Real estate is one of the most profitable investments you can make, especially in California. It is, however, a very expensive investment, as the average home price in California is $524,400, and it’s even more expensive to buy commercial properties. Still, if you’re able to invest in California real estate, strip malls, single-family homes, and multi-family complexes are the most profitable types of properties to invest in.
However, there are ups and downs when it comes to owning any type of real estate— particularly residential properties. Apartment complexes are special cases, as they can be considered either residential or commercial— or both as mixed-use properties. Here are the pros and cons when it comes to owning an apartment complex.
Pro: You Earn Passive Income
Most people know that owning real estate is a great way to earn passive income, and this is true with apartment buildings. Passive income means that you earn money by not working (not actively or constantly) like you would with a regular job. As the owner of an apartment complex, the money you earn comes from the rent that the tenants pay. You can also raise the rent due to things like apartment upgrades and changes in the economy.
Con: Finding and Maintaining Tenants
One downside to owning an apartment complex is that you have to have tenants in order to make money. Apartment buildings have dozens of units to be rented and if you have more vacancies than occupied apartments, you could be losing a lot of money. Not only do you have to find tenants, but you need to make sure that they stay for the duration of their lease and actually pay their rent.
Pro: Tax Benefits
Like with any type of real estate, you’ll be eligible for certain tax benefits when you become the owner of an apartment complex. Some of the things you can deduct from your taxes include property taxes, property management fees, payroll, and advertising fees.
Con: Low Liquidity
One thing that some people look for in investments is liquidity, and unfortunately, apartment complexes aren’t very liquid investments. This means that if you need to get cash quickly by selling your investment, it’s not likely to happen quickly— and maybe not even at all. This is a common risk you run when investing in any type of real estate.
Pro: Lowered Risk Exposure
Though much more expensive, investing in an apartment complex is a much less risky investment than a single-family residence when thinking about tenants. Although you have to find more tenants to improve your occupancy rates, many people are still renting apartments these days, even in California. Even though there’s a chance you’ll have some vacancies, you’ll still be able to make money with the occupants you do have.
Unfortunately, not all risks are lowered when owning an apartment building. As the property owner, you may be held liable for any crimes that are committed on your property, as well as any accidents that may occur.
Pro: More Control With Appreciation
Unlike sing;e-family residents whose value is compared to other similar properties in the area, apartment complexes have their value determined in another way. They’re still compared to other apartment complexes, but this comparison is based on the income that’s produced. As the owner, you can increase the NOI (net operating income) by adding (and charging for) additional amenities, such as internet and satellite.
Con: Maintenance Duties
As the property owner, it’s your responsibility to keep up with the maintenance of the entire apartment complex, which can be very time-consuming. This includes simple things like arranging to get a tenant’s air conditioning fixed, and it also includes more complex tasks such as repairing potholes in the parking lot by calling a commercial paving company. Any issues with the property are your responsibility, but you can get help by hiring a property manager to do things for you.
Anytime you invest in something there’s going to be some type of risk, and there are always advantages and disadvantages. As with any investment, you must weigh the costs and the benefits before you invest and do all of the necessary research to be more knowledgeable when going into this investment. So if you’re looking to invest in real estate in California, consider investing in an apartment complex, or if you’re already the owner of an apartment complex, you now have peace of mind that you made the right investment.