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Friday, July 1, 2011

Multi-Family Real Estate Investing 101

There are millions of people around the world who took the advice of their family and friends for investing and took heavy losses as a result of that advice.  Some people even trusted their financial advisors who for the most part give good advice in a bull market economy.  However, what goes up doesn't always continue to go up and in some cases goes down hard.  The stock market during the most recent recession as well as the housing market in the United States in particular are good examples of how a good thing can turn sour in a relatively short period of time.  Before I write about multi-family real estate investing, let me first discuss the basis of the financial industry as a whole and what is peddled to the general public for their investment dollar.

Financial Advisors - The Truth 

Financial Advisors are for the most part good people who are trying to make a living just like all of us.  The key thing to understand is that they are sales people.  They make a commission by selling financial products, just like any typical salesperson.  When you buy a mutual fund through them, they make a commission.  When you buy an insurance policy from them, they again, make a commission.  How about buying stocks or bonds?  Yes, you are right....they make a commission.  So for the most part, they are concerned with your well being but their first concern is self- interest.  Yes, they want you to make money in your investments so that you will buy more, but what happens when things go south?  Will you invest more?  Probably not.  Is there a long term investment plan?  Maybe....Now please don't misconstrue what I am writing here.  Financial Advisor sales people have good intentions predominantly, however who is going to be the person most concerned with your money?........of course, it's YOU!

When you buy financial instruments of any kind, there are zero guarantees, unless of course you purchase a fixed rate, low interest bearing instrument like a CD (certificate of deposit), or GIC (Guaranteed Investment Certificate) or a bank deposit that is insured.  Once you put your investments into other areas, you had better have a clear and thorough understanding of the risks involved.  Don't just rely on your Advisor giving you prompts.  Take the time to learn and understand what you are doing with your money and then make an informed, educated decision on what you do with it.

Multi-Family Real Estate Investing

I've been buying, renovating, managing, and selling multi-family properties for nearly ten years.  Creative financing, bank financing, even on some properties, more than 100% financing where I actually got paid to buy the property with cash back at closing.  How is this done?  Well, if you specialize in an area, you eventually learn the pitfalls, the positives, the great results, the good the bad and the ugly.  It's not all a bowl of cherries, but it certainly has its rewards.  

Now....Real Estate is not a new phenomenon.  People have needed a place to live since the first humans came into being.  Mark Twain said, "Buy land; they're not making any more of it."  This is a good basis, however it's not always good to buy just any land.  I believe it's better to buy a building that sits on land that is giving you a nice monthly cash flow.  This involves some investigation into various ways of doing this.  You can do it yourself and buy a single family house and rent it out and make a few dollars.  A major drawback with this type of investing philosophy is that if your tenant doesn't pay you, you are out of pocket to pay the mortgage, property tax, utilities (if you include them in your rent payment), and maintenance etc.

I've owned this type of property before and let me tell you....no matter how well you screen, you will eventually have a non-paying tenant.  How you deal with it is then entirely up to you to figure out.  In some cases they may not pay for months while you try to evict them.  When you finally succeed, you're out a substantial amount of money and you're scratching your head wondering why you bothered doing this business.  I developed an excellent approach on dealing with this type of situation even though it rarely occurred but unless you know what you're doing, there is only one way to learn, and that's doing it the hard way.  

Why do that when you can hire experts?  You could hire a property manager, but for a single family home that eats a big portion of your income.  Yes it's true that your numbers may accommodate a property manager, but in the long run, single family homes offer only a small amount of appreciation and cash flow at best on an annual basis and you can't increase the value of the property by simply doing some techniques that work well with multi-family properties.  This type of property value is directly and only related to emotional buying.  When it's time to sell, you will only get what the market will pay you and that is emotionally driven.  You could have a house that you couldn't rebuild for $500,000, yet you could only sell it for $400,000 or lower even.  Does this make sense?  No, but single family homes are primarily sold on emotion and that is reality.

Now we come to multi-family properties.  These properties have one roof, but house many families beneath them.  Examples are multi-plexes, and apartment buildings.  These types of investments are much better than single family because if you have a tenant or two that doesn't pay, you still have cash flowing from the other paying tenants.  You probably won't come out of pocket to cover those mortgage payments, taxes etc. while the problem tenant is being dealt with.  You must hire a property management company that has specific experience with not only the type of property you have but also has specific experience in the area you own your property.  They have to do their job in managing the property and when it's time to increase rents, they will do that for you because that's their job.  You don't get phone calls at 2 am telling you that the toilet is plugged.  Your manager takes that call.  Pretty nifty!  You could manage it yourself but you're probably burn out within 2 years.  If you're superman, you may last for 3 years before dealing with the tenants and the issues become so annoying that you decide that you have to sell, rather than want to sell (There is a big difference).

The Beauty of Multi-Family Investing

Given a choice of where to put your money, this is a great way of getting a great return with low risk compared to many other investments out there.  By screening for artificially low rents in buildings that require a little cosmetic fix-up, or maybe were run by a property owner who didn't use a management company and was afraid to increase rents because "tenants might leave", then you can quickly make your property worth more.  By understanding when leases become due and your local market laws, this is an ideal way of increasing the value of your property by a few strokes of the pen.  You can't do that with a single family but you certainly can do this with multi-families, and the amounts can be astounding.

Example:  You have a 100 unit apartment building and they're all 2 bedroom units renting for $900 per month.  You slap a legal "nuisance" increase of 2% which is $18/month.  Now we say "nuisance" because the typical tenant will accept this type of increase as part of life and won't move out because of it.  What have you just done by doing this?  $18/month x 100 units = $1,800/month extra cash flow x 12 months/yr =  $21,600 extra per year in cash.

The typical investor would like to see say a 10% return on their money, so at a 10% CAP rate which satisfies this, you've just increased your building's value by $21,600 / 10% = $216,000.

With a nuisance rent increase you now have a building worth almost a quarter of a million dollars more than before you put this measly little increase in.  This is the power of multi-family investing.

These are real numbers and another great aspect of this business is that we buy buildings with verifiable income by looking at P&L statements from the owners for the previous three years as well as looking at their portion of tax return for that same period to help ensure that what they are telling us is in fact the truth.  Understanding rent rolls and when leases are due for renewal are other aspects that are considered when buying a multi-family property and are placed in the long term business plan.

For more information on how you too can earn a really good monthly cash flow and see cash on cash returns of 10% - 25%, get in touch with me directly and let's have a relaxed chat on what your goals and needs are.

Be well until next time.

Carpe Diem

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