If you'd like to get your feet wet in real estate investing and don't want to purchase single family residences, apartment complexes might be a good option. Your tenants will hopefully make your mortgage payment and pay the bills for you, leaving you to collect the profits. Compared to other types of investment properties, they're usually easier to manage and to keep full. That's because you don't have to deal with businesses, configuring spaces for them and paying leasing commissions.
Think Like an Investor
One of the keys to investing in apartment complexes is to look at them differently than you would a house, where you add value by improving the property. Since investors buy apartments to make money, there are essentially two ways to drive value. You can either make it less expensive to run or increase the income it generates. For instance, you'd remodel a kitchen in a house because new kitchens cause buyers to pay more for houses. In an apartment, you'd decide whether the amount of extra rent you could get for a renovated kitchen, if any, would justify the expense.
From a lender's perspective, a two- to four-unit apartment building is frequently seen as the same as a single-family home, especially if you live there. Because of that, one way to get started in apartment investing is to buy a multi-unit building where you occupy one unit. This makes you eligible to take out owner-occupant financing and to potentially get a low down payment.
While you're living there, you can learn how to run an apartment while your tenants' rent pays down your mortgage and covers at least some of the building's operating costs. When you're ready to move on, you may choose to hold on to the building and rent your unit to another tenant, giving you a pure investment property with the benefit of owner-occupant financing.
When you move into the realm of complexes with five or more units, the financing environment changes. You generally need at least 20 percent down and frequently more than that. Your lender may also look at your qualifications as a property manager before approving a loan. That can make it hard to buy a larger building unless you have relatively deep pockets and experience with smaller units, or a manager you can work with. With this in mind, having an experienced partner with access to financing is a good way to invest in a larger complex. Another is to look for owners that will finance your purchase, potentially allowing you to put less money down and saving you from having to look for a traditional lender.
If you want to get exposure to the multi-family market without having to own physical apartments, a real estate investment trust (REIT) that owns apartments may be a good option. REITs do nothing but buy and own real estate, much like a mutual fund owns stocks and bonds. When you purchase shares in a REIT you're effectively buying a piece of their holdings. The share price will fluctuate in part with the value of the apartments the REIT holds and your dividends will be tied to the net income those apartments generate.
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