Pros and Cons to Investing in Apts
It's the beginning of 2023 and the financial field is tumultuous. It is an imperative time to understand what you are investing in, the benefits of it, and the also the drawbacks. Most people only look at the benefits of an investment and don't stop to weigh the drawbacks until it's too late. There are many different investment vehicles out there, but we believe apartment investing is the best option. Let's take a look at the pros and cons...
Cash flow is the golden egg of apartment investing. If you're not familiar with how cash flow works, this article HERE will explain it. Cash flow is ongoing and provides a substantial return during the life of the investment, something other investment vehicles cant compete with.
Real estate may seem volatile to those that live and breathe in the industry, however, compared to other vehicles such as stocks, it is very stable. Real estate is stable because it is an illiquid investment (one of the cons addressed later in this article), therefore there cannot be any dramatic shifts day to day or even week to week because it takes so long to transact. This is compared to the stock market which is extremely liquid. Investments can be purchased and sold in seconds, however, this means that there is immense volatility.
Real estate is a real asset. An apartment building can be felt, seen, and touched. This means that the value of the investment can not go to zero. When investing in apartments, you're told you're investing in the business of renting apartments. This is true, but you're also investing in the building itself plus the land the building sits on. Therefore, even if the rentals were not performing, the building and land still hold value. If something happened to the building, the land is still valuable. Although every real estate investment focuses on the profit-earning aspect, it's good to keep this in mind.
Compare this to the stock market. In stocks, you're investing in a business, but not something tangible. If a business goes bankrupt, its value goes to zero. There's nothing left to recoup.
Another golden egg of real estate is the tax benefits it offers. Real estate has many incentives from the US government, the largest being depreciation. If you're not familiar with depreciation, read this article HERE. Depreciation allows investors to show a paper loss each year on their K1 even when they actually receive distributions. This means until the property is sold, distributions covered by depreciation are not taxed.
There are also other tax benefits such as using acceleted depreciation through a cost segregation study or using a 1031 exchange to defer capital gains tax.
Real estate fulfills a basic utility, a foundational human need - housing. There will always be demand for housing, which is controlled by supply. This is often overlooked in real estate because it's given, however, in the stock world there may be utility for a company today, but not tomorrow. If a company loses utility, they must either pivot or become obsolete. Utility is imperative in terms of resale. Most real estate investments focus on a purchase, improve and resale strategy. Real estate can be modeled this way because it has foundational utility and can be accurately modeled several years in the future.
There are two types of appreciation: natural and forced. Natural appreciation is the natural increase in value of a property over time. Real estate naturally appreciates primarily due to inflation. There is also forced appreciation where someone improves a property and it becomes worth more. In apartment investing, this is done by increasing the performance of a property (increasing profit) which increases it value. Forced appreciation is a huge benefit because it allows investors to control the outcome through their business plan.
The largest downside to real estate is its illiquidity. As mentioned above, this does create a benefit of reduced volatility, however, it makes the barrier to entry high. In large real estate transactions, it often takes 30-60 days to complete a transaction whereas many other investment vehicles such as stocks and bonds can be traded in seconds. Illiquidity becomes a problem when investors decide to cash out or are in need of cash. It takes time to sell or refinance a property and therefore it takes time to access the equity in the investment.
The other major downside to real estate is time. Real estate investments take time to increase value. Even in an accelerated business plan, renovations and stabilizing take time, and therefore cash is tied up for a sustainable period. Most apartment investments last anywhere from 3-10 years. Although their certainty can be good fortune and an investment can outperform expectations quickly and be recapitalized much sooner than expected, it cannot be expected.
Clearly, there are many more pros to investing in apartments than there are cons. The pros explain how incredible the investment is, the cons simply outline the downside, and there really are not any bad aspects of it. We believe investing in apartments is the #1 way to create wealth today, and want you to have the opportunity to access this. For any questions, more info, or insider tricks, please contact us via email or on our website.