Investment Decisions: High Rise Or Garden Apartments

August 30, 2017

There are distinctions between garden and high-rise apartment buildings when viewed as investments.

Building-Land Ratio For Depreciation Purposes

While garden apartments have much more open space, the land is usually substantially less expensive than that in high-rise apartment projects. The result is a more favorable building-to-land-cost ratio for depreciation deductions (i.e., the land represents a smaller percentage of the total cost than in the case of a high-rise project). Since only the portion of total costs attributable to the building is depreciable (land, of course, is not depreciable for tax purposes), a garden apartment investor frequently can depreciate a larger percentage of his total costs than an investor in a high-rise project.

Elasticity Of Rent Structure

The rents charged for garden apartments tend to be quite elastic. Rent reductions are very likely to generate increased demand, while rent increases often cause tenants to search for alternative housing. On the other hand, rents charged in a high-rise building tend to be higher than in a garden apartment project and are less volatile. This reflects that fact that a high-rise development is more expensive to construct than a garden development, and the tenants tend to be more affluent than garden apartment tenants.

Consequently, high-rise tenants are less likely to be troubled by a rent increase or to be attracted by a rent concession or decrease. For this reason, rent reductions or concessions are not considered by many owners to be a good way to fill vacancies, while they are frequently quite successful in garden apartment projects. However, during periods when vacancy rates have been unusually high, inducements in the form of several months free rent or even a free trip to the Caribbean have often brought excellent results.