by Attorney William Bronchick
If you’ve been buying and flipping or renting single family homes, you may want to look into apartment investing. Yes, I know, you think you need gobs of cash to buy apartments when the fact is you can buy apartments with little or no cash out of pocket. I’ve done it, my students have done it, and you can do it, too!
Apartments operate on an economy of scale. If you have 10 units and one vacancy you are still 90% occupied. When you lost a tenant on a single family house, you are 100% vacant. Multiple units allow you to spread the risk around.
Apartments are cheaper per unit than single-family houses. The more units you buy, the cheaper per unit cost.
Multiple units mean bigger discounts on supplies and materials. It’s easier to negotiate for 10 fridges than one.
Multiple units make professional management more effective. You can be a passive investor in apartments.
Depreciation can give you huge tax write-offs against other income.
Financing, particularly with larger buildings, is often easier to get than on single-family homes. Believe it or not, it’s easier to get a $5 million loan than a $50,000 loan. Large commercial lenders look at the efficacy of the project, not your particular financial ability to make a payment on a vacant house.
Since the mortgage meltdown, lenders have become as tight as a drum, making a nation of renters. This means more demand for rental units. On the low end of the scale (called “C class”), there is a very limited supply of apartments. Builders cannot afford to build low-income housing. This limited supply and increased demand have resulted in record low vacancy rates for landlords. This trend will probably continue for several years until lenders loosen up.
Because of the dilution of our dollar, inflation will drive up rents. Small increases in rents will drive up the value of your apartments dramatically.
Interest rates are lower than low. Lock them in now while you can!
The apartment market, unlike single family, is making a comeback. Inventory is down, demand is up, and pricing is starting to rise. The timing is just right in many cities across the country.
How do I Buy Without a Large Cash Down Payment?
Syndications are the name of the game in apartment investing. While it does take some cash to do the due diligence on an apartment project (appraisal, attorney fees, inspection, etc), this is often reimbursed from the capital raised from investors. This means that “nothing down” investing is very doable with apartments.
Seller financing is the way to go with smaller buildings (5 to 50 units) because FNMA won’t finance them and commercial banks don’t want to bother with small loans. This forces seller to consider carrying back financing to get their properties sold. With a small down payment and reasonable interest rate, you can negotiate seller financing with “mom and pop” operators looking to retire. It’s also smart to have a trusted advisor or mentor along the way to help you handle the various issues associated with apartment investing!