by: Dennis Dahlberg
CEO/Broker/Partner/RI Level 4 Funding LLC
When people hear about the millions and billions of dollars investors make buying and selling properties, most of them think about duplexes and homes. A good number of people do not know much about buying apartment buildings.
The benefits of investing in apartments are out of this world. Investing in apartment buildings can be one of the best ideas even when the economy is going sideways. Even though there are advantages and disadvantages to every kind of investment, investing in apartments in not a bad idea. As part three of our apartment building blog posts, here are some of the top reasons to invest in apartment buildings.
1. Predictable source of income
The reason many investors prefer buying apartment buildings is because they provide a very steady source of income. When you choose properly, and in a good location and area, apartments will always provide cash flow every month. Most businesses come and go especially in office, retail and warehouse properties. But people are always looking for a place to live.
2. Apartments provide a more affordable housing option
When we get into all economics that explain why apartments provide a cheap housing option, there are so many things to talk about. For example, the difference between the amounts of paying rent and mortgage payments most consumers spend every month is called a gap. Now, if the average rent is $800 per month and the average mortgage is $1200. The gap is 400. When the gap increases, very few people can afford to buy a home. This means they will choose apartments to live in. If mortgages increases the gap becomes bigger, and we experience greater demand for apartments. This is another good reason to purchase an apartment building.
3. Property appreciation
The value of the apartment is based on the Net Operating income the building offers to the investor. The good thing about apartment buildings is that you can escalate the value of the building without investing in new windows, carpet, siding or paint.
When you decide to increase income, reduce expenses or even both, you increase the value of your property. For instance, if the average Cap Rate in the area is 10%, and you increase the Net operating income by $1000 annually, you have definitely added $10,000 to the value of the property. The Cap rate (capitalization rate) helps to measure the ratio between the net operating income and property’s buying price. Cap rate involves three variables that include value, interest rate percentage, and the net operating income.
Hence, the lower the Cap rate percentage, the lower the net operating income will be. If interest rates fall, it is uncommon it see the rates fall, but when interest rate increases, the rates will follow. You can do this by raising rents and reducing expenses. This is one of the most protected secrets of investors.
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About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.