1. You control the cash flow. Unlike other, passive, investments such as stocks and bonds, the owner of an apartment building is the CEO. If you need more cash flow and the local market will allow it, the owner can raise rents.
2. If you don’t want to manage the day to day operations of the apartment complex then you can delegate the management duties to a qualified and licensed real estate management company.
3. It is possible to get seller financing. Many apartment building owners are savvy investors and are more than willing to offer seller financing. This makes the purchase of an apartment building easier without having to qualify for a bank loan.
4. All of the units are under one roof. This fact makes management easier and more cost effective.
5. Forced Appreciation. Apartment buildings are valued according to the net operating income. This means that a motivated apartment building owner can directly increase the market value of his or her investment by cutting or reducing various maintenance costs. Value can also be increased by making strategic improvements to the property.
6. The stock market stinks. The stock market has been a roller coaster ride for most investors. Why trust your hard earned money to chance? Apartment buildings offer a relatively low risk investment with a high rate of return.
7. Your job stinks. If you are employed full time working for someone else you can never be sure how long you will have your job. The income from a well managed apartment building is relatively stable and secure. Most tenants will be on a year long lease.
8. Appreciation. During times of high inflation, such as now, apartment buildings tend to see their value increase. Historically, rents tend to rise along with the prices of other goods and services.
9. Lower cost per unit. Typically, apartment buildings have a lower cost per each unit then residential homes or triplexes and duplexes.
10. You control the quality and quantity of your income. As an apartment building owner you can control the quality of your income. This means that you determine who rents from your building and who doesn’t. The quality of income from a person employed as a school teacher for 15 years is different then the quality of income derived from a shiftless day laborer.
11. Maintenance on apartment building units can be a lot more affordable then maintenance on an equal number single family home units. Generally, contractors will be more competitive on their bids for large jobs, under one roof, then they would be for an equal number of small jobs spread across town.
12. Retirement money. An apartment building can be a steady source of income during your retirement years. An apartment building investment will allow you to work only part time while still receiving a full time income. If you need an affordable place to live you can live in one your units.
13. Pay half the taxes you now pay. Standard tax rates of 30-50% don’t apply. You will be able to pay the capital gains rate of 15% by buying and holding.
14. Pass on the wealth to your children or grand children. Have you thought about how you will pay for your children’s or grandchildren’s college education? Apartment buildings can be easily passed on to your heirs. If they lack the experience or desire to manage the building you can have management already in place for them.
15. Foreclosures. Millions of families are now facing foreclosure. These displaced people will need a place to live. They will most likely be renting because mortgages are harder to come by while home prices are still dropping in most areas of the country.

Photo Credit: albany_tim

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Tags: cash-flow, financing, Foreclosures, real estate, real estate investing, seller financing

Basic Real Estate Project Planning and Management

This will be elementary to seasoned investors, but I’m assuming many investors using BiggerPockets are beginning and collecting information, so I thought it might be useful to go over basic project planning and management. I have learned these things from experience, but mainly through knowing smart investors.

When considering a project, get information on the maximum income the property will bring.
Factor all the costs and time involved in getting the property to it’s max according to what you are paying for the property and the costs involved in maintaining it. Don’t give up on the property if your figures show that it seems to already be at the max and no improvements will bring significantly more income– look for ways where costs can be lowered — is it managed correctly? Is there any way to lower expenses? Can you get better financing? But know the numbers. Make sure you have projected the lowest possible operating expenses. keep cutting until you get to the bone.

Determine where your break even point is.
If it is a single occupancy investment property make sure you choose your tenants wisely because you only have one tenant and if the tenant doesn’t pay then you have zero. There’s less risk in multiple tenant properties, and you can figure what percentage of occupancy is your break even, so you know anything below that will cost money. Getting a very good history of occupancy rates is critical before buying to make sure the property has a history of at least breaking even, then there may be improvements you can make to increase the occupancy rate.

When renting to a tenant who will be running a business make sure you know as much as the tenant about the likelihood of the location being amenable to the type of business going in — don’t expect the tenant to be making a wise decision. Learn to analyze demographics so that you can make informed choices as to tenant’s prospects of being profitable and paying the rent. Sometimes you can even be helpful to a tenant by making suggestions that could help their business — be involved and proactive, because it will help you in the long run.

But the main thing is sticking to your goals and making sure the investment is what you want it to be, and also making sure the property is not at the end of its usefulness — this doesn’t mean you pass on it, but if the property has no other good use, then yes, pass on it and don’t jump because of price or some stubborn dream to own a certain type of property that’s just no longer producing and will soon be useless. Always be ready to change and never get emotionally attached to an idea.

And be careful of following the crowd when there is news of new city planning and development — sometimes it might be best to get in on the second wave after anxious investors have bought land expecting big development to take place, only to run into delays and set-backs that cause the first investors to sell at a discount to get from under it. A few years back, there was news of a Mercedes plant coming and investors scrambled to get in on the action — Mercedes backed out and never built here, but there is a lot of cleared land that can be bought reasonably where the plant would have been. Always be smart, wait and see, but don’t wait past the time to make the best deal — timing is everything and almost impossible to judge correctly all the time. But, if you use sound economic judgment and common sense you will time it close enough most of the time.

After all your analysis regarding use of property, choice of tenants, maximum income, and operating costs, everything is in line and you can get an acceptable rate of return, then run it all by someone with experience for a second look — it always pays to get advice.

Tags: cash-flow, cashflow, Investment suggestions, landlord, real estate investing, tenant

The mister and I waited years before buying our first rent house. Of all the various and sundry reasons for staying out of the game, our biggest obstacle was a severe case of Tenant-phobia– the crippling fear of Landlording. To make matters worse, anytime the subject came up, helpful friends and relatives regurgitated the same horror stories over and over… tenants trashing houses, refusing to move out, paying late, cooking up drugs in the garage, selling off the fixtures for booze and worse.

One day it occurred to us that once upon a time, we were tenants-and we never paid late, or trashed anything, or refused to move anywhere or cooked up anything in the garage. Come to think of it, none of our friends had that much fun either. As the dawning light of reason broke forth, the answer to our dilemma became immediately clear-we needed to target ourselves.

The Part Where We Clone Us

For the sake of simplicity, let’s call our target Cab (for Connie Always Broke). How do we lure Cab over to our lovely rentals so she can pay off the mortgage for us?

• For starters, Cab doesn’t do drugs, so she doesn’t want to live in a drug-infested neighborhood.

• Also, she’s not so tough… in fact, she’s a big weenie, chicken-baby so high crime areas are out too.

• Cab’s trying to save enough to buy her own house. She’ll pass on a larger brick home with central air and heat to live in a smaller frame home with window units to save $100 per month.

• Without exception, Cab will pick the cleanest house or apartment in the best condition in her price range. She’ll head right out the door at the first sign of filthy carpet, dingy paint, roach droppings, broken drawers and/or other signs of delayed maintenance.

• Cab follows the rules. She wants to know what’s expected from the beginning. A clear, logical, understandable lease makes her feel secure.

• Cab wants to be treated with respect. If her landlord is jaded, angry, bitter, money-grubbing, and/or heavy-handed, she’ll find another place when the lease is up.

• Not surprisingly, Cab and her friends are very much alike. She always asks the people who share her values for referrals because they understand what she’s looking for.

• Cab likes puppies. And gardening. And painting every room a different color. And because those things aren’t landlord favorites, she’ll eventually figure out a way to buy her own place. But if the landlord realizes what a great tenant she is and eases up on some of those restrictions, she just might stay a few years longer. Maybe.

Some folks can handle problem tenants. Some people *are* problem tenants. And some of us just like a little peace and quiet.

The Part Where We Ponder and Stuff

In general, I look for single family homes or duplexes in quiet, stable neighborhoods where the yards are well maintained. We check backyards for the presence of fighting dogs and the absence of swing-sets. Lawn chairs and rockers on the porch are good. Large groups of able-bodied men hanging out during working hours is not-so-good. And with every house and every neighborhood, we ask-

What type of tenant will this place attract?

Finding great tenants begins before you buy your investment property. Learn your local market, target neighborhoods that will attract the type of tenant you want to deal with and solve the majority of tenant/landlord issues before you start.

It’s funny– we’re landlords now and still hear the same horror stories…and it’s only recently that I noticed that all those stories are told by people who aren’t landlords.

Interesting, huh?

Before: When good little houses go bad, they attract all sorts of bad things.

After: Much better. Now it’s ready for Cab and company.

Tags: cash-flow, investment property, landlord, Landlord Tenant, screening, tenant, tenants

I was having a conversation with someone that had absolutely nothing to do with investing. The conversation was about a different business but he was talking about how difficult it was to work with people who were always trying to cut corners. People often think that they know better than the experts do, or that they can build a better mousetrap by doing things their way. Instead of using methods that were tried and true they were always trying to “trick the deal”. In the end it never worked but only served to make things more difficult.

I thought about what he said and how it applied to real estate. Real estate investing is very much a numbers game. We deal with situations and people and associated problems but, in the end, it comes down to the numbers. A property either has equity or it doesn’t, it either has positive cash flow or it doesn’t. No matter how you manipulate the numbers, at the end of the day your bank account will tell you the truth. As they say, a deal either “pencils out” or it doesn’t.

Numbers Don’t Lie

While even veteran investors can sometimes fall prey to it, it is usually the novice investor who will fool himself into thinking that he has a deal by using the numbers improperly. He may see a property that he likes and play games to convince himself that he has a winner. He may do this by underestimating the cost involved to acquire the investment or by underestimating the amount of work that the house needs. It can also happen by being overly optimistic about the price that can be achieved when flipping, or how long it will take to complete a sale.

Perhaps the biggest cases of self-deception come with rental properties. Sellers and agents alike are quick to claim that a property provides a positive cash flow and the novice buyers are all too eager to believe it.

It is so easy to fudge the numbers on rental properties that it is imperative to dig as deep as possible to verify their accuracy. A vacancy factor of 5% is typically used, but is that appropriate? A factor of 5% means that a unit will be vacant for 30 days once every 20 months, do the tenants stay that long? How easy is it to get the unit cleaned and rented in only 30 days? Perhaps a 10% vacancy factor or even higher would be a better bet. Another number that is often overlooked is maintenance, can you really expect that no maintenance will be needed? Property management is often ignored because the investor intends to manage the property as well. Does that mean that the expense should be ignored? What if a manager is needed down the road? Should an investor really work for free by managing his own properties without getting paid? That’s what it amounts to if you ignore the fee. What about accounting, legal and other administrative expenses? These costs are real even if you choose to ignore them.

Novice investors tend to accept the numbers presented to them at face value. They will also look to real estate agents for advice. If the agent is a real estate investor as well and truly has the best interest of the investor at heart that may be fine. However most real estate agents have never owned an investment property and only know what they have been taught. Remember that an agent only gets paid if he makes a sale. For a property to have positive cash flow it must cover all of the expenses not just the mortgage.

What it comes down to is honesty. Not the honesty of the seller or the agent or the appraiser or home inspector or anyone else involved in the deal. It is all about the investor being honest with himself. Do not try to make the numbers work because you are eager to do a deal or because you’re frustrated with not being able to find something that works. If you do convince yourself to do a bad deal you will pay the price in the end. Although you “can’t trick the deal”, you can trick yourself.

“Trust, but verify.” – Ronald Reagan

Tags: cash-flow, property analysis, real estate investing, real-estate-deals

In more than 15 years in the financial services industry I worked with many different investment theories and with almost as many different kinds of investors. Some were extremely conservative and would only invest in bonds or CDs while others were aggressive speculators dabbling in various options strategies or betting on the futures market. There were the technical investors with their charts and graphs looking for trend lines and breakout patterns and those who followed the fundamentals such as the earnings and growth prospects of various companies. What stood out for me, however, were the stock market investors who favored growth or value. A growth investor would seek out companies that had the potential for future earnings growth, and therefore, price appreciation. The value investor would search for companies that were undervalued by the market with the idea that at some point the market would recognize the discrepancy and the stock price would rise.

While both investment theories were valid, market conditions had a tendency to favor one over the other at different times. Within the industry we were constantly on the lookout for a change in the current trend. Were we in a growth phase or was the trend turning towards value? An investor who spotted the change in trend at an early point could shift strategy and benefit from the changing climate. However there were many who could not spot the change until well after it occurred and were always chasing the market after it had shifted. A bull market run up in the stock market didn’t end gradually, it usually ended with a speculative blow-off. Inexperienced investors would jump in and the end of the bull market cycle and bid prices up to unreasonable levels. The rationale was that “it was different this time”, “it’s the new economy”, “old rules don’t apply anymore”, and hearing statements like this was usually a signal that the pendulum was about to swing back in the other direction. Most bull markets would end with a correction where prices would fall a bit and start moving up after a period of time. A much steeper drop, such as the 1987 stock market crash, usually followed a major market run-up. Novice investors would run from the market with their tail between their legs vowing that they would never buy a stock again. The value investor loves a market decline. This is where he could step in a buy solid stocks that had been oversold and suffered a price drop that was below the theoretical value of the company. These bargains could be scooped up and held on to until the next rise in market prices.

Real Estate Market vs. Stock Market
In comparing the real estate market to the stock market you have some very significant differences. The stock market has almost instant liquidity, you don’t need to advertise your stock or list it on the MLS and wait for a buyer. A stock doesn’t have carrying costs, mortgage payments, vacancies etc. What the real estate market does have is the extraordinary power of leverage. Through the use of a margin purchase you can obtain a maximum 2 to 1 leverage on a stock but in real estate a 5% down payment gives you 20 to 1 leverage. This means that if you put 5% down and your property appreciates only 5% you have doubled your money!

The parallel that we can draw from the stock market is that the bull market in real estate has peaked and we definitely saw it end with a speculative blow-off. The wanna-be investor cashed in his home equity and used easy mortgage money to buy investment property because, after all, everyone knows that real estate always goes up. This was what Alan Greenspan once called “irrational exuberance” or a frenzy of speculation. Prices were bid up to unsustainable levels and there had to be a correction in the market. Where are all of the investors and agents who claimed that it was not a problem to have negative cash flow because you were going to make so much more in appreciation? Perhaps they realize now that what they were touting wasn’t investing but speculating. These inexperienced investors are being forced out of the market, many of them never to return.

Cash Flow is King for Value Investors
The value investors are now able to come into the market and find properties at bargain prices. Cash flow is king once again and built-in equity is paramount. The current glut of unsold homes will eventually be sold and the market will return to a level of sanity we haven’t seen in a while. The get-rich-quick schemer will find a new fad to throw his money at. The savvy real estate investor will buy properties because they make economic sense, not because he is speculating on price appreciation.

What we can learn here is that while every type of investment has its’ own unique characteristics, they all share some similarities. The most notable common trait is the human element. When greed overtakes sanity and reason you will find people making rationalizations to justify their behavior. All of the excuses as to why this market is different are your signal to head for the exits and wait to capitalize on the change in the trend.

The poet, novelist and philosopher, George Santayana, said it best:

Tags: bull market, cash-flow, Economy, growth, real estate, real estate investing, stock market, value

A question that has been coming up a lot lately is, “Should I Invest in real estate in other states?” This is actually a great idea for those people that are living in overpriced markets where cash-flow is virtually non-existent, but there is a price you’ll pay for going out of state.

Investing in properties that you can’t simply hop in the car and drive to, requires a steady plan and an impeccable team. If you don’t have a solid management company, your experience could turn into a nightmare. I recommend to anyone considering investing in properties out of state to also make sure that you have a trusted friend or family member within reach of your property. Unless you can personally oversee your manager remotely somehow, it is a good idea to check up on your properties and management periodically. While I learned this the hard way, you don’t need to. You can use your tenants to keep you posted on the effectiveness of your management company, and your building’s neighbors to let you know about your tenants. Having someone you trust around, though, can give the peace of mind you will want with a property located far away.

These lessons, which I learned the heard way, should make life a bit less stressful for the rest of you who want to buy a property far away.

Overall, investing in other states can be very profitable, but there are costs. Having an investment property in a place that you can easy access makes life that much easier on you.

The best place to find good investments is typically in your own backyard. Given the current market conditions, now is as good a time as ever, to find deals where you live. With the massive influx of foreclosures and properties that owners can’t keep up on their payments on, bargain hunters can snap up great income properties virtually anywhere in the country if they have the skills to find them.

BiggerPockets has helped thousands of investors learn how to do this (for free, of course)! To start learning yourself, just jump on to our real estate investing forums.

Tags: cash-flow, income property, investment property, real estate, real estate investing