Multifamily Properties: The Ideal Investment
There are many investments out there that can create wealth and security. People invest in stocks, bonds, and single-family homes, but multifamily properties are the ideal investment. Other investments have some of the following attributes, but only
multifamily properties have all five.
I-Income-Multifamily properties produce income. Unless you receive dividends, most stocks don’t give you income, and although single-family rentals might bring a little cash flow, the income is usually not substantial unless you’ve held the property for many years. Receiving regular income from your investment frees you up to do other things.
D-Depreciation-Although multifamily properties increase in value over time, for tax purposes they depreciate. The tax benefits of depreciation are substantial, and many investment vehicles lack this significant attribute. Stocks and bonds bring zero depreciation. You can use depreciation when flipping single-family homes, but because the transaction is temporary, the tax benefits will not be as great.
E-Equity-The property will increase in its equity value every month just from paying the mortgage. The rent your tenants pay you goes toward the mortgage every month, so your equity increases as others pay your mortgage. Real estate investments have the advantage over stock-related investments when it comes to equity.
A-Appreciation-Over time, real estate investments appreciate, meaning they are worth more now than they were in previous years. The land beneath your property becomes more valuable over time as the city around it grows. In addition, you can increase appreciation by raising rents and cutting costs. Single-family homes appreciate as well as multifamily properties, but the scale is larger with multifamily properties, and there is more room with multifamily properties to raise rents and cut costs.
L-Leverage-Multifamily properties can be bought without any of your own money. When you sell a property, the equity you’ve gained in it can be applied five-fold to purchase a bigger, more expensive property. Generally, you need 20% down on properties, so $100,000 in equity on one property means you can leverage that equity to acquire a $500,000 property. Every time you sell a property your leverage becomes greater.
As you can see, multifamily real estate is the IDEAL investment vehicle, offering the best odds in income, depreciation benefits, equity, appreciation, and leverage into bigger and better avenues.
Four Components to Creating Wealth through Real Estate
If you want to create massive wealth through real estate, there are four components you need to focus on. Each component is important, and becoming an expert in even one of the components can help you make some good money. But if you want to be truly
successful, make sure you gain skill in all four areas: Specialized Knowledge, Marketing, Systems, and Mindset.
Specialized knowledge
This is the nuts and bolts of your business, the techniques you’ll learn to help you find properties, acquire them, analyze them, and operate them. Your specialized knowledge will include financing options, legal contracts, and market savvy. This knowledge sets you apart from those who haven’t taken the time or found the resources to learn the specifics of the real estate business.
Without marketing, acquiring a property would be both difficult and foolish. You’ve got to be able to find good deals, private money, and tenants. Without marketing, you don’t have a business; you have a hobby. Remember, if this business is going to work for you-and that’s the goal-you’ve got to reach out and market.
When you’re just starting out with a fledgling business, you’ll probably be doing everything yourself, but ultimately you’ll want other people running things for you. You need documented systems in place to get things done, things like advertising, accounting, and maintenance.
None of this can come to fruition without action, and action is a result of your mindset. We all inherit scripts from our parents and environment about what our potential can be. We may have deeply embedded habits that keep us from our goals. But it’s possible and imperative that we get over those roadblocks so we can take action. The strength of your business is a function of the strength of your mindset.It looks simple because it is. The key is to become expert in all four components.If you master specialized knowledge, systems and mindset but leave out marketing, you’ll be at a disadvantage. Likewise, if you are strong in the first three areas but have a negative mindset you’ll limit your success and your wealth. Become well rounded in these four areas and you’re sure to succeed.
Creating Value in Apartment Buildings
The way to create value in apartment buildings is to increase the NOI.
The NOI is the Net Operating Income. Very simply, you calculate the NOI by subtracting your expenses from your revenue, on an annual basis.
Your expenses include everything for running the property but do not include the mortgage payment, which is otherwise known as your debt service. The expenses you need to include in your calculation are property management, taxes, property insurance, maintenance and repairs, and utilities.
Revenue includes rents and any other income you have in the property like vending machines, laundry room, and late fees.
So how can you increase your NOI? There are several ways to do it. Here are a few:
If you raise the rent $10 per door, you have increased your revenue.
Depending on how many units you have, a $10 increase could be significant. In a 10-unit building, your revenue has increased $100 per month. In a 100-unit building, your revenue has increased $1,000 per month.
Not only do your increase your NOI, but you also increase your equity. This increase in NOI will have an effect when you refinance with the bank.
Add amenities.
You can increase your revenue by adding amenities such as a Laundromat. Not only will you get revenue from the Laundromat itself, but you’ll also increase the value of the apartment complex, and in doing so, you can raise rents because you have provided convenience for the residents.
Add covered parking for an added fee
Some people will pay extra for covered parking. It’s a one-time cost for you, but the monthly fees you’ll accrue increase your revenue and therefore increase your NOI.
This is another example of how you can add value by providing convenience to your tenants. Instead of having to drive to a storage unit, they can use one of yo urs onsite. You have again added value, and your NOI increases.
The following amenities could be added to your apartment building: exercise room, pay phone, vending machines, security gates, clubhouse rental, a daycare center, trash pickup at doors, house cleaning, Internet access, phone service, cable or satellite service.
Each of these ideas will add value to your apartment building and increase your Net Operating Income. Therefore, your equity will increase, and you’ll be better able to leverage your asset into bigger and better investments.
Cap Rate Basics
When analyzing a multifamily deal, it’s important to understand the term Cap Rate and how it can help you quickly and easily make decisions about a property. Cap Rate is short for “capitalization rate.” The Cap rate is the return on investment on a percentage basis if you paid all cash for a property. Use this calculation to determine cap rate: Cap Rate (%) = NOI (*100%) / Price. For example, let’s say you have an apartment building with a net operating income of $100,000 per year and you paid $1,000,000 for the property. The Cap Rate on your property is 10% because you are getting a 10% return on your $1,000,000.
The Cap Rate is useful for measuring the performance of different properties. Regardless of the size, price, or other variables of a property, the Cap Rate is a common denominator for evaluating properties. Cap Rate is a widely used term. Across the country, you can talk with commercial brokers and investors about
Cap Rates. However, using the Cap Rate is only pertinent when evaluating properties with five or more units. Fourplexes and smaller properties do not follow the Cap Rate formula as much.
Once you have determined the Cap Rate on the apartment buildings you are evaluating, you can determine which properties are worth further investigation. Different investors will have different thresholds of risk, but a good rule of thumb is to look for properties with Cap Rates of 10% or higher. Of course, the current Cap Rate on a property may change if, through better management, the occupancy goes up or costs go down. This is something to take into consideration in evaluating Cap Rates.
For example, if you find a multifamily property that has a current Cap Rate of 9%, but through further investigation you realize that through better management or more active leasing you could drive the Cap Rate up to 12% fairly easily, then you can rationalize not needing the 10% Cap Rate before the deal is finalized. If the apartment doesn’t have a 10% Cap Rate today but could have a 12% Cap Rate tomorrow, it may be a deal you don’t want to pass up.
As mentioned earlier, Cap Rate is a term that most investors and brokers are familiar with, so become a Cap Rate expert yourself. Learn to calculate the Cap Rate on a property, and you will save yourself precious time in analyzing and evaluating properties during your search for a multifamily property.
Investors expect a larger return when investing in high risk income properties. Lance Edwards is living proof of his mantra that you don’t have to “graduate” from single family to multifamily – you can start with multifamily. Utilizing his strategy of evaluating the Cap rate, Lance purchased his first deal (a four-plex apartment) in March, 2003 – nothing down. Over the next 2 years, he went on to purchase 50 units nothing-down on a part-time basis, while working his full-time corporate job. In July, 2005, Lance retired from his 20 year corporate career to start a full-time real estate business that acquires multifamily properties. And he now teaches others how to create faster financial freedom with apartments using none of their own money. Last year, he purchased 10 unit and 50 unit apartment buildings – all nothing down. Just recently, he closed a 56 unit property – again using none of his own money. For more information http://www.apartmentwealthmachine.com
Multifamily real estate investors can create massive wealth over a period of years by following market cycles. Market cycles are largely influenced by jobs. When a large company grows and hires new workers, the demand for housing in the area increases and property values and rents rise. Conversely, when a large company lays off workers, demand for housing decreases, prices in the area drop, and vacancies rise. Keeping tabs on market cycles can be a simple way for real estate investors to make great gains.
By keeping an eye on business news and following Fortune 500 companies, investors can find out which housing markets are best to invest in, where the good deals are, and where higher rents can be supported by high demand. Other factors besides job growth affect market cycles as well. A current factor in market cycles is the sub-prime lending bust. Although the sub-prime mortgage difficulties have negatively affected property values for single-family homes and condos, owners of apartment complexes are seeing increased demand for their units as foreclosures mount and homeowners must find new places to live. Wise real estate investors see market cycles as
opportunities to leverage their current assets into new ventures.
For example, let’s say an investor owns a multifamily property in a city where a Fortune 500 company opens a new office. The new office brings 1,000 jobs to the area, and soon there is a housing shortage. By increasing rents and cutting expenses, the investor is able to increase the value of the property by half a million dollars. The appreciation of the land and property increases the value by another half million dollars. The investor takes that million dollars out of the property and puts it into a new property worth $5 million. In this way he has leveraged his property during a fortuitous point in the market cycle into a larger property.
Following market cycles, an investor can continue leveraging over and over again, acquiring bigger and bigger properties. Even if the investor only makes 20-40% on each deal, over time, the increased property values amass significant wealth. In this way, following market cycles can cut down on risk and increase profits.
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