Single-Family vs Multifamily Part 2: Costs required to buy a property

A quick primer: Single-family rentals (SFR) are a single house with one tenant and one lease.  Multifamily properties are apartments, with many tenants and many leases.  I personally have invested in both and see pros and cons of each that I’ll be discussing over the coming weeks.

Last week we talked about the time it takes to buy a property, but what kind of costs are associated with a purchase?  (This article will not address the costs associated with ‘owning and maintaining’ a building, that will be a later post.).  You’ll find it encouraging that regardless of which property type you buy, there are really only 2 items you will pay out of pocket: Down Payment and Closing Costs.

For this comparison, let’s assume we’re going to buy either 5 Single Family Rentals or one 10-unit apartment building.

For easy numbers, we’ll say that the 5 houses each cost $100,000, and that the 10 unit building costs $500,000.  So the total value will be equal.

DOWN PAYMENT:
This is simply the amount that the lender wants to see you invest into the deal for them to feel safe lending you the rest.  This is your money and is invested into the property. You would get it back if you sold the property at some point.

For the 5 SFRs, you will generally put down 20% on each.  The bank will lend the other 80% of the purchase price.
20% of $100,000 = $20,000
$20,000 x 5 houses = $100,000 total down payment.

For the 10-unit apartment building, you will generally put down 25-30%. The bank will lend the other 70-75%.
30% of $500,000 = $150,000 total down payment.

If you don’t have a large chunk of money to use as a down payment, then perhaps Single Family is a good option for you to start with.  But remember, whichever property type you buy, this is your money that is invested in the property and will come back to you if you sell the property.

CLOSING COSTS:
This is a broad term that can include all inspections, document filing fees, appraisal fees, etc.  These are fees – money you will not recoup upon sale. 

For the 5 houses, you will pay closing costs on each property of approx $4,500.
$4,500 x 5 = $20,500 total closing costs.

For the 10-unit apartment building, you will pay closing costs of approx 2% depending on your lender.
2% x $500,000 = $10,000 total closing costs.

This is an area I see the huge benefit of multifamily properties.  You get more bang for your buck since you are only paying 1 set of closing costs, instead of 5.  Remember, these are fees, money you will not get back when you sell the property (unlike the down payment, which will come back to you).

And that’s it.  These are generally the only costs associated with buying a property.

As you can see, combining the 2 costs, you will need less money upfront to purchase a Single Family Rental.  Now, there are huge benefits to owning and maintaining a large multifamily property, but we’ll get into that next week.

If you are interested in investing in large multifamily properties but don’t have the capital needed for the down payment and closing costs, consider investing in an apartment syndication.  As a passive investor, you don’t have to cover allthese costs since they’re split amongst the investors.  As an added benefit, all these calculations, as well as all negotiations with the lenders, are handled for you.  You get to ride on the coattails of experienced investors who have preexisting relationships with the lenders and get great lending terms that fit that property and the plan in place.  But I always think it’s good to know what’s going on in the background as much as possible.

OK!  You’ve bought a property, but now you have to run it like a well-oiled machine!  We’ll dive into that in the next article.

Next week…Part 3: OWNING A PROPERTY

Single-Family vs Multifamily Part 1: Time required to buy a property

A quick primer: Single-family rentals (SFR) are a single house with one tenant and one lease.  Multifamily properties are apartments, with many tenants and many leases.  I personally have invested in both and see pros and cons of each that I’ll be discussing over the coming weeks.

It takes a lot of time and effort to buy a property.  You have to analyze markets, crunch numbers, profile tenants, find a property management team, pick a lender and get qualified…

But here’s the thing… all that work will be roughly the same whether you buy 1 or 50 units!  So if you want more units, this is one area where multifamily really shines.

Some examples to put this in perspective:

You may look for different highlights in a market for a single family rental vs a multifamily property, but you’re still ‘analyzing a market.’
(What are the schools in the area? What are the major employers? What are the crime statistics? What kind of stores are around? Walmart or Nordstrom? Starbucks or 7-11? Etc.)

You may crunch larger numbers for a multifamily property, but the amount of numbers/expenses are relatively the same regardless of your property size.
(Rent from a house may be $1,500/month.  Rent from all your apartment tenants may add up to $15,000/month.  It’s still ‘rent,’ just more zeros.  Insurance on a house may be $500/year.  Insurance on an apartment complex may be $5,000/year.  It’s still ‘insurance,’ just more zeros.)

You will still profile your tenant base regardless if you’re buying a SFR or a multifamily property.
(Who lives in the area? What is the median income level? Education level? Etc.)

You will have to talk to a lender and qualify for a loan, just a different department at the bank depending on your property size.
(A house requires a residential mortgage, whereas a multifamily property requires a commercial mortgage.  A local bank, for instance, can offer both types of financing, you simply talk to a different person at the bank and submit different paperwork – though commercial mortgages are more paperwork and require a more advanced applicant.)

You will need to find a property manager, but will simply call on different managers who focus on different property sizes.
(Some property managers focus on houses and others focus on multifamily properties.  You may ask them different questions and look for different answers, but you’re still having the conversation.)

You see, the time you’ll spend to acquire either type of property is roughly the same.  It may feel more overwhelming to buy larger properties, but that is simply a mind-shift.

Now, if you invest passively in syndicated apartment deals, all this time and research is done for you while you get to enjoy the benefits of having a much larger property with multiple tenants paying your monthly rent.  But I will always encourage you to learn as much as possible, even when investing passively.  

Next week…Part 2: COSTS REQUIRED TO BUY A PROPERTY.

The Power Of Leverage

Some of you have asked “Why do you take out a loan to buy a property?
Why not just save up enough and pay cash? You’ll have no mortgage payment, doesn’t that make you more money?”

Great question!

Real estate differs from stocks in that $100,000 can buy only $100,000 worth of stocks.  That same $100,000 on a typical real estate purchase with a 25% down payment, can purchase $400,000 worth of property!  ($400,000 x .25 = $100,000).  This is called ‘leverage’ or ‘borrowing money from the bank.’

But what we care about is the returns, right?.  At the end of the day, do we get more money in our pocket if we pay cash for a property? Or if we use leverage to buy a property.

Let’s look at the different scenarios, and calculate our cash on cash returns.

1. You pay CASH.
You buy a property for $100,000 that has a yearly net income of $10,000 before taxes.
Remember, since you paid cash, you have no mortgage.
Let’s calculate your cash on cash return in this scenario…
$10,000 (net income) ÷ $100,000 (total capital invested) = 10% cash on cash return.  Not too shabby!

2. You use the power of LEVERAGE.
You buy that same $100,000 property with only 25% down ($25,000).
Your yearly net income is still $10,000 before taxes.
But since you have a mortgage, you will have to subtract $5,000 of mortgage payments from your profit (this, of course, will vary depending on your loan terms).
$10,000 – $5,000 = $5,000 net income.
Remember, you only put down $25,000.  So let’s calculate your cash on cash return in this scenario…
$5,000 (net income) ÷ $25,000 (total capital invested) = 20% cash on cash return.

By using leverage, you have doubled your cash on cash returns for this property.  Oh, and by the way, you still have $75,000 from your original $100,000 to go buy 3 other properties just like this!

Note: The numbers used here are for example only.  I used nice round numbers to make it easy to digest.  Every real estate deal is different, but simply put, the numbers are in your favor when leveraging the bank’s money to buy rental property.

How to calculate returns. Pt. 2 “Equity Multiplier”

Equity Multiplier

Hey Everyone.  This is a follow up to last week’s post about return on investment.  What return will your hard earned cash give you when invested in a specific real estate deal?  The 2nd common metric that I rely on is the equity multiplier, which really comes into play when you buy, hold, and then sell properties.

If you recall in last week’s article, Cash on Cash is simply how much cash you receive each year compared to how much cash you invested in the first place.

But what if you hold your property for 5 years, then sell it?  You got a return each year, then made a profit at sale.  This brings me to the equity multiplier, another simple formula that gives you a great idea of ‘how did my investment do?’

The calculation is: Total Dollar Income Over The Life Of The Property (including proceeds from sale) ÷ Total Dollar Invested.

Example: If you invest $50,000 and receive $10,000 net proceeds each year, and sell the property after 5 years for a $50,000 profit, that’s a 2x equity multiplier…

Breakdown: $50,000 ($10,000 net proceeds x 5 years) + $50,000 (profit from sale) = $100,000 Total Dollar Income Over The Life Of The Property

$100,000 ÷ $50,000 (Total Dollar Invested) = 2 (read as a 2x equity multiplier) In other words, you doubled your money.

Pretty simple right?  

The more aggressive the investment, the faster the potential to double your money (IF everything goes according to plan. Be wary of people promising overly-impressive numbers in short timeframes).  The more conservative the investment, the longer it could take to double your money.

What kind of equity multiplier would excite you? 
How fast would you want to double your money?

How to calculate returns. Pt. 1 “Cash on Cash”

Cash on Cash Return

Hey Everyone.  When evaluating real estate investments, one of your main questions should be “How do I  calculate my return on investment?” The most common metric is your Cash on Cash Return.  But what is that exactly? And how do you calculate it?

Cash on Cash is simply how much cash you receive each year compared to how much cash you invested in the first place.

The calculation is: Annual Dollar Income ÷ Total Dollar Investment.

If you invest $100,000 and receive $10,000 net proceeds each year, that’s a 10% Cash on Cash return.  10,000 ÷ 100,000 = 10%.  Pretty simple right?

This is my favorite metric because it’s easy to calculate, easy to understand, and is based on simple numbers.  There are no fancy metrics here, no jargon or lingo I need to understand.  “How much money does this property put in my pocket each year compared to how much it cost me to buy it?”

Two caveats here:
1. This return can change every year.  One year you may have more maintenance requests on your property, driving expenses up and your cash on cash return down.  Another year you may have lower vacancy than expected, driving expenses down and your cash on cash return up.  It is best practice to keep track of this both yearly and cumulatively for the life of your investment.

2. Make sure you’re calculating your ‘Annual Dollar Income’ correctly.  This should be your NET proceeds.  Just because you receive $2,000 in rent from a property doesn’t mean you can use the full $2,000 in your calculations.  You must subtract all your debt service and operating costs (mortgage, taxes, insurance, vacancy reserves, maintenance reserves, property management fees, etc.)  What’s left over is your NET proceeds, and that is the number you will use to calculate your Cash on Cash Return.

What kind of cash on cash return would make you feel comfortable with a real estate investment?  Maybe compare it to your stock portfolio.  What kind of cash on cash return would make you consider selling off $50k in stocks in order to invest in real estate?

Finding Your Team

One question I often receive is “How do you find the people you work with, and how do you trust them in business?”

In my thirst for knowledge and mastery of real estate, I spend a lot of my time both strategically networking and casually getting to know people.  I also spend a lot of time listening to podcasts, reading books, and listening to audiobooks.

I have never been someone who is afraid to reach out and talk to people in high up positions, so I simply pick up the phone and call hosts of podcasts.  I call big players in this industry that I hear being interviewedon podcasts.  I call authors of seminal books.  I call VP’s of large companies.

During those conversations I stay humble, I learn, but most of all, I build up a rapport and develop friendships.

This has served me well and helped me connect with people that do big things, and do good work.  If I think someone will be a good partner in real estate, I’ll cross-reference them with other people I’ve met along the way and try to get a sense of their clout and trustworthiness.  I’ll try to get an opinion on their current business dealings: Are they conservative or aggressive?  Do we have complementary ideologies?  Can I add to their business and vice versa?

I also feel them out over phone calls and coffee.  I’ve gotten on a plane and flown across the country more than once.  I try to get to know them on a personal level beyond just business.  (Would it surprise you in the least that this has happened multiple times over bbq and tacos?)

At the end of the day, it still takes trust and faith in another individual or another team of individuals, which is why I simply do my best and then take action.  I invest in deals and I learn with my money at stake.  This is a people business, built with teams of hard-working and smart people, and I’m proud of who I’ve connected with thus far, and the people I continue to connect with today.

How about you?  Have you connected with anyone lately that you are proud of and eager to do business with?  Do they motivate you and push you to take action to change your life?  I hope so!

Top 5 questions I get about Real Estate Investing: #5

#5 “So, what’s your end goal here?”

“When I spend $15k one month on a trip to Hawaii with my family, I want that money to be replaced the very next month from rental income.”

My goal is relatively simple really.  I will hit certain milestones of calculable and dependable monthly income from my rental properties, so I can live life with a confidence that my 401k won’t provide.  Who knows when they’re going to die? I certainly don’t.  I don’t know how long that pile of money (401k) will have to last.  I want streams of money that replenish every month regardless of how long I live (and for my family’s sake, that stream will continue long after I’m gone).

You see, streams of money give me freedom.  When I spend $15k one month on a trip to Hawaii with my family, I want that money to be replaced the very next month from rental income (plus much more even!), and the next month, and so on.  When I take the entire summer off of work to spend it with my family while my sons are on summer vacation it will be fully funded by streams of rental income.

But why the urgency? Why do I work so hard at this now? The way I see it, if I don’t get on this now,  I imagine a future where my son is 18 and about to go to college, and my second son is 15 and needs a new car so he can get to his expensive club sports practices, and health insurance is even more ridiculously expensive than it is now…  If I don’t have streams of income, then I’ll be locked into my 9-5, working hard just to spend the entirety of each paycheck on my expenses, never getting ahead, and never having ‘more than enough.’  That’s not what I want.  I’m investing the time and money now, so when those times come, I won’t worry about buying a $20k car for my son because guess what will come the very next month? Another $20k in rental income.  I won’t worry about my son’s tuition bills because they will be paid for by my tenants!  (Yes, I plan to have my tenants pay for my sons’ college tuition.)

Finally, I want to set an example for my family of what can be achieved financially with enough grit and determination and accumulation of knowledge.  And ultimately, I want to share and help others do the same in my sphere of influence.

What about you?  Are you already strapped for cash on a monthly basis?  Do you see an ‘out’ or even a break from your 9-5?  Will your pile of money be big enough or do you want streams of income?  What are you going to do to change that?  Real estate is definitely not a ‘quick fix’ but you can begin investing now to change the future for you and your family.

Please, let me know how I can help and I’ll do my best to get you involved and get your own streams of income started.  I even have a property right now that has a few spots left for investors looking to gain some passive income, some streams of cash to supplement your current income.

Investment Update 2/2/18 – We Closed On Ashland Apartments!

84 Units in Lexington, KY

I am very excited to announce that Amity Cash Flow, in partnership with Venture D Properties, has closed on Ashland Apartments (formerly known as Country Lane) in Lexington, KY.  This property has a bright future and we can’t wait to get going.

The Property

The 2nd largest city in Kentucky, Lexington is a beautiful city known as the Horse Capital of the World.  In its honor, we are rebranding the community to Ashland Apartments, named after the Ashland Stakes-a thoroughbred horse race here in Lexington.  Surrounded by multiple apartment communities that are demanding a premium in rent, we are perfectly positioned to offer our residents a freshly updated community of 2 & 3 bedroom units to compete in the market.

The Plan

We are taking a strategic approach to renovating our interiors, as well as the landscaping and common areas.  Our professional management team will raise rents slowly at first.  Then, once more of the community has been upgraded, we will raise rents to meet market rates and drive investor returns.

The property will be repositioned over the next 16-20 months, increasing the Net Operating Income (NOI) and forcing the value. The process will begin this coming week, with vacant units being renovated to meet our standards.

Through the property’s repositioning, rental increases, and eventual sale, our conservative underwriting targets investors’ Internal Rate of Return (IRR)  at 16-20% annually.

If this is something you’d be interested in, I have another property that has a few spaces left for investors in San Antonio, TX.  Shoot me an email at chris@amitycashflow.com

Top 5 questions I get about Real Estate Investing: #4

#4 “Don’t You Worry About Another Market Crash?”

A market crash might not bother you if you plan on living in your own home for 30+ years and the value today doesn’t affect you, but what about an investment in which your goal is to make money no matter what?

“If you want to feel secure in your investments, and not live in fear of another market crash, then simply run the numbers. Run the numbers. Run the numbers!”

Am I worried about another market crash like we had in 2007/2008?  Yes, but perhaps not to the extent you may assume.  You see, if another crash happens, two things can be affected: 1. Occupancy.  2. Rental Rates.

  1.  Occupancy
    I want my apartments to stay occupied.  The more people paying rent, the better.  Most stable markets hover around a 5% Vacancy Rate.  This means that any given property is 5% vacant, or 95% occupied.  That’s a ‘normal day’ on a given property, but what if it all goes bad?

    During the 2007/2008 crash in San Antonio, multifamily vacancy soared to 10.5%. (That means an average property was only 89.5% occupied).  What do I do with that information?  I simply factor that ‘worst case scenario’ into my analysis of any given property.  If the property would still turn a profit, then I don’t let it bother me anymore past that.

    For example, in my current property offering, we analyzed that the property can drop to a 20% vacancy rate (twice as bad as the last crash) and would still turn a profit and give a positive return to investors.  Now, that is a worst case scenario but it paints a realistic picture of what you may be up against and how conservative analysis can give you peace of mind.

  2. Rental Rates
    I also want my tenants to be paying competitive rates for their unit.  This may vary from market to market, but in general, rental rates are not directly tied to housing prices.  They’re actually tied more to income levels.  (Yes, they may get hit to an extent, but if the housing market crashes and people can’t afford their homes, where do you think they go?  They become renters!  So rents tend to stay relatively stable). 

    But, just like with Vacancy Rates, I simply use worst case scenarios in my analysis of properties, and if it works out, then I move forward without fear.

    For example, say the market does crash, and the rents on my Memphis properties drop by an astounding 30% or $400 per month! That would be terrible! Well, I would still be cash flow positive by approximately $50 per unit every month.  That’s right, the rental rates could drop by 30% and I would still not lose money on my properties.  Again, conservative analysis can give you peace of mind when investing in real estate.

    That conservative analysis I’m talking about is all part of ‘running the numbers.’  What would it look like if vacancy goes up?  If rental rates go down? Go ahead and assume the worst!  If you want to feel secure in your investments, and not live in fear of another market crash, then simply run the numbers. Run the numbers. Run the numbers!

    Would you like more details on running the numbers? I’m happy to walk you through a basic property analysis.  Just reach out!

Top 5 questions I get about Real Estate Investing: #3

#3 “Can you break down the investment process for me?”

In a typical apartment syndication (becoming a partial owner of an apartment community) the property will be bought, repositioned, and then sold for a profit over a period of 3-7 years.  But what does that look like from the investor’s perspective?

“You are now officially an investor in a property and can enjoy your financial returns while the General Partners do all the hard work for the duration of the hold.”

This week’s article is a bit lengthy, as I’m going to do my best to give you a step-by-step breakdown of the investment process with one giant PREFACE: Every deal is uniquely its own, so these will be generalities for education purposes.

  1. Your investment process will begin by educating yourself.  This can be done through books, classes, friends, podcasts, or educational articles like these.
  2. You will receive an “Investment Summary” for a specific property.  This is not like a REIT where you are investing ‘in real estate in general’ but rather, you are sharing ownership with other investors for that one property.
  3. If you have questions, you will speak with one or more of the general partners on the deal, who will explain the plan for the property, as well as your expected returns.
  4. Once you are comfortable with that property and lock in an amount you are willing to invest, you will sign a PPM (Private Placement Memorandum).  This is a legal document specific to that deal, covering the financial structure for the investors and the General Partners, as well as the standard disclaimer: ‘Investments are not guaranteed, be advised that you are investing at your own risk, etc.’
  5. Once the general partnership is ready, they will open up an escrow account, where you will wire your funds.  The money will be used specifically for the property and will live in the LLC that owns the property – safe from tampering.  (This is not going to any partner’s personal bank account for instance).
  6. Roughly 15-45 days after your money is wired, the property will officially close/be purchased.  The reason the money gets sent so early is to be certain the funds transfer and that all capital is raised.  The more investors, the sooner money will need to be transferred – simply to wrangle everyone’s money.
  7. Congratulations! You just literally completed all the ‘work’ you will have to do.  You are now officially an investor in a property and can enjoy your financial returns while the General Partners do all the hard work for the duration of the hold.

Speaking of the returns, there are typically two ways you will get paid; monthly or quarterly distributions, then, when the property sells, you will receive your share of the proceeds. 

In order to make this clear using specifics, I will assume a $100,000 investment, with an 8% preferred return.  I will assume a purchase/closing date of Jan 1, 2018, and a sale date of January 1, 2023 (5-year hold).

Year 1:

Jan 1, 2018 – property closes.  You now have $100k invested in the deal.

April 1, 2018 – 1st quarterly distribution – You receive a check for $2,000.

July 1, 2018 – 2nd quarterly distribution – You receive a check for $2,000.

October 1, 2018 – 3rd quarterly distribution – You receive a check for $2,000.

Dec 31, 2018 – 4th quarterly distribution – You receive a check for $2,000.

(K-1s are distributed for tax purposes, reporting your $8,000 income for the year, as well as your percentage of the property’s tax depreciation – which can be used to offset your income.)

Year 2-5: 
Returns are paid on the same quarterly schedule, with the same dollar amounts.

But now, at the end of year 5, the property is sold.  Assuming the property went according to plan, it is sold for more than you bought it for.  Congratulations, you’re about to make more money…

January 1, 2023 – Property sells for the projected sales price

January 15, 2023 – You receive your original $100k investment back, plus a check for $60,000 – your share of the profits.

At the end of year 5, you have received a total of $40,000 ($8,000 x 5 years) in quarterly distributions. This comes out to an 8% return on your investment annually.

$40,000 in quarterly distributions + $60,000 from the sale of the property + $100,000 (your initial investment back) for a grand total of $200,000, thus doubling your money in 5 years.

At this point, your investment commitment is over, and you have a couple of options.  Your first is to simply declare your capital gains and pay your taxes.  But the second, is to roll that money into another property through what is called a 1031 exchange, deferring your tax and doubling your investment in the next property if you choose.  Feel free to read more on 1031 exchanges, but the cliffs notes go like this: ‘You may continue to defer your taxes until you die, and never pay taxes on the capital gains.’

I know this was a lengthy read, but good job investing time into your education.  Keep in mind, all deals are unique.  Some may fall short and some may overdeliver.  If you are eager to get involved right awaycontact me.  I have a deal that is open right now for a limited number of investors.