If you’re looking for ways to increase your real estate investment profit without increasing your workweek, it’s time to consider an apartment investment. You’ll see long-term increases in passive income if you stop busting your butt doing rehabs and enter a whole new world of commercial real estate.
Is this the right move for you? Let’s look at the benefits of apartment investments for both you and your private lender, how to find those deals, and the numbers from a recent deal.
THE APARTMENT ADVANTAGE
1. Scalability
Apartments add a ton of zeroes. Rather than negotiating one unit, you’re negotiating 50, but you’re still working with just one seller. Plus, you’re considering one building foundation instead of 50 and reviewing one inspection instead of 50. Your cost has some extra zeroes, but so does your profit.
2. Team Opportunities
At this scale, you’re going to need some partners. That means you can staff out the things you’re not good at and work in your strengths. You can do more deals and have more fun because you’re working where your genius is.
3. Passive and Residual Income
These are the kinds of deals you do one and get paid over and over again. And they’re consolidated. Why have 400–500 doors across your state when you could have them in one property?
Get off the transactional hamster wheel. With apartments you don’t have to do another deal in order to make more money—you get a check every month.
4. Massive Tax Advantages and Tax-Free Money
Wealth has always been measured in land ownership. Landowners and businessowners create tax laws, so there are massive tax advantages to real estate holders. You get massive depreciations. You’ll see long-term capital gains—hold a property for 12 months before selling and you pay less income tax. Or you can do a 1031 exchange and defer those gains to double into better and larger properties.
5. Build Legacy Wealth
True wealth is created by making money, keeping money, and getting money working for you. Apartments can do all of those things. When you buy an apartment you’re buying an asset, not a liability.
ADVANTAGES TO PRIVATE LENDERS
In order to do these deals, you’re going to need to find private lenders. But that’s not going to be hard if you understand and explain the returns investors receive—this is a great deal for them as well as for you.
There are four ways investors get paid, and they include payments up-front and payments over time until the property is sold.
First, there’s a fixed preferred return of 10%. Interest isn’t taxed until the sale, and it’s taxed at the long-term capital gains rate.
Second, these deals have a perpetual equity of 1.25%. When the property is refinanced and the investor’s loan is paid off, they earn part of the refinancing proceeds, which is non-taxable income.
Third, they earn cash flow (even after refinancing). This is taxed income, but it’s offset by depreciation.
Fourth, they hold a percent of the equity of the property. This increases annually and it’s taxed when the property sells at the long-term capital gains rate.
This is an incredibly safe investment (compare it to an investment like bitcoin) with immediate and long-term benefits.
APARTMENT HUNTING
After all this talk of benefits, you’re probably ready to jump in. But just how do you find these commercial deals?
Let’s Find a Deal
There’s less regulation and red tape in commercial real estate. When an agent gets a listing they can sit on it 30–60 days as a pocket deal before listing. This is very different from the 72 hours they have to list with residential. That means you’re probably not going to find your next apartment deal on the MLS.
Networking is going to come in handy here. Go to city hall. Talk to property management companies, exterminators, and landscapers who work for commercial real estate companies to find out when a property is going to be listed.
You don’t want just any apartment building either. You want to yield at least a 10% cap rate with the stabilized ARV. For example, if a building is going to yield 100,000 a year, you don’t want to be in any more than a million dollars.
Finally, unlike residential investments, wholesale is king. Always buy wholesale. Location isn’t as important as wholesale.
Money to Buy
It’s easier to finance commercial properties because lenders assume you know what you’re doing. Unlike residential, 90% is based on the property and 10% on the borrower. Your money is going to come from local banks for 80–85% of the purchase price.
Raise Private Money
Banks expect you to raise private money for the down payment. You shouldn’t be using your own money. Use this private money for the down payment and operating capital for your renovations.
Add Value
You’re going to make money by rehabbing the property, raising rents, and adding amenities.
These properties are based entirely on net income. Increase the income and decrease expenses in order to improve the value. Increase the income by raising rents. Decrease the expenses by reducing the utility bills and minimizing maintenance.
To reduce utilities, install LED lights in the hallways (10–25% reduction in the electric bill), use low-flow toilets and aerated faucets and showerheads.
Use products that wear well long-term to reduce maintenance costs, such as hardwood-look tile flooring and granite countertops (use remnants to cut costs; if you install white countertops the granite color won’t matter). You can also reduce your management fee.
Stabilize
Apartments are considered stabilized when they are over 90% occupancy for 90 days. Getting an apartment stabilized typically takes 12–18 months.
Refinance
You don’t want to sell these deals; you want to refinance and keep that passive income coming.
When you refinance you can get a 75% loan-to-value loan. This is based on the appraised value of the property (not what you’re into it for). Use this money to pay off the acquisition financing and your private lenders. Then distribute that non-taxable money between your partners and continue collecting your passive income.
A LOOK AT THE NUMBERS
Let’s take a look at some numbers from a 216-unit apartment complex.
| Numbers before Purchase | Stabilized (ARV) Numbers |
| Rental Income | $1,530,000 | Rental Income | $1,679,000 |
| Vacancy (18%) | (273,000) | Vacancy (7%) | (117,000) |
| Gross Income | $1,258,000 | Gross Income | $1,562,000 |
| Expenses | ($713,000) | Expenses | ($701,000) |
| Taxes | (58,000) | Taxes | (97,000) |
| Insurance | (59,000) | Insurance | (59,000) |
| Utilities | (200,000) | Utilities | (162,000) |
| Maintenance | (232,000) | Maintenance | (223,000) |
| Management | (164,000) | Management | (160,000) |
| Net Operating Income | $545,000 | Net Operating Income | $861,000 |
Don’t feel like you have to have an Ivy League education or come from a family of investors in order to start building your own real estate legacy. Commercial real estate does not have to be complex and overly complicated.
Remember, it’s not much different than single-family rentals and there are a lot more benefits. Sure, there’s a little bit different verbiage and nuances and some things you have to learn and understand before you jump in.
That’s why you need to find someone local that you can partner with. Find a partner who can bring in the money, help you get into larger projects faster and accelerate the growth you’re looking for. Then, focus on what you’re good at and together you’ll make a lot of money.
Be Daring,
Josh
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