Most income property investors buy apartments. This investment is generally safer and more profitable than other types of real-estate investments. Many successful real-estate investors launched a fortune with a little money machine¡ªa two- or three-flat apartment building. When you think of all the risky investments that are available¡ªstocks, commodities, and real-estate syndications to name a few¡ªthe unglamorous small apartment building can be a winner. Ways to win include appreciation, equity buildup, cash flow, and tax benefits. An apartment on a good block in an improving area is bound to mean hefty appreciation. The biggest lure to most investors is the tax-shelter benefit. They can deduct operating expenses and mortgage interest and take advantage of accelerated depreciation.

Demand for apartments is strong. It's growing stronger. This demand is related more to changing life-styles than to changing population figures. Young people are leaving their homes. The wave of condominium conversions in the late 1970s took many rental units off the market. Few new apartments were constructed to take their place because high interest rates and relatively low rents worked against development. The same high interest rates priced would-be home buyers out of the market, forcing them to stay renters. But economic

recovery puts additional apartment seekers into the market who previously doubled up or lived with their folks. These factors have pushed occupancy levels toward 100 percent.

As with all investments, there are elements of risk. The neighborhood could take a turn for the worse. Typical landlord headaches include rising utility costs, boiler breakdowns, leaky roofs, and tax increases. Tenants may cost money. Some renters will damage the property and skip out on the rent. These woes can wreak havoc on your budget.

In most parts of the country, you should be able to buy apartments for six to eight times gross annual revenues. Before you invest in apartments, consider buildings that have these qualities: paved parking lots, pitched roofs, a non-wood exterior, and floors made from lightweight concrete. Financing small residential rental properties used to be more difficult than financing single-family homes. But that problem is less important today than in the past, especially if you plan to occupy one of the units. Single-family homes generally go up in value faster than do small rental properties. However, in areas undergoing renovation and where there's a strong demand for rental buildings, their appreciation has kept pace with single-family homes.

A duplex is two rental units in the same building. These apartments may be arranged one above the other or side by side. Duplexes are often large, older homes that have been converted. These units often have a double garage and feature individual basements and yards. Duplexes are proportionately more expensive than other rentals and may show a loss for several years. They usually appeal to an investor who needs to lighten his mortgage load or wants a retirement home. Although a landlord cannot get depreciation deductions from the unit he is living in, he is building equity. Duplexes are also easy to rent. Many renters prefer duplexes because there are fewer tenants in the building. Duplexes can also be relatively trouble free. Usually, one of the tenants will assume responsibility for the lawn or snow shoveling. Although most older buildings have one furnace and one electric meter, arrangements can be made so that the tenants are responsible for at least some of the utilities.

An obvious drawback of an owner-occupied building is the lack of privacy. Thus, the investor may decide to live elsewhere. Like single-family homes, duplexes appeal to long-term renters. In a tight money market, they are easier to sell than multi-units because they appeal to people wanting owner-occupied property. The well-kept older unit is one of the best investments in real estate.

One advantage of the multiunit is that it usually costs less to manage and maintain the property on a per unit basis than a single family or duplex. The landlord may find it more convenient to have many units in one location. There may be just one furnace to have serviced, one fuse box to check, one stop to make to collect rent, one bill to write for water and sewer, one insurance payment to make. However, larger properties often require sophisticated, even professional management services. Thus, the efficiencies you get by having a lot of units under one structure may be diminished by additional

managerial costs and responsibilities. Finally, if you focus too much of your investment capital in one location, you could put it at risk, either through a sudden catastrophe like a fire or slow degradation because of social, racial, and economic urban transition. A scattering of four- to six-unit apartment complexes in several neighborhoods strikes a good balance between achieving multiunit efficiencies and diversification.

Beware of buying a large apartment complex with a mixture of unit sizes. If the units are of varying sizes and bring varying rents, they will attract people of different economic and social backgrounds. If a building has a mixture of studio apartments and three-bedroom suites, you may have a hard time making it profitable. The Cosmo girl and the blue-haired grandmother may not make good neighbors. The CPA family man and the transient poet may not be the best of friends. Ill-assorted tenants make a building hard to manage and hard to rent.

 

Do you own real estate articles or stories and want to share with other investors? 
You have chance to win $100 Amazon Gift Certificates. We will give away 3 prizes for top authors each month!

Email your articles or stories to:  articles@buyincomeproperties.com

 

© Copyright 2001 - 2010 by BuyIncomeProperties.com               

 

 

Visit Real Estate Forums for every real estate investing topics!  Enter Here

    

Top of Page