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Owning An Apartment Complex: Is It The Right Investment For You?


Jun 08, 2020 by Liz Brumer

Investing in cash flow is one of the key methods of achieving wealth, which in real estate, is most commonly achieved by investing in rental property. Single-family rentals can be a great place to start, but over time, many people decide they want to level up, increasing their cash flow and net worth by owning an apartment complex.

An apartment complex is categorized as commercial real estate and includes any residential rental property with five or more units. Multifamily property can be a wonderful real estate investment, but it's not for everyone. Take a look at the pros and cons of owning an apartment building and who is best suited for multifamily investing to determine if it's the right investment for you.

Pros of owning an apartment complex

Economies of scale

Economies of scale refer to the ability to spread costs over multiple income streams. Rather than having to own 10 different residential rental properties to accomplish $10,000 in cash flow a month, you can own one property that only has one roof, one set of property taxes, property insurance, and one building to maintain while still accomplishing the same amount of rental income.

Increased cash flow

Owning an apartment building also allows you to increase the amount of cash flow and income you earn at a much faster rate than you would be able to accomplish with residential rental property.

Reduced risk exposure

One of the biggest hurdles rental property owners face is vacancy and tenant turnover. If you own a single property and it sits vacant for two months while you clean it up and re-list it for rent, you're eating two months of expenses and lowering your total return on the investment. When you have multiple tenants in one apartment building, you're spreading both your risk and cost for vacancies.

Management

Property management can be both a pro and a con of owning a multifamily property. Any rental property requires some level of property management. Someone has to communicate with the tenant, show leases, collect rent, coordinate repairs, and market vacancies. When you own multiple rental units, all that work becomes cumbersome, especially when those units are spread across different zip codes or markets. Apartment ownership still requires management but adds the convenience of having all of the units in one centralized location.

Boost your net worth

Owning a multifamily building, especially in appreciating markets, will undoubtedly increase your net worth. This can give you access to better financing terms, exclusive investment opportunities, and in general, help you reach personal financial goals.

Cons of owning an apartment complex

Cost

One of the biggest hurdles of buying an apartment complex at first is the cost. Commercial real estate is valued based on the income it produces or could potentially produce, meaning the property value for an apartment complex in most markets is substantially more than single-family residential real estate would cost in the same market. While you can purchase a smaller apartment building for $500,000 to $750,000, a mid-size or large apartment complex will likely cost more than $1 million. The cost will vary based on the age of the building and the type of property (such as A, B, or C apartment complex).

Financing

Financing an apartment complex is generally easier than obtaining financing for a single-family rental property because there are multiple streams of income to help support expenses, but it can still be a difficult loan to obtain, depending on your experience in real estate investing and your balance sheet.

Most traditional lenders will require a large down payment, at least 20% or more, while also reviewing both the asset performance and potential in addition to your personal net worth and investing profile. If you don't have the money to invest, you'll likely need to syndicate, which is when you pool money from multiple investors for the acquisition of the property. To do this properly, it requires a substantial upfront investment and will reduce the property's cash flow and return because you'll be sharing a portion of your positive cash flow and profits with your partners.

Additionally, an apartment loan generally will have a higher interest rate that may be fixed but is more commonly adjustable. Terms are also shorter than they are on a traditional home loan, ranging anywhere from 5 to 20 years, and they typically come with a balloon that will require the lender to eventually sell the property or refinance when the balloon comes.

All your eggs in one basket

When you own one income property, you're placing all of your eggs into one basket -- you're increasing your risk to market fluctuations by having all of your income coming from a singular property. What happens if the property burns down, a major job provider in the area files for bankruptcy and a large portion of your tenants lose their jobs, or increased new development lowers the demand for housing and, in turn, the value of your apartment building? Owning multiple investment properties across various markets or in different asset classes diversifies your investment portfolio.

Who is suited to own an apartment complex?

While there are a number of benefits to owning an apartment building, it requires time and effort. Even if you choose to hire a third-party manager to oversee the apartment complex for you, you as the apartment owner are still responsible for managing that person, ensuring the running of the building is to your standards and is achieving maximum profitability. If you're a busy professional who doesn't have the time to even oversee the investment, it's unlikely owning an apartment complex is the right move for you.

Also, if you're just getting started in real estate and don't have a lot of experience or capital ready to deploy, apartment investing probably isn't the best place to get started. Get your feet wet as a landlord and see if you enjoy the roles and responsibilities of the job. Increase your net worth, credit score, and available investment funds before moving into commercial property.

In the meantime, there are ways to participate in owning an apartment complex without having to own one yourself: purchasing shares in a multifamily real estate investment trust (REIT) or, if you're an accredited investor, by investing in a crowdfunded apartment building.

It ultimately comes down to who you are as an investor, the time you have available to dedicate to your investments, and your financial goals.

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The richest in the world have made their fortunes in many ways, but there is one common thread for many of them: They made real estate a core part of their investment strategy. Of all the ways the ultra-rich made their fortunes, real estate outpaced every other method 3 to 1.

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