An apartment is a type of multifamily property that typically has three or more units, shared common areas, and community amenities. According to Bankrate, “Apartments are typically one-story units within a multifamily or multi-unit building. Depending on the number of units it contains, the building itself may be commercial property, but the units themselves are residential real estate.“
Multiple apartment buildings owned by the same person or management company are called an apartment complex. Typically, apartments are rented out by the unit to individuals and families, but they can be owned á la co-ops and condos.
Apartment tenants often sign leases that are one to two years long, which is great for landlords looking to shorten their vacancy cycle.
Should I Buy an Apartment?
Purchasing property is a big decision, so it’s crucial to consider the benefits and drawbacks of apartment ownership before taking the plunge.
The Benefits of Owning an Apartment Complex
Janover Multifamily Loans offers compelling reasons why some real estate investors love buying apartment complexes, including:
- Cash flow. Because you can have multiple tenants live at your apartment complex, you can bring in substantial cash in the right market.You can even save money on housing by living in a unit yourself!
- Leverage. Typically, borrowers looking to purchase an apartment can put down 20-30% of the sale price, then finance the remainder over a 25-30 year amortization period. Most other types of investments like stocks and mutual funds can’t say the same.
- Tax incentives. Janover Multifamily Loans states that investors can “take substantial mortgage interest and depreciation deductions, [and] they can also often deduct travel and utility costs, as well as other expenses.”
- Syndication and partnership potential. Apartment complexes are a perfect investment for groups, especially since you can purchase larger and better properties together.
That said, there are also important cons to consider.
The Drawbacks of Owning an Apartment Complex
Though owning a multifamily property can offer significant benefits, Janover Multifamily Loans outlines the potential drawbacks, such as:
- Time investment. Finding the right apartment complex can take a long time, not to mention the work of financing and purchasing the property. From there, you should become a landlord to avoid losing up to 10% of your monthly income to a property manager.
- Local market factors. As Janover Multifamily Loans points out, “no one can predict the future. For instance, the neighborhood you thought was gentrifying could see an increase in crime and poverty, leading to a steep decline in the value of your investment.”
- Vacancy and tenant issues. Having tenants is great – if you do the work and find someone who will respect your property. But life happens, even with the best of renters, and having more than one empty unit at a time could hit your bottom line.
- Low liquidity. Selling an apartment building takes time, often several months, and closing can be time intensive.