After purchasing a couple of single or small multi-family properties as investments, many newer real estate investors may begin to wonder how they can get to the “next level.” For example, there are many investors who begin their career by buying a single rental home, and then another – and then possibly a duplex or small apartment building.
However, sooner or later, they come to a screeching halt. This is when they are told by their lender that they are not able to obtain any more mortgages or that their portfolio is outside of their lending parameters. This, unfortunately, can be a common issue when it comes to building up a real estate property portfolio. The good news is that there is a way to fix it. One solution may actually entail purchasing larger income properties such as apartment buildings.
In fact, there are several reasons why going with apartment buildings can be more beneficial for investors than investing in single family homes – even though at first, doing so may seem a bit overwhelming.
First, everyone needs a place to live – and today, there are still many people who are holding off on purchasing a home in lieu of renting. This could be due to an inability to obtain a mortgage, a growing senior population (and thus, the desire to downsize), or even the transient nature of certain areas. These all point to a growing demand for apartment housing.
In addition, apartment buildings can also provide you with a much more steady cash flow than a single family unit. While single family properties can offer a nice, steady source of income, when your tenant moves out, you have essentially lost 100% of your income source from that property until the next tenant moves in. Conversely, when just one tenant moves out of a multi-family building, only a percentage of your cash flow is lost.
On top of good steady cash flow, many apartment complexes will also raise their rents annually – and, as these rents go up, the value of the building will also rise. This is referred to as forced appreciation.
One of the biggest benefits to owning apartment buildings, though, is the tremendous amount of leverage that they can provide. For example, as an investor, would you rather own 20 single family houses with 20 different lawns to cut and 20 roofs to maintain – all in different areas of town, and 20 individual mortgages, or just one 20-unit apartment building?
With the multiple properties, you would also have multiple utility bills, tax bills, and property insurance premiums to pay, as well as a plethora of maintenance costs. Yet, with the apartment building, you can actually spread out your maintenance costs, and the taxes and insurance would all be tied to just one property – all in one location.
Leverage with the apartment building may also mean that you could have an easier time getting financed through a lender. In fact, many banks may even lend up to 80% of the purchase price. And, by using the cash flow that is already coming in from the current tenants, the lender will also view this as a positive.
You can also enjoy all of the benefits of owning an apartment building without having to do all of the work if you hire a good competent apartment building manager. For more information on how you can tie it all together, give us a call.