Real estate investments are a strategic way to diversify one’s investment portfolio and they come with a variety of benefits. Primarily, real estate acts as a tangible asset with multiple revenue streams that come coupled with many useful tax deductions.
When most people start to dabble in these alternative investment options, they begin with single-family homes or go straight to looking at commercial spaces. However, apartment buildings are a great option for some people and there are many ways to start investing in them.
Let’s look at the benefits of investing in apartment buildings and the different methods for getting started.
Are Apartments Good Investments?
If you invest in apartment buildings where there is little supply and high demand, collecting monthly rental money from tenants can be very lucrative. Plus, insurance, advertising, property management fees, and more, are all tax-deductible. You even get to write off a portion of your apartment’s value each year thanks to MACRS depreciation.
Additionally, you can typically sell the apartment buildings later for a profit and potentially enjoy their treatment as Section 1231 property. Apartment investments are a top investment strategy for people who want a slow, but steady appreciation in their portfolio value, as well as an additional monthly income source.
Unfortunately, while the profits can be substantial, so can the amount of work you’re required to do. Your monthly costs, including unexpected expenses, such as repairs, need to be paid no matter what happens. If you have too many vacancies, or tenants behind on rent, it will cut into your profits.
The good news is that you can hire a property manager to help with many of your responsibilities. Of course, that means you make less money. You decide if the reduced workload is worth the lower cash flow.
Another option is to use a real estate crowdfunding service like DiversyFund to do all of this for you. The service which targets undervalued apartment buildings, invests the cash flows received from tenants and sells them for a gain about five years later. They accept both accredited and non-accredited investors and only require $500 to get started.
Is Owning an Apartment Complex Profitable?
If you invest in the right apartment complexes at reasonable price points, owning an apartment complex can definitely be profitable. Apartment complex investments create a dependable income generating asset and over the investment’s lifetime can provide a high return on investment. Many real estate investors use the 1% Rule to estimate if a property will be profitable.
This rule states that the monthly rent should equal at least 1% of the rental property’s purchase price. If you follow this rule, the monthly rent must exceed the property’s monthly mortgage payments (assuming you used a mortgage). Otherwise, you would not be earning enough money each month.
For example, if a property rents for $3,000 per month, you usually wouldn’t want to pay over $300,000 for that property. It’s still important that you’re able to control costs, such as landlord insurance and maintenance. If you can target properties that meet the 1% rule and can manage expenses, you have an excellent opportunity to earn money. This rule is less of a concern if you were able to pay cash for the rental property.
6 Ways to Start Investing in Apartment Buildings
There are several ways to start investing in apartment buildings. The best choice(s) for you depends on the amount of risk you’re willing to take on, how much money you have available to invest initially, and your level of real estate investing expertise.
Having some real estate in your portfolio is advised for its non-market correlated performance, income and appreciation features, thus making it one of the best investments for young adults.
1. Do Your Own Due Diligence and Investing
If you invest on your own, you get to keep all of the profits. However, this is a significant amount of work. At this point, this is not a passive income-producing real estate investment.
Therefore, if you want to be an actively-engaged real estate investor, it’s essential to examine several elements of an apartment complex before investing.
Some of the most important requirements you should research include:
- Financial Audit Report (including a trailing 12-months and 3-years profit and loss statement)
- Property Condition Assessment (third-party report examining the current condition of a property)
- Market Report (helps determine a property’s estimated occupancy level)
- Lease Audit & Rent Roll Analysis (looks at several aspects of leases, such as billing schedules and unpaid or late rental payments)
- Environmental Site Assessment (checks for traces of dangerous chemicals and other contaminants)
- Appraisal (estimates market value of a property)
- Site Survey & Title Report (a title report ensures there aren’t competing legal claims to the property and this usually requires a site survey confirming property boundaries)
Even when everything looks positive on paper, it can be beneficial for you to see the property in person and walk around. Look for any potential problems and any improvements you could make if you really want to learn how to make easy money while you sleep.
For additional ideas on how to grow a real estate portfolio of properties you own and manage, you might consider looking into the BRRRR Method.
2. Team Up with a Partner
You may want to split profits and risk with another individual for your apartment building investment. This arrangement is referred to as a real estate limited partnership (RELP).
While the returns and risks aren’t as high as individual investments, both are still significant. Working with a partner may be a smart option for you if you have limited real estate experience or knowledge.
Teaming up with a partner provides an alternative perspective, helps with the overall workload, and gives you more capital to invest. An experienced partner may also have an extensive network.
While there are many benefits of teaming up with an investment partner, there are also downfalls. If you choose to work with a friend or family member, mixing in business may strain the relationship. There can also be conflict if responsibilities aren’t clearly discussed or if one partner contributes more money or time. Still, for many, the pros outweigh the cons.
3. Invest through a Syndication Arrangement
Real estate investors can pool money and resources together through syndication agreements. These arrangements allow one to invest in larger projects than they could afford or manage individually.
The Sponsor of the arrangement typically invests between 5-20% of the required equity and manages the day-to-day operations.
Other investors contribute the rest of the equity. Often, Sponsors take an upfront profit (an acquisition fee) since that person acquired the property. Everybody involved makes money from rental income and property appreciation, usually on a monthly or quarterly basis. Some syndications last only between 6-12 months and others last 7-10 years.
Services like Fundrise, Equity Multiple and DiversyFund all operate under this model. They help investors source properties for investing, manage them on a daily basis, find tenants, and eventually sell them to other investors.
4. Invest through a Real Estate Fund
A real estate fund is a type of mutual fund that mainly focuses on investing in securities offered by real estate companies. Investors make money through buying real estate as appreciating assets.
The three types of real estate funds include:
- Real estate mutual funds (these can be actively or passively managed)
- Private real estate investment funds (only available to high net worth investors)
- Real estate exchange-traded funds (these trade like stocks)
Real estate funds primarily invest in real estate investment trusts (REITs) and real estate operating companies, but some invest directly in properties. Typically, you don’t receive short-term income, but rather receive value mainly through appreciation. These provide more diversification than buying individual REITs, but REITs come with their own set of advantages.
5. Invest through a REIT
Real estate investment trusts are companies that pool investors’ money to manage income-producing real estate properties they own. A major benefit of investing in real estate investment trusts is that it’s a very liquid option. REITs are bought and sold similarly to stocks and can be sold at any time.
Investors make money both from passive income earnings and from selling their shares at a higher price. REITs are passive investments you don’t need to actively manage.
The financial barrier to entry is lower than many other types of real estate investments. You can purchase publicly-traded REITs through a brokerage firm like Webull. This brokerage is a free stock trading app that offers free stocks for signing up.
Alternatively, you can invest in commercial real estate using a company like Streitwise. The company enables accredited and non-accredited investors to participate in federally registered offerings through their online platform.
Since their inception, they’ve averaged an annualized 9.66% dividend and target a return just below that of 8-9%. Compared to publicly-traded REITs, which offer average returns of just under 4%, Streitwise’s results have outperformed.
Streitwise can offer these yields by combining institutional quality commercial properties, experienced management and the #1 rated lowest fee structure among qualified real estate crowdfunding sites. Consider signing up through the button below to learn more and whether it would make a good investment for your portfolio.
6. Crowdsourced Investing
Crowdfunded real estate investing is another method that allows you to invest in apartment buildings without having to pay for the entire building on your own. It’s possible to have just partial ownership of apartments. You don’t have to manage the buildings and you still earn a portion of the proceeds.
Typically, you earn dividend returns monthly, quarterly, or annually. You may also get a portion of the profits when the apartment building is later sold. On your end, the investment is passive as you rely on experts to keep your investment profitable. These investments are very illiquid, so you shouldn’t invest funds you’ll need to access in the near future.
How to Start Investing in Apartment Buildings
Investing in apartment buildings is an excellent method for diversifying your investment portfolio and can start earning you money quickly and a substantial amount long-term. This holds especially true if you’re interested in building generational wealth.
If you’re willing and able to front a high amount of money, you could invest on your own or with a partner. To reduce your risk and spend less money initially, you may instead choose to invest through a syndication arrangement, real estate fund, REIT, or a crowdfunding platform.
Whichever type of investment you choose, make sure to research your investment thoroughly. If you invest strategically, your profits can rise as high as the high-rise apartments you invest in.
About the Site Author and Blog
In 2018, I was winding down a stint in investor relations and found myself newly equipped with a CPA, added insight on how investors behave in markets, and a load of free time. My job routinely required extended work hours, complex assignments, and tight deadlines. Seeking to maintain my momentum, I wanted to chase something ambitious.
I chose to start this financial independence blog as my next step, recognizing both the challenge and opportunity. I launched the site with encouragement from my wife as a means to lay out our financial independence journey and connect with and help others who share the same goal.
I have not been compensated by any of the companies listed in this post at the time of this writing. Any recommendations made by me are my own. Should you choose to act on them, please see the disclaimer on my About Young and the Invested page.