Real estate investing is a great way to diversify your investment portfolio and gain financial freedom. Like other types of real estate investing, investing in apartment buildings can provide multiple revenue streams with steady and consistent cash flow.
Many apartment building investments also bring tax benefits. Apartment buildings also typically appreciate, meaning their value increases. Because the value of an apartment building links directly to its rental income, you can often push property appreciation faster by adding features that justify a rent increase.
You can invest in apartment buildings in many different ways. You can also work with others in person, by phone, or through digital means, such as Fundrise, Realty Mogul, Crowdstreet, and Streitwise. Some investment models require considerable capital, while others require much lower initial investments.
Here are proven ways to invest in apartment buildings.
Ways to Start Investing in Apartment Buildings
1. Buy an Apartment Building Yourself
The most straightforward way to invest in an apartment complex is to buy it yourself. This investment method puts all the responsibility on you. However, you also yield all the benefits.
Buying an apartment building requires significant capital. A 100-unit apartment complex might cost several million dollars.
It also requires that you develop a strategy. For example, do you plan to keep the building over the long term and live off the cash flow, or do you plan to hold it for a short time, make improvements, and eventually sell it at a gain?
Here are the steps in buying an apartment building outright.
- Gather your capital.
- Develop a budget.
- Find a broker.
- Review offerings with your broker.
- Make an offer based on a multiple of net operating income.
Once the seller accepts your offer, you’ll need to obtain a loan and find a property management company to manage the entire building unless you want to be involved in screening tenants, collecting rent, and handling maintenance.
Pros
- You can make all the decisions yourself.
- You receive all the income yourself.
- You can control how long you hold the investment.
Cons
- You must come up with a large capital investment.
- You’ll have to do careful due diligence.
- You assume all the risk yourself.
- The responsibility of ensuring everything goes well can be intimidating.
2. Invest With a Partner
Investing with a partner or partners is another way to reap significant benefits through owning a rental property like an apartment complex. Having a partner means you won’t have to come up with all the capital needed for a downpayment or renovations yourself. You can buy an apartment complex in a better neighborhood than you could afford.
If you can find a partner with experience owning multifamily properties, you’ll also be farther along the learning curve. Of course, you’ll have to share the decision-making about property boundaries and income with your partners.
Consider your partners carefully. Are you looking only for someone to pool funds with, or do you want someone with particular expertise, for example? You also want someone you can work with.
Some people invest in rental properties with their friends. While you may know each other well and be able to work together, investing with friends can sometimes put a strain on the friendship.
Pros
- You can pool assets, including money and expertise.
- You still reap a large percentage of the income and appreciation benefits.
Cons
- You’ll have to share decision-making and income.
- You may not always agree with your partner.
- You’ll still have to find a property manager unless one of your partners decides to take on that role.
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3. Invest with a Multifamily Syndicate Company
You can also invest in large apartment complexes or buildings through a syndicate company. In this case, the syndicate company is the general partner, and you and other investors are limited partners.
The syndicate will operate the investment. As an investor, you must determine the required amount to buy a small share of the property.
If the investment is successful, you’ll receive passive income, which means you receive distributions and a percentage of the profits when the building sells.
You’ll need to ensure that you choose a reputable syndicate company that has a business plan that fits with your investment strategy. You’ll still need due diligence to ensure the market report of your investment property aligns with your investment goals.
Pros
- You don’t have to manage the property yourself or hire a property management firm.
- You typically need less capital.
- You share the risk with other investors.
- You can join in on deals you normally wouldn’t find alone.
Cons
- The general partners will make decisions based on their business plan, which may not necessarily agree with yours.
- You may not be able to get out of the deal if you need your money earlier than you expected.
4. Invest in a Real Estate Mutual Fund
A real estate fund is a mutual fund that invests in real estate properties. Many funds invest in apartment buildings and multifamily properties.
Like mutual funds that invest in stocks, you buy into real estate mutual funds without knowing which properties the fund managers will choose to invest more capital in. The fund manager also makes all the decisions about renovating and selling the multifamily properties. You review the fund manager’s record, business plan, and reputation to decide which fund meets your needs the best.
A real estate fund allows you to diversify your real estate investments, which can help insulate you against risks. The goal of most funds is long-term appreciation income, so investing in a real estate fund makes sense for long-term investors.
Pros
- The funds provide an opportunity to diversify across multiple properties.
- You don’t have to make any operating decisions.
Cons
- Because the goal of most funds is long-term appreciation, real estate funds are not good investment choices for those seeking income right away or who can’t tie up their money.
- You must trust the fund manager to make decisions.
5. Invest in a REIT
Real estate investment trusts (REITs) are another method of apartment investing that only requires a small initial investment. REITs differ from real estate funds because you are investing in a real estate company, which, in turn, invests in commercial real estate.
Many REITs are income-producing, so you receive some income. Indeed, federal law requires that REITS distribute 90 percent of their taxable income annually. However, many still require that you leave your money in the investment for a specific time.
You can invest in a REIT through a broker, apartment investing apps, or online sites. Popular online sites for investing in REITs are Streitwise and Realty Mogul.
Pros
- You don’t need to have significant capital to invest.
- You can receive dividends from the net operating income as well as appreciation growth.
- You only have to go through a broker if you want to.
Cons
- You may have to leave your money in the investment for a specific time.
- The REIT controls the investment property and makes all the decisions.
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6. Invest in a Real Estate ETF
A real estate ETF is another type of real estate investing and is a hybrid investment tool. It combines the diversity of mutual funds with the ability to buy shares on a major stock exchange, just like a stock.
Unlike other real estate products such as mutual funds or REITs, ETFs may change prices frequently throughout the day. They also might include various multifamily properties and other commercial and real estate companies.
Some ETFs are composed of multiple REITS, as well. You can use an app like Robinhood to invest in real estate ETFs with no commissions instantly.
Pros
- Small real estate investors can invest in various rental properties or commercial real estate REITs without significant capital.
- Investors purchase shares in ETFs quickly through online investment sites.
- You can include ETFs in your retirement portfolio.
Cons
- Because ETFs are more liquid than REITs or other real estate types, they may not provide the same rate of return.
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7. Crowdfunding
Another way to invest in apartment buildings is through crowdfunding. Crowdfunding real estate platforms like Fundrise and Crowdstreet allow you to earn passive income, tap into appreciation, and hedge against volatility. You can invest in these platforms with small amounts of money.
Some platforms allow you to choose which commercial real estate options to invest in. Others have a specific portfolio purchase real estate they manage, and you invest in the whole portfolio.
The best crowdfunding platforms carefully vet the projects they offer. Many also provide real estate education. Annual returns can vary from 2 percent to 20 percent.
Pros
- You can enter the commercial real estate market for a small investment, sometimes as little as $10.
- The platforms are quick and easy to use.
- You can have access to education about the real estate industry.
- Most crowdfunding platforms allow investors some control over their investments.
Cons
- Many crowdfunding platforms require you to be an accredited investor. Accredited investors have had an individual gross income that exceeded $200,000 over the past two years or joint income of more than $300,000. They also have over $1 million in assets, excluding their primary residence.
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8. Create A Syndication
If you want to invest in real estate with others, can raise money, and can find lucrative multifamily housing investment opportunities shortly, you can create your syndication. You’d then find many real estate investors for your deals.
Creating your syndication means you’re the general partner. You develop a business plan and make all the decisions yourself. It is a full-time job, but it can be lucrative.
Pros
- You can reap significant financial rewards.
- You are in control of buying, selling, and renovating the properties.
Cons
- Being a real estate syndicator requires considerable knowledge.
- It is also a lot of work.
9. Invest in an Opportunity Zone
Opportunity Zones (OZ) are distressed areas that are prime for development. The concept of OZs began in 2018, and every state has designated some OZs, so it’s a great way to diversify your strategy for investing in apartment buildings.
Investing in apartment buildings in an OZ yields tax benefits. Typically, when you sell real estate and make a profit, you have to pay capital gains tax.
However, if you put your gains into an OZ, you can defer paying taxes and sometimes avoid paying taxes altogether. An OZ also allows you to be part of revitalizing a section of a city or county.
Pros
- You can defer and avoid capital gains taxes.
- You can engage in impact investing while still making a profit.
Cons
- The investment may be risky.
- You’ll need to conduct due diligence carefully.
- You typically need a lot of upfront capital.
10. Use a 1031 Exchange
Real estate owners have to pay taxes on gains on most real estate properties. However, a 1031 exchange is named for a part of the tax code. Under the code, you can defer capital gains in exchange for buying another property of a specific type.
A 1031 exchange must meet certain criteria, so consult a tax adviser. Also, you must exchange one property for a like property; for example, an apartment building for another apartment complex.
Pros
- You can participate in an unlimited number of 1031 exchanges and defer capital gains taxes indefinitely.
Cons
- You must follow the rules precisely to ensure you qualify.
- You’ll also need to require a specific timeline.
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11. Buy a Physical Property Through a Fintech Company
Often, physical real estate investments require a lot of capital. However, you can invest in physical properties through fintech companies for a fraction of the purchase price — sometimes for as little as $100.
Investing through fintech is a great way to start investing in apartment buildings. You receive all the benefits of apartment investing, such as rental income and appreciation, without tying up much of your money. Because the investment in each property is small, you can also diversify your apartment building investment portfolio.
One example of a fintech that offers the opportunity to invest in physical apartment buildings is Streitwise.
Pros
- You can invest in tangible, brick-and-mortar apartment complexes with a relatively small investment.
- You can diversify your portfolio to reduce your risk.
- Many fintech companies have algorithms to help choose investments that best meet your needs.
Cons
- The investment can potentially tie up your money for some time.
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