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Historically, real estate has been a popular alternative investment that can produce steady cash flow and help you diversify your portfolio. And this is not only the case of office buildings and commercial properties; Multi-family homes and apartment buildings can also be excellent investments.
With the affordability of buying a single-family home hitting new lows this year, many would-be homebuyers have been left on the sidelines and have opted to remain renters. This increased demand is likely to drive up rental prices, making apartments an interesting investment opportunity right now.
However, there are many ways to invest in assets such as apartment buildings depending on your level of experience and capital. Some methods also suit different objectives, such as income versus growth, and various levels of risk tolerance.
That’s why this guide includes how to invest in apartment buildings and the pros and cons of this asset class so you can decide if it’s right for you.
How to invest in apartment buildings
Investing in apartment buildings can seem very complicated at first glance. Fortunately, there are numerous beginner-friendly strategies to get you started, as well as arrangements that suit seasoned investors.
1. Invest yourself
One option for investing in apartment buildings is to simply work with a real estate agent who specializes in these types of properties and invest for yourself. However, this approach requires an immense amount of capital, especially if you are looking at larger buildings with many levels and dozens of units.
Also, if you invest alone, managing the apartment building is also your responsibility. Landlords often work with property management companies to help find tenants, keep up with payments and keep up with maintenance. But again, the barrier to entry for this solo investment is probably too high for most investors.
2. REIT
Real estate investment trusts, or REITs, offer a much easier way to invest in apartments or other forms of commercial and residential real estate. And if you’re interested in fixed income, REITs certainly deserve a spot on your investment radar.
A REIT is a company that owns or operates income-producing real estate. By law, they are required to pay at least 90% of annual taxable income to shareholders as dividends. And since many REITs are publicly traded, you can buy shares through your online stockbroker very easily. This includes residential REITs that invest in multifamily homes and apartment complexes.
The main advantage of REITs is that you can generate income with them. And if you stick to publicly traded REITs, liquidity isn’t as much of a concern as private REITs.
However, the potential for growth is lower for REITs than for growth stocks. That’s because REITs must distribute 90% of taxable income to shareholders, which limits the amount of capital that can be put back into growth. But if real estate income is your goal, REITs are an excellent investment.
3. Real estate crowdfunding
Like REITs, real estate crowdfunding platforms present another low-barrier-to-entry option for investing in apartment buildings and other residential or commercial real estate offerings. Crowdfunding companies pool money from investors to buy and operate income-generating real estate. Many platforms have their own eREITs that invest in numerous properties, while some platforms also offer individual deals that you can buy from.
Fundrise is one of our favorite platforms because its $10 minimum allows you to invest in real estate without a lot of money. It also has very low annual fees and has historically returned around 8-9% per year. Streitwise and CrowdStreet have a mix of individual offerings and are also branching out into eREITs, though both focus on commercial real estate like office buildings a bit more.
In any case, crowdfunding is a viable way to add real estate to your portfolio without much capital. And you can still get dividends reliably similar to REITs.
4. Work with a partner
If you like the idea of owning an apartment building, but don’t have enough capital or want to mitigate some risk, you can consider investing with a partner. This route facilitates the acquisition of capital to invest in the first place. In addition, you and your partner can divide the sourcing and management responsibilities between you as you see fit.
The main downside to this strategy is that they give up some control. This may not matter for day-to-day management once tenants move in and things are up and running. But when it comes to maintenance, potential renovations and deciding when to sell, it might be harder to always be on the same page.
5. Syndication
Just like investing with a single partner, you can also explore real estate syndication arrangements to invest in apartment buildings or other types of real estate.
In this arrangement, a sponsor generally invests a large percentage of the capital required for an apartment building and then takes over active management. Other syndicate members are limited partners, meaning they are passive investors, but provide the additional funds to complete the deal.
All syndicate members can benefit from rental income distributions and potential property appreciation. But it is the sponsor who has ownership and management control. This can work perfectly for all parties, assuming everyone agrees with the sponsor.
Also keep in mind that, like many capital-intensive forms of real estate investing, you must be an accredited investor to participate in a syndication arrangement. This means having an annual income of at least $200,000 ($300,000 with a spouse) or having a net worth of $1 million or more.
6. Real estate fund
As the name suggests, a real estate fund is a fund that invests in real estate. Typically, real estate funds are ETFs or mutual funds, and some are actively managed while others are passive. There are also private real estate funds that invest in individual properties, although they often require much higher initial investments.
Like publicly traded REITs, you can buy many real estate funds through your broker. And many brokers also offer their own funds, such as Fidelity’s MSCI Real Estate ETF (FREL) or Vanguard’s Real Estate ETF (VNQ).
The main difference between REITs and real estate funds is that REITs pay 90% of taxable income to shareholders, while real estate funds earn mostly through appreciation. If your goal is fixed income, most other apartment building investment strategies are a better choice.
Pros and cons of investing in apartment buildings
pros
- Monthly rental income can be quite lucrative
- Expenses such as maintenance and property management are eligible for tax deductions
- In markets with limited supply and high demand, monthly rental prices may continue to rise
- You can get out by selling the apartment building or potentially by selling individual units
against
- Some methods of investing in apartment buildings require immense capital or being an accredited investor
- It’s not a passive investment unless you pay to outsource everything to a property management company
- Vacancies and late payments pose risks to cash flow
- Ongoing costs, insurance and renewals can be very expensive
Who should invest in apartments?
Investing in real estate is a popular way to diversify your portfolio. And it can also serve as a good inflation hedge in many cases. Both advantages are valid for investing in apartment buildings. You can also generate significant cash flow if the building has long-term tenants.
If you are primarily interested in portfolio growth, some options such as REITs or crowdfunding may not be as attractive. And direct ownership, even with a partnership or union arrangement, requires a lot of capital.
For new investors, you can explore various crowdfunding platforms or stick with REITs and real estate funds to invest in apartment buildings. And more experienced investors with serious cash can consider direct ownership, as long as they do their due diligence and understand the work involved.
