Is Buying An Apartment Complex Worth It?
Buying into any new investment can seem like a daunting task and purchasing an apartment complex will likely sound even more daunting and expensive. However, by the end of this article, it will be shown that buying an apartment complex is a doable investment. In addition to not only being doable but also is likely to increase the lucrativity of your portfolio.
One of the things stopping many people from starting with this investment is the perceived barrier to entry. Understandably so while some apartment complexes require a minimum of $100,000 as a down payment. However, there are apartment complexes that don’t require such a steep down payment as well as creative financing options that can make the down payment much lower than one would expect.
How Much Buying An Apartment Costs:
An important factor when determining how much purchasing an apartment building would cost, it helps to define the classes and sizes of apartment buildings:
Building Classes:
Class A: These buildings represent the highest quality properties in their market and area. Usually are newer buildings with plenty of amenities.
Class B: A step down from Class A and typically are older buildings that may or may not be professionally managed.
Class C: These buildings are usually older than 20 years, require renovation, and are in less than desirable locations
Apartment Building Size:
Usually when someone mentions an apartment building, your first thought is a towering building with hundreds of units within. However, there are much smaller and less expensive buildings that still classify as an apartment building. Something as small as a duplex, triplex, or fourplex are considered apartment buildings and can offer a great return and be a great way to foray into apartment ownership (especially if you don’t mind living in one of the units to be eligible for a FHA loan!)
When determining what size of apartment building you want, a factor to keep in mind is that any property with more than 4 units will require a commercial loan. With a such a wide price range that can go from tens of millions of dollars for the larger apartment complexes with hundreds of units all the way to smaller properties like a duplex, it’s important to do plenty of research and to outsource to a real estate agency before making a decision on what type of property to purchase.
This table shows the average price that can be expected to be paid on an apartment building.
The Return On Investment:
An apartment building will generate income in four different ways:
Rental Income: The income from your tenants, after all the properties’ expenses have been paid, the rest of that cash flow is yours to spend.
Property Appreciation: This is usually where a good portion of the income is made. Over the last 10 years, the value of apartment buildings has risen steadily.
Leverage: If you were to borrow millions of dollars from the bank at 4% and use that money to purchase an apartment building at 8% cap rate, you could profit a hefty return on the difference.
Tax Benefits: Real estate is one of the most tax advantaged investments you can make
The overall income that can be made off of an apartment building varies heavily on the size and type of building you purchase. However, a 4%-10% cap rate can be expected on the apartment building purchased.
Is It Worth Buying An Apartment Building?
After reviewing all of these factors of owning an apartment building, it's time to decide whether or not it is a worthy investment to purchase an apartment building:
The Pros & Cons:
If it’s been said once on this blog, it’s been said a thousand times. It’s always a good idea to form a comparison of pros and cons before proceeding on an investment:
Pros:
High Earning Potential: Buying a midsize to large apartment building you can grow your portfolio much faster than you would with a single family home.
Dependable Cash Flow: Apartment buildings can offer a steady stream of income due to the bulk of tenants. This can also be a cushion against vacancy as the filled units can cover the expenses of some of the empty units.
Appreciating Asset: As mentioned above, apartment buildings have proven to be an appreciating property. So if you no longer wanted to run the apartment building, you could sell for a return.
Cons:
Harder To Diversify Market Exposure: The potential steep price of apartment buildings can make it difficult to own many of them and diversify your portfolio with buildings of different classes.
Higher Turnover Rate: The benefit of the bulk of tenants is having a steady source of cash flow but the downside can be the rate at which vacancy occurs.
Large Down Payment: This con should have been anticipated when mentioning the cost of some of the larger apartment buildings.
Ultimately, purchasing an apartment building can be an incredibly lucrative addition to your investment portfolio and generally will be. However, for an apartment building to be a worthy and dependable investment, you must do the proper research and choose the right property.
With the renting of apartments becoming more prevalent with the need for affordable housing always on the rise, it could be a great idea to reach out to plenty of the incredibly knowledgeable real estate agencies in Tucson, Arizona about potential opportunities in buying an apartment building!