Apartments play a special role in the lives of most young Americans. Many of us fondly remember that moment when we were handed the keys to our very own dwelling. Intoxicated with freedom, we had people over whenever we wanted, ate whatever we wanted, let the laundry pile up as high as we wanted… It’s entirely possible we didn’t even take into account the fact that we would have to DO the laundry. No matter your experience, the fact remains that affordable housing will always be in high demand, and people at all stages of life may find themselves looking to apartments to fill the need. There are many ways to get your feet wet if investing in apartments sounds like the right choice for you. If it doesn’t, it should. Here are 5 reasons why…
Passive Income
The mythic white whale of wealth accumulation.
Wouldn’t we all love to be lying on the beach in some tropical locale while our money is doing the hard work instead of us? Investing in apartments might just be the key. It will certainly take some work on the front end. Finding the right property (one that does not require an enormous amount of repairs and is located in an area that is desirable enough to draw prospective tenants) and filling it with the right renters means multiple rent checks make their way into your account every single month, and they continue to do so until one of your units is vacant.
Whether or not you choose to hire a property manager is up to you, but spending the extra cash to have someone else deal with any repairs or tenant complaints that come up means you spend less time on the phone and more time pursuing your other ventures.
Tax Benefits
Ask anyone who has purchased any property, apartments, single-family, multi-family, commercial, or otherwise, and they’ll tell you it was no cakewalk. But once you’ve acquired your little slice of the American dream, the IRS eases a little bit of the pressure.
The IRS allows investors to claim depreciation over a period of 27.5 years on a rental property. That means roughly 1/27th the value of your investment property can be deducted annually, even if you don’t spend that amount on the property in question.
No matter how hard you cross your fingers, something is going to break at some point. It’s an unfortunate and unavoidable truth of owning an apartment building. The good news is, any repairs you make are a tax deduction as well.
Advertising costs, traveling to and from your property, legal expenses, property taxes, mortgage interest, and that property manager we talked about earlier? All deductible.
Inflation Hedge
Investing in stocks is easier than ever. Choose from one of the many apps available on your mobile device and you’re off. But don’t get too excited when you buy and trade your way to a 5% return on your investments. Once you factor in the inflation rate (projected at 2.24% for 2021), you could find your return cut nearly in half. An inflation hedge is an investment, like an apartment building, that isn’t necessarily tied to inflation or rising prices. The value gained from investing in an apartment building is much more stable since you are free to adjust your rent right along with inflation levels. That way, your income keeps up with inflation while your property value is free to continue growing.
Reliability Compared to Single-Family Home
Granted, the initial investment is a fair bit higher than a single-family home, but it can pay off significantly in the long run. While you are limited to one single rent payment with a single-family home investment, an apartment building could net you dozens. Granted you must take into account the cap rate, but the sky is the limit on your return. A 49-unit property with a cap rate of 8% might cost $1.75 million. If you were to put $450,000 down and finance $1.3 million, you could pocket $62,000 a year.
Or you could rent one single-family home for $2,500 a year.
Appreciation
Because of all the reasons listed above, an apartment building kept in reasonable condition is bound to appreciate more than a single-family home. A multifamily structure full of tenants with steadily increasing rent looks incredibly attractive to another investor when it comes time to sell.
Conclusion
No investment is without risk and apartments are no exception, but if you have the capital to pour in, there is simply no limit on how your returns could grow.