Investing in apartment buildings can be a sound financial strategy, even when the economy isn’t performing optimally. However, like all investment opportunities, there are pros and cons to consider. This article will discuss the benefits and drawbacks investing in apartment buildings.
Advantages and Disadvantages of Investing in Apartment Buildings
Pros and Cons of Investing in Apartment Buildings
—- Pros —-
1. Reliable Income Stream
One of the primary reasons many affluent investors choose apartment buildings is their ability to provide a consistent income. A well-located and well-chosen apartment property will generate regular cash flow. While businesses in the retail, office, and warehouse sectors may come and go, there will always be a demand for residential spaces.
2. Appreciation of Property Value
An apartment building’s value is tied to its Net Operating Income (NOI). The beauty of apartment properties is that you can enhance their value without investing in physical upgrades. By increasing income and reducing expenses, you can boost your property’s value. For instance, if the average Capitalization (CAP) Rate in your area is 10%, a £1,000 increase in NOI could add £10,000 to your property’s value. This strategy, known to professional investors, can be applied to multiple properties.
3. Reduction of Principal
Every month, your equity in an apartment building increases automatically. This is due to your tenants paying down your mortgage with their rent. Each rent payment contributes to your equity and wealth.
4. Tax Benefits
Apartment properties can provide one of the best tax-sheltered investments. The tax laws allow apartment building owners to benefit from depreciation expense during ownership. Additionally, you can sell the property, reinvest the proceeds into a new property, and not pay taxes on the gain – something not possible with stocks or mutual funds.
—- Cons —-
1. Property Management
The necessity for property management is one of the challenges of apartment properties. This requirement can deter some investors. However, if you purchase the property correctly, a professional property manager can handle day-to-day operations.
2. Liquidity of Investment
Unlike stocks or mutual funds, apartment properties cannot be bought and sold quickly. When you decide to sell, it can take time, making it a more long-term investment than other options.
3. Maintenance Concerns
Maintenance, like management, can discourage investors from considering apartments. However, with professional handling and correct property purchase, these issues can be managed. The rent revenue should cover these expenses, granting you, the investor, time to scout for your next potential deal.
