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First of all, it would make sense to say that owning apartments is a profitable rental strategy. However, besides the advantages of it, there are still downfalls to this strategy. In this post, we are going to dive deep into both the advantages and the disadvantages of apartment rentals. Before we get into that, let’s talk a little about what factors contribute to its profitability or non-profitability:
Is Owning Apartments Profitable: Location
You know the saying in real estate “location, location, location.” Well, sure enough, it is not there for nothing. In fact, it is one of the most important aspects of profitable investments in real estate. One fact you must understand is that you can fix a property to make it profitable. However, you cannot fix a location. If the profitability rates drop for a certain location, it will drag down all the investment properties within it.
As for how to choose the right location, there are some general criteria and some that are more specific. Generally speaking, when choosing a location, it would make sense to check the job market in that area. The job market is a strong indicator of demand for apartment rentals in the real estate market. It is also an indicator of future market trends. One way you can check the job market is by contacting the chamber of commerce in that area. They have all of the data that will help you decide whether that certain area is worthwhile. Another thing to look for in a location is facilities such as gyms, shopping malls, and schools. These factors contribute to tenant turn-out to certain locations.
On the other hand, the specific criteria are what you must take into account. It includes the comparative market analysis process. This means that you must look for real estate comps which are similar investment properties to which you are going to compare yours.
Is Owning Apartments Profitable: Numbers
Numbers are also important to determine how profitable is real estate when you own apartment rentals. This process consists of the investment property analysis and this is what you need to analyze:
The return on investment: How much the investment property is expected to generate in profit in relation to what you have initially invested on an annual basis.
The cash on cash return: You basically calculate your net profit and divide that by the amount of money you have invested from your own pocket. Make sure to exclude any external financing.
The capitalization rate: This measure is calculated by dividing your annual net profit by the total property price.
Is Owning Apartments Profitable: Legalities
Taking care of legalities is part of the due diligence process. Neglecting them, however, might cause you to lose your business. Therefore, making sure to check with the state’s regulations where you plan to invest in real estate is as important as location and numbers in this case.
Is Owning Apartments Profitable: Plan-B
No matter how lucrative an investment strategy appears, it is always best to have an alternative plan. Sometimes, things can take an unexpected turn in the real estate market. Therefore, when buying apartment rentals, you want to make sure that you have a plan to compensate for any unexpected events that might occur in the future.
Is Owning Apartments Profitable: Working with Professionals
If you are a beginner real estate investor and this is your first time purchasing rental properties, hiring a real estate agent would be a great idea. These agents are experts in the field. They are on top of the market and know what to look for in apartment rentals that make them profitable investments. Moreover, real estate agents could save you the effort of analysis as they already have all the data at their disposal. So, make sure to find a real estate agent who knows the area well and watch him/her while they work.
Benefits of Investing in an Apartment
Now that you know what can make owning apartments profitable, here are the advantages of investing in them:
#1. Is Owning Apartments Profitable: Multiplied Income Stream
Having multiple units at your disposal is a great way to generate wealth in real estate. Renting out these properties provides you with multiple streams of rental income on a monthly basis. Therefore, this means that you have more cash flow each month than if you were renting out a single-family home, for example.
#2. Is Owning Apartments Profitable: Building Equity Faster
Having multiple sources of rental income is a great way to build equity by repaying the mortgage. In fact, it will help you repay it faster and therefore build equity over the property.
Also, due to this fact, it is easy to get financing for an apartment building. Lenders never hesitate to lend a real estate investor the money to invest in apartments. Why? Because there is a guaranteed income from multiple sources.
#3. Is Owning Apartments Profitable: Tax Advantages
Just like all other types of real estate, apartments are subject to property tax deductions. These include property expenses as well as any losses in addition to other unexpected expenses associated with it. Therefore, at this point, we suggest that you check out the tax laws in the state you wish to invest in and see what deductions apply to this particular investment strategy.
#4. Is Owning Apartments Profitable: Property Appreciation
Another major benefit of apartment ownership is property appreciation. Real estate properties tend to rise in value at a steady rate on an annual basis. This makes it a great way to make money in the short-term while renting it out and in the long-term while it appreciates. By the time you sell the investment property, it would have dramatically risen in value especially if you hold on to it for a long time.
#5. Is Owning Apartments Profitable: Growing Your Portfolio
Owning apartments is the best way you can grow your real estate investment portfolio faster. An apartment building can have somewhere between 5 or more renting units in it. Therefore, this will add up to your investment record.
#6. Is Owning Apartments Profitable: Reduced Risk
Investing in apartment rentals can be a great way to mitigate the risks of any losses in the future. Owning apartments guarantees an income and reduces the risks of high vacancies. If you manage to rent out half of them, you can guarantee that your business is paying for itself. You can also make sure that your business is capable of maintaining mortgage payments.
#7. Is Owning Apartments Profitable: Property Management Fees Make Sense
Professional property management is a huge part of real estate investing. If you own a single-family home, hiring a property manager will cut a significant amount of money from your single rental income. However, that is not the case with apartment rentals. Having multiple units located in the same building will make it much easier and, of course, much cheaper to hire a property manager to take care of them. Therefore, it makes more sense to invest in apartment rentals.
Want to find the best apartments for real estate investing? Use an investment property calculator. Read: Investment Property Calculator: A Simple Guide On Using It