Is it a Bad Idea to Buy an Apartment Building for My Very First Deal?

by | BiggerPockets.com

Buying apartments can be a great way to invest in real estate, build wealth, and realize your financial goals. I personally own several smaller apartment buildings, and they have been some of my best performing properties. But should newbies jump in head first and buy apartment buildings as their first real estate investment? Or should they perhaps start off a bit smaller, with a single family dwelling or a duplex?

Well, the answer is that it depends. It depends on a lot of things, actually. It depends on understanding the pros and cons of apartment investing. It depends on the deal, as well as the newbie’s understanding of the deal. It also depends on the newbie’s personality and risk tolerance level.

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The Pros and Cons of Apartments vs. Single Family Dwellings

Apartments and single family homes can both be fantastic real estate investments. Each property type offers both pros and cons to the investor. Determining which property type would be a good fit for the newbie investor should start with an examination of some of those pros and cons.

Apartment Pros

On the pro side, apartments will generally offer higher and more consistent income to the investor, as there are more tenants to pay rent under one roof. It is also highly unlikely that an apartment building will ever be totally vacant, thus there is always some income coming in. Single family homes, on the other hand, can be vacant for extended periods of time, making the investor write checks rather than cash them. Apartments also contain everything in one place. There may only be one heating system to repair, one roof to patch, and one yard to cut. Single family homes can be widely scattered, each with their own separate systems needing repair from time to time.

Related: 12 Surefire Ways to Increase Revenue in Your Apartment Complex

Apartment Cons

Apartments do have a downside, though. First, they are often a lot more expensive. While an investor might be able to purchase a single family home for under $50,000 in some markets, apartments may go for $50,000 per unit. This cost effectively puts apartments out of range for many newbie investors. Apartments are also more difficult to finance and the financing is often much more expensive, with higher interest rates and substantial down payments. Repairs and maintenance are also often more expensive. While everything may be under one roof, that roof is often larger and more complicated, which costs the investor a lot more money.

Finally, it can be much more difficult to sell apartments versus single family homes. A single family home can often be sold on the retail market. There is no retail market for apartments. When you are ready to sell your apartments, only other investors will be interested in buying—and they will most likely be looking for a deal.

Understanding the Deal

Not all apartments and apartment deals are the same. Some are large buildings with hundreds of units; others are small with as little as three or four units. Some are in high rent, highly desirable locations, while others are not. All of these apartments can and do make money for their owners, but the dynamics of how they do that can be quite different.

Basically, what it comes down to with apartments is the tenant base. Tenants are where the rubber meets the road in apartment investing. An investor has to understand who the prospective tenants are and how to serve them. If you can get good, stable tenants and cater to them, you will likely do well. But finding and keeping good tenants is not as easy as it sounds. It can be quite difficult depending on where the apartments are located and what population they serve.

Most newbies simply do not understand this fact of apartment investing, have no experience with it, and hold a false belief that it will be easy. It is not. Differing tenant bases will require differing levels of service.

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Related: An FHA-Financed Duplex is an Ideal First Investment Property: Here’s Why

Your Personality and Level of Risk Tolerance

The investor’s personality and level of risk tolerance also play large roles. Does the investor want a truly passive investment? Do they want to be completely hands-off and simply collect checks at the end of the month? If so, then apartment investing is not likely going to work for them, and they should perhaps look to invest somewhere else.

Apartment investing simply takes a lot of oversight. Even if the investor decides to go with a management company, there is still a lot of oversight of the management company to be done. You still have to closely examine income and expense reports to ensure your property is being managed properly. Never visiting your property and completely trusting a management company is generally a recipe for disaster. In short, apartments are something you just have to stay on top of.

Risk tolerance is another key factor. Apartments can cost a lot of money, not only at the point of initial investment, but also over the course of ownership. Things will break, and management is expensive. Can the investor handle a major expense if it should arise? In other words, do they have reserves or have they put all of their eggs into one basket?

To Sum it Up

Apartments are great real estate investments and may be great investments for the first time investor. But as with any investment, the first time investor should proceed with caution and know themselves. Many newbies, in my experience, have the false impression that apartment investing is easy. But they have no experience and little knowledge. Thus, to me, it makes sense to start off small and build up over time. See if you even like real estate investing—you may find out very quickly that it is not for you.

What do you think—is investing in apartments as a first deal a savvy strategy or recipe for disaster?

Weigh in with a comment!

About Author

Kevin Perk

Kevin Perk is co-founder of Kevron Properties, LLC with his wife Terron and has been involved in real estate investing for 10 years. Kevin invests in and manages rental properties in Memphis, TN and is a past president and vice-president of the local REIA group, the Memphis Investors Group.

9 Comments

  1. karoline kaon

    Thank you for posting this! I think it depends on the individuals circumstances. If multifamily properties were available in my area, I would have more options and I could get creative. Since it is a tough market to find small apartments in my area, I think it would be a recipe for disaster for a newbie like myself.

    I’m interested in multifamily properties but I want to proceed with caution. I am currently searching for my primary residence and with that SFH experience under my belt, I’m hoping to take on larger projects in the future.

    • Kevin Perk

      Karoline,

      Thank you for the kind words.

      I think you are wise to “stick your toe in first.”

      Have you considered a duplex for your primary residence? You can live on one side and get some tenant experience from the other. It is how I get started. Give it some thought.

      Kevin

  2. Do you think if one was to consider investing half way across the country, they should think twice? Since they wouldnt be able to visit the property very often? Ive been told if you hire the right PM you should feel comfortable and should consider long distance investing. I know Im looking into it, since the market Im in its incredibly tough finding deals

    • Kevin Perk

      Matt,

      I think long distance investing can be a good strategy. I have seen many investor make it work. They do that by hiring and working with a trusted management company. But, investors still need to keep on top of things and I think that means a visit (sometimes unannounced) every once in a while. Maybe once a year or so. Such visits will build your relationship with your management company and possibly open up new avenues of investment as you become more comfortable and familiar with the area you invest in.

      Good luck and thanks for reading and commenting,

      Kevin

    • Jessica L Renard on

      This is a great question. Following here. I gather the answer can be very market-specific, and there’s a sweet spot for everyone. 25% down on investment properties, I still know investors that would want very different net profit from their units. A minimum return I’ve encountered is 1% of the purchasing price as the monthly rent.

    • Kevin Perk

      Allie,

      It will depend on your market, but I generally find them in older sections of town where land uses were developed in a more mixed style.

      I have always tried to get at least $150 per unit per month after all expenses (including some reserves) have been paid. Cash flow is king. Like Jessica says below however, this will be very market specific and not achievable in every market. This is why so many folks are trying to buy here in Memphis.

      Good luck and thanks for reading and commenting,

      Kevin

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