The New York Times and Wall Street Journal reported that apartment buildings are a great investment. They further reported that people who want to ensure their retirement are using apartment buildings as a way to save for their retirement because they provide high yields at moderate or low risk given the current housing crisis.
The New York Times and Wall Street Journal are correct! Apartment buildings do provide low risk and high returns relative to other investments.
Investing in Apartments
Return on Investment
Lets first look at average returns earned when investing in apartments or similar types of income properties:
A typical return to an apartment building owner is six percent or higher after all expenses – including paying a professional property manager to take the tenant calls and maintenance requests.
And that is just a cash return from rents. In addition to the rents, the apartment building owner will also benefit from appreciation – which has historically averaged a little over three percent.
The true return from an apartment building once the appreciation is considered is more likely to be 10% or more.
As much as we like the mathematical returns, there is a practical strategy that investors are using to ensure they enjoy cash flow during their retirement.
They buy a building that can be paid off by retirement, and then they use the rents as a retirement income. Let me give you an example:
We own a small apartment building at 4224 Parkside Avenue in Philadelphia. It has six rental units that rent for an average of $605 per month per apartment (net of vacancy and bad debt). That gives us total rent collected of $58,102. Our operating expenses for the building are $18,194 leaving us $39,908 to pay the mortgage and to pay ourselves. Right now the mortgage is $30,135 per year leaving $9,773 in cash profit. We have around $30,000 in cash in the building giving a cash-on-cash return of 32.6%.
We will pay the building off approximately fifteen years from now. At that time the building will have inflation adjusted rents and expenses that will be similar to what we have today. The means our cash flow will increase to $39,908 per year! All from our initial $30,000 investment!
Easy Investing Niche to Learn
I like apartment buildings as an investment. They are easy to find, easy to analyze, everyone needs a place to live, banks love to lend on them, and they're great cash flow generators, especially now that prices and interest rates are down! In fact right now FNMA is offering 5.5% loans on apartment buildings!
For a new investor they are easy to analyze, manage, and easy to relate to. For an experienced investor they are straightforward to manage and you can set up business systems to automate and delegate the mundane day-to-day tasks of owning apartment buildings. Once one is started it is relatively simple to buy more and more apartment units and become a rich apartment building mogul.
When & How to Buy Your First Apartment
Now is a great time to start. There are lots of great deals on apartment buildings because properties are being bought on cash flow today based on current rents and occupancy – not on artificially high prices based upon hope of future appreciation or condo conversion. Buying at today's low prices gives you positive cash flow from day one. That makes is a smart investment.
Our advice to my new investor was to start off investing in small to medium-sized multi-unit properties (5 to 12 units) then work your way up to larger properties as he gained experience and a strong management team.