No landlord responsibilities, rapid tenant turnover—Leverage!
Investors who yearn for solid gains and recurring passive income often look to real estate. Perhaps they’ve been lured by the seemingly easy manner in which reality TV personalities make big bucks flipping single-family homes. Or they’ve read about techniques for buying foreclosures and then leasing them to tenants.
With so many opportunities out there, professional people may wonder what the best formula is for making steady money—without duress, free of the perennial headaches associated with being a landlord.
As you now know, I’m a full-time physician whose real estate investing has allowed me to translate my high income into a high net worth—the measure of wealth that assures stability now and in the twilight years of life. Although I’ve engaged in various types of transactions, there is one opportunity that far outshines the others, in my opinion.
The term multi-family real estate may sound like a contradiction. Didn’t I just allude to the anxiety of being a landlord? Yes, I did. But this opportunity differs in many significant ways. Let’s talk it through.
SECRETS OF MULTI-FAMILY UNIT SUCCESS
Start with the example of buying multiple single-family homes. What is wrong with this picture? The homes are probably spread out over long distances, not next-door. That means a lot of time on the road, perhaps, to keep those tenants happy.
But what if you could put all those single-family homes on the same block in a neighborhood. That means a property manager would have only one stop to make to get the job done.
What have I just described? A multi-family unit. Apartments. They all co-exist on one piece of property. That centrality saves time and money.
But there are other advantages.
There is rapid turnover of leases in an apartment dwelling. At first glance, this may seem like a hectic problem. Actually, this is in your favor. Now you have the opportunity to upgrade your tenant profiles and perhaps raise rents, thus improving your income stream.
Compare that to the long-term leases usually associated with single-family homes, or even commercial real estate. Under those conditions, it is difficult to regularly raise rates and adjust to a changing economy.
Not to mention, the population in our nation is increasing, in part, because more immigrants are coming here in pursuit of the American Dream. They need housing. You won’t lack for tenants.
Also, the rent downturn in housing has created tighter banking restrictions that make it more difficult for first-time and under-qualified buyers to purchase homes. This may not sound like it would affect a well-paid professional. Yet doctors, lawyers and other educated folks may be over-extended as they pay back college loans and raise a family. If this describes you, the first order of business is to get rid of bad debt—credit cards, that boat you rarely use, etc.—so that you free up some capital for investments.
There are other factors at play. We are at a pivotal point in history: home ownership is at an all-time low. Part of the downturn is the result of millennials mostly preferring to rent. Can you blame them? They witnessed how the economic crash of 2008 beat up their parents and therefore may fear long-term investments in this uncertain era.
(IN THE BLACK NOTE: Not all debt is bad, by the way. Good debt can be described as leveraging the power of your money. For example, you invest in a multi-family dwelling, Yes, you have taken on debt. But the asset you have purchased is providing ongoing, passive income that eventually pays off the loan for you. This is the opposite of buying a home. Your home is a liability because it is not paying you, but rather eating your money as you upgrade or make repairs. More on this good debt/bad debt concept in coming blog posts.)
Management is another key benefit to multi-family success. Now you can hire a third-party management firm that can maintain a presence within the apartment complex. Convenience saves time and money. The fee for this type of service? About 2 to 3 percent of your monthly revenue. The economies of scale for management and resources are now in your favor. Your costs go down and you are released from landlord responsibilities. Conversely, such an arrangement would be far too expensive for a long list of single-family properties.
In short, when you buy a multi-family apartment building you are buying a business. In that case your goal is to maximize your income, while minimizing expenses. It’s a fairly simple concept.
Multi-Family vs. Mutual Funds
Recently I took a call from a physician who was very unhappy with the performance of his IRA. After seven years of participation, his money was stalled at about $250,000. The broker was doing well, but this highly trained medical health professional who earns an impressive annual income was getting nowhere.
I was shocked. So we discussed what it means to be an accredited investor. This title is very important and is defined this way:
- • Any individual that makes over $200,000
• A couple that earns $300,000
• An individual or couple that has $1 million in assets, excluding a home
• An individual who has a net worth of over $5 million in a trust, if none of the above are otherwise met.
Does this sound like you? If so, you and other professionals have a huge edge in equity investing. It opens doors to wealth creation through direct participation in real estate deals and other transactions.
Otherwise, you and I would be stuck with being part of a REIT or mutual fund—the types of assets that are leading my colleague nowhere.
With funds, you lose almost as soon as you begin because the hedge fund manager, brokers, intermediaries and salesman all get their piece of the action prior to your paltry dividend. In a sense, you have created a deficit that you can overcome only if the fund grows generously.
Participating in smaller direct equity groups enables the investor to get much larger returns and leverage on debt as well as leveraging other experience. There are many crowd funding sites that offer investments that cut out Wall Street.” In fact, many third-party companies will even hold IRA monies and allow participation using tax-deferred methods if cash returns are not a desired vehicle for you.
Multi-family units have far more potential to create wealth. And there is a lot more information to share with you.
In blog posts still to come, I’m going to define the types of properties and neighborhoods you should be looking for. You might be surprised by what constitutes an ideal multi-family real estate investment.
I also want to teach you about the three phases of depreciation, 1031tax code exchanges and even PPM 101—a big topic. What is PPM? Private Placement Memorandum.