5 Things To Consider Before Buying an Apartment as an Investment

Most real estate tycoons would not have advised investing in apartments a few years ago. But things have changed, and apartment living is steadily becoming a trend, especially among millennials. And it’s not a fad. 

According to a 2020 Freddie Mac Survey, 84% of renters believe renting is cheaper than homeownership. This number is up by 17 percentage points from 2018 and confirms that apartment living is here to stay. 

For futuristic property investors, apartment investing promises a stable income-generating asset with a potentially high ROI over its lifetime. 

Of course, while apartment investing can be profitable, it’s not a get-rich-quick scheme. Its profitability comes down to making the right decisions. To help you make the right moves, here are the top five considerations when buying an apartment as an investment. 

Property Location

“Location, location, location” is every real estate agent’s mantra- and for a good reason. When it comes to property investment, location affects all other variables- demand, prices, home insurance rates and property market value. That means location is a key determinant of your success in the Buy-to-Let market. 

Demand for rental units should be your number one guide when identifying the best location to buy an apartment as an investment.

If your goal is to create a solid cash flow, you want to go to a location that favors your target tenants. For example, closeness to social amenities, such as hospitals, schools and colleges, tops most people’s list of considerations when looking for an apartment.

Security is another location-related factor when choosing where to buy an apartment as an investment. Investing in markets you’re already familiar with will go a long way as far as security is concerned. If you’re eyeing lesser-known locations or interstate, consider working with a dependable real estate agent to save time on evaluating the security level of different areas. 

Mortgage and Additional Expenses  

How are you planning to finance your investment? Unlike single-family and owner-occupied residences, rental property investors don’t have access to government-backed loans, such as FHA loans, VA loans and USDA loans. Most individuals looking for a loan to purchase an investment property are left with income property mortgages.

When applying for a rental property mortgage, keep in mind that you may be required to make a larger down payment of at least 20%. Putting 25% down will attract better deals on mortgage interest rates. Secondly, beware that investment property mortgages often carry higher rates than you’d pay for a normal mortgage. 

Rental property mortgages are typically harder to come by than primary residence mortgages. This is partly because they have a higher level of risk since they are non-owner occupied.

To qualify for one, lenders want to see a 35% to 45% debt-to-income ratio and a credit score of at least 620 points. Also, you’ll be required to prove that you have enough savings to cover at least six months of mortgage payments besides other obligations, such as landlord insurance costs.

Solo or with a Partner?

Apartment investing is a tried and tested way of accumulating wealth. But like other routes in the real estate industry, investing in apartments has its fair share of risks and challenges.

Buying an apartment solo has benefits if you have capital and enough experience in the real estate business. However, bearing all the complications and challenges alone makes it an extremely risky venture, especially for starters. 

Joint property investment makes buying an apartment easy and less risky because all the decisions and financial implications are shared between the parties. As expected, this ownership structure has its challenges.

For example, if you’re co-owning the property with a friend, there may be disagreements on when and how to sell the property. Also, if one of the partners cannot meet their financial obligations, the other co-buyer(s) will have no option but to shoulder the burden. 

Apartment Building Amenities 

Apartment living is, for most people, a more affordable and flexible way of living. One of the key reasons people choose apartments over stand-alone homes is the wide range of amenities that this style of living affords them. 

When looking for their next residence, prospective tenants focus on apartments with amenities that will make their renting experience more enjoyable. 

Thus, the type of amenities in the building is a crucial consideration before buying an apartment as an investment. Amenities determine how your property stacks up against the competition and its occupancy rate. 

Apartment building owners try to provide as many amenities as possible to remain competitive. But not all amenities are feasible. Ideally, you want to focus on amenities that improve the renters’ quality of life. Here’s a list of amenities tenants look for when comparing apartment complexes:

• Parking availability
• In-unit laundry services 
• 24/7 surveillance and modern security features 
• Swimming pool 
• Modern appliances
• Flexible pet policies 
• Automated smart homes 
• Playgrounds 
• Fitness center 
• High-speed Wi-Fi 
• Storage space
• Electric car charging stations
• Balcony 

Estimate the Return on Investment (ROI)

Return of Investment is a percentage of how much profit an investment has raked in. Calculating ROI is important in ensuring that your investments are efficient and all resources are being used wisely.

However, for savvy real estate investors, ROI is a pointer to whether a particular investment will make acceptable profits in the future. Determining potential ROI provides investors with the foresight before investing, thus saving time and money. 

Use this formula to calculate the potential ROI for a potential apartment investment:

ROI= (estimated annual income-annual operating expenses)/total value of your mortgage 

To determine potential annual income, research the average monthly rent for similar properties in that location. Next, multiply the rent price by twelve to get the potential annual income. 

Annual operating expenses are the costs incurred to maintain the property. Typical operating expenses for a rental apartment include property insurance, real estate taxes, janitorial fees, utilities and maintenance.  

Note that there’s no single best ROI in real estate due to all the variables at play. What one considers acceptable may not be pleasing to another investor. All in all, most real estate investors look for investments with an average ROI of at least 10%.