Investing In Apartments: Pros and Cons (2026)

Investing in residential real estate, particularly apartments can be a strategic move for those looking to build a stable and profitable portfolio. However, it’s important to understand the pros and cons of investing in apartments since there are many other options to consider. Dr. Roger D. Silk and Katherine A. Silk, in their book “The Investor’s Dilemma Decoded,” explain why apartments often present a lower economic risk compared to other types of real estate like commercial or industrial properties. This excerpt explores the durability, consistent demand, and income-generating potential of apartment investments, making a strong case for their inclusion in investment strategies.

We view residential real estate as generally the most attractive type of investment real estate for passive portfolios primarily because we believe that there is less long-term economic risk for apartments than for commercial, industrial, retail, or specialized property.

Although apartments can and do age, wear out, or become obsolete, they seem to do so at a slower rate than most other types of property. Many people have no problem living in a building that is quite old, even more than 100 years in many places. But there are few if any industrial facilities that old that have not been mostly or completely rebuilt. Similarly, the trends and fashions in retail – away from downtowns, then to malls, then to big-box stores and category killers, and now to internet and delivery-based retail – make it harder to predict the future value of retail real estate.

We believe apartments are generally better investments than houses because houses usually command a premium (that is, sell at lower cap rates) to apartments. Also, because apartments are easier to invest in (via REITs), we believe apartments are arguably the best candidate for including real estate in an investment portfolio.

Apartments are a business in which a large amount of fixed capital is invested to provide a largely fixed stream of services. That is, a building is built with a certain number of rental units. To a first approximation, that number of rental units is fixed. You can’t move it. You can’t unbuild it (in any economical manner). And you can’t usually expand it.

To a first approximation, apartments are a commodity, and it is hard or impossible to earn profits above the market rate. Bad management can drive away customers, drive costs up, keep revenues down, or any combination. Good management, again to a first approximation, can earn the market rate of rent.

Apartments are, then, somewhat comparable to farmland as a generator of rental income. They are a long-duration asset that we expect would, as a result, be quite sensitive to interest rates.

Rents, when aggregated at the national level, have tended to rise at almost the rate of inflation over the long term. That is, since 1933 (the last year of the gold standard), rents have risen at a compound annual growth rate of about 3.2% versus the CPI of all items increase of 3.5% over the same period.

If we assume that rents will continue to keep up with inflation, then, everything else equal, it is reasonable to assume that the real cash flows from apartments will keep up with inflation. While individual properties and markets will almost certainly do better and worse, there is no obvious reason to think that the overall future of rents will diverge significantly from inflation.

Economic theory provides a convenient, simple (and probably correct) argument for why rents should roughly follow inflation. The argument is that housing is basically a commodity, and it is a commodity that has a fairly elastic supply in the long run, and fairly inelastic demand in the long run.

On the supply side, houses (and apartments) are basically just a bit of land, some wood, some concrete, some metal, some plastic, some labor, building materials, and other expenses. In the United States, in many areas, there is plenty of additional land, and where land is not available (e.g. Manhattan Island), it is usually possible to build vertically. So broadly speaking, in most places there are no physical constraints to building more housing units.

In most places where there are tightly binding constraints, (e.g. Silicon Valley in California) the most binding constraints are political. Other than local political limits, which restrict building in some places, there is no practical limit to the number of apartment units that can be built over time. So supply, unless restricted by politics, grows as demand grows, keeping prices (rents) from increasing much beyond the cost of new construction.

On the demand side, long-run demand for housing is mostly a function of population. Barring some kind of demographic disaster (e.g. a plague, or giant natural disaster such as eruption of the Yellowstone volcano or large meteor strike, or war or civil insurrection), the US population is likely to keep growing. The US Census Bureau predicts that over the next roughly half century, the US population will grow at about 0.6% per year. But, you should take that projection with a large dose of salt. Demography is not an exact science. During the twentieth century, the World Bank and the United Nations made a series of predictions about country populations for the year 2000. Not surprisingly, the earlier the predictions were, the greater their ultimate error proved to be. From 1972 to 1994, both organizations consistently reduced their estimates, but they all turned out to be high.

Logic and historical studies suggest that population must, over the long run, drive demand for housing. Droes and van de Minne looked at about 200 years of data for housing in Amsterdam and found, not surprisingly, that population was the major demand variable over the period. Over shorter periods, income and interest rates are also important factors driving demand for housing.

It seems likely that the US population will continue to grow, possibly at a declining rate of increase, resulting in a slow but positive long-run increase in demand for housing. And it seems likely, based on theory and experience, that the supply for housing will be very elastic over the long run. That is to say, it seems likely that the increasing demand for housing as a result of population growth over the long run is not likely to drive up prices very much. Over shorter periods, which might still be a generation or so, other factors including income and interest rates may well have large influence on demand and therefore on prices.

This analysis of long-run supply and demand is consistent with there being relatively little real (i.e. after inflation) capital gain return to housing, including apartments, over the long run. If so, then the long-run returns to apartments must be mostly from current cash flows, with price rises reflecting mainly inflation.

And if we are right that the returns from apartments must, over the long run, come from the rental cash flows, the long-run return from apartments, as is also the case from businesses, must be mainly a function of the rate of such cash flows.

Dr. Roger D. Silk and Katherine A. Silk make a good case for investing in apartments in their book The Investor’s Dilemma Decoded. Investing in apartments offers multiple advantages, such as a lower long-term economic risk compared to other types of real estate and a slower rate of obsolescence. Apartments typically provide stable and predictable rental income, with historical rent increases aligning with inflation, making them a reliable inflation hedge. Additionally, they offer better investment accessibility through Real Estate Investment Trusts (REITs), allowing for easier portfolio inclusion and diversification.

However, there are disadvantages to consider. The initial capital investment required is typically high, and profitability may be limited by market rate constraints. Additionally, apartment investments are vulnerable to fluctuations in interest rates and heavily dependent on effective property management. Political constraints in certain regions can also limit the growth of housing supply, further impacting potential returns. Despite these challenges, apartments can still be a worthwhile investment for those who manage these risks effectively.