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.

Before we begin, though, one small bit of housekeeping:

What's the Difference Between Apartment Buildings and Apartment Complexes?

An apartment building is a single structure with multiple units, while an apartment complex can be much larger, spanning multiple buildings. Functionally, both are the same — they offer apartments to rent — and from an investment perspective, they are also handled similarly.

The real difference lies in how they're managed. A sprawling suburban apartment complex with several buildings and a clubhouse requires a different approach than a six-unit building downtown.

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 and 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, 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 significant expenses. 

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.

5 Traits of a Great Apartment Investor

Despite the wealth of lucrative apartment investing opportunities out there, this field isn't for everyone. Not sure if you've got what it takes? Test yourself against the key five personality traits of an apartment investor below.

1. Strong Analytical Thinking

If you're thinking about buying an apartment complex, the most important tool in your kit is your brain. You've got to be able to analyze multiple investment opportunities and see the strengths and weaknesses in each.

Finding a property in a great location may seem simple, but if you don't understand your market's dynamics or your competition, you may be setting yourself up to fail.

2. Risk Focused

Multifamily investments are often touted as being low risk. That's broadly true, but there is a massive difference between a low-risk investment and a no-risk investment.

Understanding what risks exist in your investment strategy is key to coming out on top. Managing vacancy risks, focusing on maintenance issues, keeping an eye on local and national laws — all are ways of managing and mitigating risk in any multifamily investment.

3. Detail Oriented

You know that apartment investing can be time consuming. That's largely because of all the moving parts involved in running even a small apartment complex.

Renting to multiple residents with competing needs, getting ahead of long- and short-term maintenance issues, ensuring your rents are set correctly, knowing when the best time to buy or sell is — these are all important and rely on a very detailed look at your asset and your strategy.

You can reduce some of your focus on the details through a property manager. This can be an excellent idea, but it doesn't take care of everything. An eye for detail is still critical for every aspect of your investment.

4. Self Motivated

Multifamily investment isn't easy. It requires hard work, diligence, patience, and discipline. At the center of all these qualities is self motivation. Being self-motivated is important for apartment real estate investment because it helps you take action, overcome challenges, set and achieve goals, build resilience, and maintain a positive attitude — even when the going gets tough.

5. Financially Street Smart

If you're investing in an apartment complex, understanding the financial side of a business is key. You will need to be able to calculate your return on investment, weigh opportunities using metrics like cap rates, and more.

And that's before we even get into finding a loan for your multifamily investment. Before you take any financing package, you need to familiarize yourself with everything from interest rates and trends, how much leverage you need, and what sort of long- or short-term financing package your property can support.

You'll also need to have a good understanding of broader economic issues. After all, the economy has a direct impact, both on multifamily financing as well as rent growth. Understanding the stock market and commercial real estate market's connections is also key, as it can help you seek opportunities or weather downturns.

The Final Word

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, 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.