There Will Always be Renters
There are three types of people in this world: those who rent, those who own, and those who don’t care about either and live their lives traveling from place to place, never staying in one spot. Homeowners understand that a place to live is needed in order to raise a family, have a job close by, and be able to drive to the city’s attractions. They also understand that if they have a mortgage, the payment must be made every month to avoid foreclosure. The same is true for renters, they understand that rent is due every month as well, but the main difference is not having the option of owning the apartment, unless of course, they choose to purchase apartments as an investment. For that reason, this article is not about how to buy a home, or sell a home, but rather how to purchase apartment buildings as an investment in real estate.
Of the many types of property investments out there, by far one of the most lucrative and long-term wealth vehicles has been apartment buildings. Apartment buildings create primary and secondary wealth for individuals because the sale includes both the actual land under the building, the building structure itself, and the business that happens at that property. In this case, the business is that or renting individual units. So why and how is this more lucrative than other realty business?
For starters, the key principles in the deal receive a percentage anywhere from 3 to 5% of the total purchase price of the apartment building. This is called an “acquisition fee“. A fund must be created in order to raise money from investors, unless the deal can be closed without the need of any investors. This percentage is similar to what a Realtor would make, except that the check is awarded for doing the research, analyzing the deals, putting the teams in place, finding the market(s), and all unpaid. The Realtor gets paid no matter what, and in an apartment building transaction they should NEVER be “cut out”.
The second lucrative aspect of investing in apartments is the monthly cash flow. Cash flow is the blood of any business and it is essential that a business makes money in order for it to continue. In an apartment building, the renters pay for everything. This is the reason why analyzing close to 100 deals is a rule of thumb before finding one that will be able to pay its own mortgage, and other expenses, while providing monthly profits (cash flow) for the principles and the investors.
Thirdly, investing in apartment buildings can create a huge increase in wealth in two ways. The first being raising the rents. This is possible in almost every market and the math is fairly simple. Imagine owning a 150 unit building where rents can be raised by say $200. This would equal an extra $30,000 per month, or $360,000 per year. The impact this can have on the return on investment is huge and may even retire an individual from ever having to work again. Lastly, owning an apartment building, means one owns a percentage of the equity and will benefit as the economy grows, the building is improved, and it increases in appreciation. Going back to that same deal, imagine that the 150 unit building was purchased for $4,500,000 and appreciated 2% per year. In five years, the building would be worth $5,175,000.
Apartment Ownership can be a Game Changer
Apartment buildings can be a major game-changer for people’s career and retirement portfolio. Apartment buildings are in the “economies of scale” section of finance and should be treated as a major trophy that could potentially create a cash flow machine for creating long-term wealth for generations. If you are able, this may be the best type of property to invest in.