I believe that apartment building investment should be a core holding for every successful conservative investor. Briefly here are the top ten reasons for low risk investors:
1. Monthly Income. Properly acquired apartments generate monthly checks in 6-8% or higher annual cash on cash returns.
2. Straight forward, conservative investment strategy. Buying existing apartment buildings with good due diligence means that you know what you’re getting going into the investment. Apartments are not subject to sudden changes in investor sentiment and/or valuations.
3. The numbers determine the value. Apartments are valued based on rents less expenses (Net Operating Income) and increases in rents can go straight to the bottom line increasing the value.
4. Inflation protection. Rents rise with inflation and with 12 month leases every year there is the opportunity to adjust rates. With fixed rate financing your income goes up while your biggest cost stays the same.
5. Tax Advantages. Net income can be offset by depreciation deductions, your property can be refinanced to free up cash, sold for long term capital gains or exchanged tax free for another similar (potentially larger) property.
6. The tenants pay your mortgage. Your equity grows as the tenants pay down the principal on the loan.
7. Professional Property Management. Your job is to manage the managers, not deal with toilets, tenants and trash. Be in the property owning business not the landlord business.
8. Economies of scale. Instead of dozens of single family rentals spread around town, there is one location with one parking lot, one set of roofs, one yard to landscape.
9. Financing is easier. Although financing is tighter than a few years ago, apartment loans are available and obtaining one is much easier than financing multiple single family rentals. Often seller financing is available as well.
10. The Timing is right. The apartment market is cyclical and most markets are at or near the bottom of their cycle. In addition there are many more people looking to rent either because they can’t qualify for a home mortgage or don’t see the value of owning. As the economy recovers many of the young people who are natural renters will ‘unbundle’ by moving out of their parents homes or roommate situations.
As you can see there are solid advantages to owning apartments. In my next posts I will go into more detail on these top ten beginning with #10 which may represent the best investment opportunity in the next decade for conservative investors. Can’t wait until then? Contact me now at giovanni@ashworthpartners.com to find out how to take advantage of the opportunities available right now.
