subject: Houses VS Apartments-Which Is Better? [print this page] Houses VS Apartments-Which Is Better? Houses VS Apartments-Which Is Better?
Here at MIS University we specialize in strategies that allow real estate investors to profit in any market, regardless of what their financial position is when they get started in their investing efforts. Many investors wonder whether they should focus their energy on houses or apartment buildings.
The decision on what type of real estate class to invest in is based on a wide variety of factors. However, one of the factors that many people assume is a key determining factor on where to invest is money.
Many investors believe that if you are just getting started as an investor and you don't have a lot of money to invest, you should start with houses. Apartments are only for investors that have excess cash available to make an investment.
The decision on whether to invest in houses vs. apartments is not a decision that should be based on whether you personally have money to invest or not. The decision should be based on your overall investing strategy, the market that you are investing in, the role you will play in the investment and what combination of these factors will likely produce the biggest return on investment for you.
There are some general considerations that should be made when comparing investing in houses and investing in apartment buildings. While these are general principles, keep in mind that whether these generalizations play out in your investing or not depends on your style of investing and your strategy.
Houses are typically owned or rented out in living situations where there are a number of people living in a single home. The average house has at least 3 bedrooms and 2 bathrooms. The most common type of occupants of a house is a family, in which you have one or two parents and one or more children.
There are exceptions to this. Particularly in this economy, more and more families are combining households to reduce living expenses. For instance, adult children may opt to move back in with their parents. Sometimes these children might even be married and/or have children. The opposite occurs as well where a parent or both parents move in with the children. Sometimes it could be siblings that share a home and other times it could even be an individual that buys the home, occupies one room and rents out the other rooms.
The typical family prefers to own a house instead of living in an apartment for several reasons. A house ensures that family of living stability in that they don't have to worry about having to move if their lease expires because they own the property. The prices of homes historically have increased over time providing a return on mortgage payments unlike rent payments.
From a long term investing standpoint, houses tend to provide a lower monthly cashflow return on investment. However, they also tend to provide a higher capital gains return on investment. The reason why is because houses tend to include more land with the property than apartments. Since land is a scarce and limited resource in high demand, the less land that is available, the more valuable it becomes and the price increases over time.
Apartments are typically occupied by individuals or smaller family units. A couple with no children or a couple with one or maybe two children is more likely to occupy an apartment. This is because they require less living space and can rent out a smaller apartment for less than what it would cost them to rent or even own a house in terms of monthly payment obligations.
Apartments for the typical investor tend to be a better investment if you are looking for a cash on cash return monthly more than capital gains. This is because the rental units available in an apartment make it easier to charge a price per month for each unit that will exceed the monthly mortgage and other property expenses associated with owning an apartment building.
Apartment buildings tend to have a lower land appreciation than homes because they typically occupy less land. There are exceptions to this. For instance, if you live in an area that has a heavy population density, such as Manhattan, New York, the capital gain appreciations that occur with an apartment building can rival or even exceed the type of capital gains that a house experiences.
So how can you as an investor determine which type of real estate is better for you as an investor? The simple answer is if you are going with a typical "buy and hold" investing strategy, a house is better for capital gains and an apartment is a better buy for cashflow.
Now, if you have been a subscriber to this newsletter and/or if you are familiar with our educational programs, you know that we specialize in teaching non-traditional methods of investing. What if you are looking to invest in short sales, judgments, or defaulted mortgages? Should you invest in homes or should you invest in apartments?
With these types of investing strategies, the type of real estate property is less important than the deal itself. A $100,000 discount is a great discount for a short sale for an apartment as well as a house as long is the property doesn't require so much fix up that it eats away at all of the profit. That being said, because there are differences between apartments and houses, your best bet would be to pick one or the other until you are consistently making money with the real estate type that you have decided to invest in.
Most investors feel more comfortable getting started with houses. They may own a house already as their personal residence and feel like they understand it better. Or they may gravitate towards investing in houses because houses typically have smaller numbers on the prices and this makes them feel more comfortable. This is fine. However, don't feel that you cannot use these same strategies with apartments. In fact, there could be more opportunities in your area with apartments because most investors focus on houses.
Finally, keep in mind if you are utilizing a strategy that relies on others (and most investing strategies do), there may be other forces at play that make investing in one type of property class better than the other. For example, let's say you utilize a strategy where you find discounted short sales and flip them to investors looking to fix them up. If most of your investors are looking for houses and don't do apartments, you are going to want to focus on houses. The real estate class that you invest in is dependent on the needs of all parties involved with making the deal happen.
