Apartment Investing For Long Term Profit – Appreciation and Wealth Creation
As most experienced investors know, short-term investments yield short term gains but in order to realize a larger return on their investments, they need to choose investments that improve over time. Such is the case with apartment building investments and many new owners only look at the first year or two when considering the profit from their apartment purchases. When considering buying property as an investment, there are three things to look at to determine the long-range growth potential.
Amortization, appreciation and the leverage of their investment — Investors also need to consider these factors over at least five years or more when determining the profit potential of their purchase. Amortization is the paying off of the loan balance over time; appreciation is the increase in value of the property and leverage is controlling the large investment with a minimum cash investment.
The reality is that the rate of return on their investment typically improves the longer they own the rental apartment property. There may be times when they can buy an apartment, invest in improvements and quickly sell, or flip, the property to realize a quick profit. However, the savvy investor will understand that the longer they hold the property, the more return on their investment they will realize. Buyers should consider their return on investment for at least five years, when making the decision to become apartment owners.
For example, look at a property purchased for $ 500,000. With 20 percent down and closing costs of $ 12,000, the buyer's initial investment is $ 112,000. Consider an annual net income of $ 47,000 from rent and an annual principal and interest payment of $ 33,925, leaving a cash flow of $ 13,075. The return on the initial investment the first year is about 12 percent, which is a good return for the first year on any investment.
Looking ahead to the fifth year, net operating income improvements to $ 54,485 with a cash flow of $ 20,560 offering an 18 percent return on the investment. Appreciation has lifted the property value to $ 579,636 insuring a continued increase in the annual operating income as well as the larger return on investment of 14 percent per year, adding up to 37 percent in year five.
The amortization of the loan, the mount that has been paid down on the principal based on a 25-year mortgage at seven percent interest is $ 29,242 allowing the investor to put more of the cash flow profit into interest-bearing accounts to improve the overall balance in their portfolio.
This investment also offers the investor tremendous leverage as they are controlling an investment of $ 500,000 with an investment of $ 112,000. Since everyone will need a place to live, even during periods when the economy is in jeopardy, these type of long-range investment plans can provide a better return on their investment than many other types of investments can provide.
When looking for rental apartments to purchase it is important to find the right property that is profitable. Calculating the current income to insure it covers more than just the cost of the mortgage, providing enough income to provide positive cash flow is the first step in buying into the commercial apartment rental properties. Even without the liquid assets to provide the usual 20 percent down payment, knowledgeable investors can seek out funding to make the investment while providing leverage for the long-term holding.