Apartment investing is a great way to diversify your portfolio, create income and enjoy tax benefits. But other investment strategies may offer some of these benefits, but not as strong as though with apartments. So the question we all have (especially if you are newer to the industry) is: is it worth it?
There are many ways to invest in apartment buildings. These include investing in a REIT, investing in a private fund, being part of a joint venture, buying your own building, and investing in syndication. In this article, we will compare the two popular strategies: being part of a joint business venture and buying your own building
We can see how apartments have historically faired in general terms. A prominent economist, Dr. Peter Linneman, compiled an outstanding analysis that measured the performance of commercial property over any 10-year holding period on NCREIF, the leading real estate performance index. On average across all asset classes, any 10-year hold period would have yielded an 8.3% return.
If you had invested in apartments for the past 10 years, your investment would have outperformed all other asset classes. This is partly because apartments have historical returns of 9.4%. Apartments also have the least risk, with a standard deviation of 2.1% compared to 2.6% across all asset classes. Past performance does not predict the future, but history is all we have to make our best attempt. Apartments have outperformed all other asset classes on average, in the worst 10 year period and in the best 10 year period. Apartments also had the least risk of any asset class.
To illustrate this point, we have conducted an unlevered analysis—one free of debt. It is important to note that apartments have a wide variety of benefits, the most significant being their low debt burden. Compared to their peers, they receive favorable terms from institutions such as Fannie Mae and Freddie Mac. Although other real estate asset classes are valuable in their own right, apartments historically have proven to be a reliable investment.
Thus, if you are still with me, you are likely interested in learning more about apartment investing. And I have only touched on one of the many benefits of this investment strategy, namely that it offers investors a chance to use leverage to magnify returns. In addition, investors can collect consistent cash flow and take advantage of real estate tax breaks. So is apartment investing worth it? That depends on your goals and circumstances as an investor. But for serious investors who can invest for at least five years and do not need immediate access to their investment funds, yes, apartment investing could be right for you. All that said, should you try to buy your own building or seek out an experienced operator? Of course, it’s up to you—the prudent investor will carefully consider both options before making a decision.
Pros and Cons of Investing in an Apartment
Buying your own building can have several advantages. . You will be able to control your deals and have a say in when you buy and sell, what financing choices you have, and how you manage your property. Nonetheless, there are disadvantages of purchasing a building: first, if you do not have experience, it will be difficult to manage the business; second, if you do not have proper experience and education in real estate investing, you may underestimate or overestimate your expenses and revenue; third, if you do not have access to capital or experience being a landlord (or both), finding financing for a building may be difficult; and lastly, if you do not have significant capital nor access to capital (or both), you may not have the ability to purchase larger buildings that could offer better economies of scale.
An alternative to buying your own apartment building is to invest in multifamily syndication. To be clear, syndication is the pooling of resources for a common goal, in this case, financial growth for investment properties. With the combination of professional experience, relationships with brokers, ability to find and acquire quality deals, ability to optimize an investment property’s operation, and access to good financing terms through a network of lenders—an experienced operator can help you take part in multifamily housing investment deals as an equity partner with little or no out of pocket expenses. The best part? You can now be part of a larger, institutional quality deal with limited funds.
If you have little or no financial capital to invest, you might be unable to participate in syndication. However, there are many other aspects of the multifamily industry that can provide value. For example, deal finding, being on-site, and raising capital are all valuable skills and there are a multitude of resources available for free
To decide what’s best for you, the following questions need to be answered:
Do you have the time?
Do you want to invest in your backyard?
Do you want to manage tenants?
Do you want to learn how to underwrite and identify deals?
Consider investing in your own buildings and partnering with experienced operators if you can answer “YES” to all three questions. If your answer to most or all these questions is “NO,” you can use an operator as a passive way to invest in real estate. However, you still need to learn about the operator and the deal. This may take time, but it is much less than what it takes to become a good operator yourself.
So, should you invest in apartment buildings? If you have read this far, the answer is probably YES. While I would not recommend plowing $50,000 into a syndication, but If you have saved enough money to invest in a syndication, go ahead and give it a try. You still have several other ways of getting involved in the process, so identify what works best for you and go from there.
Founder | Growth Capital Group
Join a community of investors working
and partnering together to build wealth