Disadvantages of Investing in an Apartment
Regardless of the health of the real estate market when you jump in, expect to live a different life after morphing from renter to investor. If an apartment -- or an entire building full of units, for that matter -- is in your future, you’ve probably already identified advantages that await you after the closing: tax breaks, mogul status and painting every wall red, if you feel like it. Of course, you’re smart enough to ferret out disadvantages, too. They may be profound enough to make you think twice.
Don’t Count on Profit-Taking
Unless you own a crystal ball, you can’t know whether the apartment in which you plan to invest is likely to appreciate or depreciate. Market volatility, availability, economics and a glut of units may be all it takes to dramatically alter the average price of apartments in your community. Even the terrific advantage you may enjoy from scooping up a bargain can come back to bite you if the equity landslide you enjoyed keeps spiraling downward. Remember, too, that it’s wise to hold your investment long enough to justify your down payment, which it typically 20 percent.
Financing Could be Problematic
Some lenders are more comfortable financing a single-family house rather than an apartment, so you could wind up paying a higher interest rate if mortgagors in your geographic area want to hedge their bets. Sure, you can find good deals, especially when the market is flooded with distressed or foreclosed apartments, but money also tends to get scarcer when things are iffy. Even half a percentage point increase in a mortgage rate is disadvantageous if your budget is tight.
Qualifying May Be an Issue
Your liquidity ratio could be a disadvantage when you seek to buy an apartment. Qualifying for this type of real estate investment isn’t the same as getting a mortgage for a home. You need cash reserves to show that you are capable of paying your mortgage even if your unit remains empty for long stretches of time. According to the Real Estate Investor website, bankers closely scrutinize personal debt/income ratios to ascertain whether a budget can take another hit. “Having a great FICO score won’t help you very much when qualifying,” the REI folks add.
The Devil is in the Details
Since apartment investing is usually considered a commercial transaction, the process isn’t the same as it would be if you were investing in a house, advises My Orlando Home Expert.com. From mountains of paperwork, research, zoning variances, inspections and permits needed to undertake capital improvements, if you’re not a detail person, you might not survive this experience. Aging apartments -- those over 12 years--present unique disadvantages such as zoning changes, building degradation, an aging infrastructure and fluctuating property tax rates.
A Consortium Isn't Always an Advantage
Perhaps you decide to invest with a spouse, friend or investment partner because you can't handle this on your own. This financial muscle could pass muster with a lender and nail the deal, but excellent relationships have been known to go the way of the Edsel as a result of partnering with friends and relatives. It's a troubling disadvantage to discover that you can't sustain a working relationship -- too often after you're in too deep to get out gracefully. From complex legal machinations to taking responsibility for administering maintenance or improvement projects, small disagreements may be all it takes to ruin close relationships forever.
Renters Can be Destructive
Owner-occupied apartments offer few disadvantages: you live there, fix problems as they arise and go about your life. But if your investment is profit-motivated and your intention is to become a real estate mogul by acquiring one or more rental units, you could discover surprises not long after you sign your first lease. From having to make mortgage payments in between renters to unit destruction by out-of-control lessees that even security deposits don’t cover, problem renters can not only add to your stress, but they can hit you in the wallet big time, too.
Based in Chicago, Gail Cohen has been a professional writer for more than 30 years. She has authored and co-authored 14 books and penned hundreds of articles in consumer and trade publications, including the Illinois-based "Daily Herald" newspaper. Her newest book, "The Christmas Quilt," was published in December 2011.