Why invest in an apartment building? There are a many advantages to investing in an apartment building over other types of real estate, as well as a few challenges.

Apartments are usually leased out on an annual basis. This creates two of the primary advantages in investing in an apartment building--flexibility and increasing value.

One of the most critical elements you need to address in your operation of an apartment building is tenant retention. People always need a place to live. Achieving a retention rate of 80% or more is important in the typical residential market. You should not be shy about increasing the rents at the end of every lease, nor so aggressive that you drive out more than one in five of the current tenants.

Tenant retention strategy includes a combination of public relations, fulfilling maintenance requests in a timely manner, and doing general upkeep on a regular basis. Everything you say and do that can impact the overall living environment and will either maintain or improve it for the current tenant. However, turning over too many apartments every year will have a negative impact on your cash flow, so walk the wire carefully on how high you increase the rents.

Conversely, achieving 100% retention is not necessarily always desirable. You are almost guaranteed that some of your apartments will go vacant every year as tenant requirements change and the rents rise, giving you the opportunity to increase the rents significantly without a concomitant increase in operating expenses. This can increase the value of the property, as well as increase your overall cash flow.

However, changes in the local economy can cause sudden dips in the income levels of potential tenants, making it more difficult to lease an apartment should it go vacant. While a difficult emotional decision, it is better to keep your cash flow steady versus declining, so you can forgo an occasional increase in rents if local conditions dictate this is prudent. Unless you have purchased a property in a questionable location or a locale with a dicey economy, seek to have steadily increasing rents.

Every year, you will need to create a budget for your income stream, which will require you to assess local market conditions. You may find a sudden surge in apartments being built to accommodate your target customers, and you can adjust accordingly. Usually, new construction in apartments is geared to the higher end of the market, and you may find your rents are out of synch with what is achievable, either too high or too low.

New apartments create occupancy stress on the market, especially if the number of new units far exceeds the near-term demand. However, new construction can be a positive if your tenant retention program is adequate and consistently applied. New construction has a lift effect on the rents in the marketplace for those properties that are well-maintained in a good location.

Another side effect of a good tenant retention program is that your current tenants know what they can expect from you, while a new landlord is an unknown, giving you brand loyalty. New tenants will take note if your property, while older, is well-maintained, and that you have a good relationship with the existing tenants.

Because of the annual increase in rents, the value of the real estate can rise annually. The gap between the value of the property and the debt (equity) subsequently rises annually, since the value of the property is based on the net income of the property. Depending on your personal investment strategy, you will be able to either ultimately retire the debt; or, you can refinance on occasion, taking out a portion of the equity, tax free. This freed equity can be used to finance your next apartment purchase, buy a home, or other property.

Investing in an apartment building can be either a hands-on investment, or an arms-length one, again, a flexible choice. There is probably a good property manager in your area who will maintain the property at the levels you dictate, and who has a handle of the local market. They will do the legwork necessary to keep tabs on the local market and rent the property at the highest achievable rents, since they are paid based on the income generated from the property. For a good form of Property Management Agreement with a property manager, go to www.LegalAgreements.com.

Well-maintained apartment buildings are a great long-term investment toward retirement. If you have not already hired a property manager, you can find a good one in your area when you are ready to kick back and enjoy the fruits of your labor.