Disadvantages of Investing in an Apartment
Purchasing a home as an investment property can be difficult for a landlord. In addition to the business aspects of showings, collecting rents and maintaining minor issues, landlords have to contend with general maintenance of the home and the property upon which it sits. Some investors simply choose to purchase a condominium unit and rent it as an apartment, letting the condo association tend to the big-picture maintenance issues. While this frees investors from some of the hassles of home renting, investing in apartments isn't without its disadvantages.
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Unpredictable Maintenance Fees
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Investors don't fully free themselves from building and grounds maintenance when they purchase a condo. They simply let someone else handle it, and pay monthly maintenance fees to cover upkeep and administrative costs. While newer buildings' maintenance fees may be stable, aging buildings may need major repairs, and if condominium organizations don't have a reserve fund set up to meet these issues, they are forced to turn to owners to supplement repairs. Monthly maintenance fees may increase at any time, adding costs to your unit's upkeep and eating away at your profit margin.
Tied to Housing Market Forces
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Some investors see investment properties as a means to collect rent revenue on an investment as it appreciates. This strategy works in a best-case scenario, but isn't guaranteed. Because rent revenues depend on the market value of similar units, investors may need to rent their apartments for less than their monthly mortgage payment, particularly in the first few years after they purchase it. This may not be too large of a problem if the condominium's value appreciates over time, but there's no guarantee that will happen. In a worst-case scenario, an investor may continually pay more in mortgages and maintenance fees than he collects in rent to cover an investment that isn't increasing in value.
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May Not Be Renter Friendly
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Some condominium associations' bylaws don't allow units to be rented, and many others don't have policies on rentals. If at least 10 percent of the building's units are rental properties, the association should have rental policies in place in their bylaws, according to Smart Money. Even then, associations may modify their bylaws at any time to bar rental properties from the building. The more properties in a building that are used as investment properties, the more difficulty an association will face if it attempts to modify its bylaws.
Management Issues
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The low maintenance involved with condominium ownership is one of its primary attractions for many investors. Those benefits are only valuable if the building's management is effective, and attends to issues in a timely fashion. Self-managed apartment buildings may be managed well, though those issues may change when board membership changes. If a professional management service is used -- which will incur higher maintenance fees -- make sure it's one with a reliable reputation that will protect your investment.
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References
- PBS Nightly Business Report; Surviving the Condo Crisis; Benno Schmidt; November 2010
- CNN Money; Real Estate for Retirement -- A Good Idea?; Walter Updegrave; October 2005
- Smart Money; Condo Shopping -- Ask These Seven Questions Before You Buy; August 2010
- Bankrate; Condo or House -- What's Best For You?; Steve McLinden; November 2004
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