There are many ways to invest in Real Estate so why invest in apartments? What is so great about them in comparison to fix and flip, lease options, and all the other residential investing strategies?
There are 7 key reasons why you should invest in apartments:
- Reduce risk
The first investment property that I bought was a single family house. The first time it went vacant, I had a big burden to pay the mortgage payment on my own. In contrast, I also owned a duplex at the same time and it was not as big of a burden when one of the units went vacant. I still had the other tenant paying me while I was making repairs and marketing for a renter. Now, when my Dad had a unit go vacant at his 126-unit apartment complex, it barely dented their cash flow. In fact, they anticipated a certain amount of vacancies every month and were pro-active in filling them up. He never had to risk his personal financial well-being because he always had a majority of the tenants paying his mortgage payment.
- Principal reduction
In the same way, while units are full and the mortgage payment is being made every month, the tenants are paying down the debt that you owe the bank little by little. The same is true in residential investing, however when your mortgage payment is $10,000 per month instead of $1,000 per month, you are reducing the principal by 10 times as much. When it is time to sell or refinance, you can put that money directly into your pocket.
In commercial Real Estate there are 2 ways to benefit from appreciation: 1. Natural Appreciation – Increase in value over time because of outside economic factors. 2. Forced Appreciation – The increase in value because of internal economic factors. Basically, what I am saying is that the first one is what most people talk about (Real Estate goes up through time) and the second one is where an investor makes an improvement to the property and forces the value to go up because a buyer is now willing to pay more for a better looking/performing property. In commercial real estate, forced appreciation allows the investor to make much higher returns because the property’s value is normally appraised in comparison to the income that it produces where in residential the property is valued in comparison to the house down the street. If you had a 10 unit building and you increased the rents by $100/month per unit, you would have an extra $1,000/month cash flow. While that is great in and of itself, the bigger benefit lies in the form of forced appreciation. If you multiply $1,000 x 12 to get a $12,000 increase in cash flow and then divide that by the market cap rate (let’s say it is 8% since I don’t know your market but that is close to the average), you would have increased the value of your 10 unit apartment building by $150,000. Now, how much work is it to increase rents by $100/month? Of course, the situation has to warrant that, but overall it is not much work. I would say it is less work than flipping a house.
- Market Cycles
All markets ebb and flow: supply and demand change. The good news about commercial is that it tends to lag behind residential by 2 years. So, what you saw in the market 2 years ago for houses should be happening in commercial right now. That is a blanket statement because there are many types of commercial property, but for apartment buildings specifically, it tends to be the opposite of residential. 1 is booming while the other is busting. If you pay attention to which is doing which and you time it right, you can buy an apartment building and do nothing more than hold onto it and make sure the management is being handled properly, and see a multiple 6 figure and even a 7 figure increase in value (depending on the size of the building) just by learning how to ride market cycles.
- It’s easier at the top
There is less competition in commercial real estate investing. People are scared of big numbers. If you are over that, you should take advantage of your powerful mindset. When you have climbed to the top and you are hanging out with the real estate elite, it is almost laughable how easy it is to make big money. More big deals are done on the golf course, in private jets, at sports games, and other fun venues than in an office setting. It is all about the relationships and when you have developed a few key relationships with A players, things will be easier, money will turn quicker, and bigger, better, and easier opportunities will come your way. It seems like the guys who have success in residential are pretty private and don’t want to share their secrets.
- 1 Deal to retirement
Imagine having the education, mindset, and skills to acquire just one 100-unit apartment building. If you were to use someone else’s money and understand the game enough to play it and you cash flowed a conservative $50/unit after paying for management, debt service, and all other expenses, you would have $5,000/month coming in to your household forever (if you choose). Most people can live on that. If you can, you are now retired. When your income is higher than your expenses and you don’t have to work to earn the money, you are retired. In residential, it will take a lot more than that to retire.
Right now, with all the foreclosures, people losing their homes, job security down, and confidence being low, people are downsizing left and right. They leave their home and rent an apartment. That creates less supply, which creates more demand, which increases the amount of rent the owner can charge. Using the cap rate formula, your wealth will increase more dramatically in these times than ever before. Not to mention, the banks are looking for solutions to this nightmare of theirs, and are more creative and more negotiable than ever before. You can get a great price on a great property and see the value go up faster than ever.
Investing in apartments has done my family well. My Dad has been in the Real Estate game for over 30 years and I grew up learning about it. He has experienced most of the things there are to experience in Real Estate and he chooses to invest in apartment buildings. I have been in Real Estate since 2002, and I have bought and sold many variations of Real Estate and I too am continuing down the multi-family real estate path.