Building, buying, and managing an apartment or housing complex isn’t easy. It’s back-breaking work. It’s a landlord headache multiplied by five or more.
However, it can also be greatly rewarding—a profitable, smart move that can bring in thousands of dollars of passive income a month and support the country’s economy.
Here are the best reasons now is a good time to buy and build an apartment:
- The United States Need More Homes
Many homebuyers are spending at least $60,000 more than the list price and skipping essential steps like inspections to secure a property. It’s because the United States has a major housing shortage problem.
The demand is already high, but the supply is low as some homeowners continue to hold on to their assets or prefer to refinance instead. In some places, the available houses are just not enough. According to Wall Street Journal, the country had built almost 300,000 fewer houses each year from 2001 to 2020 compared to 1968–2000.
While the housing crisis seems beneficial to property owners and real estate investors because it creates a hot sellers’ market, it can be detrimental in the long run. California, for example, reported losing $140 billion annually in economic output, including $50 billion loss in consumer consumption each year, because of the high cost of housing and rent.
The lack of housing is particularly detrimental to young ones, who are often first-time homebuyers. They are at risk of homelessness and are vulnerable to living in properties with poor conditions, endangering their health.
Building a multi-family apartment is less likely to create a massive impact on the macroeconomy, but it can already spell a huge difference for hundreds of families looking for a home today.
- Financing Options Are Abundant
The cost of building construction can vary depending on location, size, and access to loans. What one can agree on is that it can be very expensive, even reaching a million or more.
Fortunately, many lenders now specialize in multifamily loan programs, where interested parties can borrow the following:
- USDA 538 loan — This is a loan ideal for those planning to build or rehabilitate a low-income rental complex in rural areas, preferably with a population of no more than 35,000. It is a federally-backed debt that guarantees no loan cap and fixed interest rate over the life of the loan, which can be up to 40 years.
- Fannie Mae/Freddie Mac loans — The loan can be a value-added debt, which provides funding for upgrades of properties with a budget of $10,000 to $25,000 for every unit.
- FHA loans — This can be a sub-rehab loan, which is non-recourse, but another person might be able to assume it to avoid the seizure of the collateral. It can also have a 40-year amortization at a fixed interest rate.
- Interest Rates Are Low
Interest rates, especially over the last few months, have been fluctuating wildly. On August 12, Bloomberg revealed that the mortgage rates in the country had reached 2.87 percent for a 30-year loan, which was the highest it’s ever been since July 15. But the historical data from Business Insider showed that pre-pandemic, the interest rate for the same period was actually 4.75 percent.
Although the interest rates for multifamily loans are different, often, they can be reflective of the movement of a conventional mortgage. In other words, now is a good time to upgrade or build an apartment building while the interest rates are still more affordable.
Moreover, the interest rates available for the investors are fixed. Although they may not be able to take advantage of savings when the interest rate goes down, they can better estimate their monthly income.
- You Can Use Them to Get More Properties
Owning an apartment can provide someone an opportunity to invest in another commercial property via options like the 1031 exchange. How does this work?
The name comes from a provision of the US Internal Revenue Code, which says that a commercial owner may defer paying capital gains tax when they sell the investment and use all the proceeds to buy a like-kind property, although this term is a misnomer. It is possible to exchange an apartment for a healthcare facility, for example, if they have almost the same or greater value.
The sale doesn’t generate a profit, but the individual can still create passive income from the newly acquired building. It is also a good way to diversify one’s portfolio and broaden one’s experience in commercial property management.
Investing in a huge project such as this can be daunting, and so everyone is entitled to think it over. However, waiting a long time could mean a significant opportunity cost too. When in doubt, potential investors can talk to the experts, including lenders.