Real estate investing is an excellent strategy to diversify your investment portfolio and gain financial freedom. If you're considering investing in real estate, apartment buildings can offer multiple revenue streams and a steady cash flow.
Moreover, apartment buildings often appreciate in value, making them an attractive investment option. As the value of an apartment building is closely linked to its rental income, you can increase property appreciation by adding features that justify a rent increase.
Here are 11 proven ways to start investing in apartment buildings:
1. Take the Plunge and Buy an Apartment Building Yourself
The most straightforward method is to buy an apartment complex outright. While this puts all the responsibility on your shoulders, it also allows you to enjoy all the benefits. However, keep in mind that buying an apartment building requires a substantial capital investment and careful strategy development.
To purchase an apartment building, you need to gather capital, develop a budget, find a broker, review offerings with your broker, make an offer based on net operating income, obtain a loan, and find a property management company unless you prefer to handle tenant screening, rent collection, and maintenance yourself.
Pros:
- You have complete control over decision-making.
- You receive all the income.
- You can determine the investment duration.
Cons:
- Requires a significant capital investment.
- Requires thorough due diligence.
- Assumes all the risk.
2. Partner Up for Shared Success
Investing with a partner allows you to pool assets, including money and expertise. With a partner, you can afford to buy an apartment complex in a better neighborhood and benefit from their experience in owning multifamily properties. However, shared decision-making and income distribution should be taken into account.
Choose your partners wisely, considering whether you want someone to pool funds with or someone with specific expertise. Investing with friends can work, but it's essential to carefully assess the potential impact on your friendship.
Pros:
- Access to pooled assets and expertise.
- Share in the income and appreciation benefits.
Cons:
- Shared decision-making and income distribution.
- Potential disagreements with partners.
- Need to find a property manager unless a partner takes on that role.
3. Explore Multifamily Syndicate Companies
Investing in large apartment complexes or buildings through a syndicate company is another viable option. In this scenario, the company acts as the general partner, while you and other investors become limited partners. The syndicate manages the investment, and as an investor, you receive passive income and a percentage of the profits when the property is sold.
Ensure you choose a reputable syndicate company with a business plan that aligns with your investment strategy. Due diligence is crucial to ensure the market report of the investment property matches your goals.
Pros:
- No need to manage the property or hire a property management firm.
- Requires less capital.
- Shared risk with other investors.
- Access to deals you may not find alone.
Cons:
- General partners make decisions according to their business plan.
- Limited flexibility to exit the deal early if needed.
4. Engage in Real Estate Mutual Funds
Real estate mutual funds invest in properties, including apartment buildings and multifamily properties. Similar to investing in stocks, you buy into these funds without knowing the specific properties the fund managers will choose. The fund manager makes all the decisions regarding renovations and property sales. Consider factors such as the fund manager's track record, business plan, and reputation when selecting the right fund for your needs.
Investing in a real estate fund offers diversification across multiple properties, making it an excellent choice for long-term investors seeking appreciation income.
Pros:
- Diversification across multiple properties.
- No need to make operating decisions.
Cons:
- Not suitable for immediate income or short-term investors.
- Reliance on fund manager decisions.
5. Leverage Real Estate Investment Trusts (REITs)
REITs are real estate investment trusts that allow you to invest in a real estate company that, in turn, invests in commercial real estate. Unlike real estate funds, REITs require smaller initial investments. Many REITs generate income, with federal law mandating that they distribute 90 percent of their taxable income annually, offering potential dividends.
Investing in REITs can be done through brokers, apartment investing apps, or online platforms such as Streitwise and Realty Mogul.
Pros:
- No need for significant capital to invest.
- Potential dividends from net operating income and appreciation.
- Broker involvement is optional.
Cons:
- Potential requirement to keep funds invested for a specific duration.
- Loss of control over investment decisions.
6. Consider Real Estate Exchange-Traded Funds (ETFs)
Real estate ETFs allow you to invest in various rental properties or commercial real estate REITs without significant capital. These funds provide the diversity of mutual funds combined with the ability to buy shares on a major stock exchange. Some ETFs even consist of multiple REITs.
Investing in real estate ETFs is convenient and can be done through online investment platforms such as Robinhood. However, ETFs may not provide the same rate of return as other real estate investment types due to their higher liquidity.
Pros:
- Access to rental properties and commercial real estate REITs with minimal investment.
- Quick and easy purchase of ETF shares.
- Suitable for inclusion in retirement portfolios.
Cons:
- Potentially lower rate of return compared to other real estate investments.
7. Join the Crowdfunding Bandwagon
Crowdfunding platforms like Fundrise and Crowdstreet offer opportunities to invest in apartment buildings with small amounts of money. These platforms allow you to earn passive income, benefit from appreciation, and hedge against volatility.
Depending on the platform, you can choose specific commercial real estate options or invest in a portfolio managed by the platform. Crowdfunding platforms often vet the projects they offer and provide real estate education. Annual returns can range from 2 percent to 20 percent.
Pros:
- Entry into commercial real estate with a small investment (even as little as $10).
- Quick and user-friendly platforms.
- Access to real estate education.
- Some control over investments.
Cons:
- Accredited investor status may be required.
- Potential investment risks.
8. Build Your Syndication
Creating your syndication allows you to invest with others, raise money, and find lucrative multifamily housing opportunities. As the general partner, you develop a business plan and make all the decisions. While this option requires considerable knowledge and effort, it can be highly rewarding.
Pros:
- Potential for substantial financial rewards.
- Full control over buying, selling, and renovating properties.
Cons:
- Demands extensive knowledge and effort.
9. Seize Opportunity Zones
Opportunity Zones (OZs) are distressed areas designated for development. Investing in apartment buildings located in OZs offers tax benefits, including capital gains tax deferral or avoidance. By investing in an OZ, you can simultaneously make an impact and generate profits. However, thorough due diligence and significant upfront capital are necessary.
Pros:
- Deferral or avoidance of capital gains taxes.
- Engaging in impact investing with potential profit.
Cons:
- Investment risks.
- Required detailed due diligence.
- Significant upfront capital.
10. Utilize 1031 Exchanges
A 1031 exchange refers to a section of the tax code that allows real estate owners to defer capital gains by purchasing another property of a specific type. To qualify for a 1031 exchange, certain criteria must be met, and it is crucial to consult a tax adviser. This method allows for unlimited exchanges and indefinite deferral of capital gains taxes.
Pros:
- Unlimited participation in 1031 exchanges.
- Deferral of capital gains taxes indefinitely.
Cons:
- Strict adherence to rules for qualification.
- Specific timeline requirements.
11. Invest in Physical Properties Through Fintech Companies
Fintech companies offer a way to invest in physical apartment buildings with a minimal investment, sometimes as low as $100. This approach allows you to diversify your portfolio while experiencing the benefits of apartment building investing. Fintech platforms typically provide algorithms to assist with investment selection based on your preferences. Streitwise is an example of a fintech company offering apartment building investments.
Pros:
- Tangible investment in apartment complexes with a small capital outlay.
- Portfolio diversification to mitigate risk.
- Algorithm-driven investment selection.
Cons:
- Potential for capital tie-up.
Embarking on an apartment building investment journey requires careful consideration of your resources, investment goals, and risk tolerance. By exploring these 11 unique ways to invest in apartment buildings, you can find a strategy that aligns with your specific needs and preferences.
Related Resources:
- Best Real Estate Investment Websites
- Impact of Foreigners Investing in US Real Estate
- Understanding Green Buildings and Sustainable Building
