Real estate investments can provide an attractive return on investment. Rentals provide monthly cash flow and build value over time. However, many investors question whether they should invest in multiple single-unit properties or apartment real estate.
Overall, investing in apartment real estate is less risky. Here’s why:
1. Strong Cash Flow
Apartment real estate is preferred by many investors because of the strong cash flow it generates. When apartment buildings contain multiple units, each unit provides monthly income.
To generate the same amount of cash flow with single-family homes, investors would have to purchase multiple properties and potentially in multiple states.
2. High Demand
In today’s housing market, there is a strong demand for rentals, particularly apartments. The homeownership rate dipped to 63% in 2016, which is the lowest rate in 50 years.
There are several reasons for the decline in homeowners. Millennials prefer the mobile lifestyle that renting affords. With many delaying marriages and starting families, the need for homeownership remains low.
Low inventory and high prices are also preventing many young people from purchasing homes for the first time.
These factors create the perfect storm for high rental demand. With high demand for apartments, there’s a lower risk of losing income from lengthy vacancy rates.
3. The Population is Rising
Each year, the population continues to rise, which only further increases the demand for rentals.
By 2034, the number of older adults in the U.S. is projected to outnumber children for the first time in history.
In the near future, older adults will make up a large percentage of the population. Many retirees prefer the flexibility and freedom that apartments offer, so demand will continue to swell.
4. Low Vacancy Rates
High demand for apartments means lower vacancy rates and less risk of loss of income. In the second quarter of 2018, the rental vacancy rate for single-family homes was 5.7%, according to HUD. During that same period, the vacancy rate for apartments was 4.8%.
Strong demand for apartments means that property owners spend less time looking for new tenants to fill empty units. As soon as one tenant moves out, another one is ready to move in.
5. Simplified Management
A single apartment building with 12 units can generate roughly the same amount of income as 12 single-family homes, depending on the location. However, instead of having to manage multiple single-family homes in several different locations, only one building needs to be managed in one location.
Whether the investor manages the property or a professional is hired, there’s less of a risk of mismanagement.
A properly managed apartment building will continue to generate strong cash flow.
6. Easy Financing
Apartment buildings come at a higher price, but they are generally easier to finance than a large portfolio of single-family homes. Multi-family units provide a strong cash flow, and banks view that as a significant advantage over a single-family home purchase.
If a tenant moves out of a single-family home, the property is 100% vacant. If an apartment building loses one or two tenants, the remaining tenants will still provide monthly income. The risk of foreclosure is much lower because cash is almost always flowing in.
With apartment real estate, the risk is much lower compared to single-family homes. Demand is high, and these properties generate strong cash flow. Financing is also easier simply because banks view these properties as low-risk.