In this first blog article, I’ll introduce you to the many reasons you should consider investing in apartments. Over the next few weeks, I’ll elaborate on the details because I want to give both the experienced and novice investor my insights and experiences.
As with most investments, apartment investing has its pros and cons. But I think it has many advantages over investing in single family residences (SFRs).
Why Apartment Investing?
Cash flow. You should get more cash flow than with rental houses. Of course, big projects take more time, research, and cash, but they pay you year after year.
It is easier to start investing in single family homes than apartment buildings. If you have done so, you’ve noticed how difficult it is to get positive cash flow from houses. Even if you do squeeze a little out of each, it can take a lot of them to have a decent income.
Like in a Monopoly game, at some point you’ll want to trade in your little green houses for a big red apartment building. One apartment building can provide as much cash flow as twenty little houses. And once you have management in place–it may be a lot less work.
A Few Things to Consider…
Multifamily Values
Apartment values are more dependent on the income they provide than houses. Houses are made mostly for owner occupants. The pool of buyers will always be larger for homes than apartment buildings. When you buy a house with a similar down-payment to an apartment it’s unlikely that you will have a positive cash flow.
Appreciation vs. Income
Houses, unlike apartments, are more likely to appreciate because they have a larger pool of buyers, while apartment buildings rely more on the income to increase value. In some cases, apartment buildings have additional value derived from them in the future, such as remodeling, condo conversions, rezoning, or rebuilding.
Maintenance
Having a 20-unit building, for instance, in one space helps keep management down, maintenance, accounting, etc. Most of these expenses can be reduced compared to houses. Your business is in one location versus 10+ houses spread around the valley. Now imagine each house being in a separate LLC vs. the 20-unit building in one LLC.
I wouldn’t go as far as to say that apartments are easier to maintain than homes because with apartments, you have a higher tenant turnover. But while one house has one roof, and four houses have four roofs, a fourplex has only one roof, though 4 kitchens and more bathrooms and more appliances.
Is It Worth It?
You bet. Investing in multifamily apartments does pay. In addition to the positive cash flow, you get appreciation.
You can force appreciation as well. I’ll go into it in more detail in the future, but one way to force appreciation is to buy a poorly managed apartment complex with rents below market and priced accordingly. By improving management and raising rents to market rates, you increase the value of the property and your return greatly increases from the investment.
If you buy in strong rental locations, you will benefit from low vacancies.
Investing in Apartments vs Single Family Residences
SFR Pros
- Fewer building inspections and regulations
- More houses available for sale
- You can fix up cheaply and raise the value
- Larger pool of buyers
- More unsophisticated buyers
- More unsophisticated sellers
- Tenants stay longer
- Lower down payment
- Easier financing
- More government-funded programs for home buyers
- Utilities are more easily be passed on to the tenant
- If need be, you can live in the house
SFR Cons
- It’s either 100% occupied or 0% occupied
- One vacancy is brutal on the cash flow
- One bad tenant can really hurt
- Houses rent to families (plus pets), increases maintenance expenses
- Houses are more likely to have children, increases the liability
- An empty house is more likely to be vandalized than an empty apartment
- Houses cost more per unit
- FNMA lending limit on houses
A Few More Considerations
Multi-units usually offer a better chance for a positive cash flow. Some houses are negative cash flows.
Multi-units are more cost efficient – a new roof on a four-unit doesn’t cost four times a roof on a house.
Cosmetic improvements and better management have a greater impact on the value and cash flow of a multi- unit versus a house.
Lots to think about! I have experience investing in apartments and houses, and after considering the pros and cons of each type of investment, I choose apartments because it has been my experience that over time, the cash flow is stronger and more consistent in apartments.
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Good luck with your investments,
Phil Wazonek