Investing in multifamily properties is a time-tested way to generate passive income. Apartment buildings typically carry less risk and offer a much higher return on investment than single family homes. On the other hand, they can be difficult to manage and require more time and commitment than other types of rental properties. But is owning apartments profitable?
Apartment buildings (or multifamily properties) are defined as multi-story residential buildings where three or more housing units are contained within the same structure. Apartment buildings are classified into low-rise, mid-rise, and high-rise buildings, based on the number of floors and overall height.
In this article, we’ll take a look at how much money you can expect to make from owning an apartment complex—and whether owning an apartment is worth the time and effort or not.
Is owning apartments profitable?
Yes. Apartments are generally more profitable than single-family rentals. They are designed to maximize profit with numerous units available to provide temporary housing to renters. If you’re willing to put in the time and effort, there are several reasons why owning apartment buildings can be a profitable investment:
- Less competition, compared to single-family rentals. With SFRs, you are not only competing with other investors, but you are also bidding against buyers who are only looking for a residential space.
- The higher number of units in an apartment building allows you to generate more rental income, based on volume.
- Also, apartment buildings tend to appreciate over time, yielding a high return on investment from passive appreciation.
How much do apartment owners make in a month?
So, how much do you stand to make from an apartment building? Let’s take a look at the numbers.
According to a report by Realtor.com, the average rent in the United States is $1,827 per month, for both single family and multifamily rentals. Let’s say after expenses – mortgage, maintenance, repairs – you have a monthly cash flow of $150/unit on your apartment complex. In an apartment with 50 units, rental income would amount to $7,500 every month compared to $150 for SFH.
But, that’s just a hypothetical situation. Things tend to be less than ideal in real life. The answer to how much you can expect to make from apartment ownership depends on many factors, such as:
- The size of the building
The number of apartments per floor
- How close it is to public transportation and/or local businesses
- Amenities available in the building and nearby
- The type of neighborhood it’s located in. For example, an apartment complex owner in Santa Clara, CA is likely to earn more money than someone who owns in Morgan City, Louisiana.
- Property management and maintenance costs.
- The type of tenants and the tenant screening process.
Based on ZipRecruiter’s data, the average apartment building net income is $49,977 per year. Top earners make an annual income of $97,500 per year or more. In other words, owning apartments can be quite profitable.
Pros and cons of owning an apartment complex
Owning an apartment complex has its benefits, but it’s not without its downsides either. The benefits mainly pertain to apartment complexes’ ability to yield a fairly high return on investment. The cons relate to the difficulty inherent in managing multi-family rentals and the tenants living in them.
Pros of buying apartment buildings
1. Higher cash flow
When people ask if owning apartment buildings is profitable, they really want to know about cash flow. Apartment buildings give you access to regular rental income from all of the units. Also, you can charge for amenities, such as parking spaces, gyms, in-unit laundry, and park areas, increasing your profit margins.
Multifamily investments are less likely to experience absolute vacancy. Therefore, cash flow is unlikely to be cut off completely. Having a multifamily rental can be likened to having multiple streams of income coming in every month. The overall amount of monthly income generated by apartment buildings completely dwarfs the amount earned from comparable investments in stocks, bonds, and single-family rentals.
2. Clearer comps for rents and sales
Apartments are not valued based on the price of similar recently sold properties but based on the income they generate compared to apartments in the same area.
Comparables can tell you how much to charge for rent, as well as extra amenities such as parking spaces, fitness centers, and swimming pools. You can use comps to determine the net operating income (NOI) and the market cap rate of the property. These metrics enable you to evaluate the property’s current value and the potential ROI.
3. Opportunities for syndication/ partnership
Apartments offer opportunities for syndication and partnership with other investors, unlike single-family properties. Syndication, also known as crowdfunding for real estate, allows individuals to pool capital and other resources together to achieve a common purpose, such as investing in a multifamily property.
A syndication agreement typically involves two parties: the syndicator (general partner) and the passive real estate investor. Syndication gives you access to more capital, increases deal flow, and provides tax benefits all without the hassle of property management.
Apartment complexes are suitable for group investing. Teaming with other investors gives you access to more capital and allows you to maximize your return on investment.
4. Equity growth
Apart from regular rental income, multifamily properties appreciate over time. This annual growth makes apartment complexes a sound investment to make money — from rental income in the short-term as well as value appreciation in the long term.
If your property appreciates over time, the equity built up could be used as collateral for loans. For example, if your property is worth $800,000 and your mortgage is $500,000, that leaves $300,000 in equity which you could borrow against (with interest) if necessary.
Having multiple sources of rental income also helps you build equity as you repay the mortgage faster. Multifamily housing is also easier to finance because lenders look at the building’s profitability, rather than your credit history.
5. Higher tax incentives
Multifamily real estate gives you the advantage of several tax incentives. You can write off any expenses relating to the maintenance and management of the property as well as depreciation and mortgage interest deductions.
Also, you can defer capital gains taxes indefinitely with a 1031 exchange — a transaction that allows you to swap an investment property for another similar property and postpone capital gains taxes to a later time. There is no limit on how often you can carry out this exchange and it enables investors to grow their investments tax-free.
6. Lower vacancy rates
Multifamily rentals have much lower vacancy rates compared to single-family rentals. There is considerable demand for multifamily housing units, due to the limited availability of apartment buildings compared with their demand.
Also, vacancy rates in apartment complexes have a less drastic effect on monthly turnover, in contrast with single-family properties. In apartment buildings, one tenant leaving will not significantly reduce your monthly income. However, tenant acquisition and screening should still remain an important part of your investing strategy.
Cons of investing in apartments
1. Requires larger down payments
One of the factors that makes owning apartment buildings potentially less profitable than smaller properties is the down payment. Investing in an apartment complex for sale requires a lot of money upfront. If you don’t already have enough saved up for financing the apartment complex as well as for paying for other expenses such as renovations and maintenance costs, then this may not be the right choice for you. Depending on the property and your financing options, you may need anywhere from 20% to 50% of the cost of the building up front.
2. Fewer exit strategies
Single-family homes are easy to buy and sell. But there are fewer exit strategies available when buying a whole complex. Because of the way apartments are structured, there are fewer exit strategies available when investing in an entire building.
You might be able to sell off individual units within your building. However, there aren’t as many options for selling off your holdings as there would be in other kinds of real estate transactions. Hence, you must have a clear plan for what you want out of the deal before committing to it.
3. Harder to manage than SFRs, Duplexes, Triplexes, and Fourplexes
Managing apartments is much more complex than managing smaller multifamily properties, like duplexes and fourplexes, due to their size and the number of tenants. An apartment building with 50 units will need separate maintenance records for each unit.
You’ll need to handle tenant complaints, collect rent payments and ensure that the property remains well-maintained. This usually requires hiring various employees to handle maintenance and janitorial activities or paying a property management company up to 12% of your gross monthly rent to oversee the property.
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4. More regulations and higher insurance costs
5. High costs for maintenance, repairs, and improvements
6. Renter demand is shifting towards SFRs
Rental income tends to fluctuate based on the demand for housing in the area and the level of competition from other properties nearby. The increase in demand for single-family rentals means that there could be lesser demand for multifamily housing units going forward.
Is buying an apartment complex a good investment?
In a nutshell, it depends. If you buy an apartment complex in excellent condition in a prime location for an affordable price, that would be a worthwhile investment. An old apartment that seems to be coming apart at the seams in a slow area could be a problematic investment.
Certain factors determine whether an apartment complex is a sound investment or not:
- Location: “Location, Location, Location” is a popular real estate quote, and for good reason. The location of an investment property determines whether it will yield positive or negative cash flow. You should consider whether the apartment complex is located in a growing neighborhood. In addition, you should take into account the level of public infrastructure available nearby, and the type of tenants the property is likely to attract.
- Cost: You should also consider the overall costs of the building, as well as your financing options. Compare the amount to be generated in rental income with the potential expenses (insurance, management, and maintenance fees).
- The property’s condition: To decide whether an apartment complex is a sound investment or not, you should evaluate its condition. What percentage of the units are move-in ready? Is there any room for improvement? Are the major systems — heating, plumbing, electricity, etc — functional? Are there any repairs, major or minor, to be made?
- The market condition: You should always try to understand the conditions of the market you’re investing in. If it’s a buyer market, demand may be too low to make a profit. You should also seek to analyze the local economic factors that can drive demand. For example, if there is a nearby university, students will be on the lookout for affordable housing. The market condition, at different levels, drives demand for housing.
- The current cash flow: It is critical to evaluate the complex’s average cash flow to determine its income potential and the appropriate bid price. Taking a look at the current cash flow can help you uncover areas for improvement and unexploited opportunities.
So, is owning apartments profitable? Yes. Owning an apartment complex can be a very effective way to grow your real estate portfolio and build a long-lasting source of regular income. They can be a very profitable investment, especially if you can get them at the right price and maintain them without spending an arm and a leg. However, they do require a lot of work, careful planning, and management.
When planning to acquire an apartment building, you should have the facts as well as expertise from people who’ve been there and done that. An in-depth market analysis and careful research will help you make the right investment.
Become a member of RealWealth today and schedule a strategy session with one of our experienced investors. While we don’t typically work with partners who sell apartment buildings, we do have resources we can connect you with who do. We can also connect you with property teams that sell duplexes, triplexes and quadplexes, which are easier to manage than apartment buildings and can still be quite lucrative.