Posted: March 28, 2008
Apartment rental rates are rising after flat years: They're still the best investment for tax shelter
"He who hesitates is lost."
If you're looking to invest in apartments, heed this advice. Now is an excellent time to buy because rental rates are rising after several flat years. Furthermore, financing continues to be available for qualified buyers.
During recent year's, the adjustable rate mortgages, interest-only mortgages, and more importantly "creative financing" by lenders led to higher vacancy rates in the apartment market as homes were unusually affordable. Unfortunately, the bubble has burst and many of those home buyers who stretched to purchase a home are now back in the apartment market. Apartment living is becoming an increasingly attractive alternative to higher priced home ownership.
Renting an apartment for many is simply easier than owning a home and all the additional responsibility associated with home ownership. The hidden costs of home ownership are considerable and unless you're willing and able to place a large down payment your monthly PITI will far exceed many quality apartment complexes. As a result of these factors apartment occupancy rates are improving which in turn increases the value of apartment properties.
If you're thinking about the purchase of an apartment complex, there are several essential factors to consider, of course beginning with location. Determining the proper value of a complex, tax benefits and quality management are not to be overlooked either.
Location, Location, and Location
Your time spent finding an apartment complex to purchase in a good location will pay huge dividends. Surely, it's no surprise that properties in better locations are more expensive. As the saying goes, you get what you pay for.
The advantages to good location are tangible:
* Properties located in good areas generally attract better tenants and they tend to stay longer, thus reducing vacancy.
* Rents are higher, which should help the bottom line.
* Better located properties outperform the overall market and they appreciate at a faster rate.
In my opinion the best reason to purchase in a good location is that when the time comes to sell you have a much easier time. You will be more apt to deal with serious investors rather than the disciple of a late night TV real estate guru.
Absolutely the best way to help determine value when buying apartments is the income approach. This takes into account total income, less expenses, which leaves a net amount available to support a mortgage.
A word of caution: make sure, the expenses the seller has provided are realistic when it comes to vacancies as well as the management fees, maintenance costs plus an amount set aside for reserve and replacement. These items must be taken into account in order to provide a true picture of a property's value.
Uncle Sam is truly an uncle when it comes to income property. There is almost no other investment that allows for as many write offs as apartments do. The depreciation associated with apartment ownership is significant and the tax laws in place for writing off improvements are very generous. Most importantly, when the time comes to sell your apartment complex, Uncle Sam allows you to pay no taxes on the sale provided your sale is handled as a 1031 exchange. The 1031 exchange is one of the major reasons people invest in apartments.
Many times, the difference between success and failure in apartment ownership is the quality of management. Proper management encompasses many areas from screening tenants, making improvements, along with appropriately handling tenant concerns and complaints.
Proper management translates to satisfied tenants, which in turn results in lower vacancy rates and therefore greater return on your investment. Money spent on top management is money well spent.
Investing in good, quality apartment complexes equates to a safe long term investment.
Dennis Hennessy is the 2008 upstate New York chapter president of the Society of Industrial and Office Realtors (SIOR) and vice president of COR Brokerage, Inc., Fayetteville, N.Y.
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