When you are new to apartment investing, you can get overwhelmed pretty quickly. It can be tough to tell what to pay attention to and where to start. In this post, we outline 12 of the most important concepts you need to keep in mind while investing in apartments. These are based on our 50+ years of combined experience, over 1,100 real estate transactions and $100 Million in commercial assets under management.
1. Market selection is critical.
Apartments are a fundamental need – Food & Shelter – and what drives the demand for that need is population.
To invest successfully for the long-term you need to work in markets that have the best population drivers for your asset class. If you are working in B-grade apartments then population growth, components of population change, immigration demographics, blue-collar job growth to name just a few should all be favorable.
With good historical and forecasted population and employment numbers you can trust that your asset will be able to perform at least at the “market average” for occupancy and rent growth for the foreseeable future.
With declining population or flat job growth or the wrong kind of job growth for your asset class, your property is much more highly dependent on submarket location and property management capabilities.
2. Property management makes your pro-forma possible.
The second most important determinant is property management (whether self-managed or asset management of a portfolio of property mangers)
3. You can shape your benefits to your lifestyle and financial goals.
Real estate and specifically income producing commercial real estate is so attractive because it offers a combination of 4 benefits that on their own would be a welcome addition to anyone’s portfolio and combined can help you Achieve Permanent Wealth(tm).
- Cash Flow
- Principal Pay down
- Appreciation and the ability to force it
- Tax Benefits
4. Time is your ally.
Real Estate is not a get rich quick game. It is a build-lasting-wealth-over-time game… but maybe not as long as you may think.
With just one acquisition you could create an incremental Cash Flowstream of $2,500 to $3,000 per month while earning $100,000 more to setup the project (Organization and Operations Fees) and $250,000 or more in equity on the back-end once the project refinances or sells. And this is an example where you put the project together with a small group of investors. If you’re using your own capital you could be earning $7,000 or more per month in Cash Flow and increase your net worth by over $1,000,000 with one project.
The above examples would take 5–7 years for the typical 100 unit apartment building project in stable market.
5. Only listen to proven advice.
Only listen to those that are currently receiving or are already receiving the goals you want.
Apartment investing as an industry is not very well suited for trial and error. It is a proven-path business. So when you are looking the right people, methods, etc. to be successful, follow what works. You don’t have to be creative to make money in real estate.
Find someone who has what you want. Do what they’ve done and you’ll get what they’ve got.
6. Each apartment building is its own business.
After working with hundreds of investment clients and students I have noticed that one of the most common misconceptions is that somehow owning an apartment building is different than any other investment.
Let me put this to bed right now. It’s not.
It is a very safe asset class and provides a core need – shelter. But it follows the same rules as every other business. You must maximize income, minimize expenses, have good business processes/controls, hire good people, etc.
7. Real Estate is a people business.
This is an extension of #2 above. Without good property management, your apartment investment goals will not become a reality. And good property management is a function of market knowledge, the right experience and good people.
Good people and your relationship with them matters in every other area of your business too. Are you working with the right contract and closing attorneys? Do you have the right brokerage team and do they like working for you? Are you the first phone call they make when a new project that meets your criteria comes available.
8. You don’t make your money when you buy.
That is soundbite financial advice. You make your money when you operate (for Cash Flow) and you sell (for equity gain). At the time of purchase all you establish is your baseline profit with any discount to market value.
Financial Engineering (deal structure and financing structure) can improve an already solid deal, but good operations comes first.
9. More and more passive investors are seeking yield.
With the aging boomer generation moving out of growth and into income and the prospects for growth in the equity markets becoming more and move volatile, income generating assets become more and more compelling. As a well-qualified apartment investor/investment provider you can take advantage of this trend and quickly accelerate your net worth.
10. Lending is more available now then a few years ago, but underwriting is tighter.
Most multifamily projects will required 25% to 30% down with DSCR’s in the 1.35 and higher range. The Government Sponsored Entities (GSE) Fannie Mae and Freddie Mac are lending, just with tighter underwriting. This is probably why the Fannie Mae Commercial Multifamily portofolio has a foreclosure rate below 1%
11. Specialized knowledge is required, but it’s not as hard as you might think.
Every year X number of people get their private pilot’s license and y graduate from medical school – two areas where specific knowledge must be acquired and applied or people get hurt.
The average franchise costswith only a 1 in x chance the franchise owner will still be in business. The numbers are 10 times worse in non-franchise businesses.
We will teach the specific strategies, tactics, and tools you’ll need to start your multifamily investing business because we’ve done it ourselves.
12. You have to start.
There is a defined set of requirements for being successful in apartment investing.
You can get there through several paths but the four most common are by working within a property management or commercial brokerage firm, growing up in the business, grinding it out or partnering/mentoring with someone who is already successfully doing it.
Apartment investing is an asset class that is statistically very safe. You just need the specialized knowledge, experience, and capital to get started. Once you’ve broken through those barriers to entry…
…the sky is the limit.
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