However, every investment has two sides to it, and an apartment is no different. Let us have a look at the major drawbacks of renting out an apartment.
The Brighter Side
According to data from the National Council of Real Estate Investment Fiduciaries, for the period between 1984 to 2004, apartments provided a higher total return to investors, than the average for all other types of property.
With the current boom in real estate, many people are keen to invest in an apartment. Apartment investment has numerous advantages, making it one of the most desired investments in the real estate market. A steady cash flow is perhaps the biggest draw. You receive a said amount of money from your tenants, and depending upon the number of flats in the apartment building, this can be a significantly big amount. What’s more, investing in an apartment can also fetch you good profits when you sell it, due to a steady appreciation in its value. You can also save taxes when you sell an apartment and invest the money into acquiring another property.
Demerits of Investing in an Apartment
Financing is Not Easy
It’s important to know that apartments are sold as a whole, which means quite a big amount needs to be invested. Add to it the fact that, lenders and financial institutions are not very eager to sanction loans for commercial properties, and financing the property can prove to be difficult. Financial institutions offer mortgage loans (albeit at high interest rates) once you have paid at least 20% of the value as down payment. However, the monthly mortgage payments are quite high, and can dig a hole in your pocket if you don’t find tenants sooner than later. To avoid such hassles, investors choose to invest in a group and share the expenses and liabilities.
Most investors who invest in apartments find it difficult to manage the property. An apartment can have several issues, including maintenance issues, repairs, etc. So, investors hire a third party or a property manager to manage the administration and maintenance of the apartment. While tenants collectively bear the monthly maintenance cost for the apartment, unexpected expenses can come up once in a while, and then it is the owner who has to pay up. Also, if you’re on a tight budget, the additional cost of hiring a property manager may discourage you from seeing it as a feasible option.
Dealing with Difficult Tenants
If you’re lucky, you’ll have clients who pay the rent on time, and are more than willing to follow the terms and conditions mentioned in the rental/lease agreement. However, almost every investor has had an experience with a difficult client in their careers. Add to it, the current economic condition, and you know what to expect! If the tenant fails to pay the rent for a particular month, it means additional expenditure from your end towards payment of mortgage. Also, eviction of the tenant can be troublesome in certain cases, when the tenant simply refuses to move out of your apartment. In such a scenario, the only option left before you is to take legal action against the tenant, and it can take some time for the court to pass a judgment.
It’s Not a Liquid Investment
A liquid investment is something that you can sell easily, whenever you’re in need of money, and an apartment is certainly not one. While this is a common drawback of investing in any form of property, it can be a major disadvantage when it comes to apartment investing, because it means that a large amount of your money remains ‘blocked’ for a long period of time. In times of emergency, such an investment can hardly be of any help. Thus, it is recommended that you always include some liquid investments in your portfolio, and not invest all of your money in real estate only.
Nevertheless, the benefits of investing in an apartment far outweigh the demerits. So, if you’re planning to invest in one, don’t let the disadvantages discourage you. Instead, try to overcome them and go ahead on the road to huge profits and financial gains. Good luck!