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What Are the Benefits of Investing in Apartments?

by | Mar 15, 2024 | Accredited Investor, BAM Blog, Blog, Real Estate Investing | 2 comments

Upside or Benefits Of Investing In Apartment Communities

Real estate investing is considered a lucrative opportunity for investors seeking to diversify their portfolios while building wealth over the long term. While there are many ways to invest in real estate, apartment investing is among the most popular. It is so popular in fact that many investment professionals are recommending apartment investing to grow their client’s wealth in a turbulent economic environment. 

Apartment communities are multifamily properties that hold a unique appeal for investors. From steady cash flow to potential tax advantages, there are several benefits to investing in apartments that make them an attractive option for both seasoned investors and those just starting out in the real estate market.

Apartment investing involves purchasing and managing residential multifamily properties with the goal of generating rental income. Investors can also profit from the appreciation in property value when it is time to resell the property.

Unlike single-family homes, apartment investing typically involves larger properties with multiple units, ranging from a few units to several hundred.

Just from the sheer number of units, we can see that investing in apartment communities is no walk in the park. Real estate investors should be aware that apartment investing is a big commitment. In fact, it is sometimes described as a career rather than just an investing strategy. [1]

The process of apartment investing begins with identifying suitable properties based on factors like location, market conditions, potential rental income, and property condition. Once a property is acquired, the real challenge begins, which is property management.

Being a landlord is not easy especially when it comes to multifamily properties because there are multiple tenants and units to manage. It requires a deeper level of involvement, both physically and financially. [1]

Despite the challenges, many people still choose to add multifamily properties to their investment portfolio, and it is worth discussing the reasons behind this. Here are some of the benefits of investing in apartment communities.

Steady Cash Flow

Cash flow refers to the net income from a real estate property after mortgage payments and operating expenses have been made. Cash flow tends to strengthen over time as you pay down your mortgage and build up equity. [2]

Cash flow is the primary reason investors want to add real estate to their investment portfolio. When you own a property that you can rent out to tenants, it could serve as a source of passive income because they will pay rent on a monthly basis.

But with multifamily properties like apartment communities, investors get to enjoy a strong and steady cash flow because there are multiple units producing rental income. Apartment communities are a good source of steady cash flow.

Unlike single-family homes, apartments generate multiple streams of income from various units within the same property. This means they are generally unaffected by vacancies, which normally stops cash flow for single-family real estate properties. With multifamily properties, cash flow is not disrupted even if one or two units become vacant.

Additionally, apartments tend to have higher occupancy rates compared to other types of residential properties, as they often cater to individuals or families seeking affordable and convenient housing options.

As a result, apartment investors can enjoy a reliable and predictable cash flow, providing stability to their investment portfolio and potentially yielding long-term financial growth.

Economies of Scale

Another significant benefit of investing in multifamily real estate is economies of scale.

Economies of scale are said to be achieved when more units of a good or service can be produced on a larger scale with fewer input costs. As a company grows and increases production units, they get a better chance to decrease its costs. [3]

This can also apply to multifamily properties like apartment communities. Since apartment communities consist of multiple units under one roof, it allows for more efficient management and maintenance processes.

Economies of scale come into play as operational costs per unit decrease when managing multiple units within the same property. In multifamily properties, expenses such as landscaping, utilities, and repairs can be spread across a larger number of units, reducing the overall cost per unit.

Centralized management can also lead to streamlined processes, reduced administrative overhead, and increased negotiating power with service providers. In the long run, this contributes to greater profitability and sustainability.

Diversification

Adding real estate to your investment portfolio provides diversification since it has low or sometimes even negative correlation with other major asset classes such as stocks and bonds. Adding real estate to a portfolio of diversified assets can lower portfolio volatility and provide a higher return per unit of risk. [2]

But investing in apartments also gives investors a unique avenue for diversification within their investment portfolio.

As we mentioned earlier, apartment communities can minimize the risk associated with relying on a single tenant for rental income, as vacancies in one unit can often be offset by the income from other occupied units. Unlike single-family homes or other real estate assets, apartments provide exposure to a broader range of tenants, each with their own lease agreements and rental terms.

Appreciation Potential

Real estate values tend to increase over time. This means aside from the cash flow, investors can also potentially make a profit from the appreciation of their property when it’s time to sell. This is especially true for investment properties that are well-maintained and well-located. [2]

As the demand for rental housing grows, particularly in urban areas and desirable neighborhoods, the value of apartment complexes tends to appreciate steadily.

Investors can even take strategic steps to enhance the property’s value. This is typically done through renovations, upgrades, and adding amenities to accelerate appreciation.

Due to the steady cash flow produced by multifamily real estate properties, investors are able to hold onto their investments for longer periods, allowing them to reap the benefits of property appreciation.

Tax Benefits

Another reason investors choose apartment communities is the plethora of tax benefits that serve to improve their return on investment (ROI). Using numerous tax breaks and deductions, real estate investors can save money at tax time. [2]

One key advantage is depreciation. Even though they may appreciate in value over time, apartments can be depreciated for tax purposes, unlike many other investments. This means investors can deduct a portion of the property’s value each year as a depreciation expense, reducing their taxable income.

Do take note that you can depreciate the cost of buildings but not the land itself. [2]

Apartment investors can also take advantage of deductions for expenses such as property taxes, mortgage interest, repairs, and maintenance. These deductions can help offset rental income, resulting in lower tax liabilities.

Through strategies like cost segregation, investors can further accelerate depreciation on certain components of the property to maximize tax benefits in the earlier years of ownership.

Hedge Against Inflation

Real estate properties can serve as a hedge against inflation and the same applies to apartment communities as well.

Unlike other investments that may be negatively impacted by inflation, apartment investments have the potential to maintain or even increase their value over time as inflation rises. This is largely due to the fact that rental income from apartments can be adjusted to keep pace with inflation, allowing landlords to increase rents in line with rising living costs.

Additionally, real estate assets tend to appreciate in value over the long term, which further safeguards against inflation’s effects. Apartment investing can therefore offer investors a reliable means of preserving wealth and generating returns that outpace inflation.

Interestingly, high inflation can still be a double-edged sword in the real estate industry. So while real estate can serve as an inflation hedge, it can still be affected by the same economic forces that drive inflation. Because inflation can erode the value of money, it can reduce returns due to rising costs. [4]

Professional Property Management

Investing in an apartment community is a hands-on endeavor that requires investors to play the role of landlord. However, due to the strong cash flow generated by multifamily properties, investors can justify the expense of hiring a professional property management company.

Professional property managers can handle the day-to-day operations of the apartment, including collecting rent, managing tenants, resolving issues, and handling repairs and maintenance. [1]

While the scale of apartment communities necessitates a more robust management approach, professional property management companies specialize in handling these daily challenges.

By outsourcing these tasks to seasoned professionals, property owners can save time, reduce stress, and ensure that their investments are being managed efficiently and effectively. So while this is definitely an added cost, it is something multifamily investors should seriously consider. [1]

Don’t Just Invest in Apartments: Consider Multifamily Syndication

Real estate apartment investing comes with plenty of benefits that should be able to convince many investors. But for accredited investors, there is an even better option.

Multifamily real estate syndication solves some of the biggest issues people face when investing in apartment communities, such as the high barrier to entry and property management.

Real estate syndication is an investment strategy that involves pooling the financial resources of multiple investors in order to buy a single real estate property. Multifamily syndication is when a syndication deal is created to purchase a multifamily property such as an apartment community or condominium. [5]

This type of deal can be done with any type of real estate, but because of all the benefits mentioned above, multifamily syndication is the most popular version.

Multifamily properties are associated with strong and predictable cash flow. However, they are also difficult to obtain for a lone investor because these large properties are generally expensive. The multifamily syndication approach makes them more accessible for investors. [5]

This strategy is also a lot less risky compared to purchasing a large multifamily property on your own because you only have to worry about your share of the capital.

It is a syndicator or sponsor who arranges the syndication deal, taking on the role of general partner (GP). They are the ones to locate the investment property, perform their due diligence, create and execute the business plan, and look for real estate investors who will participate. [5]

The investors serve as limited partners (LPs) and therefore have limited responsibilities in the deal. They only have to provide most of the capital needed to acquire the property, as well as pay certain fees to get the syndication going. Beyond that, they have no liabilities in the syndication.

Investors own a share of the real estate property in the syndication deal. This is why they earn a portion of the property’s monthly rental income, which may be distributed on a monthly or quarterly basis depending on the deal structure. Also depending on the deal structure, they may earn a share of the equity upon resale. However, every deal is different. [5]

The syndicator will also take on the responsibilities of a landlord. They may handle property management themselves or hire a third party company to do it for them. Either way, it is not the responsibility of the investors.

Because the syndicator will handle property management, this is a true passive investment in real estate.

Remember that most of these deals are exclusive to accredited investors: individuals who fit certain financial and professional criteria set by the US Securities and Exchange Commission (SEC), allowing them to participate in unregistered securities.

For accredited investors who desire a hands-off approach in real estate investing but want the benefits of owning an apartment community, multifamily syndication is the best investment strategy.

Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals

Multifamily syndication allows investors to enjoy the benefits of apartment investing without the headaches that come with being a landlord.

However, it is still important to work with a trustworthy syndicator with a track record for excellence. Conduct your due diligence to find a syndicator you can trust. After all, they will be making most of the decisions regarding the investment moving forward.

BAM Capital is trusted by accredited investors because this Indianapolis-based syndicator uses an award-winning strategy that creates forced appreciation while mitigating investor risk. In fact, they are recognized for their consistency and for being a leader in their industry. [6]

BAM Capital prioritizes high-quality multifamily properties that are Class A, A-, and B++, particularly those with in-place cash flow and proven upside potential.

If you are considering multifamily syndication, you should work with BAM Capital. This syndicator now has over $700 million AUM and 5,000+ units. [6]

Being a vertically-integrated company also allows BAM Capital to handle every step of the syndication process, from acquiring the multifamily property to renovating and managing them. [6]

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.

For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, schedule a call with BAM Capital and invest today.

 

Sources:

[1]: https://www.fortunebuilders.com/investing-in-apartment-buildings/

[2]: https://www.investopedia.com/articles/mortgages-real-estate/11/key-reasons-invest-real-estate.asp

[3]: https://www.investopedia.com/insights/what-are-economies-of-scale/

[4]: https://www.concreit.com/blog/real-estate-inflation-hedge#

[5]: https://multifamilyrefinance.com/apartment-investing-blog/multifamily-syndication#important

[6]: https://capital.thebamcompanies.com/