Buying an apartment building as an investment
A whole house at once: Good idea or not?
Apartment house: perfect investment?
It always makes sense to invest your saved capital instead of leaving it in your account. Real estate is particularly stable in value and crisis-proof. Most investors invest gradually in smaller properties for rent. But does it make sense to buy an entire apartment building as an investment?
In any case, it can be a good option. But it depends on your personal situation and strategy. Of course, the investment costs are somewhat higher — after all, you are buying an entire house. Plus, the management of the house is entirely up to you. But there are also a lot of advantages.
You often have higher returns and can better plan and control the return of your property by adapting the property to the location and your desired target group. This also affects the value retention of your property. On top of that, you can benefit from tax breaks when you buy an entire multi-family residence. Our podcast episode on this gives detailed info in summary. It's even more detailed below in the text. 🎧📱
Turning an apartment building into an income property
It doesn't necessarily make sense to have your money in a call money account if you want to take care of your retirement savings ahead of time. It gradually loses value there. In the current state of inflation, this happens considerably faster than usual. Looking into alternative investment options definitely makes sense. Since real estate holds its value well and is resistant to crises and inflation, it's an excellent choice for retirement planning and asset accumulation. In most cases, investors invest in apartments. But have you ever considered buying an apartment building as an investment? If you purchase an apartment building as an investment, it's often referred to as an "income property." Apartment buildings are a popular asset class in the residential real estate sector. Rightfully so.
After all, an apartment building gives you more flexibility as an investor. Not only is the return on investment significantly easier to calculate, but you can configure the property the way you want. Is the apartment building in a neighborhood near a university? Then it may be wise to create several small 1- or 2-bedroom apartments with inexpensive amenities or to make the larger units suitable for shared apartments. In neighborhoods dominated by families, on the other hand, it may be wise to combine smaller apartments into larger ones, where possible. When you own the entire house, every option is open to you. If the layout and furnishings of the house match the location, the units can be easily rented out, and you can ensure steady cash flow.
If you only own one apartment in the house, it's not so easy to do conversions. It is also easier to resell well-leased apartment buildings at a profit. Of course, the investment in an apartment building is also higher, but it can pay off. Our experts will be happy to talk to you about this — without any obligation on your part.
Benefits of a multi-family house as an investment
Although real estate should only be one component of your retirement plan in the investment mix, it's actually always an essential and wise component. If you decide to invest your savings in an apartment building, there are a few benefits. Here is an overview of the main advantages:
The benefits at a glance
Risk diversification in case of rent default
Higher and predictable returns
Tax advantages & subsidies
Sound inflation protection
Strong opportunities for value growth
Apportionable ancillary costs
Tax benefits as a multi-family house owner
If you buy an apartment building and rent it out, you can benefit from two tax benefits:
Deduction for wear and tear
Houses don't stay in pristine condition. You can write off 2% of this wear and tear on your tax return each year. If you invest in a property built before 1925, you can even write off 2.5% for 40 years.
Keep in mind that you need to determine the pure value of the property. You have to deduct the value of the land from the purchase price. After all, the land itself doesn't depreciate. Makes sense, right?
Deduction of debt interest
In most cases, investors don't buy an apartment building with their own funds; they finance it. You can write off the debt interest and thus reduce your taxable income.
To take full advantage of the tax benefits, you have to keep developing the rent. You can no longer fully deduct interest or wear and tear if your rent is less than 66% of the local comparative rent.
Subsidy programs for buyers of multi-family houses
When building or renovating a multi-family house, you can benefit from various KfW programs. The Federal Office of Economics and Export Control also provides similar offers. The prerequisite is that you opt for energy-efficient measures when building or renovating. In any case, it's a good idea because it increases the comfort of your tenants and the property's value. In most cases, you'll receive subsidies or particularly favorable loan conditions.
Apportioning service charges to tenants
Construction measures for energy efficiency or maintenance measures can't be passed on to the tenants; neither can the fees for possible property management. Ideally, you've already received subsidies for the construction costs. But luckily, many other costs can be passed on to your tenants, such as:
The property tax
Janitor and chimney sweep costs
Sewage and garbage fees
Of course, there are some things you should consider when investing in an entire apartment building. Are you familiar with the saying: "There are two sides to every coin"? These are challenges that you should give some thought to before investing your savings in an apartment building:
The challenges at a glance
Administration is high-maintenance
Purchase and sale take longer
Investment costs are higher
More obligations as a sole owner
Managing a property alone?
Earlier, we described the pros of owning the whole house and being able to remodel it according to your goals and wishes. On the other hand, this also means that you must take care of the entire property management yourself. You can use a property management company, but you alone bear the costs, unlike when you only own one apartment in a multi-family house. If you don't want to pay someone for the management, you will need a lot more time to take care of things.
The exact amount of time required depends mainly on the size of the property. Investing in a property with three units will take less time than a house with eight apartments. So think about how much time and effort you can and want to allocate to property management. You can learn more about this topic here! 🎧👇
Remember your owner duties!
Of course, you have owner duties for every kind of real estate, even if you only buy an apartment in a house. However, the costs are all on you if you own the entire apartment building. As the owner, you must pay repair and maintenance costs for the house or individual apartments.
If you own only one unit in the house, all owners share the costs. In addition, each owner pays into the maintenance reserves. Not when you invest in a whole house. But if you also put some money aside as a reserve, this isn't a big issue. Just don't forget it.
Buying a multi-family house: How to go about it
Once you've decided to invest in an apartment building, it's time to choose the right one. Since you, as the sole owner, bear all the financial risks of maintaining the place, you should thoroughly check the property. Or save yourself some trouble by buying a property that has been pre-checked by Urbyo:
You've already found a suitable object? Then you can also just get the right financing through Urbyo. Nevertheless, we have a few tips for a simple property check:
In most cases, when buying an apartment building, the property already has only one owner. Means: There are no HOA meeting minutes, which would otherwise give you a good overview of the condition. In any case, you should ask to see the service charge statements and the records of the non-allocable costs. In the best case, you can see when money was last spent on maintenance. It's also worth talking to the tenants about the building's general condition. In the case of an apartment building, you should do an on-site inspection. Hiring a surveyor is a good idea, but if you don't want to spend money on that, there are a few things you should pay attention to during the inspection.
It makes sense to inspect the house from the bottom up. So you start in the basement of the house and check the heating system there. There you will see, for example, the year of construction of the heating system on the type plate, which is usually attached as a plaque. You can also check whether more energy-efficient copper pipes have already been installed. In the basement, you can also look at the power distribution of the house and the fuse box. Sometimes in the basement, you can also see the house's beams. There, too, it's worth looking at the structure's condition.
Now to the staircase. Look at the material of the railings and stairs. We don't mean from a visual standpoint – that's a matter of taste and not that important when you don't live there yourself. But keep in mind that wooden stairs require considerably more maintenance than, say, stone stairs. This also applies to the material of the window frames. By the way, you can also find the manufacturing year of the windows written on them. The most challenging thing to check is the roof, but it's worth taking a close look. Pay attention to the last time the roof was insulated.
Of course, you should also look at the condition of the apartments. But you don't necessarily have to look at every unit. It depends on the size of the property. Often, it will suffice to look at the most important apartments and only check the remaining ones via floor plan drawings. If the property has only two or three apartments, you can take the time to look at all of them. Check the floor coverings, the general condition, and the bathrooms. Is there any visible mold? If you notice any suspicious smells in the apartments, take a look behind cabinets located on the outside walls, if possible.
Financing an apartment building: All you need to provide
In contrast to a single apartment, an entire apartment building usually means a higher investment. Does this mean you only have a chance of obtaining financing if you have a very high income? No. The important thing is that you can explain the investment to the bank in a way that makes sense. Our experts have a lot of experience and will guide you through the process. But if you have hardly any risk of rent losses, the financing will be covered mainly by the rental income.
Therefore, the bank looks at the purchase price to annual net rental income ratio – the so-called multiplier. If the multiplier is 35, you should contribute about 15% through your capital. However, if you buy the property at a multiplier of 17, you also have a good chance of obtaining full financing for the property. In any case, you must submit the following documents:
Checklist Financing MFH
Land register excerpt
Residential building insurance certificate
(Optional: list of previous modernizations)
How do I calculate the return of my apartment building?
One advantage of an investment in a multi-family house is the sometimes higher returns, which you, as the only owner, can influence later. Still, you should know how high the initial return is before investing in a property.
You can save all the calculations when you buy a property from the Urbyo marketplace. We've already calculated the initial return of all our pre-checked properties.
If you have a different property in mind, there are two main methods of calculating the return. One is simpler but not as accurate. The other one is a bit more complicated but more precise!
The rent multiplier
You can find out the multiplier like this: purchase price / annual cold rent
A factor of 20 to 25 indicates a good ratio between the purchase price and rent. Between 25 and 30 you can assume an average ratio. Above 30, the ratio is not favorable. However, when calculating the rent multiplier, you neglect some values, such as the ancillary purchase costs.
The percentage net yield
The percentage net yield is calculated as follows: (annual cold rent - management costs) x 100 / (purchase price + ancillary purchase costs)
Management costs are all costs incurred for the use of a property. It is often assumed to be one percent of the purchase price, excluding ancillary costs.
Incidentally, experts consider a return of between 4 and 6 percent to be a good return.
Is an apartment house worth it?
If you choose a property in a suitable location, it is. But there's no general answer to whether it makes sense for you as an individual. It depends on your situation. Have you already invested in real estate? What strategy are you pursuing? And have you already taken your first steps in asset accumulation and retirement planning?
There are excellent reasons to consider an apartment building as an investment. It's a prevalent choice for people who want to accumulate wealth via real estate investments. However, compared to a single apartment, the investment is somewhat higher. If you want to find out whether an investment in a multi-family house fits your situation, you can always have an obligation-free conversation with our experts.