The 7 Habits of Highly Successful Apartment Investors

#1 – They Only Invest in Apartments...The Power of Focus!
• The best and the brightest apartment owners are the best and brightest at one thing – buying apartments. They don’t stray away from their specialty, but rather focus on apartments only. They don’t try to be “jack-of-all-trades”. Neither should you if you want to be one of the best and brightest.

#2 – Not Over-Leveraging DEBT…Cuz It’s a 4-letter Word!
• Heavy debt is a cash-flow killer. Even though debt is pretty much the norm on most deals, be smart about it. Having high debt is a trap that snares cash-flow and equity. Proverbs says that the “borrower is slave to the debtor”.
• An easy way of measuring your “debt-safety” level is to figure out your breakeven-occupancy percentage. To do this quickly, simply add up all of your annual operating expenses plus your all debt. Then, divide that number by your potential gross income. You’ll find that your operating expenses will typically not vary much, but that your debt can have a huge impact on your breakeven point in occupancy. The higher the debt load, the higher the breakeven point in occupancy. For example, if your breakeven occupancy point is calculated to be 60%, then after that, it’s all cash flow. But if your calculation comes out to be 90%, that spells trouble. You have no room for error and must keep your apartments 90% occupied just to pay the bills.
• Even though there are financing programs available that allow you to perhaps finance an investment with no down payment, it may not be a good idea. Run your numbers. Be prudent.

#3 – Properties Are Managed Effectively and Professionally
• Having top-of-the-line property management, whether you do it yourself or hire a company to do it for you is a major key to success.
• In a nutshell, a top management company’s ultimate goal is to maximize potential rental income, reduce operating costs, strengthen tenant retention and relations, enhance visual appeal of property, and increase property value. If they can do this, you have a winner.
• Apartments that have the best reputation in the community have the highest rents, the lowest turnover, and have sound and solid property management.

#4 – Patiently Acquiring and Having Tolerance for Mistakes
• Rome was not built in a day. Building a good-sized and wealthy portfolio requires years to build and is built one property at a time. Successful apartment owners take their time and strategically plan out their acquisitions over a period of years. The real estate cycle and market conditions have to be just right in order to make the best buying/selling decisions. Time and timing are the keys.
• Have you noticed that life tends to have built-in provisions for the mistakes we make? The most successful apartment owners that I personally know, made huge mistakes in the past that have brought them literally to their knees, but the most successful ones bounce back to do even bigger deals.
• Allow yourself room and grace to make mistakes. It is the highest form of learning that we know of.

#5 – Effectively Partner
• Proverbs 15:22 states, “plans fail for lack of counsel, but with many advisors they succeed.” Throughout history, no one has achieved impossible dreams or built amazing companies without effective partnering and/or outside advice.
• The apartment investment business can be very dynamic with lots of moving parts to it. Don’t be average over a lot and master of none. Do what you do best and hire out the rest to the best.
• Successful apartment owners know the value of relationships. Success is a relationship business. Finding the best deals, solving the biggest problems, and finding the money for your deals come from relationships.

#6 – All Business Systems are Accountable
• Well-run and profitable apartment investments seem to go under the radar. But what you will hear more of are the apartment communities that are failing or are in deep trouble. Upon deep inspection, you’ll find that the troubled apartments have a key component to their operation that has stopped working. And that failed component has caused or will cause other facets of the operation to fail down the line soon. Nonetheless, a profitable apartment business has nearly every business component running at good to satisfactory levels.
• Successful apartment owners have excellent internal communications and accurate financial and operational reporting. Their systems allow them to hold their apartment’s business systems accountable to those responsible. Here is a sampling of typical apartment business systems: accounting, revenue, internal controls, property staff, marketing system, maintenance, and marketplace.

#7 – Well-insured and Entities are Set Up For Maximum Protection
• “Plan for the worst and be happy if it doesn’t happen” is the attitude and habit of the most successful apartment owners.
• Their goals are to build a legal fortress with insurance coverage and with the use of entities such as LLCs, LLPs, Corporations, TICs, etc.
• A poorly protected investor may not only lose his or her properties to a real or frivolous lawsuit, but personal property as well. As of 2006, there are over one million attorneys in the U.S., all wanting to deploy their skills (on your property).
• Before doing any of this on your own, consult an attorney and tax strategist first.

Apartment Investing Builds Retirement Nest Eggs

Dear Apartment Building Investor,

This is not meant to scare you, but according to The Wall Street Journal, the average 35 year old person in the United States will need to have saved a nest egg of at least 3 million dollars by the time they retire at age 65. That may seem like an astounding number and it basically leaves investors a few choices to build a nest egg of that magnitude.

The first choice would be to play the lottery and hope. Unfortunately, right now this is the plan that many millions of Americans are undertaking right now. You might be one of them.

The other, and more common route, is to contribute to your 401k and maximize on your employers matching contributions. This has worked for some people in the past but as good, high paying, professional careers become more scarce in the United States this route doesn’t appear to be a wise choice for most people. Most people’s 401ks are mostly invested in a basket of stocks, mutual funds and bonds. The problem with putting your nest egg into a 401k is the fact that you are basically counting on the fact that the stock market will be in a bull market when you are ready to retire. If not, you will end up like many people who in 2008, when the stock market nose dived, were forced postpone their retirement by another decade because the value of their retirement nest egg had dropped so dramatically.

So what is the answer to securing your retirement future? It just might be a strategic apartment building investment. Here’s why:

1) Other People’s Money. As oppossed to invesments in stocks apartment buildings offer the opportunity to invest with other people’s money. In fact, investing in apartment buildings allows you to purchase the building with up to 100% other people’s money by using a combination of partnerships and traditional bank financing. In addition, the balance of the mortgage is paid off over the life of the loan using other people’s money in the form of rent payments made by your tenants.

2) Scarcity and Demand. A record low number of multifamily units will be completed this year. The increase in rental housing demand is being met by a sharp reduction in the supply of new apartments. Just to put this into perspective, over the 10-year period from 1998 through 2008, there’s an average of about 240,000 new rental completions per year. Last year, there were 160,000. And this year, completions are expected to be below 80,000 units, which would make it a 50-year low. This level of new completions is actually less than the estimated annual loss due to obsolescence, meaning that we’re seeing essentially a net zero increase in the stock at a time of strong demand. New starts are not expected to approach historical levels until late next year, 2012, which means it would likely not be until late ‘13 and into ‘14 that we’ll see completions return to historical levels. And obviously it’s the completions that are what’s important in affecting the supply demand fundamentals.
3) Demographics. Roughly 3 million young adults had been living with family during the past five years, according to data from the Census and real-estate investment brokerage firm Marcus & Millichap, and housing experts estimate that they now generate about one-third of rental demand.

4) Instant Returns. Factoring in maintenance costs and other variables, an investment property should produce at least a 6% return on the initial cash investment in the first year after it is purchased. For example, an investor who puts down $250,000 in cash on a $750,000 property would need to clear at least $15,000 in the first year.

What does all of this mean to you as an investor? It means that the time to begin buying apartment buildings is right now. I am not promising that you will be the next Donald Trump but I certainly believe that apartment building investing now offers one of the safest and securest ways to secure the comfortable retirement that you deserve.

The next step is to get started. But don’t go out today and begin buying apartment buildings unless you are properly prepared. You need to arm yourself with all of the tools, information and market knowledge to ensure that you are investing in the right property that will not only continue to pay for itself over the years but also offer you a hefty monthly cash flow that will put money in your pocket.

If you are truly serious about learning to buy profitable apartment building then get started today by enrolling in the “Buy Your First Aparment Building E-Course”

Investing in apartment buildings is a lot easier than you probably think but the most important thing is not to jump into the market blindly. Enroll Today in my “Buy Your First Apartment Building E-Course” and you will have instant access to all of the information that will allow you to properly analyze a property to ensure that it becomes a cash cow and not a money pit. Remember, the risk is all mine. If you don’t find the information or if you simply decide that apartment investing is not for you, then I will happily return your entire tuition, no questions asked. So get started today and I guarantee you will not regret it.

Sincerely,

Ted Karsch,

Small Multifamily Properties = Big Profits

by Spencer Cullor on October 15, 2011

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Many real estate investors overlook some of the most profitable investment properties because they don’t understand how smaller properties can equal big profits. They get caught up in the “bigger is better” mentality and miss out on some of the most profitable investments right in their own backyards. Contrary to what some real estate gurus say, you don’t have to buy multifamily properties of 150 units or more to make a big profit. Smaller multifamily properties can provide an investor some of the strongest investment opportunities if you know what you are looking for. You can find them everywhere, and often times can buy them for much higher immediate returns and at better purchase terms than larger properties.
We define smaller multifamily properties as those having four to 100 apartments or units. This size of property can be a great fit for individual or a small group of investors. At this size, the income can adequately cover the expenses of the property and factor in management, debt service, and vacancy expenses.

Some of the advantages of investing in smaller multifamily properties are:

• Smaller properties usually have less competition than larger properties. When acquiring smaller properties, you are usually competing against individual investors instead of large companies, institutional investors, or investment groups.
• You can find properties with higher cash on cash returns. Often times you can buy smaller properties that provide higher cash on cash and internal rates of return on your investment dollars.
• They take less equity to purchase. Because they are smaller, they don’t require millions of dollars in equity to purchase, allowing you to purchase them individually or with a small group of investors, and own a higher percentage of the property.
• With smaller properties, you can often make more money per unit each and every month than with bigger properties.
• There are more of them in your backyard. There is a larger number of smaller properties than large apartment complexes which makes them easier to find.
• Many have more flexible sellers. These properties are normally owned by private individuals who have the ability to get creative if they want to and don’t have to go to a large ownership group for approval.
• They are often managed by less sophisticated investors who are scared to raise rents, fearing that their tenants will move out. This provides more opportunities for hands-on owners to achieve management improvements and value creation.
• They can be closed on quicker than larger properties.

As you can see, there are many advantages to investing in smaller properties, where some of the biggest returns can be found. It’s easy to get caught up in the game of trying to compete with larger investors who own more units, but like a mentor of mine told me early on in my investing career, “It’s not how many multifamily units you own, it’s how much you make per unit.”

How to Hire a Property Management Company

Somewhere along the line of your real estate investment career, you may outgrow your ability to manage the number or properties you acquired. Or you may find that managing your own property is not a skill that you are gifted in or are good at. In those cases, you’ll have to locate, interview, qualify, hire, and manage a property management company.

Searching for a Property Management Company
• The absolute best method of finding the best property management companies is by referral. Get a referral for a property management company from someone who is happy with theirs or knows of someone who is happy with theirs.
• The second best method is by asking your broker or agent if they know of a reputable property management company.

Interviewing a Property Manager
Here are 13 questions to ask professional property management during your initial phone calls.

1. What is the general vacancy rate in your area? “Your area” could be a city, town, neighborhood, district, street, etc.
• This information is crucial in studying feasibility of owning property in this area.

2. How many units do you currently have under management? What type?
• If you are looking for them to manage your 4-plex, see it to that they at least manage 4-plexes. If you have a 20-40 unit or larger apartment building, see to it that they have under management the same. A property management company that manages 400 single family homes is not the same company that manages 400 units of apartment buildings.

3. How long have you been in business?
• If they have less than a year of experience, don’t use them. They need at least one cycle (spring, summer, fall, winter) completed to know what’s going on.

4. Do you have a start-up or account setup fee for new landlords?
• Know this upfront.

5. What are your percentage management fees? What other ways are you compensated?
• Plug these fees into your property cashflow analysis.

6. What is your policy on who keeps the late fees collected – the landlord or the management company? Or is it split?
• Know this upfront.

7. Do you have your own maintenance staff or do you use independent contractors?
• Gives you an idea of their sophistication.

8. What is the cost for an eviction process from start to finish?
• In San Francisco, it costs about $5000 per eviction. In NY, it costs about $300.

9. Is there a per new lease charge to the landlord?
• Know this upfront.

10. How do you advertise your vacancies? Who pays for advertising?
• Typically, good property managers will have a referral system in place.

11. What are your business hours?
• Know this upfront

12. How are tenant emergencies handled? Weekend calls?
• Gives you an idea of their sophistication.

13. What monthly reports do you typically send owners?
• Know this upfront

NOTE: This interview is not for telling them what you want from every question asked. It is merely to gather information in order to make a decision on if you want to continue.

Character Traits You Want In Your Property Manager:
1. Tough-minded leader yet a people person, diplomatic
2. Creative and entrepreneurial instinct
3. Excellent communicator
4. Good negotiating skills
5. Capable organizational and administrative skills
6. Basic mechanical skills to verify contractor work
7. Local market and in-depth industry knowledge
8. Decisive
9. Integrity and honesty

Qualities and Capabilities You Want the Management Company to Have
1. High quality staff and support personnel
2. Confirmed reputable name in the marketplace and govt. offices
3. Reliable and modern reporting system for financials, operations, and maintenance
4. Excellent tenant relations that are visible and apparent
5. Licensed to manage and posses industry certifications

Components of a Sound Property Management Agreement/Contract:

1. Leasing
• Use best efforts to keep property rented by procuring tenants for the property and negotiating and executing on behalf of the owner.
• All leases for the property shall not be in excess of 12 months without written permission from the owner.

2. Rents
• To collect the rents and revenues from the property and serve or cause to be served all notices for the collection of rent and other charges.
• To initiate actions for evictions and when necessary, to settle, compromise, or release such actions or suits and reinstate tenancy.

3. Service Contracts
• To execute in the owner’s name for utilities and services for the operation and maintenance of the property.

4. Accounting
• Property manager shall keep proper books of account for the property and books shall be open for inspection by owner.
• Property manager shall furnish to owner a monthly statement on or before the 10th of each month.
• Find out if owner is required to keep a reserve monies account with property manager.

5. Compensation to Property Manager
• In consideration for the services rendered to the owner by the property manager under the agreement, the owner agrees to pay the property manager on a monthly basis.
• Compensation can be a percentage (%) of collected rents, a fixed fee, or a per door fee. The percentage ranges from 4% to 10% typically.
• Find out if there is a per new lease fee.
• Find out who keeps the late fees, or is it split?
• Find out if there is an extra charge at any time during the eviction process.

6. Terms of Agreement
• Initial terms are usually for 12 months. Try to avoid a 12 month initial term. If you are not able to do so, negotiate a 6 month term agreement. Never sign on for more than 12 months at any time.
• Either party may terminate the agreement by giving a 30-day written notice to the other party. Avoid 60-90 day requirements.

7. Terminations
• Immediately upon termination, the property manager shall provide owner with all originals or copies of leases and all agreements and related documents.
• All property financial records in possession of the property manager shall be delivered to the owner.

8. Provisions and/or Additional Provisions
• Delete any clause(s) stating that the property manager will act as real estate agent or receive commission if and when the owner sells the property.

9. Fiduciary Responsibility/Statutory of Compliance
• This is the code of ethics clause.
• States the property manager will perform all duties in the agreement.
• The property manager’s first obligation is to obey and abide by the law.
• The property manager will notify owner of professional opinion matters.
• The property manager shall keep the owners’ information strictly confidential and not shared with the public.

10. Be leery of “hold harmless” clauses.
• Responsibility is a two-way street. This clause relinquishes the property management company from all liability of damages to the property.

How to Determine Your Multifamily Capital Expense Budgets and Recurring Replacement Reserves

by Spencer Cullor on October 25, 2011

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One of the most overlooked aspects of acquiring a multifamily investment property is adequately accounting for capital expense items and recurring replacements that the investment property needs in order for you to reach your investment goals (See “The Importance of Having a Capital Expense Budget When Buying a Property“). Overlooking these expenses will kill your investment before you even sign the loan papers.

Capital Expense Budgets and Replacement Reserves Defined

The replacement reserve is for recurring replacements that you will have to take care of on a normal basis, such as replacing flooring or old appliances that have reached their end of life, and replacing items such as air conditioners or roofs several years down the road. In contrast, a capital expense budget is a one-time amount that you should budget for when acquiring a property. This is a repair expense or an expense to upgrade key components of the property that cannot be covered by the typical replacement reserve.
To meet your investment goals, you need an accurate capital expense budget and recurring replacement reserve, and you need to use them in your financial analysis and underwriting of the property you wish to acquire. Failing to account for a capital expense budget and recurring replacement reserve will leave you scrambling for cash when items break down, and it will make it very difficult to reach your investment goals when these items break down that should have been targeted for replacement up front.

Accounting for Capital Expense Budget and Recurring Replacement Reserve

One of the first things you need to know is how much should be set aside for your Capital Expense Budget. A good way to figure out the capital expense budget amount is to have a contractor inspect the property with you before you put in your offer, and put together a list of all the items that should be replaced over the next three to five years or your investment timeframe and an estimate of the costs to do so. Then you can take that total amount and subtract out the recurring replacement reserve amount for each of those three to five years or your investment timeframe. The amount left is what you will need to fund your capital budget (Total Capital Needs minus Replacement Reserve multiplied by Years before items need to be replaced).
For example, you inspect a 40 unit property that you plan on owning for five years after acquisition with your contractor, and figure out that the roofs need to be replaced, the buildings need to be painted, and half the appliances are in need of replacement; you calculate that the total cost to fix those items is $150K. You decide that you can only set aside $300 per unit per year or $12,000 per year ($300 x 40) into the replacement reserve. Therefore, you know that you will only have $60K over those five years ($12,000 x 5) to work with from your recurring replacement reserve. Now subtract your Total Recurring Replacement Reserve of $60K from your Total Capital Needs of $150K, and you will find that you need a $90K ($150K minus $60K) capital budget to take care of the other items that would be impossible to fund out of the operations of the property without severely affecting the cash flow and investor returns.
Therefore, you want to include that number in your evaluation of the property and adjust your offer accordingly, to make sure you can reach your desired return. If you can’t make the returns you desire after accounting for the capital expenses, you should pass on the opportunity.

Be Sure to Evaluate Each Property on its Own Merits

Each property is different, so it is important to look for these items when inspecting a property and putting together your offer. If you do not feel you have the skills to identify these costs, it’s always recommended to have an experienced contractor on your team who can help you identify them. There are some rules of thumb that we use when evaluating a property. For a capital expense budget we account for at least $1000 a unit on every property. For older properties with a lot of deferred maintenance it can be over $5000 a unit, and for new properties it can be as low as $1000 per unit; but for most properties, we budget $2000-$3500 per unit for a capital expense budget.

How much should I set aside for a Recurring Replacement Reserve?

For a recurring replacement reserve, most lending institutions will make you set aside $250 per unit per year for a newer property and $300 per unit per year for an older property. I have seen as much as $400 per unit in areas such as coastal cities, where assets are exposed to more elements. When you talk to your lenders, make sure to ask them if they escrow for these funds or if you will need to set them aside, and how much they require you to set aside for their financing. Even if they do not escrow for these capital budgets, it is essential that you set funds aside for these normal expenses that arise when owning a property.
When should I fund the Capital Expense Budget and Recurring Replacement Reserves?
We typically find it much easier to fund the capital expense budget when putting together the funding to buy the property. If you are raising money from investors, it is almost always easier to raise this money up front, rather than trying to go back after closing to put this money together. The recurring replacement reserve is funded out of the operations of the property on a monthly basis. For example, if you have a 40 unit apartment complex and a $300 per unit replacement reserve per year, you would take the $12,000 per year and divide by 12 months, setting aside $1000 per month to fund the recurring replacement reserve out of the monthly operations of the property.
Having a capital expense budget in addition to a capital replacement reserve before submitting an offer can help you account for all expenses and necessary capital required to close up front, allowing you to meet your investment return goals. If you do not account for these expenses up front it can leave you scrambling for more cash when large repairs and expenses are needed on your property, falling short of your investment goals.

Keys to Getting Started in Multifamily Apartment Investing

by Spencer Cullor on January 12, 2012

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“I want to start investing in apartment complexes. How do I get started?”
If that is a question you have asked yourself recently, you are not alone. It’s something I hear on a weekly basis from both new and experienced real estate investors. They all want to know the keys to get started in multifamily investing the right way.
If done correctly, investing in multifamily apartments can be one of the most rewarding and best ways to grow your net worth and increase your income. However, one of the most important things you need to do when getting started is avoid making big mistakes that can take you years to recover.
It is important to get started right.
Below are keys to getting starting in multifamily apartment investing. You can start doing these things today to shorten your learning curve.
Educate Yourself
The most important thing you can do as an investor is educate yourself. Find out all you can about multifamily investments. Learn how they work. Learn how value is determined. At first it’s like learning a new language, but with a little practice it will become second nature. If you are serious about being a successful multifamily investor, it is important to build a strong foundation. That foundation should be built through your investment education.
Evaluate Properties Every Day
After you have educated yourself on the basics of the industry, including how to evaluate properties, you are ready to take the next step. One of the best ways to learn about commercial real estate is by actually evaluating as many properties as possible. Determine what they are worth. Evaluate the areas they are located in and what needs to be done to fix them up. Figure out what you would pay for them to get your desired return. My first year in the business, I personally evaluated over 100 investment opportunities, and what I learned was invaluable to my current investment career.
Start small, build a strong base, and grow
This is where my advice might differ from many of the gurus out there. We’ve all seen the excited investor run out of a seminar and start telling people how they are going to go out and buy a 150+ unit apartment complex without ever owning a single multifamily property. It does happen, yes, but that is definitely the exception to the rule.
Don’t get caught up in the numbers game. Start small, where you are comfortable, and grow as you learn the business. Investing is not a sprint, it’s a marathon. Build a strong foundation stepping up a little in size with each investment and you will grow your business the right way.
Getting a good investment education, evaluating properties every day, and starting small will help you get started in multifamily investing the right way. These steps will cut your learning curve dramatically and help you to avoid making big mistakes. Once you build a strong foundation, you will be on your way to building wealth and massive cash flow.
See you at the top!

Create True Passive Income & High Cash Flow with Apartment Investing

You can truly create high passive income and high cash flow through investing in apartments.  ANd for the same investment you can make so much more than you can over single family homes.

Let’s look at a simple example:

Imagine if you were to buy a $250,000 single-family rental house. That $250,000 house may rent for somewhere in the neighborhood of $1,500 per month. The underlying mortgage on that house may be somewhere between $1,000 and $1,400 per month. So you may end up getting between $100 and $500 per month in positive cash flow.

Now, let’s take a look at a similar investment from a commercial standpoint. That same $250,000 investment may end up getting you a 10-unit apartment complex, which comes out to $25,000 per unit to acquire the property.

Let’s say each of those units were two-bedroom apartments, which could rent in most areas of the United States anywhere between $400 and $600 per month. For simplicity’s sake, let’s use an average of $500 per month. At $500 per month times ten units, you’re bringing in $5,000 per month – more than triple the rent that you could expect to get from that same $250,000 single-family house. Your underlying mortgage payment would be very similar to what you would expect on a residential property; for this example, let’s use $1,400 per month.

Your cash flow on this 10-unit apartment building will be $3,600 PER MONTH ($5,000 per month income, minus $1,400 mortgage payment). Now that will make a difference in just about anyone’s life!

In fact, if you wanted to GIVE AWAY one apartment to an on-site property manager, and maybe pay them a few hundred dollars a month for part-time help, you’d have your property working on auto-pilot and you’d STILL be making thousands per month –- true passive income!