As the economic forecast grows increasingly uncertain, more and more investors are turning to high-value real estate. Including a diverse range of asset classes in your investment strategy is a surefire means of building a stronger, more stable portfolio.
No asset class is perfect; every financial investment opportunity has its inherent advantages and disadvantages. Familiarity with the benefits and drawbacks of a given investment provides investors the insight to make the right financial decision.
Explore the pros and cons of owning an apartment complex to see if it’s the right decision for you.
What Is an Apartment Complex?
Apartment complexes include a wide range of building types: tenements, flats, mixed-use buildings, and so on. In general, apartment complexes refer to distinct units of living space contained within a larger structure, from studio spaces to multifamily spaces.
While apartments are residential spaces, an apartment building is considered to be a commercial real estate asset. Different property classifications can affect how land is zoned. Land zoned for commercial spaces may include apartment complexes because they are considered to be commercial properties. Here are a few property types real estate investors may encounter:
- Residential property
- Commercial property
- Industrial property
- Vacant Lot
An apartment building can vary widely in size: from four-unit buildings to vast high-rises with hundreds of units. The wide variation of apartment complex types and sizes means that complexes vary in price.
What Are the Pros and Cons of Owning an Apartment Complex?
Investing in an apartment complex is a big decision. Before making a decision, consider these pros and cons of apartment complex ownership.
- Strong cash flow
- Inflation hedge
- Tax breaks
Strong Cash Flow
Cash flow measures the money going into and coming out of a business or capital asset. Positive cash flow describes when more money comes out of an asset; negative cash flow describes when more money goes into it. Apartment complexes have reliably strong cash flow because short-term monthly income must necessarily exceed operating expenses in order to be profitable and turn into reliable passive income.
Through drafting the lease, real estate owners have the opportunity to set the net operating income that ensures their property retains positive cash flow. Whether it is by including operating expenses in the lease agreement or factoring them into rent, apartment complex owners have better control over how much cash their units produce.
Rental properties, like the units in an apartment complex, offset the effects of inflation and can even use the negative of poor-performing economies to their advantage. Inflation can devastate undiversified investment portfolios and savings accounts. As consumers feel the strain on their finances, they are less likely to invest in the exchange, taking down the market; when the weakening purchasing power of the dollar exceeds interest generated in retirement funds their cash holdings begin to deteriorate.
Rental properties hedge against inflation because they absorb sector-wide rises in price and pass them onto tenants; rent, like any price, rises during inflationary periods. By calculating for inflation in rent, property owners don’t just insulate themselves from inflation; their rental income grows.
Few capital assets present investors with the tax break potential of real estate. While real estate can have high financial thresholds, opportunities for tax benefits help investors secure a more complete return on investment by substantially increasing the tax-deductible generated by the property.
For example, depreciation is a tax deduction that functions as a yearly stipend over the course of a property’s useful life: 27.5 years for residential properties and 39 years for commercial properties. Through depreciation, anticipated maintenance expenses for the upkeep of the property factor into the yearly claim investors can make. Essentially, depreciation offsets the costs of property maintenance by giving investors the opportunity for tax breaks in advance.
Here are a few other write-offs apartment complex owners can use to secure a better return:
- Property insurance
- Apartment loans
- Mortgage payments
- Property management expenses
Holding high-value real estate assets, like apartment complexes, gives investors the opportunity to utilize their leverage. Apartment complexes are rarely bought in cash; that means investors turn to lenders to acquire them. In doing so, they take on debt which can be leveraged for additional investment opportunities.
Leveraging debt allows investors to utilize their credited capital on investments whose expected returns exceed the interest on their loans. Financing options, like commercial loans, will likely take on substantial amounts of debt. Investors don’t just put less money down when they take on loans, their debt can be leveraged for better investment opportunities.
With so many units, the downsides of an apartment complex may include the increased likelihood of prolonged vacancies. High vacancy rates will shut down the income stream produced by an apartment complex. With no rental coming, investors are stuck putting money into an asset that isn’t producing.
Vacancies are dependent on location and market trends. Avoiding prolonged vacancies is a matter of assessing an apartment complex’s location potential beforehand and keeping up with the local rental market. To address vacancies, investors have the opportunity to adjust monthly rent in the unit lease to encourage new tenants. Some apartment owners will even hire property management companies to find and screen tenants.
Finding tenants to fill vacant units can be frustrating; dealing with delinquent tenants is a nightmare. While property owners may not encounter delinquency often, it is a reality they must always be prepared for: delinquency can be a serious problem for apartment owners.
In the event a tenant becomes delinquent, property owners may be forced to take them to court to recoup the unpaid rent. What’s more, prolonged delinquency may make tenants subject to eviction. Managing delinquent tenants doesn’t just shut down a unit’s income stream; property owners may face increasing expenses to pay for legal action.
The inescapable reality of property ownership is that property will degrade over time. Maintaining a livable standard for an apartment complex and the units therein can be an expensive endeavor. In addition to the wear and tear property owners can expect over a period of time, sudden, unexpected damage like burst pipes can create an immediate, costly problem.
Improperly maintained properties will hinder the return they produce. Poorly kept properties won’t produce optimized rental income; failure to abide by residential standards may even keep a unit off the market.
No matter the property type, real estate investing is extremely expensive. The down payment on the purchase price alone requires significant amounts of capital. Maintenance costs and tax, mortgage, and insurance payments all together make for a serious financial undertaking.
Apartment complexes are amongst the most expensive property types available for investment. They sell for commercial real estate prices and require dedicated maintenance and management in order to abide by the livability standards of residential properties like single-family homes.
The Bottom Line
While expensive, owning high-value, income-producing real estate like apartment complexes is a good investment. Between the cash flow and tax break opportunities, investors stand to get a full return, offsetting the high costs of ownership; the majority of operating expenses can be written off at the end of the year. Additionally, the more debt investors take on means more leverage to invest in new projects. Apartment complex ownership can open many doors to investors.
Should You Invest in an Apartment Complex?
For those that have the opportunity to make the investment, an apartment complex can be a key asset in your portfolio. Finding the opportunity to make an investment in an apartment complex is a matter of finding the financing to do. Favorable loans will help investors get involved in high-value, high-reward projects.
Connect with the most favorable loans available to you with LoanBase.