Apartment Investing Strategies
Apartment investing is always a good place to apply your time and energy because no matter what approach you take, they always pay off. As of this writing apartment investing is getting pretty hot.
We are a few years post the 2008 financial crisis and residential lending is still trying to recover, as is job growth. The rate of foreclosure has come down a fair amount, but still remains high. The net result is a broad trend of people renting apartment units instead of owning a house. The consequent high demand for rental units has made occupancy rates low and put an upward pressure on rental rates
If you are an apartment owner these are good times. Your cashflow is strong and the value of your properties are going up.
If you are not an apartment owner, now is a good time to get in the game. Not so much because of the rising market (this phase will end, and another will begin), but because the rising market makes it easy for you to put your first deal together.
Let’s say you have decided to get into apartment investing, what is the best way to go about it?
From a macro level there are three basic plays. 1) Assignment Flips, 2) Turnarounds, 3) 1031 Tax Deferred Exchange.
This is a familiar strategy for people working the residential market though it is less well known that the same strategy has a place in the world of multi-family as well. It is carried out just the same way in multi-family as it is in single family; you locate a profitable deal and put it under contract at a price low enough to still be attractive to the end investor after your assignment fee has been taken out. You then put the property under contract at a higher price that includes your assignment fee. Executing the closing can be done by either replacing your end buyer contract with an assignment agreement to save on costs, or if you sense that wouldn’t be wise you can just go ahead with a regular simultaneous close.
The obvious plus to apartment property assignments is the higher assignment fees you can make, and the lack of any substantial risk. Done right, not a cent of your money is spent, no matter how big the deal.
Turnarounds are taking an under performing property, curing the problems causing the under performance and returning the property to its peak performing state. For an apartment building bad management is usually the root cause of all problems. Bad management will result in deferred maintenance, high vacancy rates, and below markets rents being charged on rented units.
The under performing property represents an opportunity for a well capitalized apartment entrepreneur to come in and install new management, rehab the property, rent up the vacant units at full market rent, and get the property running as close to 100% occupancy as possible. The difference between the before and after values can be millions of dollars, and achieved in the space of 1-2 two years.
1031 Tax Deferred Exchange:
The 1031 Exchange is a tax loophole that allows the apartment investor to defer the payment of capital gains tax upon the sale of investment real estate, provided they follow certain procedures during the sale of the property. This allows an apartment investor to sell one property, and transfer the entire amount of equity contained in that property to his/her new acquisition, without paying capital gains tax. (The capital gains taxes are eventually paid, though only later when properties are sold outside of the 1031 Exchange process.) When the 1031 Exchange is effectively employed the apartment investors wealth grows at a rapid rate, thanks to the power of compounding.
Which of these plays you choose to focus on depends on your situation and your temperament. When learning the business and cash poor, assignment flips may be the only thing that make sense to you. Locating profitable deals and then assigning them to investors would allow you to learn the business, learn your market, with little risk, while you build up some capital. Another very important benefit would be building up your network with all the contacts you make.
Once established you could then start turning around under performing apartment properties, creating significant amounts of equity in short amounts of time. Instead of holding onto the property for cashflow, you could get another turnaround property under contract, then sell your first property via 1031 Exchange, and transfer all of your created equity into the new property. If you focus on larger 100+ unit apartment properties where your upside is $1M+ per deal, this turn quickly into a significant net worth.
Of all the real estate classes apartments are the most reliable wealth creators. Whatever phase the real estate market is in there is a way to be in apartments that helps you build wealth.