What accounts for the primacy of apartments over other real estate investment types? In this article we will outline the four reasons why apartment properties can be the best real estate investment.
In our previous article How to know if a property investment is worth investing? we highlighted that a real estate investment that generates cash flow effectively put money into your pocket every month, while your equity in the real estate investment increases over time. And this is the real estate worth investing that we are talking about.
Cash flow is such a vital element of the power of real estate investments.
In commercial real estate, leases can be for many years. While the security of a long term lease is nice, it doesn’t allow you to take advantage of fluctuations in the market.
In apartment investments leases tend to last normally six to twelve months. This allows for constant adjustment of rents to maximize market value and cash flow. Additionally, apartment buildings tend to have more density than commercial buildings. That means you have a lot more individual residents on shorter term lease.
People always need a place to live. Shelter is one of the basic requirements of existence. That alone gives apartment an advantage over other types of real estate investments. You can rest assured knowing that there will always be a demand for residential housing whether the market is going up or down.
Apartments have become the housing answer to the retired age citizens. These people are frequently referred to as “empty nester” because heir “nest” is now empty. Their children are all grown and gone. Suddenly, they find themselves living in a large, virtually empty home, requiring a lot of upkeep.
Staying in apartment, they are free to come and go as they please. If they want to go traveling, all they have to do is lock their doors and leave. There is another, possibly unexpected benefit. They have undoubtedly moved into a building with other owners who are in the same boat they are, retired, no children around, leisure time, etc. New friendships are readily found and they may feel less alone and more secured then they did in their homes.
On the other hand, young working class in cities also find apartment to be an ideal temporary home which is easy to maintain. Their only maintenance requirements are within the four walls of their apartment. All major exterior maintenance is paid for out of the monthly maintenance fee paid by each apartment owner.
They also find themselves living in a secured environment with 24-hour security system, which is one of the most crucial criteria to live in a not-so-safe city like Johor Bahru. Amenities such as swimming pool, tennis courts and recreation buildings provide them a convenient yet affordable quality life style.
All of this brings us to one conclusion. Apartments have become a much needed form of housing.
Rental housing is cheap – cheap to rent and cheap to buy. We have discussed the primacy of leverage when it comes to real estate investments in our previous article Why you want to take up a loan for your real estate investment? The good news is leverage makes investing in real estate, especially apartment, extremely affordable.
In any given purchase you only have to come up with 10 to 20 percent of the total asset value in order to experience the benefits of an apartment investment. Take our recent acquisition in Permas Jaya for example. That was a RM125,000 apartment. We only had to invest a bit over RM16,000 to secure it.
Real estate is one of the only investments you can buy that is often immediately worth many times more than what you have invested. If we had invested our RM16,000 into a mutual fund ot a stock we would have had… RM16,000 worth of stock. By placing our money in an apartment investment we immediately had an investment worth RM125,000 – 85 percent more than our initial investment.
The appreciation we receive from our RM125,000 investment is not based on our actual cash, or our RM16,000 investment, but on the value of the total asset. At the appreciation rate of, say, 6 percent, that means the total appreciation for just one year on our total asset value of RM125,000 works out to be RM7,500 versus the same total appreciation on our down payment of RM16,000, which is RM960. That’s a difference of RM6,540.
The bank doesn’t get a cent of that. We are effectively using bank’s money to compound our returns almost eight times over our actual investment. We can’t think of cheaper money than that, can you?
Apartment investments are one of the only sector of real estate investment that aren’t affected by business cycles traditionally viewed as negative like rising interest rates and recession.
As interest rates rise, homes become less affordable. What does that do? It makes demand for rental housing even higher because it becomes the affordable option. The same thing happens when there is an economy downturn or recession. When people are holding back their expenses, especially the largest purchase in their life – buying a house, renting a house becomes an affordable option.
As demand increases, occupancy and rents increase. We have seen the occupancy rate of certain apartments and condominiums in Johor Bahru increased since December 2008, such as Larkin Utama and Wadihana. You can imagine what will happen next to the rent.
This is not the case for landed housing and commercial real estate. For commercial real estate investors, when housing becomes more expensive, market conditions become more strained. This is because given the choice between allocating income to housing – a basic human need – and an office, a potential resident will chose housing. They might even set up a home office. And when market turns gloomy, more and more commercial landlords’ tenants simply won’t be able to pay up. (Read our previous article Why you should stay away from commercial properties now?)