WHY INVEST WITH US IN APARTMENT BUILDINGS
Today, in this blog, we are sharing some reasons that you shall invest with us for apartments deals. Before we start, we’d like to cover some fundamentals in apartment building investment and compare it with single family home investment.
As you can see, in the below table, Single Family Homes (SFHs) are defined as homes with 1 to 4 units. If we have more than 4 units under the same ownership, they are technically apartments, a.k.a Multifamily homes (MFHs).
Some of you may have experience buying SFHs; when you apply for a SFH loan, the mortgage officer will review your income, your credit and see if you’d be qualified for a mortgage. And if there is anything wrong with the property, you are personally 100% liable for the property. MFHs on the other hand, function completely since they are viewed as commercial property and MFHs are used as collateral and non-recourse loans (another fancy way of saying you are not personally liable for the apartment) are issued to the borrower. Why do the lenders lend more money in apartments deals when there is even no need for personal guarantee? Well, they have been in this business for a long time, and they know there is way less risk (actually 90% less) than single family home investments.
SFHs are valued by comparing them with neighboring SFHs when MFHs are valued using an income based approach where the value of MFHs are the Net Operating Income (NOI) divided by the market cap rate.
For example, a 10-unit apartment has a current rent of $750 per unit per month, and the entire expense adds up to 35k in total. The Net Operating Income is going to be ($750 x 10 x 12 – 35k) and assume the market cap rate is 5.5% in that region, the MFH is valued at 1 million. You can google what Cap Rate is, and it reflects the multifamily housing supply and demand for a particular area. In general, the higher the cap rate, the greater the risk and return; and vice versa. You can always check the local brokers for actual cap rate.
So how to make money with MFHs? Let’s dive into a case study.
Say you bought the 10-unit MFH mentioned earlier, and in 6 months, you raise the rent from $750 to $850 and you reduce the expenses from 35k to 25k, a process called Forced Appreciation. You instantly raised the property value from 1 m to 1.4 m, which is 40% appreciation! You see the magic? You can control the value of the property! SFHs can never do that!
That’s not it. Nobody puts all their cash to invest in real estate, because most likely you are going to get loans from banks. Assume you borrow 75% money from the bank (it’s called leverage) and only put 250k down, and you sell it in 6 months, you cash out 650k! That’s 2.6x return!
Assume you don’t sell the MFHs, instead you refinance it. You can now assume a new loan which is 75% of the new property value; use this loan to pay off the old loan of 750k, and you get 300k cash out. In this scenario, you get all cash back plus 50k profit. You know what’s nice? You now own the 10-unit property apartment for free!
The numbers don’t exactly play out as we have demonstrated, there are transaction fees, management fees, etc. but you get the idea. Below we list the benefits of investing in apartments.
