Compelling Reasons Why Investing in Apartments is a Smart Move
A couple of people asked me last week if they should invest in apartments.
My gut reaction is to always say “YES”, but you know what? That's not the right answer for everyone.
So I say… only if it fits your investment style, risk tolerance, and helps you achieve your overall financial goals.
It definitely can be one of the most powerful and profitable investments you can make, but only you can make the determination if it’s the right type of investment for you.
To help, here’s are 4 reasons why investing in apartments may be a very smart move for you…
1) Easier Management
I once had over 100 single-family homes to oversee and manage – all spread out across a whole city.
So what do you think is easier to manage? 100 homes? Or a 100-unit apartment building … all sitting under one roof ?
Trust me. Having 100 units in one very concentrated area is 10 times easier to manage than 100 homes dotted all over the map!
One manager or one small team can manage that entire 100 unit building. Overseeing 100 home may require a mini-army.
That’s what you call ‘economies of scale’.
2) Easier to Raise Market Value Compared to a Single-Family House
What’s great about real estate is that you can typically “force appreciation”, by doing doings like fixing it up, sprucing up the landscaping, adding appliances, etc.
With a single-family home, you can do things like make repairs and throw on a coat of paint to give it more curb appeal, and you can also do an extensive rehab to add more square footage or make the property more functional; however, you can only do this to force appreciation on that ONE property only.
Nothing wrong with that. My team and I are as active as ever in rehabbing and improving homes to force appreciation.
But sometimes, we just like to go a little faster. And go bigger.
What’s great about apartments is that you have simply have more options for increasing the property’s value…
Just like a home, you can make repairs, upgrade the appliances, and give the place much more curb appeal.
But you can also quickly increase an apartments value by doing things like:
- Add a laundry room to create an additional income stream.
- Hire a more effective property management team.
- Implement a marketing plan that fills your vacancies quickly and consistently keeps your units filled.
- Raise rents as you make capital improvements.
- Take advantage of tax benefits made available by your City, County or State (typically made more available on larger properties).
- Implement policies and guidelines that improve your collection rate.
- Add amenities like a swimming pool, playground, mini-gym, business center, or community meeting room – which enable you to raise rents.
- Offer referral fees to existing tenants.
- Reduce operating expenses.
On that last point, listen to this: I just met with a colleague today who specializes in reducing expenses on apartment and commercial complexes.
On just one example we talked about, he thinks he can reduce operating expenses by up to $50,000 - $100,000 per year.
That’s huge… up to $100k per year.
How huge is that? In the area we’re investing, reducing operating expenses by $100k increases the market value of just one apartment complex…. by $800k - $1 Million Dollars!
That’s the type of ‘forced appreciation’ potential you’re talking about with apartments and commercial properties.
3) There Can Be Great Tax Benefits That Come with Investing in Apartments
Apartment owners are more likely to receive tax breaks from the government, especially when focused on providing clean, safe, and affordable housing to residents of the city.
Examples might be getting a tax credit from the City for offering energy-efficient windows, or getting a tax incentive from the Federal Government by offering low income housing.
On top of that, you can write off loan points and interest, and you also get to claim depreciation expense – which can be huge.
Ex. One of our buildings last year had a Net Profit of over $60,000.
How much in taxes did we have to pay on that?
The depreciation expense we got to claim… zero’d out our net profit!
Bottom line: The tax benefits can be massive. Just make sure you get a highly competent CPA to help you get as many deductions and tax incentives as possible.
4) Multi-Family Properties Hold Their Value
Once the property is rehabbed and stabilized, and you’ve made it attractive to tenants, you now have an asset that’s spinning off a healthy and consistent cash flow.
And that is highly attractive to many investors.
To maintain (or even increase) value, just make sure you’re doing things to retain the property’s value over the long haul.
Things like keeping up the grounds, maintaining great curb appeal, being diligent with maintenance and repairs, monitoring expenses, and always looking for ways to increase value and the overall experience of your tenants.
Your most important hire? Your Property Manager.
But every single hire is important. So from your PM, to your groundskeepers, to your tradespeople, to your bookkeeper, and everyone on down the line, the best advice I can give is to…
“Hire slow… fire fast!”
It’s priceless advice that an early mentor of mine gave me, so I encourage you to adopt it wholeheartedly as well.
You’re looking for a mindset. A strong work ethic. And pride.
Selection is everything… so take your time on this my friend.
Anyway, those are just some of the reasons why I think Apartment investing is one of the smartest moves you can make.
If you can think of any others, I’m all ears…