When you sit down and examine the advantage of owning multifamily properties, you will be amazed at the multitude of benefits. While other avenues of income generation offer some attractive incentives, owning multifamily properties brings many great things to the table. Let us explore these advantages:
1. You can outsource your property management to professionals. You don’t have to be bothered by tenants and toilets. Even if you have smaller properties, you can hire property managers. Leave the headaches to them and go on vacation! The property doesn’t own you; you own the property.
2. You can buy with NONE of your own cash. You can raise private money to cover any cash requirements. You will find that it’s easier to get financing on apartments and that the MORE you borrow the LESS they look at the borrower’s credit. In some instances, they don’t even look at the borrower’s credit but at the borrower’s assets instead.
3. Apartments are made to cash flow even with nothing down. This means that instead of there being one house with one roof generating only one source of income, you have one roof with possibly multiple apartments under it creating multiple income streams. You have economy to scale. Apartments are designed to be income-producing properties.
4. Better leverage of your time and effort. Think about it. What would you rather do? Look for ten houses or a ten-unit apartment building? On the flip side, wouldn’t you rather sell a ten-unit apartment than sell ten houses? Of course! You have more leverage of your time.
5. The value of income properties is based on income. This is a function of Net Operating Income (NOI) and you can create value by raising the rents and cutting the expenses. This is a very predictable process. You can determine how much the property is worth based on how much you raise the rents.
6. Less competition. There are less people out doing multifamily deals than single family deals because they lack mindset and they lack specialized knowledge. They have limited themselves by the mindset that says they must graduate from single-family homes to multifamily properties.
7. There is less risk. With multiple tenants you have multiple revenue streams. If you lose one client, it’s not the end of your business. On the other hand, if you are relying on a house as your sole source of income and you lose that tenant, you are still pouring money into that house. There is mitigated risk through apartments.
8. Non-recourse financing. The more money you borrow, the easier it is to borrow. When you get to loans of two million dollars and above, it becomes non-recourse financing which means the asset is the sole security for the loan. No one is personally guaranteeing the loan.
9. Condo conversion. This has been very big in some parts of the country such as Denver and Tampa. As an example, you would take a fiveplex, convert it into condos, and then sell the individual units. It is a different strategy because you’re putting all your cash forward and then pulling out. It’s not a long-term hold strategy.
10. The sub prime lender bust. With sub prime mortgage lenders falling out of the market, there are people cannot qualify for home loans. These people have to live somewhere so the demand for rentals is skyrocketing.
As you can see, the advantages to owning multifamily properties are solid and sound. With so many venues to consider when trying to find something to generate passive income for yourself, you just can’t overlook the tremendous value created by multifamily properties.
Everyone is feeling the economic woes. We are bombarded everyday by bad news in the market.
Investments in multifamily housing, however, provide a bright spot amidst all of the dim prospects that are out there.
Hear one student’s amazement at this reality:
“I was pretty amazed that in a falling market, when cap rates are falling, that the values of these are going up. That’s, that’s, that’s…shocking.”
What do you do if the bank won’t allow you a second mortgage?
Listen to what Jennifer, a student of Lance’s, has to say:
“I liked the concept where if the bank is not going to allow the second mortgage, then you use your stock in your LLC as collateral. That was a nice tool.”
On the importance of knowing the ratios of expenses to income:
Quote from Lance Edwards’ Multi-Family Success LIVE Student:
“It makes you much more aware when you try to communicate with the brokers. At least you’re on the top of your game.“
Quote from Lance Edwards’ Multifamily Success LIVE Student Jim Craig:
“The closer I get to a solid deal the more money that seems to appear from odd places. People are willing to give you a million dollars, two million dollars. So it takes the fear away.”
Quote from Lance Edwards’ Multifamily Success LIVE student:
“If you don’t have the credit find somebody who does. If you don’t have the money find somebody who does. If you don’t have the experience…. network yourself into somebody who has. That is the key so there are No Limitations.”
While income producing properties are one of the ideal vehicles for creating wealth, there is yet another principle out there called “leverage and velocity”. Let’s take a closer look at this principle.
The effect of compounding and leverage:
Let’s say we have $20,000 to invest. I put it into some vehicle that pays 10% interest compounded. After 7 years, that $20,000, just through compounding at 10% is $39,000. It’s almost a 2 to 1 return which isn’t too shabby. Many people would be satisfied with this passive income. Let’s take a look at what happens with leverage.
Let’s take that same $20,000 and buy a house with 10% down and buy a $200,000 house with zero cash flow and just enough rent to pay the debt and expenses. It has 5% appreciation. After the same 7 years that 5% appreciation is on the $200,000 so it’s about $10,000 per year and through the compounding, the value of the house is $281,000 and your equity is now worth $101,000 because of the equity. That is a 5 to 1 return on your money through compounding and leverage. That’s a whole lot better!
Effect of Velocity:
Let’s continue with that same $200,000 house with 10% down and 5% appreciation per year. After 2 years, the house has appreciated about $20,000. You can then take that $20,000 after two years and buy another house. You can then refinance this house, pull out the $20,000 and buy another house.
After 2 years, you now have two houses. If you do this every two years then after four years you have 4 houses and continuing that line of thought you would have 8 houses in 7 years. The value of those eight houses is $2.1 million and the equity is $270,000.
That’s a 13 to 1 return through leverage and velocity. Velocity is moving the appreciation every two years. You are going from one house to eight houses and $20,000 to $270,000 in equity from all of the houses. All of the houses combined are giving you more buying power every 2 years.
Think about it. If $20,000 became $270,000 in 7 years through leverage and velocity, then you could take $200,000 and do the same thing and create $2.7 million in seven years. You are just adding a zero to the deal.
Take this same principle and apply it to bigger deals. Buy an apartment. You are moving that much faster and your wealth creation is that much quicker.
Don’t limit yourself and your vision to one kind of deal. Keep your eyes open for opportunities that are ripe for the picking. The ability to create passive income comes in many forms.
When you sit down and examine the advantage of owning multifamily properties, you will be amazed at the multitude of benefits. While other avenues of income generation offer some attractive incentives, owning multifamily properties brings many great things to the table. Let’s explore these advantages:
1. You can outsource your property management to professionals. You don’t have to be bothered by tenants and toilets. Even if you have smaller properties, you can hire property managers. Leave the headaches to them and go on vacation! The property doesn’t own you; you own the property.
2. You can buy with NONE of your own cash. You can raise private money to cover any cash requirements. You will find that it’s easier to get financing on apartments and that the MORE you borrow the LESS they look at the borrower’s credit. In some instances, they don’t even look at the borrower’s credit but at the borrower’s assets instead.
3. Apartments are made to cash flow even with nothing down. This means that instead of there being one house with one roof generating only one source of income, you have one roof with possibly multiple apartments under it creating multiple income streams. You have economy to scale. Apartments are designed to be income-producing properties.
4. Better leverage of your time and effort. Think about it. What would you rather do? Look for ten houses or a ten-unit apartment building? On the flip side, wouldn’t you rather sell a ten-unit apartment than sell ten houses? Of course! You have more leverage of your time.
5. The value of income properties is based on income. This is a function of Net Operating Income (NOI) and you can create value by raising the rents and cutting the expenses. This is a very predictable process. You can determine how much the property is worth based on how much you raise the rents.
6. Less competition. There are less people out doing multifamily deals than single family deals because they lack mindset and they lack specialized knowledge. They have limited themselves by the mindset that says they must graduate from single-family homes to multifamily properties.
7. There is less risk. With multiple tenants you have multiple revenue streams. If you lose one client, it’s not the end of your business. On the other hand, if you are relying on a house as your sole source of income and you lose that tenant, you are still pouring money into that house. There is mitigated risk through apartments.
8. Non-recourse financing. The more money you borrow, the easier it is to borrow. When you get to loans of two million dollars and above, it becomes non-recourse financing which means the asset is the sole security for the loan. No one is personally guaranteeing the loan.
9. Condo conversion. This has been very big in some parts of the country such as Denver and Tampa. As an example, you would take a fiveplex, convert it into condos, and then sell the individual units. It’s a different strategy because you’re putting all your cash forward and then pulling out. It’s not a long-term hold strategy.
10. The sub prime lender bust. With sub prime mortgage lenders falling out of the market, there are people cannot qualify for home loans. These people have to live somewhere so the demand for rentals is skyrocketing.
As you can see, the advantages to owning multifamily properties are solid and sound. With so many venues to consider when trying to find something to generate passive income for yourself, you just can’t overlook the tremendous value created by buying multifamily properties.
One of the many advantages of investing in multifamily properties over single-family properties is that you can be more hands-off in your investment. Instead of being at the beck and call of a tenant of a single-family property, you can sit back and let someone else take care of the little crises in multifamily.
Many people who consider investing in multifamily properties worry about property management. They fear that they’ll be tied down to the property, always on call to fix toilets or drains. They worry that they’ll never be able to go on vacation or focus on other things besides the property. But property management doesn’t have to consume your time and energy. You can hire professionals to manage your property for you, even for a smaller property like a four-plex.
For smaller properties, you’ll want to find a property manager; for larger properties, like large apartment complexes, you’ll need an onsite manager, someone who is available to the tenants on a daily basis. Property management should be seen as simply a business expense, and will be if you have the mindset that the property works for you; you don’t work for the property.
A successful entrepreneur needs to have systems in place to take care of the business and make it run smoothly. Property management is one of the systems a multifamily investor needs. When you’re just starting out, you may want to take care of property management yourself, and this has its benefits as well. For example, you will understand the ins and outs of property management having done it yourself, and when you later hire someone to do this work for you, you will be perfectly able to train, inform, and give specific instructions to the person who takes over this part of your business. Outsourcing property management gives you time to do other things, whether you want to grow the business, further educate yourself, or go on vacation.
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