.
Supplementary income: Though rental payments from tenants are typically the most substantial source of income for an apartment complex, other sources of income can make a serious difference. The most common supplemental income sources include laundry machines, vending machines, and parking spots for non-residents (which can be particularly profitable in upscale urban areas).
The Downsides of Apartment Complex Ownership
While owning a multifamily property has tons of advantages, it has a number of potential downsides as well, including:
Time investment: Selecting, financing, and purchasing an apartment complex can take months. And, while you can hire a property management company to take care of many of the day-to-day responsibilities of apartment ownership post-purchase, you’ll still need to spend a certain amount of time supervising the management company to ensure your investment remains profitable.
Local market factors: While smart multifamily investors are careful to purchase real estate in great locations (or locations that seem to be trending towards greatness), no one can predict the future. For instance, the neighborhood you thought was gentrifying could see an increase in crime and poverty, leading to a steep decline in the value of your investment.
Vacancies and tenant issues: While tenants generally provide 95% or more of the income generated by an apartment property, they can also cause serious headaches. Even tenants with great credit and long-term leases sometimes leave unexpectedly, not to mention those who fail to pay their rent, or worse, cause significant damage to your property.
Liability: While smart property owners always have a robust insurance policy, owners still could potentially be held liable for accidents and crimes that occur on the property. This risk is basically non-existent for comparable investments such as stocks, bonds, or real estate investment trusts (REITs).
Maintenance expenses: From windows and railings to appliances and lightbulbs, apartment buildings often need constant maintenance, and landlords are responsible for paying for it. While insurance may cover larger items, maintenance, repair, and replacement costs are still a significant expense.
Low liquidity: Unlike stocks or bonds, you can’t simply click to sell an apartment building-- and, even if you could, you might not get the price you want. Multifamily properties often take several months to sell, and closing can be a time-intensive process.
Apartment Investing is a Great Opportunity, But It Isn’t For Everyone
Owning an apartment property isn’t everyone’s cup of tea. The ideal apartment owner/investor has a decent level of risk-tolerance, a strong work ethic, good critical thinking skills, and a willingness to work with numbers. However, if you possess the factors mentioned above (or at least a few of them), purchasing an apartment building could be an excellent choice—and a great way to provide income for you and your family for years to come.