Are you thinking of investing in real estate? There are usually a lot of options for you. If you choose residential real estate, you’ll invest in either a house or an apartment. So, why are apartments bad investments?
Apartments could be bad investments for reasons including the additional fees affecting profits, difficulties getting finance, limit on modifications, lease period, and influence of neighbors and tenants. But it could be profitable too with its low cost, high demand, and no need for maintenance.
However, you need to consider the location and the terms of the lease or ownership of the apartment are important to achieve profitability. Here, we discuss whether an apartment is a bad investment.
What is an Apartment?
Apartments are self-contained housing units within a building. A residential building usually contains multiple apartments. Although apartments are similar to condos, they don’t always mean the same thing. The difference is in the ownership. Apartments are leased while the condos are owned. But there are times when people use apartments to refer to condos.
Factors That Make Apartments Bad Investments
Apartments aren’t necessarily bad investments, but there are cons to investing in one. That include:
1. Additional Fees Affect Profits
When investing in apartments, your goal is likely to convert them into a rental property for a while and sell it later on. If you choose to make it a rental property, you’ll have to contend with the extra fees on the property.
Service charges on an apartment can be quite high, and since you’re the owner, you’ll be one responsible for paying this. So, even if there’s high demand for the apartments, and you earn well in rent, the extra fees will eat into your profits.
2. Difficulties Securing Financing
Lenders are generally less open to issuing loans for apartments and condominiums. When they do, it comes with stricter terms. This is because they consider them to be at higher risk.
The loan to value (LTV) ratio needed to get a loan for apartments would be bigger than a house. Other terms of the loans may also be slightly less favorable. All these make securing a mortgage for your investments harder.
3. Harder to Modify
One of the most challenging things about owning an apartment is that you have limited options in what you can do with it. Any remodeling or modifications you want to do can’t go beyond the apartment’s interior.
In some cases, you may not even be able to do this. Also, if you have a long-term lease instead of ownership, there’s a limit to what you can change in the apartment.
As for the shared spaces in the building, there’s nothing you can do about it. At best, you can make recommendations to the homeowner association.
These restrictions mean you can’t improve the value of your investments. Any modifications even in your apartment may require the approval of the freeholder and even your neighbors. You can’t also extend or convert the property.
4. Effects of Neighbours and Tenants
The desirability of a real estate property goes beyond its location. It also depends on social factors, such as others in the building. That’s why many people prefer single-family homes because it reduces the effect of social factors. However, with an apartment, other building residents matter a great deal.
Unfortunately, you can control what they do. There could be nuisance problems or anti-social behaviors among some building occupants. This could discourage others from moving there. When your prospective tenants have misgivings about the property, the chance of making a profit on it reduces.
5. Volatile Income
When you invest in an apartment, your goal is to make steady income through rent. But there’s no guarantee of that with apartments. Most real estate investments don’t have positive cash flow for the first few years after purchase. This means you’ll be the one covering for the losses within this period. Besides, their values also don’t appreciate fast. So, you might not make much profits when you eventually sell.
Pros of Investing in Apartments
Although there are several reasons not to invest in apartments, there are also valid reasons for investing. These include:
1. Low Cost
The best thing about apartments is the entry barrier. It’s usually much cheaper than a house. So, you won’t require as much capital to invest. This is understandable given that apartments are smaller. The fact that you don’t need much to invest means you can easily build a portfolio of real estate investments with apartments. Doing the same thing with houses will take longer and cost more.
2. High Demand
The demand for apartments is quite high among young people. Houses are too big for them and don’t have the flexibility of apartments. With the high demand, it’s possible to earn a good profit on investment.
3. No Need for Maintenance
With apartments, there’s no need for personal maintenance of the property. You only need to make sure the renter is using the apartment well. The external part of the property is in the hands of the property owner or homeowners’ association. They usually do a great job of keeping the value of property up.
What To Consider When Investing in An Apartment
Here are things to consider when investing in apartments:
The apartments have to be in a location where demand will be good. This includes anywhere with a large concentration of young people, such as city centers and near campuses. Make sure you invest in an apartment only in a great location. Without that, it might be hard to make a profit.
2. Terms Of Ownership or Lease
You need to make sure any agreement you sign won’t prevent you from maximally using the property. This is why you need to use an expert when getting an apartment. It’s important to avoid investing in an apartment with restrictive covenants that could affect your investment.
When investing in real estate, it’s important to have a goal and a plan to achieve that goal. Once you have that, you can make money by investing in apartments. Of course, there are several challenges to it. But houses aren’t perfect either.