Discover how you can convert equity in your single family home investments into the bigger game of commercial multi family properties that generate much high cash flow, much better upside opportunity and are much easier to manage so that you can get closer to your goal of financial freedom. It's common for residential real estate investors to sell a single family home and buy a duplex, triplex or quad. And while that can slightly improve one's path to economic independence, it's still remaining in the residential investing realm which is not nearly as lucrative. In this training, you'll learn how one of my Proteges sold his two single-family home rentals and purchased 34 apartment units which increased his cash flow by $2,677/mo and instantly gave him an additional $275,000 in equity.
Play a Bigger Game
You can convert the equity in your single-family home investment into the bigger game of multi-family properties, generating high cash flow and better upside opportunity. This article could also be called “Playing a Bigger Game” because that’s what upgrading from single family rentals to commercial multi-family real estate is all about.
To play a bigger game in life, and in business, three things must happen:
- You must be mentored by someone who’s already playing the bigger game that you want to play.
- Get out of your comfort zone. If you want something that you don’t have now, you are going to have to do something that you’ve never done before.
- You need to take bold action. If you want to make a big change in your life, or accomplish something great, it’s going to take a little bit of risk.
Life rewards action. In our company, we take educated, calculated, and measured risk. That’s the difference and that is the key to being successful in this business.
Single-Family Homes: Lots of Equity, Little Cash Flow
Our student has two problems. First, he owns several single-family home rentals. They have decent equity but minimal cash flow; he is only bringing in $100-$200 a month. His second problem is that because he has equity but very little cash flow, he feels stuck buying single-family home rentals and it isn’t helping him achieve his goal of working less in his professional job and gaining financial freedom. He is stuck investing in single-family homes and is unsure what to do. Does he buy more? What does he do next?
Our Protégé knew he needed help to get unstuck, and that’s when we came in as his advisors and as his mentor. Acknowledging the problem is important because it’s the first step to avoiding lost opportunities. This is called opportunity costs, which is the benefit an investor misses out on when choosing one investment over another. As he chooses to invest in more single-family homes, what is he missing out on?
After nine months of focus and hard work, he discovered that he was missing out on greater cash flow, more equity, increased net worth, and playing a bigger game. However, there is a solution for him and for you as well.
Convert the Equity in Your Single-Family Home Investment into a Multi-Family Commercial Property
First, you need to prepare and sell your single-family homes. What I mean by prepare is do any repairs or maintenance needed so that it will show well. Hire an agent, do your research on sales, and lastly get an advisor who you trust and is experienced. Having an advisor is important because the step from a single-family home investments into a commercial deal is most likely the biggest investment of your life. It’s too risky to do it by yourself, you need get help.
When you sell your single-family homes, you are going to sell using a 1031 tax-deferred exchange strategy. This is an IRS tax code that real estate investors really like, and for good reason. If you take all the profit you make from the sale of your property, all the equity and move it into the next property, a larger property, you do not have to pay capital gains taxes. You can defer it and use all that to grow your portfolio. If you take all the equity at close, you won’t have to pay capital gains. You can just trade it up and continue trading up to larger properties over the years. It’s a phenomenal way of increasing your wealth and building your portfolio in commercial real estate. This is what we had our student do.
The Basics of the Deal
- Our student purchased his two single-family homes for $360,000. His cash flow is limited at $100 to $200 per month.
- He sold them for $625,000 seven years later using a 1031 Exchange and made $265,000 on the sale.
- He purchased a 34 unit apartment for $1.225 million. He used the entire $265,000 as a 20% down payment.
- Over the next year or so he increased the rents by $50 a month per unit. As you may know, in commercial real estate, as the NOI goes up so does the property value. He increased the NOI by $22,000.
- The $22,000 NOI increase divided by the market cap rate of 8%, equals $275,000 in increased property value.
The Power of the NOI
What he did was he forced the equity upward. You can’t do this with single-family home investments, only with commercial. That’s the power of the NOI; a $275,000 increase in nine months compared to a $265,000 increase in seven years investing in single family homes. It’s amazing what it can do for your cash flow, for your net worth, and for the property value.
Increased Cash Flow
Before our student was making $100 to $200 per month renting out single family homes. Now with his 34 apartment units, he’s bringing in $2,877 per month. That is almost 14 times more than before in cash flow.
Play a Bigger Game
If any of you are sitting on single-family homes with equity, that perhaps aren’t performing well in cash flow, consider selling and investing in multi family apartments. It will bring you closer to your financial goals, financial freedom, working less at a job, or having security just in case you lose your job.
I don’t often recommend books, but there is a fantastic book that will help you take steps if you are stuck in your business. It’s called How to Get Unstuck by author Matt Perman. It will help you identify your mental barriers and habits.