The Complete Guide to Buying and Selling Apartment Buildings
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In summary, it can be said that supply and demand for both single-family and multifamily properties are generally in equilibrium at any given time. Transaction Costs With each and every purchase, some type of transaction costs will be incurred. These costs include lender and attorney fees; third-party reports such as appraisals, surveys, and possibly environmental and engineering inspections; title fees; and the like. Consider the earlier example of the 24 units.
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Imagine the time, energy, and expense of purchasing 24 separate single-family units, each having its own closing. Now compare this to the purchase of the unit, the 8-unit, and the fourplex. Instead of 24 closings, you now have only three. It is true that some of the fees are based on the size of the loan or the property value, but this actually works to your advantage. On larger deals, the parties involved can afford to be more competitive. They want your business and will often be somewhat flexible in the fees they assess.
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The smaller single-family deals will require almost as much work, and therefore there is not as much room for negotiation. If you have ever 16 Advantages of Multifamily Ownership been through the closing process, I think you will agree that 3 closings as opposed to 24 represents a much more efficient use of your time.
Concentration of Units Having your units concentrated in a specific area will also enable you to make more efficient use of your time. Once again, consider the 24 units as an example. If you live in a small town or community, chances are your rentals will be in close proximity to one another, so this will not make much difference. However, if you live in a major metropolitan area, and you are not careful, you may find yourself buying property on the other side of town because it represents a fair value.
Do this two or three times and you will be endlessly zig-zagging back and forth across town, through traffic, sometimes in adverse weather, and at who knows what time of day or night. Maintaining your focus in a specific area will once again allow you to make more efficient use of your time. This is not to say, however, that you cannot own apartment complexes located in different parts of the city.
If you own, for example, a unit complex on the south side of town and a unit complex on the north side of town, you will most likely have on-site staff to assist you—and in this case, you are simply commuting between 2 properties, not If you are managing only the 24 units we have been using for an example, chances are you are doing much of the work yourself. Depending on its size, your assistant may serve a dual role by not only functioning as a property manager, but also performing some of the light maintenance.
If the units are all situated at a common location, this will greatly simplify things for your staff. Tax and Record Keeping Considerations At the risk of sounding redundant, record keeping will be much easier for a multifamily property with 24 units as opposed to 24 single-family houses. If you have ever filed an Internal Revenue Service IRS Schedule E form or any other tax-related form for that matter , you know that it can be a very tedious and time-consuming process. With 24 single-family houses, you will need to track each property separately.
This includes all expenses such as labor, maintenance, supplies, materials, and utilities. It also means tracking depreciation and interest expense separately for each property. Even with the advent of tax software programs, a great deal of effort will be required on your part, and on the part of your accountant if you use one. With the multifamily apartment complex, you still have these same items to track, but for a single property, and the work is therefore much easier to keep up with. Divestiture of Property There are advantages and disadvantages to both single-family and multifamily housing when it comes to selling your property.
One clear advantage of selling single-family units is that you are free to choose how much or how little to divest. You can sell one or two houses, or you can sell them all. If, for example, you wanted to accelerate your program of wealth accumulation by 18 Advantages of Multifamily Ownership continuing to enlarge your holdings, you might want to consider selling the unit or units in which you had built up the most equity. If you had a large amount of equity in a unit built up over time, or recently created through a value-added process, you could choose to dispose of that unit and that unit only.
This would enable you to then turn around and acquire two or three additional properties while retaining your other holdings. An obvious disadvantage of selling single-family units, of course, is the difficulty involved if you should decide to sell all 24 units at once. You could offer them to other investors as a package deal, but there are no guarantees. More than likely, you would end up primarily with individual sales, and, just as when you acquired the units, disposal of each unit would be a separate transaction, with separate closings, and third-party reports, and all related fees and expenses.
With the unit apartment building, it is either all or none. You do not have the advantage of breaking out single units to sell if you need to raise some cash. If you have substantial equity in the property and would like to leverage yourself up to a larger complex, your existing unit property should be fairly easy to sell. This will depend on several factors such as interest rates, local market conditions, and the strength of the economy in your particular region.
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There are generally ample buyers for smaller properties like these. Finally, if you decide to divest your apartment building, you will need to concern yourself with only a single closing rather than the numerous closings required for the single-family houses in our example. I believe that after reviewing the various elements just discussed you will agree that, as a whole, the advantages of multifamily property ownership far outweigh those of single-family property ownership.
Probably the most limiting factor for most investors will be the level of resources available to work with. Given adequate capital or other assets, the prudent real estate investor will recognize that it is far more efficient to engage in a systematic process of acquiring multifamily properties for the accumulation of longterm wealth than it is to purchase single-family houses. Only through experience of trial and suffering can the soul be strengthened, ambition inspired, and success achieved.
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Unless you already have a substantial capital base to work from, you will probably want to start with a smaller multifamily complex, such as an 8-unit or a unit. You may want to begin even smaller, with a duplex or a fourplex. If you have limited experience in the real estate market, starting with a smaller building will give you just the experience you need without overwhelming you.
This will provide you with an excellent opportunity to get your feet wet and to get some real hands-on experience. Berges, I prefer the buy-andhold approach. My idea is to buy a property, pay it off, and live off of the income. While this method of building a real estate portfolio is a valid one, it is in my estimation certainly not the best method. If you have another source of income that is fairly substantial and therefore allows you to make large investments in real estate on a periodic basis, then this may be the method for you, or at least the one that you are most comfortable with.
This approach, however, prevents you from maximizing the utility of your resources. An alternative approach, one that I prefer, is what I call the value play. This method involves buying a smaller multifamily property, such as an 8-unit or a unit, that requires limited repairs, most of which should be cosmetic. In other words, it is the classic fixer-upper. Your mission, should you decide to accept it, is to initiate a series of improvements immediately after acquiring the apartment complex.
This will include things like painting, landscaping, trimming the trees, making minor parking lot repairs, and just giving the site a good overall cleanup. This will enable you to increase the rents—which, in turn, adds value to the property—within the first few months of ownership.
Assuming you are on an aggressive fast track to wealth accumulation, you will want to unlock that newly created value by the twelfth month of ownership, either by selling the property or by refinancing it. The validity of this methodology proves itself by permitting you to take your original equity, plus the additional equity created by adding value, and leveraging yourself up to the next level, which would be a property approximately twice the size of the one you just sold or refinanced.
Chapter 4 discusses the merits of the value play in much greater detail. This money can be from a traditional source such as a bank, or it can be from a family member, a partner, or even the seller, who may carry back a note in the form of a second mortgage. Whatever the source, you want to use as little of your own money as possible, because this is what your returns are based on.
You might as well leave your money in the bank and save yourself the time and energy that an apartment building will require. As previously stated, this is a very simplified example and does not take into account the debt service for the mortgage. This business is like any other business in that regard. You must have a business plan in place. Taking the time to do so will help you to stay the course. If you do not know where you are going, how will you know when you get there?
Think of a ship about to embark on a journey across the ocean. Imagine if that ship had no rudder. It would be tossed to and fro, wandering aimlessly, and would be carried off its course by strong oceanic currents. In short, a ship without a rudder would never reach its destination. Like the ship, you, too, must have a rudder, and that rudder will be your plan of attack, your clearly defined objectives, your business plan.
You cannot afford to undertake a journey in your real estate profession without having some idea of where you want to go. Many people go through their entire lives in a rather haphazard fashion with no sense of direction; hence, they end up precisely where they set out to go—nowhere. The process of proper planning is crucial to your success in this business.
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Yes, you may have to think a little bit, and it will require some effort on your part to formalize your plans, but I can assure you that any time spent developing a plan will greatly contribute to your success. By mapping out your strategy in advance, like the ship traveling across the ocean with its rudder intact, you will eventually reach your destination.
You may run into a few storms along the way, but, like the ship, you will ultimately reach your safe harbor. Monty was required by one of his teachers to write a paper about what he wanted to be and do when he grew up. Because Monty was the son of a horse trainer and had been working with horses most of his life, he dreamed of owning a horse ranch.
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Canfield writes of Monty as follows: That night he wrote a seven-page paper describing his goal of someday owning a horse ranch. He wrote about his dream in great detail and he even drew a diagram of a acre ranch, showing the location of all the buildings, the stables, and the track. Then he drew a detailed floor plan for a 4, square foot house that would sit on the acre dream ranch.
He put a great deal of his heart into the project and the next day he handed it in to his teacher.