Small Business Brief

Real Estate

Thinking Long-Term: A Beginner’s Guide to Apartment Investing

Did you know that the percentage of people renting a residence, rather than owning one, has increased by nearly five percent in the last decade?

It’s true. A variety of factors, ranging from less money saved for down payments to a desire for mobility, have led many individuals to choose to rent rather than to own. If you’re interested in residential real estate investing, this is good news for you.

Residential property investing in general, and apartment investing in particular, can be a great way to expand your portfolio. Keep reading to learn more.

Why Apartments?

If you’re new to real estate investing, you may wonder why we would suggest buying an apartment complex for a neophyte. Wouldn’t it be easier to get started with a single-family property?

In reality, there are many features to multi-unit investing that make it a great way to get started as a landlord. For instance, with a multifamily unit, you will have multiple tenants all making monthly payments. This reduces the risk of losing a tenant and going several months without any income coming in.

A multifamily home also gives you the option of having closer access to the property. Some landlords choose to live in one of the units, or have a property manager do so, to keep a better eye on the complex.

And, with an apartment complex, you can rent different units in different ways. For instance, you can rent out some units to permanent residents, and make other units available for short term stays or vacations, as these apartments do. 

Where Should I Buy?

As with any real estate investment, there are three keys to success in apartment investing: location, location, location. There are several factors to consider when looking for a location for your first investment building.

People tend to choose apartments over single-family homes for two reasons: money and convenience. For some renters, they simply can’t afford the price tag associated with renting a home, so they have no choice but to rent an apartment.

Others, however, are willing to pay the same (or more) to rent an apartment for the sake of a convenient location. Usually, apartments are the primary choice for individuals looking to live downtown or in an urban center.

As you are considering apartment buildings to invest in, look for options that satisfy one or both of these requirements.

In other words, if you are going to purchase a building where you will have the rent the units out at a high price, make sure the location is highly desirable. Look for features like walkability, proximity to employment centers, and entertainment. A more expensive apartment complex in a car-heavy area where there are affordable homes to rent may not be as good of an investment.

How Do I Know if it’s a Good Deal?

Most people who get into real estate investing do not have enough money to buy an apartment building outright. This means that they will have to take out a mortgage and make payments on the property, while at the same time accepting payments from renters living at the property.

The key, then, is to bring in enough income by renting the property to not only cover the mortgage but to bring in income as well. This raises an important question. How can you calculate whether you will be able to do that when considering a property?

The 1% Rule

Seasoned investors often reference “the 1% rule”. The reasoning behind this rule is that a property is a good investment if the fair market value for renting it exceeds 1% of the property’s total value.

So, for instance, if the entire value of an apartment building were $500,000, you would want to be able to bring in at least $5,000 a month in rental income. 

Fair Market Value

Any given real estate market has a “fair market value” for that area. This number indicates what people are generally willing to pay for a type of residence.

For instance, say the fair market value for a 1-bedroom apartment in a given area is $1,000 a month. A landlord in that area may be able to charge $1,500 a month for a nicer unit, but would have a hard time finding a tenant at $2,500. Take a look at what rentals typically go for in the area to get an idea of market value.

You should also look at what the landlord at the unit you are interested in purchasing is charging. It’s generally true that, if the current landlord could have raised the rents to a higher rate, they would have done so already. This is why it is better to look at the rent at the exact apartment you are considering, and not just other apartments in the area.

If the current landlord is renting units at a rate much lower than fair market value, that’s usually a bad sign. There might be something undesirable about the building that makes it difficult to attract and retain tenants.

Consider All of Your Costs

Some investors make the mistake of assuming the mortgage of the property will be their only monthly cost. When you are considering whether you should invest in an apartment building, make sure to consider all the costs. 

As the property owner, you will be responsible to pay for insurance and maintenance on your units. You will also want to consider whether you want to deal with tenants directly, or if you want to hire a property manager. 

Don’t assume that you can simply pass these costs off to the tenant. If the monthly rent with these costs included exceeds the fair market value, you may struggle to find renters. 

Start Apartment Investing Today

With these tips in hand, you’ll be ready to start apartment investing. This will set you on a pathway for success as an investor. 

Want to learn more about the real estate market? Check out the rest of our blog for more helpful tips.