When it comes to investing in property, many of us wonder if apartments are a good investment. Some people believe that houses make the best investments while others swear that apartments are the way to go. Well, as with any investment, you want to receive a higher return than what you put in.
And, contrary to what many are saying, apartments can still be a great investment in the current economic climate.
Until recently, the popular belief was that it was always better to invest in a house or duplex rather than an apartment. The reason behind this was the land that comes with a home. Therefore, investors have usually preferred to focus on homes where the land value would hopefully appreciate for years to come.
Things have changed, however. In recent decades, the population has increased faster than ever before. This has led to more and more people wanting to live in apartments that are close to most facilities they require and infrastructures.
On top of this, the cost of purchasing real estate has gone through the roof and apartments are generally cheaper. This has led to an increase in popularity and resulted in apartments becoming a high-performing investment choice.
To find out if investing in an apartment is right for you, continue reading. In today’s article, we will be discussing the pros and cons of apartment investing as well as some key points to consider when investing in real estate.
Advantages of apartments as investments
When thinking about investing in apartments, or any asset for that matter, you need to consider the pros and cons of doing so.
Below is a list of advantages of buying an apartment to treat as an investment opportunity:
- Apartments tend to have lower entry purchase prices than houses
- There is usually higher cash on cash returns as well as yields
- A good quality apartment can be purchased for two-thirds the cost of a house
- Apartments have become more popular in recent times with different lifestyle trends. Therefore, renting apartments has become more common which reduces voids because young people and those without children will often prefer the smaller space to a home
- Absent freeholders and short leases can make apartment investment a great opportunity for those who are willing to fight the freehold from the owner. This can be done by getting others in the area to join you and enfranchise the freehold to buy it
- The cost of maintaining the apartment tends to be shared with the managing agent or freeholder typically organizing any maintenance and work on the property
- Apartments are cheaper to buy which means you stand a better chance of purchasing a larger number of properties for your portfolio
- If you purchase an apartment with management companies that have gone bust, you could and should find a cheaper deal. This is because they can not be mortgaged in most cases. If you fix the issue, you can increase the value of the apartment
- You can secure higher discounts when buying in bulk
- If you buy an apartment in a metropolitan area, the price will almost always increase significantly every year or so
- If you purchase a few apartments, the risk of one being untenanted becomes lower
- If the apartment has a separate kitchen, it can be easier to convert if you wish to add another bedroom
While these are just a few advantages of investing in an apartment, there are also disadvantages.
Disadvantages of apartments as investments
- Some apartments can have very high service charges and ground rent
- The living spaces are usually a lot smaller when compared to a house
- It can be more difficult to qualify for financial assistance with certain types of apartments. Therefore, lenders often see apartments as higher risk investments
- If the apartment is situated in a large block, it may not have a uniqueness to it
- Less freedom and opportunity to add more value to the apartment without the consent of the freeholder
- No ability to extend the flat, add a conservatory, or convert an attic space if desired
- Usually a higher turnover of tenants
- There can often be hidden maintenance costs that can become very expensive These are commonly not anticipated and could easily affect the returns on your investment. Freeholders can also use this as a profit center
- Ground rents can increase substantially over time
- Can be more difficult to obtain financial assistance on leases that are less than 80 years old
- High-rise apartments tend to experience a slower capital growth while some apartments can not be mortgaged
- The value of an apartment can drop significantly if the lease is below 70 years
As you can see, there are clear advantages as well as disadvantages when investing in an apartment. Of course, the same applies to any type of investment but it’s important you weigh up these pros and cons before making any final decisions.
Helpful tips for buying an apartment as an investment
If you have decided that investing in an apartment is a good option for you, there are some tips to help the process go as smoothly as possible. Let’s take a look at some of these below.
The ratio of renters and occupying owners
If an apartment is located in a more central area, it will be more popular in the rental market. As an investor, this can be advantageous. On the other hand, if the entire block is rental stock, it can affect demand.
Tenants will usually have more power to negotiate the price so you need to consider the ratio of renters to occupying owners.
The level of the apartment
We do not recommend paying a large premium on an apartment that is situated on a higher floor level in high-rise buildings. The majority of renters and buyers can be put off by any apartment over the fifth or sixth floor, especially if there is no elevator.
However, high-rise buildings will usually have an elevator for each floor. Yes, young professionals may love the view from high up but they will not like the strong winds that accompany the top-level apartment when they step outside.
For apartments in quieter suburb areas, tenants will typically be young families or couples whose children have fled the nest. Such tenants will usually be looking for easily accessible and safe living quarters. Therefore, a smaller apartment block with units on the first two floors is what they are most interested in.
Not all apartments have an outdoor space. However, you should try to buy one that at least has a balcony or terrace. Ideally, this should also be big enough for a table and a couple of chairs.
For tenants, even a small outdoor area can be a huge bonus. It can even be the matter of them saying yes or no to signing a contract. Simply put, having an outdoor area to sit and lounge in will make an apartment more popular with renters and buyers in the future.
Most property experts will agree that buyers should always invest in an apartment that has plenty of light, pleasant views, and offers practicality. You should try and avoid units that have no outlook or just have a brick wall as a view. Such properties will usually have a lower price and will put many potential renters and buyers off. No matter how cheap the apartment may be, the view can make or break a deal.
The location of any property is the number one factor in any real estate investment. However, what makes a good location can differ from one person to the next. Whether the property is for residential or commercial purposes, the location and view can have a significant impact on your investment returns.
For apartments, a good location usually means easy access to town or city centers so residents can travel for employment. This includes adequate transportation systems nearby such as public or highways access.
Investing in property has its benefits and drawbacks. However, if you focus on the basics and invest for the long run, apartments are one of the best investment opportunities in commercial real estate. Why? Because people will always need a place to live. While people need a place to live, an apartment will nearly always be tenanted.
Throughout the U.S. and the world, apartments are becoming increasingly popular, especially with millennials. If you are careful with your investment selection and pay the right fee for an apartment, it can pay dividends in the future when you decide you may want to sell the property.
There is a whole generation of people looking for apartment living spaces. For many young people, apartments are their primary choice of accommodation. As long as you buy the right apartment and consider all the factors we have discussed today, investing in one can be as safe as houses.
By getting the fundamental aspects right when investing in an apartment, you should enjoy a long-term appreciation of assets and a worthwhile return on your investment.