Investing in real estate, particularly an apartment building can be the best decision you’ve ever made. An apartment building can be a great asset and a wonderful source of income. But it takes hard work, mitigation of risk, and knowledge of what can go wrong to keep your investment profitable.
The Pros of Buying an Apartment Building
Owning your own investment property can be your dream come true. A solid apartment building investment offers stable, predictable cash flow and the opportunity to provide affordable housing to good people.
The real advantages to owning an apartment building investment property are:
It’s an income producing asset that appreciates in value
Given the right market, your apartment building should be increasing in value. Meanwhile, your tenants are paying you monthly rent to live there, thus paying down the principal debt. Virtually no other investment opportunities can deliver those kinds of results.
Your rents offer a means of stable cash flow
You know how much money will be coming in any given month. You can budget and plan for renovations, contingencies, or even add amenities that create even more positive cash flow like laundry facilities, storage, or parking.
These two amazing little words can mean a world of difference when it comes time to pay your taxes. You may be able to deduct mortgage interest and real estate taxes on your rental properties. You can also write off standard operating expenses and depreciate the cost of your building over time. This will vary by individual and property type.
You benefit from economies of scale
When you have multiple renters in one space your residents share walls, a roof, a boiler, landscaping, etc. This saves you a ton of money compared to if you rented out single-family homes. One roof to repair, one yard to landscape… you get the idea.
You are providing a clean, safe, and affordable home
With competitive rents and ensuring your building is up to safety and health standards, you are providing the public a service.
Renters aren’t going anywhere anytime soon
There are over 114 million renters in this country and that number is increasing by over 2,500 per day. The majority of renters tend to be: millennials who don’t want the hassle of dealing with the upkeep of their own home and may be stuck with student debt; and aging baby boomers who choose to downsize.
The Cons of Buying an Apartment Building
If owning an investment property is so great, why doesn’t everyone do it? Well, there are drawbacks. It takes money to invest and knowledge in managing not only the property but the tenants as well. This can eat up more hours than a full-time job if you can’t afford a property management company and aren’t able to attract investors.
Most importantly, by definition, an investment is a risk, and it can pay off, or it can put you into debt. Apartment building ownership is not as rife with rainbows and sacks of cash as the infomercials would lead you to believe. Here is a list of realistic disadvantages of investing in an apartment building.
It can be difficult to attract and keep good tenants
Renters who pay their rent on time and who stay are the lifeblood of positive cash flow and they are hard to find. You can do your best to mitigate this by adhering to tight screening policies like checking landlord references, verifying income guidelines, and checking criminal and credit reports.
You will have tax implications when you sell
The good news about this is that it only negatively affects you if you sell your rental property, but the potential for having to pay is huge. Long-term capital gains taxes and depreciation recapture hits are never fun, so make sure that a tax professional is making these calculations for you before you sell so you know what to expect.
Changing markets with no viable exit strategy can be crippling
External factors like a decline in the economy and changes in the local housing market can cause your apartment building investment to fall in the red. If your exit strategy either doesn’t exist or will not work, you are stuck with a debt that is no longer producing cash flow. For tips on creating exit strategies, see How to Reduce Risk When Investing in Multifamily Real Estate.
Government regulations can interfere with profit margins
When the government interferes with housing and creates rules around rent control, building ordinances, or environmental regulations, you might have to make changes that affect your bottom line.
Your property needs to be managed
Advertisement, maintenance, tenant management, landscaping, rent collection… the list could continue on and on, but someone needs to manage your property. If you don’t have enough money to hire a professional management company to do this for you, you have to be your own property manager.
An apartment building investment is much less liquid than many other investments. If you need cash fast, it is difficult to just sell it off like a stock. Keep this in mind when investing and diversify your investments when possible.
There is a risk of your property not being resilient
All real estate goes through ups and downs. There are market highs and lows and losses due to mismanagement or natural disasters. A resilient property will bounce back from the lows. For more information on how to identify a resilient multifamily building, check out these tips.
Just like with any investment, there is risk. Staying informed of your greatest risks and knowing how to overcome them is key in becoming a successful multifamily real estate investor. Contact the experts at Theresa Bradley Banta Real Estate Consultancy for more information on how to make owning an apartment building the best investment decision you’ve ever made.
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