Apartment Investing for Beginners

hi everyone this is peter harris from commercial property advisors uh coach and mentor to many commercialist investors all across america and all co-author of this book as well commercial real estate investing for dummies the subject and title today's video is apartment investing for beginners so let's get started what i'm going to do is i'm going over five things and first of all i'm going to do why starting out with apartments is a good thing if you are a beginner number two the seven things to look out for if you're just starting out and number three the three areas that most beginning apartment investors go wrong in very valuable there number four i'm going to break down for you my very first apartment deal from the top to the bottom and lastly i'm going to give you an action plan on getting started yourself if you are a beginning apartment investor okay so let's get started okay number one why starting off in apartments if you are a beginner is a good thing first of all demand and ever since i've been born there just been a huge demand for apartments all across this country and we we expect that to continue there's a researcher by name of j thomas black and he's done some research on this demographic segment called echo boomers look it up echo boomers are children of baby boomers basically they are the ages between 18 and 34 and they will propel this this demand for apartments until at least 2020 what his research says is in the early 2000s there were about 66 million of these echo boomers around between ages 18 and 34. and by the year 2020 right they expect to for that amount to increase by seven million uh renters seven million more people that age range and they will live in apartments and there's no way that home builders and apartment builders can keep up with that number of people all right so demand will be increasing for the for some time being next is availability just drive around your town and you will see there are more apartment buildings than there are office buildings industrial centers shopping malls so just the sheer number of apartments that are available is a good thing if you are at beginning apartment investors there's plenty of them next is the ability to understand all right up the apartment business is relatively easy to understand it's not that complex but let me share with you why it's not if you compare an apartment building to an office building or a shopping center and i was building a shopping center you have to deal with complex leases that are you know for the apartment business leases are one or two pages long in in an office building it can be 20 pages long at least it's full of complex language you need to have an attorney go over it there's uh lease escalations there's common area maintenance items to deal with there's plenty to deal with that's not something i would recommend to a beginning commercial real estate investor that's why the ability to understand apartments is much easier compared to the office building or shopping center and lastly loans loans are readily available for the person who wants to borrow money from a bank to buy his or her first apartment building and the reason why is lenders love apartment lending the reason why they love it is because the income stream is steady and it's consistent so in the eyes of a bank the to lend money to a borrower for uh to purchase a apartment building is a safe investment for them okay all right so next we're going to talk about seven things to look for uh when you're you're buying an apartment building as a beginning investor we'll go there next okay number two the seven things to look for if you are a beginning investor okay seven things to look out for watch out for number one is i want you to have a goal to have an investment objective why are you buying this apartment building is it to purchase with the hopes of living off the cash flow is it buying with the purpose of retirement is it for a tax shelter is it all three regardless have a goal when you are embarking on a journey of buying your your apartment building okay number two area and location and you know uh the same uh location location location well i can tell you it the every location is is extremely important because there's an old saying in our in our business it says that you can fix a property but you can't fix a location you see if a location is declining that property comes with it a certain stigma that's negative the tennis will begin to move out and so should you all right so the number one thing i look for when i'm looking at an error location is i will look for jobs how's the job market there if there are no jobs there are no tenants you move on it's that simple now there are two ways to quickly find out uh what the job market is like number one is to call a local property management company and speak to a person there who does the actual renting now the reason why you go to a local property manager is because they are on the front lines of the rental market they know why people are moving out or moving in so they know all the trends so you simply ask them how is the job market is it steady or is it declining they will tell you straight up all right the second thing i want you to do to find out about jobs in the area is to go to your city's chamber of commerce there inside the city the city's chamber of commerce is a department called the economic development department find its director and ask him the same question and whatever answer he gives you ask him to back it up with data okay so there are two ways to qualify in area location all right all right next is the property so basically you want to know what's the property's condition you want to know what you're walking into i want you to look at uh two things there i want you to look at the the exterior look at the roof look at the siding look at the painting look at the balconies okay look at the landscape get a feel for how it is when you go inside look at the um look at the if it needs a a kitchen or a bathroom remodel uh look at the electrical look at the plumbing just real quick looks and see if it's something that can be that doesn't need major rehab if there's a small rehab that's okay but if there's major rehab that's something as a beginning investor i do not recommend you do all right as a beginning investor you're just starting to learn and you have a lot to be concerned when you're first starting out so you don't want to do major rehab after a few purchases and some experience go for it rehab is a rehabbing apartment is a great business it's very lucrative but when you're first starting up i recommend not doing major rehab too risky all right number four the numbers all right very important here here's what i want you to do very simple very simple all right over the last 12 months that the property's income exceed the property's expenses that's all you need to find out at this point all right i said 12 months not one month not two not three but 12 months all right 12 months of data now once you get the numbers in writing do not use the broker's brochure or the broker's performer we'll talk about that a little later all right that's highly inaccurate material all right we'll get to that later all right number five management strategy okay again these are seven things to look for when investing in apartments you need to have a management strategy this is where after closing this is where people make it or where they fail right here having a management strategy all right so the questions are simple are you planning on managing yourself or do you plan on hiring a management company i recommend if you're a beginner uh start off by hiring an accredited and licensed property management company do that first again this is by far the most important thing you're gonna do after you're closing all right have a management strategy number six exit strategy again i don't know why people are most investors don't think about extra strategies they're very important uh all the smart and successful investors i know they have more than one extra strategy all right in fact you should have an extra extra strategy before you close during your ownership and when you sell the property i'm talking multiple extra strategies now some of the extra strategies are are simple they could be holding long term it could be flipping even though that's not what we're into it could be to refinance with the lower rate and increase the cash flow or it could be a refinance uh cash out okay all the above all right so that's just a couple of the extra strategies to consider all right but you need to have one going in it's the smart thing to do number seven i want you to ask yourself some tough questions all right the reason why i got into commercial estate in including the apartment business is because it's less emotional there's more logic to it is more strategy to it so when you're looking at one two three four five six take out the emotions all right there's a saying that says uh follow do do not fall in love with the property but fall in love with the deal and that's what i want to do here when you go over one two three four five and six okay all right so the next thing we're going to do is we're going to talk about the three areas most beginning investors go wrong the three areas most beginning investors go wrong this is compiled from mentoring and coaching commercialist investors apartment investors for over for over a decade number one the first uh area where they go wrong most of times is they tend to believe their property financials in the brochures let me explain you find a property online you call the broker he sends you over a beautiful brochure with beautiful pictures second page has some fantastic finance property financials and the cash flows excellent you want the property well let me tell you this is where a lot of beginners go wrong because you should not believe the property financials in the brochure most case those financials are what we call performa or per forma meaning that they are best case uh uh you know best world scenarios not the actuals in fact if you if it says uh uh the actual numbers in the brochure it still isn't uh the actuals i'm sorry all right what you need to get from the broker are the uh certified from the seller the last 12 months financials from their property management company okay do not trust or believe what's in your broker's brochure ask for the financials directly from the seller if not you could possibly overpay for the property and be in big trouble okay all right again this is where most beginning vessels go wrong number two is they tend to underestimate their property's expenses all right for beginning investors the most uh the the biggest thing they underestimate and they're wonder why they're not cash flowing the first year is because they underestimate what it takes to run the property for 12 months all right what they do they tend to believe again in the brochures in the performer or they even forget to realize that uh the property needs to have a savings let's let me say this uh a property is like it's like a body all right and the body wears out after a while and it has to be maintained same thing with the property so if you buy a property day one it looks beautiful in year five it needs a new paint job and paint job could cost tens of thousands of dollars and if you don't have that money saved up you could lose a vacancy lose income and a cash flow will dwindle okay so do not underestimate the property expenses this is where beginning investors go wrong so what i want you to do is to get expert advice from a mentor from someone who's been there and done that in fact let me give you a rule of thumb that we use in the industry let's say you find an apartment building that's over 100 units our rule of thumb is the expenses should equal 50 of the income all right and brochures it may say 35 40 it is not so after you operate the property for a year you will see that it actually took 50 percent okay all right that's why you should uh really study this business don't believe um the property financials and please do not underestimate underestimate what it takes to run the property for 12 months get some help okay the third thing that most beginning investors go wrong in is property management oversight all right they hire a management company and after a few months uh their properties is is run down that happens more often than not all right so what i want you to do is i want you to have a certain mindset i'm going to use my suitcase metaphor as the proper mindset okay that you should have when hiring and managing a property management company here it goes all right let's say that you have a steel suitcase full of one hundred thousand one dollar bills and you're carrying around all day okay you have the still suitcases a big suitcase inside it inside of it is one hundred thousand one dollar bill so quite a bit of money all right and you're holding on to it to make sure it's quite safe all right all of a sudden you get busy you need to have someone look over your suitcase all right so how much diligence would you check out the person that's going to manage and watch over your suitcase you make sure that they're capable that they have integrity that they're intelligent that they really know what they're doing all right because you do not want to lose track of what's in this suitcase all right so you need to have the same mentality when you go out and hire your property manager okay all right now i gave you the three areas i have a bonus area all right the bonus area is most beginning investors go wrong and trying to find the perfect deal i'm sorry but the perfect deal does not exist all right does not exist sorry so what i want you to do is to be smart start small get started start practicing and after you practice you can do larger and larger and larger deals don't look for the perfect deal to get into so the next thing i'm going to do is i'm going to break down my very first apartment deal i'm going to break down for you my very first apartment deal all right um so how i got started first if you recall my previous story was i was initially buying the single family homes built up a nice portfolio and then i discovered the wonders of apartment business and i shot right in now what i did to buy this apartment building was i sold uh two single family homes and used those profits to buy this apartment building now it was 45 units and again i went through 70 deals 7-0 70 deals over two months to find this deal all right so perhaps it may take a little less but that's about the right time it takes to find uh your first deal two three maybe even four months to find your first deal all right okay um so again 45 units the location was next to a major university with the medical school and fortunately i didn't want the students as my tenants so it was on that on a corridor where a lot of the university workers and upper grad students lived so most of my residence attendants were either university workers or grad students which is a good thing all right they were asking 775 thousand dollars after about uh two weeks of negotiating i end up with the purchase price of 720 000 all right how it was financed oh boy let me tell you this um back then when i bought this property there weren't a lot of out-of-state uh borrowers or a lot of out-of-state acquisitions i was one of the forerunners to that what that means is it was very hard for me to find a loan all right i went through uh national banks small banks local banks i got denied but all of them all right so last just effort the last three banks i put on my nice suit i went into the president's office sat down with them and explained to him why he should uh approve a loan for me after a third try they call me office and they approve me so persistence and a nice suit pays off okay in this business all right um so the financing was decent i put down twenty percent all right um i'll get a decent rate uh six percent uh 20-year amortization you'll learn about that a little later all right now one thing that i do in a lot of my transactions is cash back let me explain what this is so what i did was i had this probably under contract for 7 20 right and what i did was i found a lot of flaws in the property all right that equaled about 50 000 and you know i just got maybe three uh contractors giving quotes fifty thousand dollars worth of stuff to do on the property in actuality it was about twenty twenty thousand dollars to get it done but i put in my negotiations i presented uh 40 um 50 000 of stuff to get done and he decided to give me credit for 40 000 of that now here's the key instead of asking for credit i ask for cash back okay there's a difference credit means they're going to reduce your down payment cash back means i get a check at closing for that amount so that's what i did in fact i have i keep a copy of the check because my first transaction is very proud of it uh you can see here i'm not sure you can see here it says peter harris and it says 45 000. i set 40 here but i forgot it was actually 45 000 uh cash back from the seller so i got this after closing okay um let's see cash flow um the cash flow on my two single family homes today that i sold combined they were producing about twelve to fourteen hundred dollars a month when i sold them and i and i got into my new apartment building forty five units the cash flow jumped up to sixty five hundred dollars a month i was on the rat race at that point all right so that's the breakdown my first deal i'll never forget it it was what catapulted me uh to where i am today all right so next i am going to give you an action plan on getting started if you are a beginning investors okay last but not least i want to give you an action plan on getting started investing in apartments if you're a beginner okay so let's get started number one is i want you to get educated this is the theoretical part okay you need to gather theory okay engross yourself in apartment investing books uh buy my commercial book read articles yourself as much as you can read like there's no tomorrow so absorb as much as you can okay again this this is the theory part okay the next what i want you to do is something practical okay we have theory practical i want you to go out and find a friendly uh real estate broker who sells apartments okay i do not want you to go out and find a residential essay agent who happens to know about apartments i want you to find a real estate agent or broker who specializes in apartments then after that what i want you to do is i want you to nurture that relationship by calling them by speaking with them by telling them that you're new to the business but you're interested getting into it be nice to them here's the goal here's the goal you want to get on their a place their a plus list where they send you listings but here's the ultimate goal you want them uh when when the money mo when monday morning comes along and they get that they receive a a pocket listing uh pocket listings as a listing for a property that will not go off the public okay when they receive that pocket listing from this property seller you want them to think of you first all right so they will call you and say hey joe or joan hey i have this great uh 40 an apartment complex it's uh in-house it's a pocket listing i'm not i'm gonna try to sell to you first let me know if you're interested that's what you want that's where the best deals are now those only come about if you are on his a plus if he likes to do business with you so just remember that the apartment business is a relationship business so build relationships it's priceless okay next is something else is practical i want you to start visiting apartments that are for sale okay there is nothing like having a the property brochure in one hand with all the property details and information and having their property in front of you okay believe me it is better than any seminar that you will go to okay so again having their brochure there and then having a property in front of you walking around and making sense on what's on here as to seeing you visually it compares to nothing else okay so that's number three to start visiting apartments that are for sale number four i want you to get your financing in order and here's what i mean by that you may have the 25 the 20 to 25 down payment you may not have it okay you may have to do something uh creative uh half of our closings are creative okay fifty percent are with uh commissioner banks fifty percent are creative all right what i want you to do and to be is be intentional on getting your finances in order is it going to be do you have the cash available do you not is it going to be creative those those three don't matter i want you to be intentional by committing yourself to either direction okay all right number five is once you decide on in an area you like to invest in i want you to go and create a relationship with the local property manager okay the uh the expertise that they can give you is incredible all right remember you are the beginner they are the experts okay they can tell you things like what the rents are going to be what vacancies are going to be uh what part of the year are the heating bills the most uh all these mark other market information and resident profile things that you need to know to become an expert in this business they have the expertise you need to go out and create their relationships those relationships here's here's the other bonus that will do that will work for you if you can create this relationship they will go out and do a drive-by inspection for you so let's say you find a property you really like you're really busy it's the other side of town you can call the person your relationship with and they will actually go out and drive by the property for you and give you a thumbs up or thumbs down that's priceless okay the second thing they can do for you is they can do on-site inspections for you let's say that you get a property in a contract or you do a walk-through they will go with you and walk through the property for you for free drive bikes for free and the actual walk-throughs for free what they want from you is your business okay and they want your business because you establish a relationship with them and they can see that you are the real deal okay all right number six is i want you to get your mindset right okay in this business you can do anything you set your mind to okay everything's possible for you the most uh wealthy the most successful apartment owners in this country started where you are okay they had a book their belief system says i can do it even though they had nothing okay same thing with you if you have nothing you can get to where they are first of all you have to believe you have to have the right mindset okay lastly is i do not want you to give up okay this is part of your action plan is not to give up persistence persistence persistence okay so building a financial fortress in in investing in apartments it takes years it's going to take you several months to find your first deal alright so to build a financial fortress investing apartments it starts with one brick at a time okay and it'll be well worth it if you do so okay so stick with it all right and don't give up all right um that was um the action plan i don't i always have a next in my video and the next is i just want to share a quote with you this is mark twain's quote okay it's fitting for this video it says the secret to getting ahead is okay let me repeat that the secret to getting ahead is getting started that's the secret you have to get started okay so i hope you enjoyed um this video on apartment investing for beginners if you want more resources like this more videos like this going to my website commercial property advisors or simply join this youtube channel okay this is peter harris from commercial property advisors i'll see you later at the next video

Channel: Commercial Property Advisors

Views: 247,723

Rating: 4.9178371 out of 5

Keywords: Apartment Investment And Management Company (Business Operation), Apartment Investing, Commercial Real Estate Investing, Commercial Property Advisors, Peter Harris

Id: jQFFLvGvZxE

Length: 28min 33sec (1713 seconds)

Published: Wed Jul 23 2014