The average investor is a passive investor. He or she is a professional focused on his or her line of work, and not an expert in investing. They do not have the time, nor in many cases even the interest, to be active in researching different investments, asset classes, markets and the like.
As such, here are five key reasons why investing in apartments can be a great strategy for most passive investors:
1. Lower Volatility: Everyone knows that the stock market can literally be up 250 points one day and down 350 points the next. It can be a roller coaster ride from day to day, month to month, quarter to quarter.
In contrast, studies by NCREIF show that commercial multifamily real estate has historically not experienced this type of volatility.
While real estate markets do fluctuate over time, the income produced from rents and the overall value of an apartment building generally does not rise or fall by millions of dollars overnight based on an analyst’s statement in the news.
2. Cash Income and Asset Growth: Investing in apartment communities can provide regular and predictable income streams, as well as long term overall growth in the value of the property.
It provides income mainly from the profits on the monthly rents collected. And while that income is steadily flowing in, the value of the asset can increase from intentional improvements to the property, appreciation in the market, or both.
3. Leverage: One of the greatest things about purchasing real estate is that you do not have to pay all the money up front. Rather, 100% of the asset can be purchased by paying only 20%, or in some cases less, of the money up front and borrowing the rest over a very long period of time.
This value of leverage allows an investor to realize the returns on large, multimillion-dollar investments for only a fraction of the asset’s price. Furthermore, leverage allows equity in the property to be accessed and put to work for even more investment gains.
4. Taxes: Investing in real estate provides multiple benefits in lowering income taxes. Two of the most effective are depreciation and deferred capital gains.
Depreciation allows investors to reduce the amount of income from the property for tax purposes, therefore reducing the amount of taxes owed in that year. Additionally, when the property is sold, capital gains can be deferred through what’s known as a 1031 exchange.
This allows the profits from the sale of an investment property to be invested into a new property, in which income can continue to be produced and gains continue to grow without the burden of taxation.
5. Easy to Understand and Relate: Can the average person, or even sophisticated investor, really explain why a particular stock raised its dividend, what factors make the stock go up or down, or why the bond market is thriving or struggling at any given time? Most honestly cannot.
However, most people, real estate investors or not, can relate to why an apartment with updated features, in a nice neighborhood with good schools will command higher rents than an outdated apartment in a sketchy and rundown area.
Likewise, its easy to understand how taking an old, worn out building and bringing it up to date through interior and exterior renovations will make it worth more.
Real estate is an element of real life. While there are nuances and complexities, the fact is you do not have to be a real estate investment expert or even a real estate professional to understand the fundamentals of real estate investing.