Studio apartments have been on the rise in different cities in the world due to the increasing demand for them. They attract a growing number of tenants who want to live in a compact yet stylish rental unit in a convenient location at relatively cheaper rates. Before you make any investment decisions regarding studio apartments, it is important to understand the logic behind it.
Are studio apartments good investments? There are many advantages that come with the decision to invest in studio apartments, such as the potentially higher rental yield from studio apartments and the lower price range of these properties. There are some downsides as well, such as the lack of liquidity and the hardships that come with collecting rent from tenants, just like in any other apartment.
Studio apartments have become increasingly popular with renters for a variety of reasons. They include:
- They are preferred by young professionals, students, and anyone with a tight budget due to their more affordable prices compared to one bedroom and two bedroom apartments. As a result, you are able to save more money when you live in a studio.
- Studio apartments are often situated in central areas of major cities, allowing for urban living without paying too much rent.
- Studios apartments are more practical for students and young professionals who have no use for larger units. A small space is easier to clean, and it is harder to accumulate clutter due to the reduced size. You also won’t spend too much money on furniture when living in a studio apartment.
- If you want to rent an apartment for a short period of time, studio apartments are the way to go since you can find many of them that offer short-term leases.
Although there is demand for studio apartments, you should also take into consideration other factors to ensure that the investment is the right fit for you.
The studio apartment investment factors
1. The initial cost
Whether you are buying the property with a mortgage or paying cash, you need to ensure that you can afford the property. Come up with a realistic budget and ensure that you stick to it so as to make wise decisions.
2. The location
The area that the property you intend to purchase should be in demand and attractive to the target demographic. Tenants typically look to live in an apartment that allows them to easily access a wide range of amenities. Ideally, the property should be situated near shops, places of work, schools, restaurants and any other appealing amenities. Proximity to public transport systems is also very appealing, as well as the safety of the surrounding area.
3. The maintenance of the property
You’ll want to go for studio apartments that do not require a lot of maintenance and ongoing repair. Ensure that the flooring of the property is hard-wearing, and the roofs and foundations are in good repair. Inspect the conditions of the fittings with the property as well to make sure that they are not faulty. When the maintenance of the property is low, you are able to maximize the profits you gain from your investment.
4. The rental returns
When it comes to the decision of setting the rent, you will need to find a balance so that the rent is high enough to enable you to cover the mortgage payments for the property and any other costs that come with owning it, but it is also reasonable enough to attract tenants and edge out competitors. Therefore, it is important to carry out thorough research on other studio apartments around the area that have similar features so that you have an idea of the amount of rent to set.
If you are buying the property with intentions to sell in the future, then it is important to make purchases in lucrative neighborhoods and during the right stage of a real estate cycle. Opt to look for studio apartments in areas that will not lose their values in the long-term. This way, you will find a property that earns you profits when you sell it instead of losses.
6. Management of the property
As you mull over the decision of whether to invest in studio apartments or not, you will also need to take the issue of management of the property into consideration. Will you manage it by yourself or seek the help of a property management company? If you opt to go with the latter, you will have to foot any additional costs that come with hiring accompany, but at least you won’t have to deal directly with tenants, which saves you time in the long run.
Pros of investing in studio apartments
Whether you are planning to buy a studio apartment for your own use or with the intention to rent, there are many pros such as:
1. They are cheaper than one/two bedroom apartments
It is generally cheaper to invest in studio apartments as compared to one/two bedroom apartments due to their smaller size. They are therefore ideal for investors who have little capital and are seeking low-cost assets. Other than being cheaper to buy, studio apartments are also cheaper to design and furnish. You won’t have to spend too much money to make the apartment appealing to prospective tenants since there is not much square footage in the first place.
2. High rental returns
Another reason why studio apartments are appealing is the high rental returns. The higher rental yields can be attributed to the fact that they are cheaper to buy, yet they are in high demand. Consequently, you can take advantage of the need for studio apartments and charge higher rent per square foot. You will end up making more profits than you would have if you invested in apartments with more rooms.
On average, investing in studio apartments can result in a rental income of up to 1.5% higher than that of a larger apartment. With larger units such a one bedroom apartment, you will end up with rental yields of 3-4%, as compared to the 6% from studio apartments. Furthermore, studio apartments manage to hold their value for extended periods of time, as long as they are of high quality and in convenient locations.
3. Price appreciation
Studio apartments are valuable assets with the potential of steadily appreciating, which gives you the opportunity to make profits if you decide to sell your property. This is thanks to the increasing demand for such unit, which attracts investors in droves. This is especially true if the property is situated in a prime location and the local housing market is robust.
4. Ideal locations
Studio apartments are more likely to be situated within large urban cities than one bedroom or two bedroom apartments due to the limited space and the high number of people. Consequently, you have the opportunity to buy property in a prime location within the city center or in its surroundings at a reduced cost. Developers are increasingly integrating studio apartments in different cities due to the high demand, so you are highly likely to find a property that suits your needs in an ideal location.
5. Lower maintenance costs
Since studio apartments have less square footage, the cost of maintaining them is also lower as compared to bigger rental units. Other than saving you some money, the low cost of maintenance can also impact the value of the property. This basically means that a studio apartment is more likely to be snapped up quickly when put on the market than a one bedroom apartment since there is less work to be done in terms of maintenance. However, keep in mind that the quality of the property greatly affects the cost of maintenance, so you are better off going for high-quality studio apartments.
6. High demand
Studio apartments are popular among tenants due to their relatively cheaper rents, often convenient location, and the practical living that the offer. Consequently, this eliminates the risks and losses that come with vacant units for you as the investor. Therefore, as long as you identify your target demographic and you have an edge over any surrounding competitors, you can count on a steady stream of applications from tenants who want to occupy your unit(s)
Cons of investing in studio apartments
There are some downsides to investing in studio apartments as well. They include:
1. Studio apartments are non-liquid assets
Just like any other real estate property, studio apartments lack liquidity. Liquidity simply means something that you can sell easily whenever you need money. Examples of liquid investments include stocks, mutual funds, and bonds. This is one of the biggest drawbacks of investing in real estate properties, and it is even more magnified when it comes to investing in apartments since it means that you may not be able to access the profits made from selling the property for a prolonged period of time.
The process of selling a studio apartment may take a long time since you need to find an investor first before you can negotiate and agree on a price. If you are in a rush to sell, you may end up selling your property for a lower price than its current value in the market, or you might even make a significant loss.
2. Dealing with tenants takes up a lot of your time
When you opt to rent out your property, you will have to deal with unpredictable tenants who may give you a difficult time when it comes to taking care of their responsibilities. Even after carefully screening prospective tenants, you may still encounter difficulties. A tenant may be constantly late when it comes to paying rent, or they may refuse to pay rent altogether. This automatically interferes with your source of income, potentially affecting your mortgage payments.
Furthermore, the responsibility of maintaining the condition of the apartment falls mostly on your shoulders. This means you have to be on call in order to fix any major issues that may arise in the apartment.
Even if you seek the help of a property management company, you still have to factor in the payments to be made for their services.
3. The risk associated with an investment property
When you opt to invest in real estate properties such as studio apartments rather than owner-occupied properties, you usually have to pay larger down payments and high-interest rates. This is a considerable risk, especially since the monthly rent that you charge occupants of your units is not guaranteed. Furthermore, you will need to keep the apartment in good condition, which means spending money you may not have on maintenance costs. Consequently, it may take a while before you start seeing the profits from your investment.
4. High prices
If you are planning to invest in a studio apartment as a startup, it may feel like a ridiculously expensive risk due to the small size. The increasing demand for studio apartments in major urban cities does not automatically mean higher capital growth. In fact, the capital growth for studio apartments is generally slower than that of other properties, which means that it will take time for you to see the returns from your investment.
5. Eviction of tenants
The laws of eviction generally vary from one state to another, which makes the whole process tricky and stressful. When you have issues with a tenant and it becomes necessary for you to evict them, it might end up costing you valuable time and money. This is especially true when there are mistakes on your part regarding the process of eviction, resulting in long delays. Even when you take the issue to court and the judge rules in your favor, the tenant may end up being judgment-proof, meaning that you won’t be able to recover the money that is owed.
- Should I pay cash for a rental property? It might be easier to buy an investment property with a mortgage than paying fully in cash especially if you don’t have enough in cash to pay for it. There are other benefits of buying with a mortgage as well, such as the potential for higher returns and better cash flow.
- Are studio apartments cheaper than one bedroom? Studio apartments are generally cheaper than one bedroom apartments. However, in some cases, the differences in rent paid per month may not be that significant.