The lucrative and stable returns that come with real estate investing are no longer the well-kept secret they once were. Today, you have a variety of investment opportunities to choose from that will carry you towards your financial goals and aspirations.
Investing in apartment complexes is growing in popularity as individuals seek a promising asset class that offers reduced financial risk and a strong, stable cash flow.
The demand for affordable housing is ever increasing in urban centers across the globe. People need a roof over their heads, and apartment complexes are the best choice for a diverse market, including students, young professionals, singles, and the low-income workforce.
Promising as it is, there are a few things investors need to know before they jump on the apartment investing bandwagon. In this blog post, we’re going to cover the benefits of investing in apartment buildings, factors you need to consider before you begin, and how to get started.
First Things First
Your end goal should be at the forefront of your mind at all times. Before contemplating apartment buildings as a real estate investing strategy, make sure you understand what you wish to gain from the venture.
Managing an apartment investment requires a significant outlay of time and energy – and in many cases experience – to achieve success. Are you looking for a profitable career change? Or do you seek to gain a passive source of income over the long term?
Many investors prefer the latter. If that’s the case for you, it’s best to consider partnering with accomplished professional syndicators like People’s Capital Group, who can take the pressure of managing the investment and the property off your hands. That way, you can secure your best chance of investment success, and you know the dividends you receive remain entirely passive.
Why Invest in Apartment Buildings?
Investing in apartment buildings is a great way to diversify your portfolio. You can start earning money quickly and gain a substantial amount over the long term.
Multifamily properties hold advantages over single-family properties because they produce better cash flow, the investment comes with a lower risk, and apartment complexes are scalable.But that’s just the beginning! Here are a few more reasons why we love apartment building investments.
Everybody needs a roof over their head. Apartment complexes are the preferred source of affordable housing for a diverse target market, including students, singles, young professionals, and the low-income workforce. As a housing option, they will always be in high demand.
Real estate investors benefit from multiple income streams and reduced financial risk protecting them from low occupancy rates. Even with 15-20% vacancy, the owner of an apartment complex can still cover monthly baseline expenses and be making money.
On the other hand, if the owner of a single-family home experiences vacancy in their property, they are required to cover the operational costs and face losing their income stream until they can find replacement residents.
Strong and Stable Cash Flow
Cash flow is the net income you receive after all operational expenses such as mortgage and maintenance are accounted for. The aforementioned high demand for apartment buildings means that they will always be a necessity.
The average lease for an apartment room is 12 months, which provides a stable cash flow term per tenant. Compared with single-family homes, even a slight rental increase, of say 3% applied to all tenants over the complex, will incur a significant increase in overall rental income and a greater return on investment.
Scalable Property Management
Pricey property management fees can motivate single-family homeowners to manage their properties on their own. With the increased income generated by apartment buildings, it’s easier and more affordable to hire a third-party property management company to handle the burden of daily operations.
Managing an entire apartment complex – including tenancy issues, property maintenance, and repairs – can be a full-time job. The facilitation of hiring a third-party property management company often appeals to investors who prefer to spend their time doing the things they enjoy.It’s also easier to manage five or more units under the same roof than five different units across multiple properties in multiple locations.
Forced Property Appreciation
The value of an apartment building is driven by the rental yield it generates. Where a single-family property will usually appreciate as the market value of other comparable homes rises in a given locality, apartment buildings can undergo forced value escalation if the owner raises the rental rate.
You can increase the rental income of an apartment complex by adding amenities for the tenants. By offering tenant parking spaces, renovating the building, and providing essential services such as laundry and security, you can then justify a rental increase.
If the property is located in a metropolitan area, apartment owners can increase the building’s revenue by incorporating public reserved parking spaces, adding a gym or a cafe, or including ATMs in the apartment.
Another way to increase the income of the building is to decrease the expenses, for example creating efficiencies in repairs and maintenance costs. These are all ways to dramatically increase the cash flow and value of the apartment with forced appreciation.
Investing in commercial real estate comes with favorable tax laws, which is why it’s such a highly sought-after asset class among many real estate investors. As an apartment complex investor, you can opt for a variety of strategies to decrease your tax obligations.
Multifamily offers accelerated depreciation, where the amount of depreciable tax is higher during the earlier years of an asset’s life. Another popular strategy among apartment building owners is a cost-segregation analysis, where different elements of an asset, such as land and personal property, are depreciated at different rates. This allows you to claim more depreciation per individual asset rather than averaging it.
It’s worth speaking to a professional tax accountant about these tax advantages to ensure they are implemented legally.
Ways to Invest in an Apartment Building
There are many approaches that individuals can choose to invest in an apartment building, depending on their knowledge, experience, available funds, and their investment aspirations. Like any other profitable business, investing in apartment buildings will require capital, time, and energy. The amount of each you have to offer to your venture will determine the most suitable investment approach.
Do it Yourself
If you have the funding available to invest in an apartment building upfront, the savvy to find a good deal, and the time available to manage the operations of the apartment, investing on your own may be a good option for you.
Investing in a 100-unit complex usually requires at least a couple of million dollars, along with the time and experience to manage it so that it produces a profit. This is one of the riskier ways for an investor to become involved in apartments. However, when executed well, it can prove to be incredibly profitable.
Partner With Professional Syndicators
Not every investor has wads of cash lying around and years of experience to enter into the market of multifamily properties on their own.
In this case, partnering with a professional syndicator with extensive local market knowledge, industry connections, and loads of experience in the field is an easier option to access the lucrative opportunity that comes with apartment building investments.
Professional syndicators like People’s Capital Group raise capital from multiple investors, then secure and manage real estate investment deals. This brings many advantages for investors.First, you can access the same remunerative returns as the pros. Second, if you passively invest in multifamily property syndication, you are not responsible for managing the daily operations of the asset. Expertise available to investors, high returns, and minimized risk are all reasons why professional syndication partnerships are one of the simplest and most profitable multifamily real estate investing strategies out there.
If you want to add a professionally invested and managed apartment building to your portfolio without the responsibility of daily management, talk to the dedicated and experienced team at People’s Capital Group today.
Become a Syndicator
While some investors prefer a simple passive investment strategy, others enjoy sinking their teeth into their investments with a hands-on approach. Even if you don’t have the upfront capital to invest in an apartment complex, you still have the option to become a syndicator yourself.This strategy requires the most time and energy of the three because it requires you to manage not only the apartment complex, including sourcing, daily operations, and asset resale, but it entails the mediation of investor relationships.
When syndicating a deal, you need a solid real estate education under your belt, which is not always evident if this is your first apartment building.
Other investors in your syndicate may have knowledge and experience to offer, though as the sponsor, the financial success of the venture usually comes from your own decisions. In general, passive investors seek an experienced partner that they can trust to manage the project.
How Much Can I Make Investing in Apartment Buildings?
The potential income you can earn as an apartment investor is indicated by the capitalization rate (or cap rate). This is a function of the property value and net operating income and is expressed as a percentage.
To get your cap rate, calculate the net operating income (NOI).
Start by subtracting all outgoing expenses (including mortgage payments, taxes, maintenance, and property management) from the total income you make (including rental income and any additional revenue from extra amenities like parking, laundry, or a gym). The remaining value is your NOI.
Next, you divide the NOI by the market value.
This will give you the cap rate, which indicates the profitability of your investment.The initial cash outlay associated with purchasing commercial real estate is higher than single-family rental properties. If the rental income exceeds expenses such as the mortgage, maintenance, and repairs, this class of real estate investing can produce extremely high returns.
In particular, when you consider the benefits of forced appreciation, both your potential income and purchase price when you do eventually sell will increase the returns you see when investing in apartment buildings. That said, it’s important to be realistic about the costs involved in apartment investing. Big-ticket repairs and maintenance, as well as unexpected or long-term vacancies, can affect your bottom line.
Factors Real Estate Investors Should Consider Before Buying an Apartment
There are lots of advantages to investing in apartment buildings. That said, you need to consider all aspects of the investment and what it may mean for your lifestyle thoroughly before you enter into this asset class.
Determine the Type of Apartment Building
There are many different types of apartments on the market, and each comes with its own unique and attractive qualities that can carry you to your end goal. For example, a rehabbed victorian apartment is different from a modern multifamily property located in an urban space.In older buildings, big-ticket expenses like outdoor painting, plumbing, and electrical repairs are more likely to arise. They may also offer more opportunities for forced appreciation by rehabbing the interior, than a modern complex.
Determining the type of apartment that is right for you will help achieve your investment goals faster, and will get you the best returns on investment for your budget.
Mind your Due Diligence
Be sure to seek advice from the professionals when necessary, and do an in-depth analysis on the expenses your investment will incur – such as repairs and maintenance – as well as the rent you can charge. Some factors worth considering are:
- The number of apartment units
- Amenities that are available and those you plan to add
- The building’s condition – this can help you prepare for repairs and maintenance expenses that may affect your bottom line
- Location – this is affected by socioeconomic factors that influence long-term profitability, such as rental yield, occupancy, and the resale value when you eventually sell.
Many people consider managing an apartment as a full-time job. Think about whether you have the time and experience to invest in managing the building yourself or whether you can afford to fork out for a third-party manager to handle the daily operations for you.
If you choose to outsource management, ensure that the company or person can handle the work. Companies may choose to manage the property in a way that is cost-efficient and time-effective for their business. In some cases, this could work to the detriment of your investment goals.
Ensure you have a trustworthy, competent, and experienced team behind you to ensure the best outcomes for your investment venture.
Investing in apartment complexes is a serious project and can offer lucrative financial rewards when executed properly.
If you have the time, capital, and investment experience available to manage the property and mind your due diligence, investing or syndicating on your own may be the right choice for you.On the other hand, if you’re interested in gaining a passive income stream and benefiting from portfolio diversification with this profitable asset class without the responsibility and temporal demands of managing it yourself, it’s best to partner with professional syndicators.
If you’d like to learn more about professional syndication partnerships, talk to the competent and dedicated team at People’s Capital Group to help you achieve your investment goals today.