There was a time when living in a house or duplex was preferred over renting an apartment. Real estate investors concentrated on buying homes at desirable locations where the land value would increase over time. Moreover, there was a popular belief that the investment’s worth was in the land. However, is buying an apartment a good investment today?
Times have changed, and many investors prefer investing in apartment complexes. Also, the cost of buying real estate is rising, making apartments a high-demand investment property choice that can yield excellent returns.
Having established that apartments can be good investments, this article will discuss six ways an apartment can be a good investment.
How Is Buying an Apartment a Good Investment Decision?
1. Passive Source of Income
Rental income from an apartment is an excellent way of making money. Moreover, your property also undergoes steady appreciation. Rental properties, such as apartment complexes, are financially rewarding. As an additional benefit, you can also curb property expenses such as mortgage and maintenance costs.
Furthermore, investing in apartments warrants an even higher ROI than the stock exchange. As a tip, consider buying your apartment in a good location. A suitable location will grow your rental income while keeping debt repayment constant. Hence, buying an apartment is a long-term investment that will generate constant earnings while remaining an asset you can sell at any time.
2. Affordability for First-Time Real Estate Investors
For first-time investors, apartments provide a cost-effective entry point with a positive cash flow. It provides a safe entryway to the market, giving you more options and fewer hazards. Also, if you can afford it, you can buy several units in the same apartment building to multiply the cash inflow. This will diversify your holdings in the same place and reduce net operating income (NOI). Reduction in NOI will further help you reduce the debt balance. So, you will be generating more capital from the same source of investment with lower risks.
3. Yields a High Return Value
Investing in apartment complexes produces a steady source of income. Moreover, throughout the investment, it can yield a large return. Investors often use the 1% Rule to calculate whether a property will make them money. According to this guideline, the monthly rent must be at least 1% of the total cost of the rented property.
According to this rule, the rent must be higher than the monthly mortgage payments for the home. If not, you wouldn’t have enough money coming in each month.
For instance, you typically would only want to pay $200,000 for a house that rents for $2,000 per month.
4. Property Tax Benefits
When you own a rental property, you get certain tax deductions. Real estate owners have to pay gradually decreasing taxes on rental properties due to the depreciation of the property. Moreover, the IRS lets you deduct property maintenance and conservation expenses. Based on such tax benefits, you may be able to deduct around 20% of your net rental property tax. Also, according to the US tax code, your mortgage interest is deducted as this interest is a business expense. In certain scenarios, you may even get a break from paying property taxes altogether.
5. Multifamily Properties Investment
Sometimes, as a real estate investor, you would prefer investing in multifamily properties. Multifamily investing lets you increase your income while also reducing the vacancy rate. The vacancy rate is the percentage of all available units in a rental building. It applies to a hotel or apartment complex that is vacant or unoccupied for a specific period. This will help you make a portfolio quicker as a real estate investor.
Multiple-family property can help a large investment fund build or sell large rental apartments. It is easier to acquire or manage a 20-unit apartment complex than to purchase 20 separate single-family homes.
6. Suitable for the Masses
Apartments are well-liked by downsizers, first-time buyers, and other investors. So, you have a larger pool of potential buyers when you want to sell your apartment. Moreover, the increased appeal of apartments to the general public increases demand and raises the price of your property.
Tips for Buying Investment Property or Rental Properties
There are several ways of real estate investing, especially when it comes to apartment investing. It depends upon the amount of risk you can take, the amount of money you can invest, and your real estate investing expertise. Here are some tips to get the maximum out of your investment.
Do You Want to Be a Landlord?
The real estate market can be an effective means of earning cash without sacrificing time or money. Once you find the perfect property to live in, prepare the property and hire an experienced tenant, maintenance is necessary.
Maintenance expenses will reduce your income in rent. Investors must reserve 1% of the property’s worth for emergency renovation. Rental property managers may own the property or employ the property manager, typically charging from 8 to 12 percent of the rent collected.
Teaming Up With a Partner
Although investing alone will offer greater returns, you will also have to do a significant amount of work. If you think managing this alone will be hard, try teaming up with a partner. You’ll also be splitting risks and profits and have better investment opportunities. Legally teaming up with a partner is called Real Estate Limited Partnership (RELP). In addition, working with a partner is also beneficial if you have limited real estate investing experience. An experienced partner will help you manage expenses, source tenants, and find quality property management.
Be Aware of Strata Fees
All associated council and strata costs are instantly transferred to you when a seller transfers their property. The owners or manager of the building collects strata fees. It covers the property’s aggregated maintenance and building insurance costs. Even after your first purchase, these fees will continue to drain your money. These are mostly quarterly fees, so it’s crucial to consider them in your budget.
Investing Through Real Estate Funds
Investing in real estate funds is simple and yields a good profit. It is a type of mutual fund that invests in securities offered by real estate management companies.
Some real estate funds invest directly in homes. However, we advise investing in real estate investment trusts (REITs). It’ll help your investment gain value by appreciating rather than simply offering short-term revenue.
Recognize the Split Between Tenants and Owners
A building’s popularity with renters will increase with its central location, which might be advantageous for real estate investments. However, it may affect your property’s demand or property income if the entire block is rental real estate. More options for tenants give them more negotiating leverage over rent. Try to determine the proportion of tenants to owners.
Saying that an apartment is a good investment won’t be wrong. Although, like any other investment, there are pros and cons you will have to deal with. Investing in apartment buildings is an ideal way to grow wealth, earn passive income, and ensure a retirement plan.
Buying a House vs. Investing in Apartments: Real Estate Investing Simplified
Paul Martinez is the founder of BendingDestiny.com. He is an expert in the areas of finance, real estate, and eCommerce.
Join him on BendingDestiny.com to learn how to improve your financial life and excel in these areas. Before starting this blog, Paul built from scratch and managed two multi-million dollar companies. One in the real estate sector and one in the eCommerce sector.