Investing in Apartments: Pros and Cons
Hard-working professionals are seeking ways to diversify their income and create the lifestyle of their dreams. Many have turned to real estate, but a growing number are investing in apartments instead of single family houses.
For most, apartment investing or multifamily sounds like an excellent way to add another income stream, but they don't know enough about the subject to take the next step. The truth is there are many approaches to get in the multifamily game and start earning passive income.
You might be thinking that this sounds too easy. Well, it definitely takes work and we’ll cover some of the pros and cons of investing in apartments. But first, let’s define this alternative investment.
What Is Multifamily?
As the name implies, multifamily is a building or structure designed to accommodate several families in different housing units. It comes in many forms, duplexes, triplexes, quadruplexes, townhomes and apartment building. It may be owned by an individual, a business, or an individual who purchased a unit.
Investing in apartments is attractive for the various benefits, especially for high income earners seeking tax relief, but there are some drawbacks to consider. As you weigh your options, take a look at its pros and cons.
Pro: Favorable Returns on Multifamily
As you might expect, you’ll generate larger cash flow in multifamily compared to a single-family home. Cash flows from rental income is the money left over after all expenses and mortgage payments. Cash flow isn’t just king, it is the cornerstone of multifamily investing.
Effectively managing cash flow can drive impressive returns that are hard to match from other investments. Even conservative returns from apartments tend to be favorable to other asset classes.
Related Podcast: How to Create a Lifetime of Cash Flow with Rod Khleif
Con: Requires A Large Cash Outlay
The acquisition of an apartment building requires a large cash outlay, covering the down payment, closing costs, fees, reserves and any capital expenditures to stabilize operations. This amount can quickly add up to a sizable figure.
Pro: Control on Appreciation and Value
Unlike single-family homes, which are valued based on comparable home sales, values for apartment buildings are determined by the income they produce in relation to other apartment buildings in the area.
Typically, you’ll have clear comps for rents, sales and income producing extras such as parking and laundry to inform operational decisions. This enables investors to force appreciation by simply increasing income or decreasing expenses.
Con: A Non-liquid Asset
Relative to other investments, apartments are not liquid. To get money out of an apartment, an investor typically needs to sell or refinance. Furthermore, it usually takes months to identify a qualified buyer, agree to purchase terms and then close on the sale.
Pro: Centralize Operations and Efficiency
A major benefit of owning an apartment building over the equivalent number of units in single-family homes is scale and efficiency.
With one building, you can efficiently manage expenses and centralize operations. There is a central location to handle inspections, meet contractors, collect rents, and show vacant units without the hassle of driving all over the city. Expenses are decreased with fewer roofs, mechanicals, and other inefficiencies.
Also, a vacancy in a single-family home provides no income, but with an apartment building, the other units will continue to generate cash flow. As an example, when one of our inherited tenants stopped paying rent, it cost us thousands in unpaid rent and repairs.. However, the other units in the building still generated enough for a positive cash flow.
Con: Risks are involved
Like any investment, apartments certainly carry their fair share of risks. With larger price points and less exit strategies than say a single-family home, it’s imperative to understand these risks and minimize them.
Proper analysis of the local landscape and target property is critical. Specific items that should be considered include: tenant demand, existing and planned apartment inventory, local economic factors, and available financing terms.
Related Podcast: From the Best Advice to $175,000,000 with Joe Fairless
Pro: You can keep your day job
One of the best things about apartment buildings is being able to hire a professional management company to oversee it. This provides a passive investment that allows you to benefit from owning real estate, without the hassle of a 2 a.m. call to fix a leaky toilet. And if you invest passively with a sponsor, they will manage all aspects of operations while you simply collect the distributions. Whew!
Con: Less Profit for You
There’s also a downside to professional management. They’re probably not going the extra mile to squeeze out more profit for you, especially if it doesn’t make them more money.
In fact, many property management firms make additional money through unit turnovers, tenant placement, repairs, maintenance, late fees, etc. Therefore, it’s imperative to proactively lead and manage the property management company and align their interests with the optimal operations of the property.
Related Podcast: How to Manage Out of State Properties with Sep Bekam
Pro: Less Tax Obligation, More Money for You
They say it’s not what you make, but how much you keep and the tax benefits of apartment investing make it one of the strongest assets to help you keep more money and minimize your tax obligation.
You can write off all of your expenses (advertising, management fees, maintenance, etc.), which can help you reduce your taxable income. You can defer capital gains and recapture taxes when you sell. You can even depreciate the value of the building over the stretch of 27.5 years. And if you use a cost segregation analysis you can accelerate the depreciation schedule for even greater savings.
Investing in Apartments: Is It For You & How to Start
Multifamily investing takes work. On top of it all, you need to choose the right property, maintain it and effectively manage residents.
If you’re looking to get started you need to ask yourself a few more questions. How much time can you dedicate to owning and managing multifamily? How do you find good deals? How do you properly and conservatively analyze deals?
We’ve come across many people who love the idea of investing in multifamily for the additional income or tax benefits, but aren’t looking for a second job. Many of them have benefitted from investing in apartment syndications, which allows investors to pool resources together to buy a property. However, in this case, there is a dedicated operator who oversees all operations, allowing the investors to simply collect checks.
Related Article - How Does Real Estate Syndication Work?
Let’s say there are 10 people with $50,000 each to invest. Instead of each of them buying single family rentals, through apartment syndications they decide to pool those funds together and use the $500,000 as a 25% down payment to buy a $2 million apartment complex. This is a major advantage and strategy that advanced investors employ to maximize their dollars as well as their time. This is how we buy apartments and just employed this strategy to acquire a $40 million apartment complex.
Now, you don’t have to jump into a $40 million acquisition, but if you’ve concluded that the pros outweigh the cons, it’s time to do your homework. You can continue learning more about multifamily in various blogs, podcasts and forums. In doing so, take an honest assessment of how much time you’re willing to invest in owning and managing multifamily and get to know others who are investing in multifamily today. Find out for yourself why so many rave about the benefits of investing in apartments.
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