Investing in real estate in 2022 is a great way to take advantage of a thriving industry. Property values are high, interest rates are low, and nearly every form of real estate investing is profitable.
The ways you can invest in real estate are nearly infinite. These methods range from residential home sales, to using a real estate crowdfunding investment platform, and everything in between. This is true across all categories of real estate: residential, commercial, and industrial.
In this article, I will focus on apartment building investment, which falls under the category of commercial real estate. Understanding what it is, how to do it, and why it can be an excellent option for real estate investors will help you decide if you want to dive in.
What Is Apartment Investing?
Apartment investing entails purchasing apartment buildings or financial tools that do the purchasing for you. There are several different ways you can create both active and passive income when you do this.
The most straightforward income you can create through apartment investing is rental income. This is the money you charge the tenants each month for living in the apartment building you own. How much you can charge depends on the local market, the condition of the building, and the consumer demand for apartments.
Another way you can profit from apartment investing is through appreciation. This is a core tenant of any type of real estate investing. When you purchase a property and then hold onto it for a period of time, the property's value usually appreciates. You enjoy a nice profit when you sell the property for more than you paid for it. We all like more money, right?
Property management is another way you can create additional income through apartment investing. If you serve as your own property manager instead of hiring it out, you can charge for things like snow removal and other apartment maintenance.
You can even make money through apartment investing without buying apartment buildings. Financial tools like real estate investment trusts (REITs) and real estate investment funds (REFs) allow you to invest and let others purchase apartment buildings.
Why Is Apartment Investing A Good Idea?
As previously mentioned, the real estate market is white-hot right now. Home values are sky high, and potential homeowners often get into bidding wars as they attempt to buy their next house.
What does this mean for apartment buildings? High home prices mean many people get entirely priced out of the home market. Of course, they still need a place to live, so they turn to renting in an apartment complex.
This increased demand means the owners of apartment buildings can charge higher rents. It also means they have shorter vacancies when one of their renters leaves. After all, there are a lot of other potential renters out there ready to fill the space.
Another reason investing in apartment buildings is a good idea right now is financing. Interest rates are relatively low, which means you can borrow money without paying a ton of interest. This improves your bottom line regarding the income you receive compared to the cost of purchasing an apartment complex.
Read on to learn about more reasons investing in apartment buildings is often a good idea.
After deducting all of your expenses from your net rental income, you have calculated your cash flow. Expenses often include maintenance, taxes, and your mortgage, just to name a few.
This is appealing to many real estate investors because it allows them to enjoy monthly income from their investments. Other investment strategies can often tie up money for extended periods, which some investors shy away from.
Cash flow is consistent with apartment buildings because leases are long-term (usually 12 months), and the rent gets paid every month. In addition, the aforementioned consumer demand for apartment buildings ensures you won’t likely have a shortage of tenants for extended periods.
Owning an apartment complex means you have more monthly income than you would if you rented a few single-family homes, duplexes, condos, or other buildings with a small number of units. That means you probably have the funds to invest in hiring a property management company. Many investors that want to invest in real estate without being a landlord take this route.Of course, you can certainly save money by handling this yourself. When you only own a small rental property, it makes a lot of sense. In addition, using a rental property management software system can help.
Tax laws provide several benefits for apartment building owners and investors. For starters, work with a certified tax professional to determine the rental property tax deductions you can take out when you file taxes. Things like maintenance, advertising, attorney fees, and many more can save you money each year. Other strategies like accelerated depreciation (higher depreciation expenses during the early years of ownership) and reducing your taxable income can also save you money.
You are probably familiar with residential real estate appreciation. Essentially, when the home sale prices go up around you, your home value rises. This is true of apartment buildings as well, but they also appreciate differently.
When the rental income in an apartment building increases, the property's value goes up as well. That means you can actively raise the value of your real estate by raising the rent.
Some ways to justify raising the rent for your tenants include renovating the building or adding services like security or parking. You can also increase your rental income by completing a construction project to add more units.
How To Buy An Apartment Building
Now that you know a little bit about investing in apartment buildings and why it’s a good idea, let’s illustrate how to do it. Real estate investments of any kind require expertise and diligence due to their complexity. It gets even more complex when you deal with multifamily properties like apartments instead of residential real estate. Read on to learn about the steps you should take to purchase rental real estate successfully.
Assess Yourself As An Apartment Building Owner
Before you purchase your first apartment building, it’s essential to think long and hard about whether you want to be an apartment complex owner. Think about the cost to acquire the property and how that fits with your current financial situation. Next, think about your cash flow goals and if owning one or more apartment complexes will help with those goals. Finally, consider how you might manage the property (or outsource it) in relation to your current work/life balance.
Assess The Type Of Apartment Building You Want To Buy
As you probably already know, apartment buildings come in many forms. Some are skyscrapers in a big city with 50 or more units, and others are converted single-family homes housing students on a college campus.
Determine the type of building you want to be responsible for and the amount of money you can afford for the purchase. If you have vast capital, consider apartment investments that require considerable acquisition costs. If you are not a big fan of continual maintenance, consider a newer building.
Find A Potential Property
There are a few different ways to approach finding apartments to buy. One way is to enlist the help of a professional real estate agent or broker. They will charge a commission when the deal is done, but they have the expertise and access to find you opportunities to review. Another way is to do the searching yourself. There will be a learning curve if you aren’t a real estate professional or seasoned real estate investor, but you will save money on commissions.
Whichever path you choose, pay close attention to where potential investment properties are located. A bustling city will have more potential renters than a rural area and will allow you to demand higher rents. Areas with high home prices are good to target as well. When people can’t afford to enter the home buying market, they turn to renting.
Carefully analyze a property before investing. Assess the number of units, the location, the maintenance or repairs required, and the finances. Think about your operating expenses, the loan amount, and your forecasted monthly rental income to find your rental property ROI. Use this rental property calculator as a resource.
Hire a professional inspector to review the entire property. They will let you know if there are expensive repairs needed and outline what your yearly maintenance of the building should entail. In addition, collect and review any legal documents like leases and tax returns from the owner.
Unless you are paying cash, you will need to get a loan to purchase an apartment building. Here are a few to consider:
Make An Offer
When you are ready to make an offer, your real estate agent is a great resource to lean on. They will understand the local market and what the property is worth. If you are doing it yourself, review recent similar sales in the area to get a sense of a fair price. Use that information, along with the records of the property’s income, to determine your offer price.
Close The Deal
If your offer gets accepted, it's time to make sure all the necessary paperwork is in order to get to the closing table. This will include any property disclosures the seller can provide, all the operational and financial documents for the investment property, and your loan information from your lender. Once everything is signed at the closing, you are the new owner of an apartment building!
Get Into Apartment Investing Without Purchasing Property
Rental properties can be a headache to purchase and manage, even if they are a sound investment. If you think you don’t have the desire for it, here are a few other ways to get into apartment investing without actually buying a building. Learning how to invest in real estate without buying property expands your options before making any decisions.
One way to make money off of apartment buildings without buying one is to invest in a real estate investment trust (REIT). REITs pool money from multiple investors to purchase real estate properties. Some focus on residential, and others on commercial real estate (like apartment buildings). Real estate investing always comes with risks, but one nice thing about REITs is that they are required to pay no less than 90 percent of their profits to their investors.
Real Estate Investment Funds (REFs) are like REITs, but they focus exclusively on residential real estate. When it comes to apartment investing, residential real estate is defined as buildings with five or fewer individual units. Consider a real estate investment fund if you are interested in putting your money into small rental units and don't want to purchase the property yourself.
Crowdfunding has revolutionized access to real estate investments. Anyone can go online, find a crowdfunding platform, and search for REITs and REFs to invest in. If you’re interested in learning about one of the leading platforms, check out this Fundrise review.
Apartment building investing can provide excellent investment opportunities that lead to monthly income and accumulated wealth. Think about your financial goals, do your homework, and consider if these types of investments are worthwhile for your specific situation.