How to Build Passive Income by Investing in Apartment Buildings
Have you ever wondered who owns your apartment building? Many of us have never met or even seen our landlords, yet we give a hefty chunk of change to them every month. For all you know, your landlord is on a beach in the Bahamas right now sipping on a margarita bought with your money.
Wouldn’t it be nice to flip the script? Believe it or not, there are many ways you can build passive income by investing in apartment buildings. Some of the following methods involve a lot of sweat equity upfront, but build income passively over time. Others are totally passive from the get-go.
How you invest your money will depend on your wants and needs, but there are options for everyone. First, let’s sweeten the deal by going over the benefits of investing in apartment buildings.
Why Invest in Apartment Buildings?
Investing in apartment buildings can make your money work for you. There will always be demand for housing, and supply is limited.
Here are just a few benefits of investing in apartment buildings.
Almost every cost associated with your investment can be deducted from your tax bill, including but not limited to:
- Interest on loans
- Property taxes
- Capital expenditures like repairs and upgrades
- Maintenance costs
- Property management fees
- Even dinners with investment partners, provided you discuss your investment
While it’s always better to keep costs low, deducting these expenses will help you save money on your taxes.
Monthly Income on Cash Flowing Property
If you play your cards right, you’ll earn monthly cash flow. Cash flow is the rental income you get to keep every month after expenses are paid. Essentially, you’ll want to be sure that you’re charging enough in rent to cover your expenses and take home a piece of the pie.
Real estate appreciates in value over time, generally in line with inflation (3% to 5%). Simply by virtue of owning a property, you hedge your risk against inflation. On top of that benefit, improvements you make to your property can raise its value, and many of those improvements, as mentioned above, are tax-deductible.
Increasing Your Equity Over Time
While your property appreciates over time, you’ll also be increasing your equity in the property. Unless you’re buying an apartment building in cash, you’ll probably have an amortized mortgage loan. Each month, part of your mortgage payment goes toward interest and part of it goes to paying down your principal. A cash-flowing property will enable you to build equity using your tenants’ payments.
But not everyone has the cash to drop on a whole apartment building, and not everyone has the time, experience, or desire to own and maintain a building. Fortunately, there are many ways to build income through investing in apartment buildings with different levels of involvement.
Let’s get into the many ways you can invest now.
7 Ways to Invest in Apartment Buildings
No matter your level of income, there’s a way you can build passive income with apartment investing.
1. House Hacking: Duplexes, Triplexes and Fourplexes
House hacking is a great way to get started if you have enough funds for a small down payment, but not enough to put 20% down on a million-dollar building. In this scenario, you occupy one unit of a duplex, triplex or fourplex and rent the others out. Your building will appreciate over time while you build equity and subsidize your own rent.
Better yet, you can use an FHA loan to buy one of these small apartment complexes, so you’d only need to put 3.5% down. Once you’ve built up some equity, you can do a cash-out refinance to take money out tax-free and use that cash as a down payment for another property. Alternatively, you could sell the property and use that capital to invest in a bigger apartment complex for better appreciation and cash flow.
The downside of house hacking is that you’d be living with your tenants. If you go this route, be sure to thoroughly vet your tenants with background checks and rental history so you can live peacefully.
2. Buy or Build Your Own Apartment Complex
If you have 20% to put down on a larger apartment complex and you’re ready to jump right in, you can make more money in the short and long term by purchasing a large apartment complex.
This method is great for individuals who already have a high net worth, but it’s not for beginners. As the sole owner of an apartment complex, the responsibilities of due diligence fall on you. You’ll need to be sure you’re doing the math to ensure your property will be cash flowing and appreciate over time. And if you’re going the new construction route, you will need to consider how much it costs to build an apartment complex and how that will affect your bottom line.
Be sure to get your own commercial appraisal and inspection so you don’t end up underwater due to repairs and maintenance. You’ll need to decide if you can afford a property management company to deal with tenants, or if you want to manage the property yourself.
If you succeed, this method can build passive income in the form of rental income and appreciation.
3. Invest with a Partner
If you’re new to the real estate investing game, consider investing with a partner who has real estate experience. The upside to this method is that you’ll have a general partner who can help you evaluate multifamily properties and find excellent deals. The downside is that you’ll be splitting your earnings and you may have less say.
4. Real Estate Syndication
A real estate syndication includes several partners. There is a general partner, also known as a sponsor or syndicator, and limited partners. The general partner is responsible for the bulk of the work, like sourcing the deal, performing due diligence, and finding a property management company or managing the property themself. The limited partners provide the capital for the deal.
Depending on how you and your partners agree to structure the deal, you could earn income in a variety of ways. As a general partner, you can collect an acquisition fee for finding the deal, a portion of the cash flow, and a portion of the appreciation when your group decides to sell. This isn’t exactly passive income. You’d need to be well-connected in the real estate community to get started.
As a limited partner, however, you invest a percentage of the capital upfront and own a percentage of the deal. You collect a percentage of the cash flow and appreciation if and when the group decides to sell. This is passive income.
5. Get Involved in Real Estate Crowdfunding
Real estate crowdfunding has only become accessible to non-accredited investors since 2012, when the JOBS Act lifted restrictions on investing in small businesses. You can easily get started using investment platforms like CrowdStreet and Fundrise.
Real estate crowdfunding is just like any other form of crowdfunding. Investors pool their money and become shareholders in a property. You won’t have to worry about buying or managing an apartment building and you can invest with as little as $1000. However, if the investment goes belly up, you stand to lose your whole investment.
If you’re interested in real estate crowdfunding, be sure to do your research on the company you’ll be investing in. Ensure they have a track record of successful, cash-flowing properties and ask for an offering memorandum.
6. Invest in Real Estate Funds
A real estate fund is a type of mutual fund. When you invest in real estate funds, you’re investing in securities offered by public real estate companies. You can choose real estate exchange traded funds that own shares of real estate corporations and REITs.
You could also choose to invest in private real estate investment funds which are managed by companies investing directly in properties like multifamily apartment buildings, among other asset classes. However, you generally need to be an accredited investor to go this route, meaning you have to have a high net worth and offer a lot of cash upfront to get involved.
Real estate funds are best for investors looking for long term profits. They appreciate passively like a property appreciates. You generally won’t get monthly income from them.
7. Put Your Money into REITs
Real estate investment trusts, or REITs, are traded like stocks. REITs are required to payout 90% of their taxable income as dividends to shareholders. That revenue means you could make monthly or yearly income from this investment vehicle, and you wouldn’t have to worry about buying, managing or financing an apartment building. If you’re looking for truly passive income from real estate investing, REITs are your best bet.
Which Investment Vehicle Is Right for You?
All these investment strategies exist on a spectrum. Buying an apartment complex that you can live in, either on your own or with partners, involves more work upfront, but pays out nicely in the long run. Putting your cash into REITs or real estate funds is virtually effortless. No matter how you want to get started, there’s an option for you. And you’ll thank your former self when you’re sipping on your margarita in Mexico.