"Come look at this, Adam," the boy's father said as the six-year-old jumped from one puddle to the next. The boy continued to splash and play, ignoring his father and those around him.
"Adam, come here. You have to see this." The boy was too excited to listen. Surely these puddles had to be more fun than anything Dad had in mind. Little Adam was determined to splatter water as far as he could and became energized when he did. Eventually, after continuous prodding, the boy's father picked him up and pointed toward one of the world's most fantastic natural phenomenon's:
Adams eyes bulged and his face lit up. With one gasp he yelled, "Wow!"
His father smiled and said: "Now that's a puddle, isn't it?"
Sometimes that's exactly how investors react once they get involved with apartment buildings. For some, it's just easier to play in other real estate puddles. That's not to say other types of "puddles" can't be lucrative, they can be. But for the few who take the time and energy to understand the business, apartments provide everything they'd ever hoped for, and more.
I find that investors hesitate to buy apartment buildings for a couple reasons: First, they believe apartments require a lot of money. For some people that might be defined as the down payment required to buy the property. For others, the total purchase price can be difficult to grasp. Both concerns, at first glance, are valid. But both are easy to overcome.
Apartment buildings usually do cost more than single family homes located in the same area-at least in terms of total purchase price. There's nothing you can do about that. But for some people higher purchase price spells greater risk. Many investors look at an apartment building selling for $1,000,000 and quickly dismiss the thought because they live in a $200,000 home. The numbers are too big and they struggle to wrap their minds around the figure. And then there's the loan. Some believe higher debt equates to greater risk. All investors should at least pay attention to debt, but that doesn't necessarily mean there's greater risk. Those who understand apartment investing realize that their risk is dramatically reduced, not increased, when they purchase apartment buildings versus other real estate investments.
Then there's the down payment. This is the biggest reason investors think they need to start with single family homes and "work their way up." Most investors believe it's easier to buy houses with little or no money down, but you can do the same thing with apartments-if you know what to do. Numerous strategies exist to give buyers the ability to leverage into large apartment buildings that produce mountains of cash flow with little or no money out of pocket. If that's true, why are there so few investors chasing these incredible properties?
That question leads us to the second reason investors hesitate to buy apartment buildings: they don't know what to do or where to start. Most people are hesitant to embark upon something they know little about, and from a certain point of view that makes sense. Just as it would be foolish to dive into a swimming pool before filling it with water, buying any type of real estate before educating yourself is a recipe for disaster.
Flipping houses and buying foreclosures is very popular today. Why? Because they're easy to understand and anyone with a hint of common sense and a little know how can make a fair amount of money. But is that the way to go?
Here's the challenge. An investor can buy a house and if everything goes as planned they might earn a quick $20,000-$50,000. However, they might break even or-worse yet-lose their shirt. Most investors start out with the same vision you and I have. They want financial security so they can do whatever they want when they want. But then they combine their long-term vision with short-term expectations. Most Americans want what they want and they want it right now. They don't want it tomorrow. They don't want it next week-they want it now.
Short-term solutions rarely carry the same long-term benefits. Most people don't think five years down the road, let alone 20 years. In 1901 the average American life span was less than 50 years. Today, the average life span is nearly 80 and many people are living well into their 80's, 90's and even over 100 years. You can't lose sight of your long-term objective.
I had a conversation with an investor who told me about a $50,000 "profit" he made on a recent flip. "That's good, Mark," I said. "There's nothing wrong with that. How much do you plan on keeping?"
"What do you mean?" he replied.
"Well, obviously we all have to pay our taxes. And because you sold it in less than a year your profit qualifies as ordinary income." I grabbed my calculator. "I'll assume you're in the 28% tax bracket, which leaves you about $35,000. You worked on the property for what, 40 hours a week for 8 weeks?"
"Something like that," Mark said with a sigh.
"That's 320 hours of work at $50 an hour which equates to $16,000. I imagine you'll need to take that to pay yourself since you don't have time to work another job. So now you have $19,000 left. Now what?"
"I don't know," he replied. "I guess I'll sit on it and do it again. I'll eventually get it to the point where I'm doing 15-20 properties per month and I won't be doing any of the work."
"So instead of doing the work yourself, you'll run around town looking for other properties to buy and follow up on contractors-you're basically a project manager, right?"
"That's the idea," Mark said.
"It still sounds like a lot of work to me. You can make a lot of money doing it, but what happens when you stop?"
"Why would I stop?"
"Well," I continued, "Nobody wants to work forever. The fastest way to wealth is tax-deferred accumulation of capital. You're giving Uncle Sam 28% of your profit. Isn't the goal to create a high income so you can do what you want when you want?"
"Well, what if you could do that without recreating work over and over again and decrease the risk?" That's when we started to talk about apartments.
Mark purchased the home for $200,000, put $25,000 into it (not including his time) and sold it for $300,000. When it was all said and done, he had about $35,000 left and he still hadn't paid himself. And I'm not saying that's a bad profit, because it's not. But what if you could make that much, or more, doing nothing?
Another investor, Susan, purchased an apartment building for $600,000 using none of her own money. The property has a positive cash flow of a few hundred dollars per month and she does nothing. She also increased the rent and made minor improvements. Less than a year later, it's worth $675,000. She hasn't paid any capital gains tax, still owns the property, and will benefit from the cash flow and appreciation for years to come. She still has her 320 hours to spend finding another property to do the same thing. The growth compounds itself and eventually she can lay on the beach drinking a Mai Tai while the cash flow supports her love for traveling.
In most cases, Mark's $35,000 is gone. Most people will spend the money on things they want right now. They'll buy a new car, go on vacation, and build a deck. There are a million different ways people choose to spend their profits. And even if he reinvested the money in another property, he'll still need to spend his time and effort working on the project-one way or another-again.
The reasons for investing in apartment buildings are plentiful. If your goal is to produce an income so you can do what you want when you want, give apartment investing a serious look. Don't let money or the fear of the unknown get in your way. It's a simple business. Much like the natural flow of the water of Niagara Falls, the information and the money is readily available. Anyone can do it. You can too.
Steve Steadele is the author of the book Multifamily Millionaire, a Real Estate Investor, Broker, and Teacher. Visit him on the Web at http://www.SteveSteadele.com.