Should you invest in a multi-unit apartment building?
Choosing between an apartment building and a single-family home is one of the most talked-about and key investment decisions made in the real estate and property investment sector. There are a variety of factors that influence a buyer’s choice, and that there’s no one correct answer when it comes to the property type one ultimately put their money on. But knowing the plus and minuses of opting for one over the other, depending on your financial circumstance, will greatly inform you of the more optimal choice, says Travis Cadman of leading residential property company Investar USA.
Firstly, there are differences in valuation. When putting a price on a one- to four-unit residential building, it’s best to apply the Comparable Sales Approach. This means evaluating property value based on a comparison of the price of sale received by those in your neighborhood. When looking at a five-plus-unit residential building, however, the value is dictated by the Income Approach, which is when the price is dependent on a building’s net operating income or NOI.
Financing-wise, one- to four-unit residential properties follow the Residential Lending guidelines while five-plus units abide by Commercial Lending ones. Note that it’s not always that banks agree to both types of financing options, so one needs to seek the aid of a real estate professional to guarantee getting the right lenders.
Keep in mind that the so-called and all-important cap rate is measured based on NOI divided by the property’s value. Cap rate refers to ROI gained in the first year if you had bought the property in cash, with no financing whatsoever, and prior to income tax. It’s important to note here that cap rate is different from Internal Rate of Return (IRR) as IRR factors in one’s income tax, equity increase, and mortgage payments. In other words, one cannot gauge the worth of investing in a property based on its cap rate alone.
All in all, before you make your decision on whether to go for a single-family home or an apartment building, you should be well-versed in your real estate investing road map and know full well your objective for investing in real estate in the first place. High cap rate markets are best for those looking for high cash flow to add to their income, while lower ones are ideal for those looking to build equity and wealth and are not interested in real estate investment for income supplementation, explains Travis Cadman.
Investar USA is a leading North American residential and commercial property developer specializing in renovating and repositioning diverse properties throughout the U.S. and Canada.
Firstly, there are differences in valuation. When putting a price on a one- to four-unit residential building, it’s best to apply the Comparable Sales Approach. This means evaluating property value based on a comparison of the price of sale received by those in your neighborhood. When looking at a five-plus-unit residential building, however, the value is dictated by the Income Approach, which is when the price is dependent on a building’s net operating income or NOI.
Financing-wise, one- to four-unit residential properties follow the Residential Lending guidelines while five-plus units abide by Commercial Lending ones. Note that it’s not always that banks agree to both types of financing options, so one needs to seek the aid of a real estate professional to guarantee getting the right lenders.
Keep in mind that the so-called and all-important cap rate is measured based on NOI divided by the property’s value. Cap rate refers to ROI gained in the first year if you had bought the property in cash, with no financing whatsoever, and prior to income tax. It’s important to note here that cap rate is different from Internal Rate of Return (IRR) as IRR factors in one’s income tax, equity increase, and mortgage payments. In other words, one cannot gauge the worth of investing in a property based on its cap rate alone.
All in all, before you make your decision on whether to go for a single-family home or an apartment building, you should be well-versed in your real estate investing road map and know full well your objective for investing in real estate in the first place. High cap rate markets are best for those looking for high cash flow to add to their income, while lower ones are ideal for those looking to build equity and wealth and are not interested in real estate investment for income supplementation, explains Travis Cadman.
Investar USA is a leading North American residential and commercial property developer specializing in renovating and repositioning diverse properties throughout the U.S. and Canada.
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