Investing in apartment buildings is a sure way to multiply your capital, earn passive income and secure your retirement.
Apartment building investing requires a significant amount of commitment—you need to treat it like a career and not just an investment strategy. While it’s a lucrative investment, it’s not easy. Far from it. It requires a big commitment since you need to treat it like a career and not just an investment strategy.
So, is buying an apartment complex a good investment? Yes. Today, we discuss why.
What Is an Apartment Building?
An apartment building refers to a residential building that contains four or more dwelling units with a common entrance. The whole apartment building is typically owned by one person or entity, and its units are being rented out to tenants.
The difference between an apartment building and a townhouse complex is its structure. While tenants in an apartment building share the same entrance to access their units, each unit in a townhouse complex has separate access from the ground level for its entrance.
An apartment building differs from a condominium in the way they are owned. A condominium is built by a developer, and each unit is sold to different individuals. On the other hand, the apartment building and all its units are owned by the same owner and are only rented (not sold) to tenants.
Is Investing in Apartment Building a Good Investment
Investing in an apartment building gives you a lot of unique benefits and income potentials that you might not enjoy from other investment options. Think of housing as a basic need. Everyone needs a home to stay in—however, not everyone can afford to buy one.
If you invest in a good location where there are a large population and plenty of job opportunities, you’ll be assured of high demand, high occupancy rate, and consistent income. Depending on the location, apartment building investing is generally a low-risk investment.
While many real estate investment professionals believe that investing in a large family-size apartment is your best bet, it does not apply to all investors, especially new ones. If you are just starting out to expand your investment portfolio to include apartment buildings, you can start small by choosing to invest in small apartment buildings.
Some small apartment complexes usually consist of three to four one-story units. Because they’re not many, it’s common to find small apartment buildings with separate entrances and a doorbell for each unit, just like a townhouse.
So, is buying an apartment complex a good investment? The most straightforward answer to this question is yes—that is, if you are committed to it. You may be wondering: why is investing in an apartment building a safer investment than other real estate investments?
Here are a few important reasons:
High Demand for Rentals
Often, there is a high demand for small apartment buildings. Many families prefer living in smaller buildings with fewer next-door neighbors and more relaxed rules where they can enjoy a more homey feel.
In addition, because real estate inventory in most markets remains low, you can expect more residents to need a place to rent since it’s difficult for them to find a house to buy. The continuously high demand for long-term rentals can give you assurance that you will get your apartment units occupied. It means that you’ll see a greater potential to build a more robust income stream from rent.
Stable Income and Cash Flow
With apartment building investing, you’re assured of a stable income stream and cash flow each month. In real estate investing, cash flow refers to the net income after paying all expenses, including repairs and maintenance, property management fees, taxes, mortgage, and other operating expenses.
Moreover, because an apartment building consists of more than just one unit, you don’t need to worry about a tenant moving out. If you get all four units of a small apartment occupied, and one unit gets vacated after a year or so, you’ll still earn rental income from the other three units while you wait for the other one to get occupied.
Plus, the average rental period for a small apartment unit is 12 months. Since it is the usual lease term for an apartment, you can be certain that you’ll receive a stable income stream for the whole year. As an investor, you can depend on your units to provide you income that you can save or plow back into another investment and build your wealth in the long term.
More Control Over Your Investment
When investing in multi-million apartment buildings, investors often have to join hands and form investment groups or syndications. In such a consortium, your level of ownership is diluted, and your voice may count for nothing.
You can invest in a small apartment building as a private investor by yourself or with two to three partners at most. It increases your control over the investment, as you don’t need to consult a lot of partners before making business decisions.
You may also decide to venture into an apartment building investing all on your own and handle all the property management tasks by yourself. You may actually end up paying less for property management fees and maintenance expenses since there’s no salary for an onsite manager.
It’s important to note that small apartment buildings may not generate enough income for you to hire a third-party property management firm. It may become an issue if you hold multiple small apartment investments because you’ll need to drive to multiple locations to oversee the repairs, maintenance, and administrative tasks. It is the reason why investing in apartment buildings should be treated as a full-time job. You need to commit your time and skills to ensure your investment becomes successful.
Nonetheless, it’s still a win-win situation because small apartment occupancy rates stay high. As the economy improves, you have a better chance of increasing your rent.
Small Apartment Buildings Are Affordable
It’s common to find new real estate investors buying small apartment buildings since they are more affordable compared to bigger complex buildings in most markets.
If you’re not getting the capital from your own pocket, lenders will mostly require you to place at least 20% of the selling price as a down payment. For example, if the building is selling for $500,000, you need to raise at least $100,000 for a down payment. A larger apartment building means a higher selling price. If, for instance, a bigger apartment building is selling for $1,000,000, you must put in a down payment of at least $200,000.
Lenders are more likely to approve a smaller loan with lower risk than larger loans, especially if you are just starting to grow your real estate portfolio. You’ll also notice that most lenders offer more products for small loans than larger ones. There are more available financing options for apartment buildings that you may want to consider, including loans from conventional banks, online lenders, credit unions, and savings banks.
The lower upfront costs make smaller apartment buildings more feasible for smaller private investors.
Scale and Diversify Your Portfolio
Small apartment buildings are not subject to a time limit that you must follow. You can build your apartment at your own pace. If you’re buying, you can buy one new building each year, biannually, or even once a decade, depending on your financial capacity and investment goals.
It’s also much easier to purchase and own multiple small apartment buildings in multiple locations because they’re generally affordable. This allows you to easily diversify your investment portfolio in order to build a high cash flow. It also provides a hedge against risks or unfavorable changes in the market, such as job losses, vacancies, economic fluctuations, and other factors that would affect your income stream.
However, keep in mind that simply owning many small apartment buildings doesn’t automatically translate to diversification. You also have to choose different locations for your investment properties, so in case one particular real estate market fluctuates, your other properties are protected.
Tips for a Successful Apartment Building Investing
Diving into real estate investment, especially as a beginner, is not an easy endeavor. However, with the following tips, you can make the process much more achievable:
1. Find the Best Investment For You
Whether you are new to real estate investment or expanding your portfolio, you need to ensure that you’re buying the right investment property. You don’t want to make an investment that won’t give you the kind of return you’re looking for.
To find the best investment for you, you need to make a few important considerations. Ask yourself the following questions:
- How much initial capital do you need?
- What’s the estimated cash flow, minus all expenses?
- Are you going to hire a property management agency?
- If you’re going to manage the property yourself, do you have the time?
- Are you ready to deal with tenancy paperwork and handle all maintenance issues?
Before you dive into such an investment, make sure you’re ready to invest the time and money required to run the rental business successfully.
Additionally, you also need to look at the property’s financial details before deciding to buy it as an investment. For traditional rentals, you have to do your real estate market research and analysis and find out the price-to-rent ratio in your chosen location. A higher price-to-rent ratio means that residents in the area are more likely to rent than buy a home because property prices are relatively high compared to rental rates.
Other factors that you should also consider when looking for an investment property include:
- The population in the area
- Job opportunities
- Neighborhood comps
2. Do Your Due Diligence
You’ve looked at a few 4-unit apartment buildings for sale and found an irresistible listing. Don’t be too quick to make an offer. Always ensure you do your own research and due diligence. Carry out a comprehensive analysis of the building so that you’re sure of what you’re getting yourself into.
You should know what to look for before investing in an apartment building, such as the following:
It’s vital to choose a neighborhood that is generally safe for all types of tenants, including young professionals, families with kids, and even retirees. Before deciding to buy an income property in a particular location, make sure to research the crime rate in the area and find out its safety score.
Moreover, choose a location that is most likely to attract tenants. For instance, consider a location that is near public transport systems, schools, health care facilities, and job opportunities.
Some apartment buildings offer amenities that may be helpful to the residents. For instance, if the apartment building is structured like a high-rise building, consider if it has a working elevator.
Does it offer enough parking space to accommodate tenants and/or guests? Or perhaps you can charge a separate parking fee for tenants who own vehicles. Some newer apartment buildings have other amenities like a gym or swimming, although these are not usually available in small apartment complexes.
Before buying any property, it’s crucial to have it inspected by a professional inspector first to ensure that its physical and architectural conditions will not pose any problem. While it’s normal to find a few things that need to be fixed, any architectural issues that are difficult or costly to fix should be generally avoided.
Consider also the age of the building and how well-maintained it is. You do not want to buy a property that may need a lot of costly repairs because it can eat up your capital and income. Also, it would be difficult to have it rented if the building’s condition is risky.
These factors are also crucial when determining rental rates. The building’s condition will help you know how many repairs it’ll need since it will affect your cash flow. In addition, the location can also affect your rental property’s occupancy rates and its resale value.
Apartment building investing can help you build your portfolio while getting an assurance of earning a steady income and cash flow. Buying a small apartment building is a great investment option, especially for new real estate investors. The rental income you can earn from apartment investing can provide you with a solid and consistent cash flow that allows you to re-invest and grow your wealth.
Small apartment buildings also give you more control over the investment since you might end up doing the property management yourself. Plus, it’s easier to access different funding options for small apartment buildings.
Before investing in small apartment buildings, it’s essential to perform your due diligence to know your potential cash flow. However, doing the research yourself is not an easy process, and this can be laborious and time-consuming. Fortunately, Mashvisor offers an investment property calculator that provides all the real estate data that you need and makes computations a lot simpler.
The property calculator lets you know the rate of return on your investment by providing you with projections and calculations. The tool factors in the expenses involved in managing the property, financing, and return on investment. You can also add your custom expenses and edit the financing information based on your preference to get a more personalized computation.
To learn more about how we can help you make smarter real estate investment decisions, schedule a demo today.