This report evaluates ownership of a small apartment building as an investment plan for the small investor. Apartment ownership is an investment which offers a number of important advantages to the small to moderate investor, but which also carries with it a number of disadvantages. The prospective investor can directly inspect an apartment building, as he or she generally cannot do with the underlying assets of financial investment instruments such stocks or bonds. The investor in a small apartment complex can directly manage the operation of the investment, if so desired, without the level of time commitment that would be required to own and operate a small business of comparable income potential; alternatively, the investor can entrust actual management of the complex to a professional property management firm. Through most of the 1970s and 1980s, real estate in general was an excellent investment. However, investment in a small apartment complex (or, indeed, any real estate) has its countervailing disadvantages. Even a quite small apartment building (for example, a four plex) represents a major investment commitment for the typical small investor: the down payment will probably run tens of thousands of dollars, and the potential risk cannot be spread out in a portfolio, as the financial investor can do. Real estate investment involves ongoing expenses (interest, taxes, operating costs) whether or not the investment proves to be a profitable one. Insufficient cash flow can lead to disaster. Direct management of the complex entails management responsibilities. Finally, the prospects for the real estate market in most of the United States do not look as good in the early 1990s as they have proven to be the recent past. When all major factors are considered, it will be found that small apartment ownership, while excellent for some investors, is not an ideal investment for the typical small to moderate investor today.
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