Is Buying an Apartment Complex a Good Investment?
Have you ever asked yourself the question, "is buying an apartment complex a good idea?" It's a common question for real estate investors, and we'll be diving into it in this article.
If you have been in the real estate investing game for some time, you may be wondering how to step up to the next level. Anyone can purchase a house or a single apartment and rent it out as an investment. But an entire apartment building? That is extreme, and if done correctly, can be extremely rewarding.
As can be expected, there is going to be an increased level of complexity that comes with investing in something as significant as an entire building. If you are willing to put in the time and effort to get it right, it can go amazingly in your favor. So how exactly does one go about purchasing an entire apartment building? And how can you ensure that it stays a good investment? Read on to find out.
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Is it Difficult to Own an Apartment Building?
So, you have decided that owning a single apartment is not enough, and you would like to get the whole building? Investing in such a huge and niche area is a big decision that should not be taken lightly. So, the first step is to make sure that it is the right decision for you. You need to have a firm understanding of the complexities involved in owning a multi residential building. Fortune Builders lists some of the bigger responsibilities that an investor will experience:
- Management of several tenants concurrently (each with a separate rental agreement).
- Unique maintenance issues (for the individual apartments and the building as a whole).
- Complex government restrictions and liabilities, including unique insurances.
The more intricate the apartment building, the more work is going to be involved. Of course, this also means the potential for high returns is larger too. If the apartment complex has a carpark attached, a swimming pool or a gym, or other common areas, these will need to be managed and will incur extra costs. You may also need to hire security and concierge personnel. Especially if the complex is in a major metropolitan area.
Pros and Cons of Investing in an Apartment Building
Investing in an apartment building is an exceptionally large and ongoing commitment, and a decision should not be made lightly. There are of course both pros and cons, as with everything in the real estate investing world. Multi Family capital market advisors highlight some of the main pros and cons to owning a multi-family, built apartment complex.
- Cash flow. The more families that live in the complex, the more potential for rental income. The more features your apartment offers (swimming pool, rooftop common area), the more you could potentially charge for rentals.
- Tax incentives. There are a lot of expenses incurred through owning an apartment building, and luckily most of these can be deducted at tax time. Investors can take substantial mortgage interest and depreciation deductions also.
- Equity growth. Apartment buildings are growing in popularity, especially in city areas. Your equity will grow substantially as the property increases in value.
- Potential for supplementary income. Even something as simple as putting a vending machine in a lobby can bring about unexpected returns. There are also many other ways you can earn extra income outside of rental – parking for non-residents, laundry costs, cleaning services and pet watching.
- Time investment. The purchase of an apartment building is not done overnight. In reality it can take months to finalize. And even once the investment is complete, you will still need ongoing management and maintenance. Even if you hire a property manager, it is important that you do not stop keeping an eye on what is happening on your property.
- Tenant issues. The more tenants you have, the higher the likelihood of issues. Vacancies and high tenant turnover can end up costly, and it can be a full-time job following up on nonpayment of rent (especially in times of economic hardship).
- Low liquidity. For the same reason that it takes so ling to purchase an apartment building, it is also time consuming and pricey to sell it. They can also be difficult to sell, as you will need to find a buyer who can handle the investment.
How Much Money Can You Make from an Apartment Building?
How much money you can make from an investment in an apartment building really depends on several factors. Firstly, the value of the building. Clearly a modern apartment building in a major city that is brimming with features is going to attract a high level of upper-class tenants who will be willing to pay inflated rent. Of course, your expenses will also be higher.
Owning an entire apartment building as a sole proprietor is going to yield maximum revenue of course, but the initial cost is out of most peoples reach. So, investment strategies such as partnerships and syndications are common. This of course means that you will need to chare any profit and income with the other parties, however the costs will also be split.
Selling of the Apartment Building
You can also make a great deal of profit on the sale of an apartment building. Especially if you were to purchase cheaply and take the time to upgrade. Even something as simple as adding a penthouse can make your return-on-investment skyrocket. Penthouses and higher end apartments often rent for tens of thousands per month in certain areas and make the sale extra appealing.
Owning and investing in an entire apartment building is not going to be for everyone, and that is fair enough. It does bring about unique advantages for investors who are willing to put in the hard work, and although it can seem daunting, a well-managed apartment building can end up being a very fortuitous and long-term investment. Understand the risks and take advantage of the pros and it could just be the best decision you ever make.
Charles is the founder of infoSpike.com. His real estate investing experience started in 2004 and he is currently focused on rental property projects. He enjoys learning about real estate investing, personal finance, and marketing. Read more about Charles here.