To avoid the financing wall, investing in apartments or other multi-family buildings may be the solution to your funding needs. If you’re like most small investors, at some point as you go along building your property portfolio, you will run out of your own investment funds.
At that point, most of us either look for funding partners, where the partner provides the investment and you provide the real estate expertise. Coming together this way allows you to continue investing in low-risk real estate.
But there is another way for you to continue adding to your portfolio without a joint venture partner, and this way actually lowers your risk and shifts the financing focus away from your personal ability to service a mortgage, onto the capacity of the building itself to service the mortgage. This is the main attraction to investing in apartments.
Let us consider five real, tangible benefits to you, keeping in mind that here at HootInvest.com, we are all about low-risk while maximizing profits.
5 Benefits of Investing in Apartments
Here are my top 5 benefits of investing in apartments:
1. Lenders look at the building, not so much you
What this means is that when you approach a lender with a proposal to purchase an apartment building or other multi-family property, the lender looks primarily at how well the building itself is performing. They consider things like rental vacancy, annual rental income and expenses, local market conditions, age and maintenance of the building, and so on.
Unlike purchasing a residential property, the lender does not look much at your ability to service the mortgage. This allows you to continue purchasing property without worrying about hitting a lender’s financing limit.
2. Often, a lower down payment is required
While some lenders insist on a minimum 20% or 25% down payment (or more for commercial properties), you can usually get a lower amount like 15% down for an apartment building purchase. More cash in your pocket = more leverage and lower risk! We really like that.
3. As mortgage rates increase, vacancies decrease
This is a simple supply and demand type of thing. We all recognize that the low mortgage rates we’re enjoying now will not last forever. And when the economy does pick up even more, then mortgage rates will increase.
Higher rates will force some current apartment dwellers to resist moving into a more expensive house. Also, some current homeowners may not be able to service their mortgages if the rates go up 1% – 2%, and they will have to move to an apartment.
So we fully expect the apartment rental market in urban centres to be strong with fewer vacancies, higher demand, and by extension, higher rents. This is all good for keeping our risks low.
4. High cash flow
What could be better than high cash flow for a small real estate investor? If you have a small low-rise apartment building with, say, 12 apartments in it and the average monthly rent is $1000, you’re looking at monthly rental revenue of $12,000. This is as much as you might get from one single family home in an entire year!
Cash flow is not the most important investing factor to consider, but it sure is a good one since that kind of cash flow can help in many different ways as you build your portfolio.
5. Ongoing appreciation
One way that investing in apartments is a good low-risk strategy is the fact that apartments are expected to outperform single family homes in market appreciation in many communities as the economy grows. Please note, we are not talking about condominiums here. I’m not a fan at all of investing in condos… way too many risks outside of my control!
But investing in a low-rise apartment building makes a ton of sense to me. All in all, investing in apartments is a sound investment strategy, and one that you should definitely consider in your portfolio especially if you are running low on your own investment funds.