Disadvantages of Investing in an Apartment

Using a potential tenant’s rent payments to build equity in your property while enjoying extra income is an appealing notion. Many existing apartment buildings have been converted to condominiums, and each former apartment is sold as a single unit. When considering the numerous advantages of investing in an apartment for rental use, you should also weigh several potential disadvantages that could impact your rental unit negatively and empty your bank account.

Loan Costs

Investment properties have different underwriting guidelines and requirements than owner-occupied residences. Lenders consider them more risky because the owner will not be occupying the residence. Typically, higher interest rates and down payments are incurred because of this. Down payments of 20 to 30 percent are common, and interest rates fluctuate with market conditions. Higher monthly payments or large out-of-pocket down payments can negatively impact monthly positive cash flow and cash reserves.

Not Liquid

Cash is a liquid asset that can be used immediately. Real estate is not a liquid asset and is not typically converted quickly for cash use. It may take a long time to sell a property. If money is tight or you are struggling financially, an investment in a rental apartment may put an additional burden on your finances, tying up cash that may be needed for emergency or even daily use.

Rent Collection

Collecting rents is an ongoing challenge for many landlords -- especially at a time of high unemployment and slow economic growth. When your tenant can’t pay the rent, you are next in line to cover the mortgage payment due that month. Written rental agreements are essential and must include clear information regarding rent collection, what constitutes late rent, late payment penalties and what procedures are followed if rent is not received. The tenant, acknowledging full understanding of the items addressed in the rental contract, must sign the agreement.

Eviction

Laws regarding eviction procedures vary from state to state. Eviction is tricky, frustrating and stressful at times. If it becomes necessary for you to evict a tenant, it might cost you time and money. Procedural mistakes can cause delays. Even if the court finds in favor of the landlord, the tenant may be judgment-proof and unable to pay what is owed. Some evictions can lead to violent confrontations.

Unexpected Expenses

Apartment owners are responsible when something breaks down or taxes go up. Routine maintenance also falls on the owner's shoulders. Unexpected expenses happen regularly: While replacing a fixture or toilet is not terribly expensive, a leaking pipe can cause catastrophic damage. Budgeting for an occasional crisis or emergency can help you minimize financial stress.