Daniel Pessin Explains the Pros and Cons of Investing In Apartment Buildings
Are you thinking about investing into a commercial multifamily apartment? This is a large investment which naturally means there is a large amount of risk. However, it can be very lucrative and an amazing way to build long term wealth. Before investing, you definitely want to do a lot of research and as much preparation as possible. Let’s break down a few of the Pros and Cons to consider before investing.
Pros
Predictable Cash Flow: Long term tenants means long term cash flow. In order to maintain this cash flow, it is important that you bring in tenants who are reliable. “Screening tenants thoroughly is one of the most important parts of operating an apartment building,” Daniel Pessin said. It’s so important to have a detailed screening process in place so you can analyze important information like their rental history and credit history.
Positive Tax Breaks: Everyone loves a tax break. When you own an apartment complex, every expense that goes towards maintenance, repairs, management fees, and anything else related will be considered as a tax write off. Even if your property is losing money, you might still be eligible to receive tax deductions from your income.
Equity: As an investor, you will be investing in a property that will have regular mortgage payments. When these mortgage payments are met with consistency and eventually paid off, your equity will build up. This is called mortgage pay down.
Cons
Maintenance Expenses: As you may have expected, apartment buildings have a lot of costs.. Maintenance expenses are obviously the most common. If something breaks, malfunctions, fails, it will count against your expenses when you need to pay to get it repaired. Even with insurance, you still will probably have to pay for other expenses that are not covered by your policy. “Repairs are going to happen no matter what, it’s unavoidable,” Daniel Pessin said. You should budget a certain percentage accordingly each month to prepare for things to break.”
Tenants Failing To Pay: Another common problem that landlords face on a regular basis is tenants failing to pay the monthly rent. Although this can be prevented with good tenant screening, unexpected issues will happen and there might be instances where a tenant cannot pay. One common reason could be the loss of income due to losing their job. You might have to evict the tenant, which could be costly.
Irresponsible Tenants: Some tenants that can be very irresponsible when it comes to their living space. Things could get broken or damaged, leading to maintenance costs piling up. Tenants sometimes do get careless and have little to no regard for someone else’s property. Another good reason why it’s always a good idea to review a potential tenant’s rental history as part of your application process. Of course, references do go a long way as well.
Vacancies: Vacancies have a direct effect on your cash flow, and not in a positive way! It’s important to fill those vacancies by advertising the space available for rent for each of your buildings. One smart idea would be to create a waiting list of potential tenants. This way if a unit becomes vacant, you have a list of tenants who are interested to rent the unit immediately.
Recap
While investing in an apartment building could be a great way to build wealth, it does come with its advantages and disadvantages. It’s important to keep these in mind when you are considering the idea of investing in an apartment building. “If you don’t have experience, it’s important to partner with someone who has experience as an owner and operator of commercial multifamily buildings,” Daniel Pessin said. These are large investments, so there is a lot of risk. It makes sense to partner with people who have experience.”
