Why Invest in Apartments?

By Mary Thomsen

First, let's determine what is multifamily housing?

In the residential housing arena, single family homes are classified as having 1 to 4 units, meaning distinct living quarters for 1 to 5 families. The buyer obtains a residential mortgage for these, if financing is needed. Five units and up are considered multifamily, meaning there are 5 or more distinct units for families to live in. It does not matter how many families live in a unit, but the number of units in the property. All the units do not need to be in a single structure. Many larger complexes are composed of separate buildings on multiple lots.

Though trailer parks, and even RV parks may be found listed under the multifamily category, apartments are the obvious property type. Each type demands a very different management style, financing, and investment considerations. For now, the focus is on the apartments.

The advantages of apartments over single family:

Cash flow: Vacancies do not stop the income steam, but just reduce it. When one tenant moves out there are still others who pay rent to cover the expenses of running the property. Vacancies can even be a benefit, allowing for rent increases when new tenants move in. There is also an economy of size. Supplies may be purchased in bulk allowing for discounts. Laundry rooms, vending machines, and other amenities may add to income.

Leverage without personal liability: Investors know about OPM - other people's money. Using money from banks, other lenders, partners, etc., creates a larger rate of return, as less money has actually been paid for the property. Commercial loans are used to finance apartments. The profitability of the property is the major consideration of most commercial lenders. Loans may be non-recourse, meaning the people who sign for the loan are not personally responsible for the debt. Unlike residential mortgages, these mortgages do not show on personal credit reports.

Appreciation: Over time, all real estate generally increases in value, or appreciates. Of course, proper maintenance and care is part of the appreciation equation. The balance of the mortgage decreases with payments, but those payments are possible due to the rents collected. Unlike residential properties, it is the income that determines the value of apartments. Comparables are based on rents and other income, not solely on the condition, size, etc of the structures. Improving apartment values may be easier that improving the value of single family residences. By adding income sources other that rent such as laundry facilities, vending machines, storage facilities; the value goes up.

Management: For larger apartment complexes, there are professional management companies who really know how to make and keep properties profitable. These companies understand how to run the units, allowing the owner to pay less attention to the day to day operations than might be needed for residential rentals. This does not mean the owner should set everything on autopilot, but hiring a good management company can vastly improve the property value. Conversely, hiring a poor management company and be a disaster. Purchasers of apartments should do as much due diligence in finding management and in purchasing the property.

Tax benefits: As with most real estate investment, there are numerous deductions available to real estate investors. Depending on the status of the owner as to what deductions and how much may be claimed. Tax professionals should be consulted before purchasing any real estate investment to determine the benefits available.

Depreciation: One of the allowable tax deductions is depreciation, increasing the profitability of the property. IRS formulas allow for the loss of value of property, due to wear, consumption, and obsolescence. This calculated loss is deducted from the profits at tax time, but may be recaptured at the time of sale. 1031 exchanges may roll the depreciation into the next property purchased.

1031 Exchange: Another tax benefit, the 1031 exchange allows some tax benefits from a property being sold to be rolled over to another property being purchased. There are very specific rules that must be followed exactly, so it is imperative that a qualified exchanger be involved in the process.

Apartment ownership is a great way to move into the commercial arena for people who currently own single family properties.

Mary Thomsen residential and commercial web site http://YMHoldings.com commercial blog: http://nnnleaseopportunities.blogspot.com Owners of numerous rental properties around the United States, Mary and her husband have spent many hours helping others get started with buy and hold investing. With the change in the market, we are changing our strategies to maximize the advantages waiting for investors. Our exposure to various markets has led to a real estate marketing business. Now associated with Keller Williams Commercial, Irvine, CA. Article Source: http://EzineArticles.com/?expert=Mary_Thomsen

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Article Submitted On: November 24, 2010