How to Invest in Apartment Buildings | A Comprehensive Guide
“Ninety percent of all millionaires become so through owning real estate.” -Andrew Carnegie
You may have heard that real estate is the best path to obtaining wealth, and apartments are one of the best ways. Obviously, you cam to that conclusion as well, or you wouldn’t be here.
Apartment buildings allow you to scale much higher in a short amount of time, because they produce higher cash flow.
With more cash flow, you get more safety. And the more units you have rented, the safer your investment is.
So if you want to know how to invest in apartment buildings, just scroll below!
The Three Ways to Invest in Apartment Buildings
There are three ways to invest in apartment buildings, and they all have their pros and cons:
- Do It Yourself
- REIT Investing (Real Estate Investment Trust)
- Partnership
Do It Yourself
Doing it yourself is the hardest way to invest in apartment buildings, but could turn out to be the most beneficial for you in the long-term.
This is because you keep all of the cash flow that the property generates, versus the other two options.
However, doing it yourself is the most time-intensive, and the most risky for new investors. Don’t let this discourage you, just make sure you know what you’re doing.
There are 12 things you will need to do if you are going to take this route:
- Find a Deal
- Negotiate the Terms
- Set up an LLC
- Get a Loan
- Close the Deal
- Find Tenants
- Turn Units
- Manage the Property
- Rehab the Property
- Provide Reports to the Bank
- Take Phone Calls from Existing and Prospective Tenants
- Fix the Property
1. Find a Deal
Finding a deal is the most important part of real estate investing. If you buy a great property at the wrong price, it could send you into bankruptcy. If you buy a bad property at a great price, it could also send you into bankruptcy, because there may be things wrong with the property that you did not know.
If a price is extremely cheap, there’s probably a reason why.
If a deal has low competition, then there’s probably a reason why.
These are all things to take into consideration when finding a deal.
2. Negotiate the Terms
It definitely helps to have a broker when you’re negotiating terms.
The broker acts as a buffer between the buyer and the seller, and will probably have better negotiation tactics than you do. Not to mention, the broker will give you access to better, off-market deals that you didn’t know existed.
If you don’t use a broker, ensure that you know the market, know what you’re looking at, know what the terms should be before you go in.
3. Set up an LLC
LLC stands for Limited Liability Corporation. So in a worst-case scenario, if a tenant sues you for whatever reason, (trying to take advantage of the legal system in most cases) only your business is affected.
This means that even though you are the landlord, you aren’t officially the landlord. Your business is. Your personal life will not be affected on paper when you purchase the property as an LLC.
There are multiple reasons to set up an LLC:
- Safety Against Legal Issues
- Loan Requirements
- Taxes
- Flexibility
Safety Against Legal Issues
LLC does not stand for “get out of jail free”. You can still be sued, you can still lose everything in your real estate portfolio if you get sued.
But, what LLC’s do is help prevent the fallout from being sued. Instead of everything in your personal life being taken away; cars, boats, house, garage, etc. You just lose your business.
Still a drastic turn of events, but much better than it could have been without an LLC.
Loan Requirements
In some areas, it is required to have an LLC to invest in certain criteria.
For example, in MN, banks will not grant you a loan under $100,000 if you do not have an LLC.
Tax Benefits
There are some great tax benefits for LLC owners. First of all, LLC’s don’t have to file a corporate tax return. This prevents double taxation, (paying taxes on your business and personal return). All you do is report your share of profit and loss on your individual tax return. Simple!
And let’s not forget tax write-offs.
By forming an LLC instead of purchasing apartment buildings with your personal name, you can write off expenses so that you don’t pay taxes on them. This can go for things like interest on your mortgage, maintenance, repairs, upgrades, remodeling, etc.
So if you replace your roof for $10,000, write it off. That’s $10,000 that you don’t pay taxes on. If you upgrade your kitchen for $3,000, write it off. That’s $3,000 that you don’t pay taxes for.
Flexibility
You don’t need many documents to set up an LLC, and you are allowed to do more, compared to other business entities.
LLC’s are by far the simplest business entity that someone can use, and is great for extra asset protection and tax benefits.
4. Get a Loan
There are two things you need to get into apartment investing:
Money, and credit.
If you don’t have money, you may need to start smaller. Start with a duplex, triplex, or quadplex. From there, build your way up until you can afford at least 20% on an apartment building.
You want at least 20%, because overleveraging has sent many into bankruptcy before, and it can send you as well. Prepare for worst-case scenario in any event in real estate.
You also need credit to invest in real estate.
If you have bad credit, you don’t get a loan. If you don’t have great credit, you don’t get great terms. Simple as that. Focus on building your credit before you engage in apartment investing.
Talk to brokers, talk to agents, talk to other investors. Talk to lenders, form a reputation in your market.
If the banks trust you to make the payment, the bank will give you a loan with good terms. If they don’t trust you, they’ll either give you a loan with bad terms, or no loan at all.
Close the Deal
The highest price doesn’t get the deal. The best talker doesn’t get the deal. In most cases, the closer gets the deal.
If you build up a reputation for closing deals quick, sellers will run to you. This happens with Ben Mallah, Grant Cardone, Donald Trump, etc.
In economic downturns, sellers care more about closing the deal quick, rather than who is willing to pay more.
Find Tenants
If you get bad tenants, they can turn your good deal into a bad one. They can ruin your property along with your business.
Make sure you call their previous landlords, make sure you check their credit history and credit score, and ensure that the tenants will pay on time. These tenants will be paying you your income, it’s like finding a good, secure job. You want one that will pay you every time you should be paid, right?
Turn Units
When you don’t have a tenant, you need to improve the property ASAP in order to get ready to get the next one filed in there when you can.
There are many ways to efficiently turn a unit, and you need to learn one that works for you. The more months that go by before the property is ready, that is cash out of your pocket essentially being thrown down the drain.
Manage the Property
You can manage the property yourself, but it is much harder to scale that way, and you will typically lose money in the long run.
If you have $2,000 in monthly cash flow, and a management team wants 10%, (good property managers ask around 10%) then what does it hurt to pay the extra $200? This is great business practice.
Instead of dealing with the headaches of tenants, problems with the property, and all of the extra hassle, you can use the extra time you gain to make more than that $200 on another business!
Not to mention, a good property management team is much better at their job than you are.
Rehab the Property
A lot of properties need to be rehabbed. If you buy a turn-key property, expect to pay full-value for it.
You need to get lined up with the right contractors. Contractors that can get the job done quick and efficiently, without overcharging.
Provide Reports to the Bank
You need to get all the paperwork lined up, and provide all of your reports to the bank. This is something you wouldn’t need to do in something like REIT investing, but the headache amounts to greater scalability and greater cash flow.
Take Phone Calls from Existing and Prospective Tenants
Take every phone call you can from tenants. The best way to keep good tenants is to make them feel like you care.
You should care. You should care deeply about what your tenants think, and their suggestions. If you don’t, you shouldn’t be a landlord.
Keeping good tenants is vital to the safety of your monthly cash flow.
Fix the Property
Rehabbing is more for value appreciation, fixing the property it ensure it works right. If there is a leak, get it fixed. If it needs a roof, get it fixed.
One rookie mistake is to ignore the little things. Ignoring the little things, typically leads to big problems. One problem turns into two, then suddenly you have 10.
Fix the property.
REIT Investing
The second way to invest in apartment buildings is by investing in a REIT.
A REIT is a Real Estate Investment Trust, which is a large, publicly traded company that you can invest in through the stock market.
Most REITs engage in rental properties and apartment investing, meaning that their revenue comes from a giant portfolio of rental properties that pay them every month.
REITs are required to pay out 90% of their profits to shareholders, and you should typically expect to receive 4-8% of your investment returned to you in cash flow year-by-year.
REITs are ideal for the hands-off investor who is willing to take lower returns in exchange for peace of mind, but still wants a monthly return.
To find out more about REITs, I have an article here:
Are REITs a Good Investment? | Pros, Cons, and Comparisons
Partnership
A partnership is where either you create a partnership, or you partner with investors that have already established a reputation and will give you consistent returns.
There are multiple ways to open a partnership, we’ll discuss the main two:
- Create your Own
- Partner with a Syndicator
Create Your Own
By creating your own partnership, you take the route closer to performing your own real estate deal. You do the work, you find the deals, you negotiate the terms, and do everything that was said above.
The difference is, other people can invest with you, and you can take the greater capital and buy bigger deals, bringing in more profit for you and your partners.
This is for someone that wants to raise more money to get access to bigger deals quickly, and doesn’t mind sharing some of the profit.
Invest with a Syndicator
A syndicator is what was mentioned above, except this time, you are the partner giving capital.
The difference between this and REIT investing, is that investing with a syndicator generally provides higher returns, but also take more money to get started in.
How to Invest in Apartment Buildings | 3 Ways to Invest
The main source of information, and the foundation of this article came from Grant Cardone’s book, How to Create Wealth Investing in Real Estate.
The book the simplest read on real estate investing that I have read thus far, but is also jam packed with information, in an easily digestible format.
Apartment buildings are an amazing investment, and it has lifted many people from the lower and middle class into the upper class, and has turned many people from broke to millionaire. It isn’t just some success story you hear about, it isn’t just luck. It’s hard work, and willingness to learn.
Once you learn, you need to be bold. Look for a deal, and when you find it, move fast.
