How to Invest in Apartments (for as Little as $500)
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Chances are that your first home when living on your own was an apartment. While most people prefer a single-family home, paying rent for an apartment is almost always cheaper than buying a home, especially for young people starting their careers.
Two in 10 Americans (17%) live in an apartment or condo, according to a survey by the National Association of Realtors. That’s a big percentage that real estate investors can profit from by buying apartment buildings and other rental income property.
Everyday investors can make money from apartment investing too, either as apartment owners or in real estate funds and other types of good investments in multifamily properties. You don’t have to be a landlord for such investment opportunities, though that’s one way to go.
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Benefits of investing in apartments
Adding real estate to your investment portfolio is one of the main benefits of owning or investing in apartment complexes. It’s another asset class to stocks, bonds, and other investments that can often be swayed by subjective forces in the marketplace.
Apartments and other rental properties have a slow, steady appreciation rate and can provide monthly rental income. Real estate funds and other such investments can pay quarterly dividends, giving you a passive income.
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Here are some other benefits to consider:
Tax benefits
Many expenses from owning a rental property can be deducted from taxes, including operating and owner expenses, mortgage interest, depreciation, capital gains tax deferral, and avoiding FICA tax. Rental property income is usually part of an investor’s total income and is taxed based on their federal income tax bracket.
Return on investment
To determine if a property will generate a return on investment, many real estate investors use the 1% Rule of real estate.
It states that the monthly rent must equal at least 1% of the rental property’s purchase price. So if a property costs $300,000 to buy, then 1% is $3,000. So if the monthly mortgage payment is $3,000 or less, then you’re earning enough money each month to pay it.
The equation is: $300,000 X 0.01 = $3,000
If the total rent is $3,000 per month, then the property may be worth buying for $300,000 because the monthly rent equals the monthly mortgage payments. The 1% rule is for a rental house with one rent check being collected. If there are 10 units in that $300,000 property, then divide the $3,000 by 10 ($300) to figure out how much monthly rent each unit must pay to make it worthwhile as an owner.
You may want to include your costs as a landlord or to hire a property management company, such as maintenance and other costs will be detailed later.
Ways to invest in apartments
There are many ways to invest in apartment buildings. Some are easier than others, depending on your finances. are the easiest, with only $10 required to open an account, and $500 to $1,000 needed to invest, depending on the platform.
Buy apartment buildings
As we mentioned above, the 1% Rule can help you determine if a rental property is worth buying. Your due diligence should also include looking at the occupancy rate and what it should be according to a market report, property condition, appraisal, financial audit report, and what your costs will be.
Buy with a partner
Buying an investment property can be expensive. You can lower the risk of your investment strategy by including a partner in a real estate limited partnership, or RELP. The partnership can be two or more investors who pool their money to buy, develop or lease property.
If you don’t have experience in real estate, an experienced partner can help raise money, find a good property management company, and determine if a property is worth buying.
Join a syndication
A syndication agreement is another way to pool money and resources to invest in real estate. The sponsor usually invests 5 to 20% of the required equity and manages the daily operations.
The sponsor of the syndication acquires the property and is paid an upfront acquisition fee for their work. Other investors contribute the rest of the equity. Syndications can last from six to 12 months, or from seven to 10 years. They buy apartment buildings, multifamily properties, or commercial real estate.
Examples of syndications are Fundrise, EquityMultiple, and DiversyFund. They often offer investments in real estate funds and real estate investment trusts, or REITs.
Fundrise is open to all investors and requires only $10 to open an account. However, $1,000 is needed to invest, with a minimum holding period of five years to avoid a 3% withdrawal penalty.
EquityMultiple only allows accredited investors who have a net worth of $1 million or $200,000 in annual income in the last two years and in the current year. It requires $10,000 to start investing. EquityMultiple offers many types of real estate investments, with returns ranging from 6% to 24%
DiversyFund requires only $500 to start as an investor. The holding period is five years. Profits are automatically reinvested, so you won’t receive a passive income stream through quarterly dividends, but you could see returns of 7 to 12% in five years or longer.
Real estate fund
A real estate fund is like a mutual fund, with a variety of properties offered by real estate companies, such as through syndication like EquityMultiple. Real estate is bought as an asset that may eventually be sold in five years or more. The funds usually don’t provide short-term income through dividends.
Other types of real estate funds are exchange-traded funds that are traded like stocks, and private real estate investment funds that are only available to high net worth investors. Some real estate funds invest directly in properties, but most invest in REITs and real estate operating companies.
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REITs
Real estate investment trusts (REITs) are another way to pool investors’ money. Properties are bought with the goal of producing income immediately through rents. REITs are liquid investments and can be sold at any time, just like stocks.
Earnings are paid and investors also make money by selling shares at higher prices than they bought them for.
REITs can be bought through a brokerage, or through a real estate crowdfunding platform such as Streitwise. Anyone can invest in a Streitwise REIT for only $1,000.
Publicly-traded REITs average returns of about 4%, and Streitwise says that since its inception it has an average annualized 9.66% dividend and a target return of 8-9%.
Crowdfunding platforms
We’ve already mentioned a few real estate crowdfunding platforms as ways to buy REITs and real estate funds. Some also let you buy individual properties and share in the rental income with other owners.
Dividends are usually paid monthly, quarterly, or annually. You may also get some of the profits when the apartment buildings are sold. You won’t have to manage the property.
EquityMultiple is a crowdfunding platform. Investors can buy individual properties, though the site’s focus is on commercial real estate more than a multifamily rental property. It only allows accredited investors, which are high net worth or high-income individuals who have professional knowledge of these types of investments.
Another popular crowdfunding platform is Fundrise. It focuses on investing in real estate portfolios, and in several properties as one investment. Fundrise’s portfolios start with an initial investment of $500, while other portfolios it offers require a minimum investment of $1,000.
Costs of investing in apartments
After buying apartment complexes or single-family homes or investing in them as a co-owner or investor, there are other costs to consider.
For investors of a fund, REIT, or crowdfunding platform, the main cost is an annual fee for maintaining your account.
A syndication agreement is often paid for through an annual fee of around 1% EquityMultiple charges 0.5% to 1.5% of invested capital. Fundrise charges a 0.85% management fee and a 0.15% servicing fee to manage a member’s portfolio.
DiversyFund doesn’t charge management fees, but because it buys, runs, and sells properties, it charges a 2 to 8% fee.
To buy REITs through a real estate crowdfunding platform such as Streitwise, costs 3% of capital assets, plus 2% annually.
For someone who buys a piece of property and owns it with someone else or on their own, an investment property includes all of the costs you’d have when owning a home, and probably more.
Unexpected expenses such as repairs should be budgeted for each month. A lot of vacancies or tenants who are late paying rent can lead to cash flow problems and can hurt your net operating income. Finding a good property management company can make these tasks a lot easier.
Some properties may also experience depreciation if not maintained well or if market rents drop in a depressed area.
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Pros and cons
Pros
- Real estate investing can be a good way to diversify your portfolio.
- You can make money through passive income, and selling the property when property values rise.
- Some real estate crowdfunding platforms have low initial investment requirements of $500.
Cons
- Real estate investments can take years to earn a profit as you wait for property values rise.
- Property maintenance and possibly having tenants behind on paying rent are some problems of being a landlord.
- Upfront costs of buying an apartment building may be too high for your budget.
The bottom line
Apartment investing can be a good way to diversify your investment portfolio. It can lead to passive income through monthly rent or dividends, and if property values rise you can make a profit by selling.
If you don’t want to own an investment property, you can invest in them with another person or through crowdfunding platforms that let investors buy shares of a group of properties. With as little as $500 to start, you can become a real estate investor and can increase your investment each month if you have extra money to invest.
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Writer
Aaron Crowe is a freelance journalist who specializes in personal finance writing and editing. He has worked at newspapers, where he won a Pulitzer Prize, and has written for numerous online publications. These include AOL, US News & World Report, WiseBread, Bankrate, AARP, and many websites focusing on housing, credit and insurance. He lives in California with his wife and daughter.
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