How to Invest in Apartment Buildings

Real estate investing is a popular passive income generation strategy. There are many ways to invest in real estate, including purchasing individual rental properties and flipping run-down houses. 

With the right approach, multifamily housing options like apartment buildings can be particularly lucrative. Here’s how to invest in apartment buildings. 

Ways to Invest in Apartment Buildings

There are multiple avenues to invest in apartment buildings. Each strategy provides its own set of benefits and potential risks. Here’s a look at the most popular options:

Invest Through Crowdfunding

Crowdfunding platforms have changed real estate investing. They allow you to pool your resources with others to invest in larger properties. 

Through crowdfunding, you can invest relatively small amounts of money in real estate projects, which makes purchasing apartment buildings accessible for beginner investors. These platforms typically offer detailed information about each investment opportunity, including projected returns. 

There are a number of perks to crowdfunding. You can diversify your portfolio by spreading your investments across multiple properties and the cost of entry is far lower. However, you will incur platform fees and have limited control over the investment. 

Invest in a REIT

A real estate investment trust (REIT) is an entity that owns and operates or finances properties that produce income. REITs allow you to buy shares in a portfolio of real estate assets, including apartment buildings. There are three main types of REITs: publicly traded, publicly non-traded and privately non-traded.

Publicly traded REITs are listed on stock exchanges. You can purchase shares like you would any other stock. It’s easy to sell your shares too, which provides liquidity. In contrast, non-traded REITs aren’t on stock exchanges. You’ll likely incur higher fees and lower liquidity. However, the assets might be more stable since access is limited. 

Invest in a Real Estate Fund

A real estate fund consolidates capital from multiple investors to buy and manage a diversified portfolio of properties. These funds often focus on a specific investment strategy, such as value-added or core investments. Professional fund managers oversee the money and portfolio. 

Participating in a real estate fund can offer long-term appreciation. However, management fees can be quite high and your liquidity may be low. If you want a hands-off investment with exposure to real estate, a fund is an option to consider. 

Invest in Your Own

Directly purchasing an apartment building gives you complete control over the investment. However, you’ll need extensive knowledge of the apartment industry and a lot of capital. Here are a few things you’ll have to perform as part of your due diligence: 

• Lease Audit: Review existing leases to understand current terms and conditions. 
• Rent Roll Analysis: Examine the rent roll to assess income.
• Financial Audit Report: Analyze the property’s financial statements for accuracy. 
• Market Analysis: Study the local real estate market to gauge demand and rental rates.
• Property Condition Report: Inspect the building’s physical condition.
• Site Survey and Title Report: Verify property boundaries and ownership history. 
• Apartment Building Appraisal: Get a professional appraisal to determine the property’s value.

The due diligence period can take months to complete. However, it’s vital that you gather all of these critical details so you can make an informed decision. 

Invest With a Partner

Partnering with someone to invest in apartment buildings can reduce risk and increase available capital. You can use the extra capital to purchase larger investment properties. Additionally, partners can bring complementary skills and expand your professional network.

However, partnerships also have potential downsides. You’ll have to split profits and implement a strategy for resolving disagreements, which means giving up decision-making autonomy. 

Invest in a Syndication

A syndication pools funds from multiple investors to purchase a property. The syndicator will manage the investment. As an investor, you provide capital in exchange for a share of the profits, typically receiving passive income from rental returns. 

The benefits of syndication include access to larger properties and passive income. The property will be managed by a professional with experience in the industry, which shifts much of the administrative burden off your shoulders. However, you will also have limited control and may experience reduced liquidity. 

There aren’t any one-size-fits-all options when it comes to apartment buildings. If you want greater control over your assets, you must also take on additional administrative tasks. Conversely, if you want a hands-off investment, you must sacrifice liquidity and control. 

Types of Apartment Buildings to Consider for Investing

Before investing in apartment buildings, it’s important that you consider the different types of properties available and their unique advantages. The three main types of apartment complexes include: 

Low-Rise Buildings

A low-rise is usually fewer than four stories tall. This building type is often a good starting point for new investors due to its lower maintenance costs and reduced price points. Renters looking for a more personal and less crowded living environment may favor low-rises. 

Mid-Rise Buildings

A mid-rise building typically has five to nine stories. It is a happy medium that offers more potential than a low-rise while still remaining manageable. Mid-rises can attract a diverse range of tenants. 

High-Rise Buildings

High-rise buildings are ten stories or taller. Because they have more units, they can offer higher returns. However, they are also complex to manage, meaning you’ll need an experienced partner to help with the administrative side. You will also encounter higher maintenance costs and stringent regulatory requirements. 

Pros and Cons of Investing in Apartment Buildings

Investing in apartment buildings offers numerous benefits but also comes with its challenges. Here’s a look at the good and bad of apartment building investments: 

Pros

• Offers strong cash flow and a steady stream of income from rental fees
• Can hedge against inflation
• Allows rental rates to be adjusted over time
• May provide tax breaks such as depreciation

Cons

• Can be cost-prohibitive
• Potential for high management and turnover expenses
• Requires you to deal with multiple tenants and common area maintenance
• Requires extensive due diligence 

Should You Invest in Apartment Buildings?

Now that you know how to invest in apartment buildings, you need to decide whether you should do it. Apartment complexes can be great mechanisms for generating income, tax breaks and long-term appreciation. However, it’s important to consider factors such as your:

• Investment goals
• Cash flow
• Liquidity
• Portfolio diversity

If you decide that apartment buildings fit your portfolio well, consider the many investment options. Then, choose a solution that provides the best control, risk mitigation and potential return.

Frequently Asked Questions