Why Apartments Are The Best Wealth Vehicle
Just about about everybody who thinks about making money and getting wealthy thinks about investing in real estate at some point.
The most common starting point is buying single family houses. This is where most people begin because it is familiar. We’ve all bought a house, so it’s not too much of a stretch to think about buying another one to begin your wealth building journey.
Single family homes are definitely great for flipping and making immediate cash.
But when you try to hold single family houses to create passive income they become problematic. Anyone who has tried the ‘ten houses free and clear after ten years’ plan knows what I’m talking about.
You see there is a belief among investors that because single family homes are small, they are manageable. The companion belief to this is because apartment buildings are big they’re unmanageable and risky.
This is a myth, on both counts.
Apartments are easy to buy and are a stable, predictable way to build wealth, for beginning and veteran investors alike. Yet most people avoid multi-family simply because they have never been taught these jealously-guarded secrets.
With these 8 secrets your net worth will balloon and you will generate enough passive income to achieve financial independence.
Other People Pay Your Mortgage:
When you become the owner of an apartment building you are sudden beneficiary of leverage in many different ways. The most obvious is that you now have other people (your tenants) paying your mortgage off for you. Not only are they paying your mortgage, but also other expenses and then what’s left over becomes positive cashflow and goes right into your pocket.
This is the case with single family investment property too, but as we’ll mention, the margins are far slimmer and when a vacancy does occur, it’s “you” that pays the mortgage.
As we just mentioned, when a tenant moves out of a single family house the property is generating zero income and it is you that has to pay the mortgage, taxes and insurance, until you find another tenant.
That money you pay is gone forever and you never get it back.
Consider though if you owned a 20 unit building and one of your tenants moved out. Your rental income would decrease by only 5% versus 100% with a single family house. At worst, your positive cashflow might be a little less until a new tenant was found.
Over time real estate generally goes up in value. Housing demand is increasing most of the time. Because the dollar value of a 20 unit apartment building is much higher than the dollar value of a median priced single family house, there are many more dollars generated through appreciation with the apartment building than with the house.
Different markets appreciate at different rates, but even with a very conservative appreciation rate of 5%, after 15 years an apartment house you purchased for $1,000,000 would be worth $2,078,928!
So … for no other reason than you own the property, after 15 years the value of your investment more than doubles. This doesn’t count cashflow or equity created from paying down the mortgage.
This illustrates how important it is to get started with buying apartments immediately. The sooner you own an apartment building the sooner you start building the awesome wealth that comes from appreciation.
All apartment buildings have cashflow, but when you buy the right apartment building in the right area, and you buy it the right way, you have very strong positive cashflow coming in from the very first month.
A single family investment house is generally a breakeven proposition … maybe $100 or $200 a month in cashflow.
However with an apartment building, you have a greater number of tenants creating higher gross rents, and you have economies of scale producing lower total expenses. The result is monthly net income in thousands, or tens of thousands of dollars.
One of the standout benefits of owning apartment buildings is they produce enough gross rent to easily cover the cost of hiring professional property managers.
If you have ever managed your own investment properties you know that there are a lot of skills you have to master to do the job well, and if you don’t enjoy doing those things you soon burn out.
When you put a “good” property management firm in charge of your building they take care of all the maintenance and tenant care, and do it better than you ever could.
This frees you from the building so you can spend your time doing what you enjoy, and makes the income you receive from the building passive income.
Easy To Fund:
As we have learned from everything discussed above, greater numbers of paying tenants and economies of scale make the economics of apartment buildings much better than any single family investment house.
There is much more money being produced by the building and the source of the gross rents are spread over many tenants, making it a very stable revenue stream.
Banks know this and they acknowledge this with their lending policies for apartment loans. They will loan up to 80% of the value of the property, and to help you qualify for the loan they will credit ‘you’ with 75% of the gross rents of the property.
Additionally, the bank doesn’t care what the source of the down payment is. This will be music to the ears of single family investors who are tortured every month by residential lenders insisting on documenting the paper trail of buyer down payments to verify the money is indeed their own, or a gift.
To an apartment lender the source of the down payment is not important, because they know the tenant rents are going to produce the income to cover the mortgage. They just want to see the cash down payment committed to the deal … wherever it comes from.
So with this being the case, we as buyers can go and raise private money to fund our down payment. We can also raise private money to cover closing costs, rehab costs, and working capital. Is raising private money hard? Not when you know how to do it.
You hear it said often, most recently by Alan Greenspan promoting his book; there is more money chasing high returns today than there has ever been.
When you have an easy to understand, easy to document, cashflow vehicle like an apartment building, you can prepare a compelling presentation to potential private investors showing them your opportunity that grows their money at business rates of return, how it works, how they are protected, and how they get their money back.
When your apartment deal makes sense and you present the opportunity to invest to people with money looking for high returns, it is only a matter of weeks and you will have all the money you need to fund your deal entirely.
I hope you can see, when you buy apartment buildings, the entire purchase and every expense associated with improving the property can be fully funded without any money coming from you.