Warren Buffett has always said that one of the most successful pathways to personal wealth and financial independence is investing in real estate. He is undeniably smart and financially savvy, so I tend to listen when he says something.
Foreclosure rates are steadily increasing, and one-time homeowners are turning back into renters. According to forecasts, the real estate market is due for a flood of new foreclosure properties MEANING renters. Industry estimates state that only 40% of foreclosed properties are listed on the market for sale.
What does that mean to you as an investor? O-p-p-o-r-t-u-n-i-t-y!
Monica Main from apartmentbuildingcashflow.com, who has made millions in real-estate and develops highly profitable real estate wealth building systems, sums it up nicely.
“Now is the BEST TIME to get started in real estate investing. All of the real estate multi-millionaires have gotten started in the “bad times” when they got DEALS GALORE. All of the real estate investors who lost their shirts got started in the “good times” when the prices were TOO HIGH!”
Matthew A. Martinez, author of several books including “Investing in Apartment Buildings: Create a Reliable Stream of Income and Build Long-Term Wealth,” is an accomplished real estate investor and principal of the Beacon Hill Property Group. After two years of investing, he was making more money from his rentals than his 9 to 5 job. His books are excellent resources for anyone wanting a more in-depth look at investing in apartment buildings.
I have had my real estate license for over seven years, and have worked with some of the most successful agents in my area. They personally invest in rental properties, and advise their clients and families to capitalize on the opportunities as well.
Because you’re dealing with short-term leases, you are able to keep up with inflation. As the market rises, you can raise your rents/income. Real estate values are going to increase over the long-term, so you will also have equity appreciation.
Interested? Let’s take a closer look!
Where to begin?!
As with any financial investment, there are certain steps you need to take to ensure your success.
- Find a qualified real estate agent
- Select a property with positive cash flow
- Do your homework
Get the right help
The first step in your search is finding a qualified commercial real estate broker. You want someone who knows local investors and laws, can read and interpret financial statements and determine return on investment, and can help you establish a fair price.
In your daily travel, you most likely see signs for commercial and multi-family properties. Notice the agent’s name. If she has several signs on well-kept buildings, it is an indication that she has garnered the respect of investors.
Call your board of realtors for a background check. This call will only take a few minutes, and can provide you with valuable information. You can find out if there have been any complaints or violations filed against the agent. You can also easily gauge whether or not the agent is respected by his/her peers by the response you get to your inquiry. Realtor boards are well-versed in handling these calls and hold all members to a strict code of ethics.
Talk to other investors. You can easily find property ownership information through the Assessor’s Office – most have searchable, online records. Ask them who they trust and work with. Most people are happy to share opinions if you ask.
Once you have an idea of the reputable agents, conduct some interviews. Make sure your values and style are in line with the agent’s. Trust your instinct – if something seems “off” find someone else to work with.
Congratulations! You have found your agent … now on to the fun part.
Finding the right building
The best case scenario is to find an apartment building that already has positive cash flow and seems physically sound. With so many properties going into foreclosure and interest rates incredibly low, now is the time to get a great deal. There is huge demand for rental housing now as well.
Once you and your agent identify potential buildings, take a look at the financials. The current owner or property manager will provide you with profit and loss statements for the past few years as well as current leases.
Identify the overall operating expenses and income. Ideally the income will cover the expenses (including maintenance) and management costs AND cash flow. One of the benefits of an apartment complex versus a single-family home is that you will have multiple streams of income.
Take your time and look at the available options. I live in a relatively small community – about 110,000 residents – and there are currently over 40 multi-family properties listed. With that kind of inventory, you are able to be selective.
Time to make the offer! Your agent will find comparable properties to help you arrive at a purchase price so you will go in armed with information.
Do your homework
You have found the agent and the property. You’ve made an offer … now the real work begins. In your offer, there should be a Feasibility Contingency (I would suggest no less than 30 days) so you have time to research the property.
I can’t stress enough the importance of due diligence. If you do your homework, there isn’t much that is unforeseeable. Knowledge is power.
- Physical inspection of the property
- Analyze the financial information
- Consult an attorney for landlord-tenant laws
- Research mortgage options for best rates and terms
- Determine if you will self-manage or use property management services
Physical inspection – Hire a professional inspector with commercial experience to conduct a thorough investigation of the building for any issues. An inspector that typically deals with single-family homes may not have the expertise needed for a multi-family property. Make sure the inspector is licensed, bonded, and certified. Check the ASHI website for recommended inspectors in your area.
The inspection will identify any deferred maintenance, plumbing/electrical problems, as well as any small items that should be addressed and corrected. He should cover the entire exterior and interior of the building including each apartment unit, and provide you with a written report of the findings.
Get cost estimates for any issues that come up in the inspection. You will be able to use these findings for negotiation. It is possible that the Seller will fix the problems (and provide you with the records) or lower the purchase price and have you correct the problems. Also if you find that the building is in bad condition overall, you have the ability to walk away from the deal and get your earnest money back.
Analyze financial records – The Seller should provide you with all financial records as well as lease agreements and rental history. If you aren’t comfortable reading profit and loss statements or legal documents, take them to a professional.
Most investors make purchase decisions based on the CAP Rate, which is the net operating income (income less expenses) divided by the purchase price. CAP Rates vary by location and property type. Your agent will tell you what a fair rate is in your area.
You also want to look at the leases and rental history. Does the building have high turnover and vacancy, or is it in high demand? Are there long-term tenants with a history of paying rent on time? When was the last time rents were increased?
Once all of the data checks out, you will be able to meet with mortgage lenders to determine the best loan for you.
Getting a loan – Commercial lenders look at the overall financial health of the property and the prospective borrower, YOU. They will also let you know what kind of cash flow you will need to cover the debt.
30% is a typical down payment for a commercial loan. Rates on investment properties are around 5.25%, which is higher than owner-occupied single-family, but still incredible. Shop around for rates and terms and make sure there is no prepayment penalty.
Self-management versus outsourcing – The easiest way to decide if you can handle the task of property management is to ask yourself this question … “What is my time worth?” Do you have the time to deal with tenant issues, or would it be better to have someone else handle them?
Here is a rule of thumb for property management:
- 20+ units should support a professional, live-in manager
- Between 10 – 20 is managed by an off-site professional manager
- 10 or less is best to manage yourself
If you hire a professional manager, you can expect to pay 8-10% of the rent as the management fee. A property manager will collect rents (and any late fees if needed), post notices of delinquencies and inspections, fill vacancies and execute leases, deal with any repairs, and generally handle any communication with tenants.
On the road to financial freedom!! Investing in an apartment building is a smart financial move as long as you minimize your risk upfront. You will benefit from multiple streams of income and own property that will build equity for the rest of your life.
By following some simple steps, you can invest with confidence. Surround yourself with the right people. Find the right property. Capitalize on the opportunity.
One of the best gifts we can give ourselves is freedom from financial burden. We all want to be independent and create wealth. We all want to make sound financial moves. You’ve got this – it’s your chance and you can make it happen!!!
If you are really serious in making some serious money with apartments, I strongly recommend you check out Monica Main’s real-state wealth building system at apartmentbuildingcashflow.com.
Monica’s system is designed around one objective – getting you from zero to a solid monthly cash flow (over $30k) the quickest and cheapest!