Apartment buildings can be one of the best places to invest your money – even when the economy is going sideways. That being said, there are advantages and disadvantages to every type of investment. In this article, I would like to go over the pros and cons of investing in apartment buildings.
Pros and Cons of Investing in Apartment Buildings
—- Pros —-
1. Predictable Income Source
The #1 reason that I and many wealthy investors choose apartment buildings is they provide a steady source of income. Chosen properly, in a good location and area, an apartment property will provide cash flow month after month.
Businesses come and businesses go – especially in retail, office, and warehouse properties. However, people will always need a place to live.
2. Property Appreciation
The value of an apartment building is based on the Net Operating Income the property provides to the investor. The great thing about apartment properties is that you can increase the value of the property – without investing in new siding, windows, carpet, or even paint!
When you increase income, reduce expenses, or both, you will increase the value of your property. Let’s say the average CAP Rate in your area is 10%. If you increase the Net Operating Income by just $1,000 per year, you have essentially added $10,000 to the value of your property. This can be done with a combination of raising rents and reducing expenses – and it can be done on many properties. This is one of the most closely guarded secrets of professional investors.
3. Principal Reduction
Your equity increases every month in apartment buildings – automatically. This is because your tenants are paying down the mortgage on your property with their rents. Every month you receive rents, pay out expenses, and pay the mortgage. With each of those payments, you are gaining equity and increasing your wealth.
Apartment properties provide one of the best tax sheltered investments available. Because of the way the tax laws work, apartment buildings benefit in two ways: through depreciation expense while you own the property, and you also can sell the property, re-invest the proceeds into a new property, and not pay taxes on the gain. Try that with stocks or mutual funds!
—- Cons —-
1. Property Management
One of the downsides of apartment properties is they do require someone to manage the property. This is probably the biggest reason why investors shy away from apartments. However, when you purchase a property correctly, you should be able to hire a professional property manager and not be involved in the day-to-day operations.
2. Investment Liquidity
Obviously you cannot buy and sell an apartment property like a stock or mutual fund. It takes time to sell when you want to “cash in your chips” down the road. So it is a longer-term investment than other alternatives.
3. Maintenance Issues
This goes hand-in-hand with management as being the main reason investors do not get involved with apartments. Again, maintenance and management can be professionally handled when you purchase the property correctly. The income stream coming in from rents should cover these expenses, and allow you, the investor, time to look for your next deal.