How To Make A Comfortable Living Buying Apartment Buildings Without Using My Own Money
There are two components to this question.
1) How do you find an apartment building that will throw off enough positive cashflow to provide you with a comfortable living?
2) Once you’ve found that property, how do you buy it using none of your own money?
Point 1) begs the question; what exactly is a comfortable living. The definition of a comfortable living is going to differ for just about everyone, but to get a general idea let’s look at some personal income statistics from Wikipedia.
If you look at these statistics you can see the income of people varies widely depending on, a) whether they are male or female, and b) how much education they have. Based on people who are over 25, high school graduates earn $26,000 a year, some college $31,000 a year, And the way the trend goes, the more education people have the higher their income is.
If you are a high school graduate your income is likely to be $26,506, or thereabouts. If you have a Bachelors degree your income is probably $49,300 or more. I don’t know what your situation is or where you fall in this range, but let’s say it’s somewhere between $26,000 and $49,000. So if your income is between $26,000 and $49,000 a year that means it’s on average about $35,000 per year.
So if you are going to create a “comfortable living” buying an apartment building, the first thing the property must accomplish for you is replace your current income. So let’s define “comfortable living” as replacing your current income, and then adding another 20% on top of that to provide the comfort factor. To keep with round numbers and something that is easily divisible by twelve, let’s say that comfortable living number is $48,000 a year, which is $4,000 per month.
Now, how do you find an apartment building, or buildings, that will produce $4,000 per month or more? Well, there are many, many ways to do that, as in all of real estate there are many different ways to get to that objective. But let’s stay within the realm of apartment buildings, and the easiest way, which is to buy turnarounds.
Turnarounds are properties that are worth less currently than their potential value if their were being managed and run at their optimum. Bear in mind, the thing that destroys value in an apartment building, because they are income property, is bad management. Whether individual owners, or property management companies, they are dropping the ball on property management basics.
This results in a vacancy factor, the property has units sitting vacant, and with less money coming in there is less money available to do maintenance and keep the property in good condition. The result is deferred maintenance. This lowers the appeal of the property to good tenants in the local rental market, and as a result only lower quality tenants are interested in renting the units. In order to attract these tenants the rents have to be lowered, and now the property is charging below market rents.
These three factors are referred to as “value plays”; that is, if you correct these factors the result will be an increase in the value of the property.
So you buy the property cheap, based on it’s current value that is being depressed by the reduced income of vacancies and below market rents, you turn the property around. You do the repairs, get the vacant units back in excellent condition, make the outside of the property look great and appealing to good tenants. And then you fill the vacancies, fill those units back up with tenants paying full market rent.
You bought the property cheap, and as a result your interest cost and other costs are low. Then you executed the turnaround of the property, filled the property up and created a lot of additional income.
The result of this is … cashflow!
If you did even just an average job of finding a turnaround property, and then you did just and average job of turning the property around, hiring contractors, renovating the units, marketing and renting out the units to high quality tenants, what you will find is the result of all of that effort will be cashflow coming in at the rate of $100/unit/month.
So let’s go back to our definition of “comfortable living that we came up with, which would be about $4,000 per month. If what we create in doing a turnaround is $100/unit/month, and the goal we want to achieve is $4,000 per month in free cashflow to support a comfortable living, this results in a pretty straightforward calculation.
$4,000 divided by $100. That means we have to buy a 40 unit property that is being badly managed, has value plays, that we can turn around and increase the value. That’s actually a pretty modest objective.
So now, how do you actually locate these deals? There are three main ways, three very straightforward ways that will provide you with all of the deals you could ever possibly hope to ever buy.
Those are :
1. Commercial Brokers: Commercial brokers in your local market will be a continual source of deals for you.
2. Direct Mail: You get a list of all of the apartment owners in the county you want to buy in. You can get this list from either your title company or directly from the Assessor’s Office. Once you have the list you send a direct mail piece to the list to generate a steady flow of motivated apartment property owners calling you wanting to sell their properties.
3. Driving Neighborhoods: This is the most under rated and under utilized method, because it actually takes a bit of time and effort to do, and your perception may be that it’s not worth the time and the effort, but it absolutely is. When you get some leads from commercial brokers and you go and check them out, while you are in that area, drive around the property block by block in concentric circles and look at all the other apartment buildings, keeping your eye out for properties with deferred maintenance where you think there may be some management problems. This is a fantastic source of deals.
So once you have found these deals, and you have them under contract, how do you buy the property without using any of your own money. This is pretty straightforward
1. Banks: Commercial lenders will provide 70-80% of the purchase price on each and every deal that you bring to them. We tend to think of banks as just banks, but first mortgages are indeed other people’s money. But they want 20-30% down payment, in cash. How do you find that? And what about the cost of rehab and funding marketing for tenants?
2. Partners: I know you are probably rolling your eyes after reading this, you’ve heard partners quoted ad nauseum as a source of funds from every information source on doing deals that you’ve found. But doing your first one, two or three deals with a partner is probably the smartest thing you can possibly do. Teaming up with an experienced apartment investor who has been in the business ten, twenty, thirty years, who has impeccable credit, a very strong balance sheet, and plenty of cash, all of the things a bank wants to see to just rubber stamp the deal and put the loan straight through, enables you to close and make money on your first deal very easily. But the hidden benefit is you get all of the experience and credentials of your partner accrue to you when the deal goes through, and becomes part of your resume. Your partner’s track record become part of your track record.
3. Private Lenders: There are tens, hundreds of millions of dollars of investment capital sitting in the savings accounts of private individuals, people who you know, and whom trust you, and people in real estate who you know, who would be willing to be private lenders for you deals once they understand what you are doing with the money and how they are protected. This private money funds your down payment, rehab costs, and other working capital requirements on your deals.
Once you become more familiar with what to look for and the apartment turnaround process, creating a comfortable living from apartment buildings using none of your money, is not that difficult to do.