Investing in studio apartments for rent is considered one of the best real estate investment strategies and an alternative to conventional real estate investing.
Real estate market analysis shows that the trend of investing in studio apartments for rent has been on the rise for the past years and is gaining more popularity among real estate investors. But what makes studio apartments appealing to real estate investors? And what drives tenants to live in a studio apartment? In this blog, we will answer these questions and show you whether or not investing in studio apartments for rent is a good idea to make money in real estate.
Related: What Does It Take to Have a Profitable Studio Apartment for Rent?
What is a studio apartment and why is it in such high demand?
A studio apartment is a small sized apartment that combines a living room, a kitchen, and a bedroom into one single room. With a size around 400-500 square feet, a studio apartment offers affordable, modern, and stylish housing to tenants looking for this combination. Moreover, young people who want to live closer to city centers find it more convenient to compromise space over location.
Studio apartments are included in almost every real estate development because they are the first to sell or rent, generating instant income for the developers. That’s why real estate developers make sure to include studio apartments in any residential real estate project.
The high demand for studio apartments for rent can be explained for the following 3 reasons:
- Competitive location: Studio apartments offer the chance to live closer to the centers of urban areas while paying less rent compared to other small-sized apartments. Students and young professionals want to be located as close as possible to urban centers, and studio apartments offer that!
- Lower costs: Living in a studio apartment lowers the operating cost for the tenant. Think about it like this: in a smaller place you will need less energy for heating, cooling, and electrical consumption in general. In addition, you would spend less time cleaning and maintaining the living space, which is what students and young professionals look for.
- Short term rentals: Tourists and visitors often look for locations that are affordable and close to the center. Online booking platforms like Airbnb show that studio apartments for rent are more favored by short-term tenants as they provide such features for a lower price compared to one-bedroom or two-bedroom apartments in the same area.
How do studio apartments generate profit?
Residential real estate properties can generate profit in two ways: rental income and capital growth. The former is the monthly amount a landlord can receive in exchange for renting out the property for a tenant, while the latter is how much the property’s price increases (or decreases) overtime, also called property value appreciation. Studio apartments for rent in strong and stable markets have a positive capital growth and an increase in rental values overtime, which makes them very attractive to real estate investors looking for investments with excellent returns.
Related: Investing in Studio Apartments: The Pros and the Cons
Should you be investing in studio apartments for rent?
In case you haven’t picked that up yet, the answer is YES!
Why?
1- Investing in studio apartments is affordable.
Investing in studio apartments for rent is a perfect option for real estate investors looking for relatively cheaper investments that can guarantee high returns. Studio apartments are more affordable than other units in a building project, which makes them ideal for real estate investors who do not want to pay for higher mortgages with higher interest rates.
2- Investing in studio apartments offers higher rental yields.
Investing in studio apartments for rent generates high rental yield, which is the rate of income return over the cost of buying the investment property (mortgage and financing). Because studio apartments have low prices, their rental yields are higher than those of one-bedroom or two-bedroom apartments. High demand for studio apartments for rent means that landlords can charge higher rent per square foot resulting in higher rental yields.
3- Investing in studio apartments generates higher gross potential income (GPI).
Gross potential income is the maximum rental income that can be collected assuming that the rental property is rented all year long. The high demand for studio apartments for rent is good news for real estate investors! It means that you can rent out your rental property without having to worry about vacancy costs.
4- Investing in studio apartments has low maintenance costs.
In correlation to their small size, studio apartments require significantly less maintenance than bigger rental properties, and they are cheaper and easier to furnish.
5- Investing in studio apartments offer value appreciation.
In a strong local housing market, value appreciation or capital growth of real estate property is bound to happen, especially with studio apartments because of their location and high demand. Therefore, studio apartments for rent are valuable assets in case real estate investors decide to sell.
LOCATION LOCATION LOCATION
The most important factor to consider when investing in a studio apartment for rent is location. If you want to invest in a studio apartment to rent out for students, then a studio near educational hubs and other amenities is a key to ensure high demand, and therefore better return on investment. On the other hand, if your real estate investment targets young professionals, then a location near the business center or city center will guarantee a steady flow of tenants.
In a nutshell, opt for a real estate investment in an area which has good connectivity and is easily accessible to important hubs.
Related: Why and Where to Invest in Studio Apartments
The bottom line
Studio apartments are affordable, low-maintenance, and high-yielding real estate investments that can be a good source of rental income for an investor. As a real estate investor, you should take advantage of the high demand for studio apartments in the housing market and find your next investment opportunity.
Use Mashvisor’s investment property calculator to find studio apartment properties.