Discover 4 advantages apartment investing has over single family rentals and find out why Bruce & Renee recently traded their 8 houses for an 18 unit apartment building. While many investors buy single family rentals, you'll learn why that is a recipe for mediocrity, and much more, in this very important training:
4 Reasons to Invest in Apartments over Single Family Rentals
If you could choose between buying 8 single family rentals or one 18 unit apartment building, which would you choose? Many people invest in single family rentals hoping it will lead to financial freedom. Unfortunately, they will probably never reach their goal with that investment strategy because its a recipe for mediocrity. Here are 4 reasons why you should invest in apartments over single family homes:
1. Forced Appreciation
The first advantage you have as an apartment owner is forced appreciation. However, this only applies if you have five units or greater. Let me explain the difference forced appreciation can make.
If you have a single-family rental and you increase your rents $200, that’s great because now you have an increased cashflow of $200 per month. Unfortunately, this does not equal more value. The value of a single-family homes is based on what the other homes in the area have sold for, not the potential income it can generate. In comparison, in your ten-unit apartment building, when you increase the rent by $200 in just one unit, you have an increase of $2,400 per year and an increase in value. If you're in a six-cap area, you take that $2,400 and divide it by 6% to determine your forced appreciation, which is $40,000. You just increased your property value by $40,000 on that one unit alone, and you have 10. That's $400,000 of forced appreciation on your apartment building. Single family rentals just can’t compete with that.
2. Scale Faster
You certainly can scale faster investing in multi-family. It can take years to purchase eight single-family homes, whereas you can purchase an 18-unit apartment building in a matter of months. Years or months – which would you rather?
Would you rather pay eight property tax bills and insurance policies or just one? Do you want to maintain eight roofs, or do you want to take care of one roof? The answer seems obvious. Apartment investing is more efficient.
4. Higher Cashflow and Higher ROI
With apartment investing you will have higher cash flow and ROI and this will make a tremendous difference over the long term. Here is the difference between single-family rentals and apartments.
If you have a single-family home and your renter moves out, you have zero income. But your cashflow is not zero. Your cash flow is negative because you’re still paying utilities, insurance, and taxes while it’s vacant. Whereas in an 18-unit apartment building, you can have two or three vacancies and still have cashflow to pay the bills. You see the difference - over the long-term, there's no comparison on what you can produce in cashflow and return on investments.
Choose Apartments Over Single-Family Rentals
Going back to my original question: if you have a choice between eight single-family rentals or an 18-unit apartment building, which do you choose? The answer is easy now - the 18-unit apartment building! But don't take my word for it. Bruce and Renee are a dynamic duo from Texas who have experienced firsthand the benefits of apartment investing over single-family rentals. When they came to our Protege Program, they had 8 single-family rentals, but they were getting nowhere fast. They knew investing in commercial real estate was the answer, but they needed guidance and mentorship. Here’s the amazing story of how they went from 8 single-family rentals to an 18-unit apartment building.
Meet Investors Bruce and Renee
Bruce and Renee began purchasing houses to flip in 2013. They flipped a couple houses only to realize that flipping is labor intensive and time consuming. Also, to generate income, they needed to keep buying. They needed long-term wealth they could build on. That’s when they began purchasing single family rentals. However, this strategy was taking too long for them to achieve enough cash flow and net worth to accomplish their goal of becoming full-time investors.
With their single-family rentals, they can’t force the appreciation and don’t have the scalability that multifamily investing has. What attracted Bruce and Renee to our protégé program was not only the increase in cashflow, equity, and the scalability of commercial investing, but also the guidance of a mentor with experience.
Bruce says, “We were looking for someone who had knowledge, who has been there…obviously was very trustworthy. You're very easy to understand. We didn't want to go into buying these multimillion-dollar properties lacking that knowledge that you were offering us.”
Bruce and Renee’s Apartment Deal:
Property: They purchased an 18-unit apartment, a B-class property, with a stand-alone cottage that was not yet rented. The property is in a thriving university area; within walking distance of the university and the city is ranked as the seventh best college town in the US. It’s also a booming city, ranked number two in the country.
Asking Price: 2 million
Purchase Price: 1.73
The Seller: The seller was not motivated. He didn't have to sell and was more interested in just having a conversation about selling. Bruce honored the fact that this is a relationship-based business. He was able to forge a strong relationship with the seller, but building a rapport took time. Their conversations would not just be about the property, but also about their families and lives. In fact, sometimes their conversations would last for hours, but because of the relationship he was able to create with the seller, they were able to negotiate a great deal.
Deferred Maintenance: When Bruce and Renee first brought the deal to us, the property needed a lot of work. Because of the relationship Bruce built with the seller, the seller agreed to fix all the maintenance issues on the property. He took care of the roof, the dry rot, and plumbing issues. Besides the renos to the cottage, Bruce and Renee didn’t have to put a dime into the property. At closing, they walked into a property that was deferred maintenance free. This one negotiating tactic that we encouraged him to do saved them hundreds of thousands of dollars.
- The upper level of the cottage is being renovated to rent out for $1,100. Also, at ground level they are putting in storage units that tenants can rent out. Space that wasn't previously being utilized is being turned into revenue.
- The property has rent upside potential because the seller hadn’t raised the rents in quite awhile. There are ten, two-bedroom units that can have the rents raised $200 over time, and the one bedroom can increase $150.
Forced Appreciation: This is the most important reason to invest in apartments over single family rentals. The property was appraised at $1.8 million which means that Bruce and Renee were walking into the deal with a more than a $100 thousand worth of equity. They're going to force the appreciation by renting out the cottage for $1,100 a month. They can increase the rents on the 2-bedroom units $200 and the one-bedroom units $150. They also have the storage areas that tenants can rent. These increases will take a few years, but the result of increasing all the income and getting that NOI up, is an increased value of over $2 million. The property they purchased for $1.73 million will be worth $4 million. Is it worth waiting? Yes. Could you do this with single-family rentals? No.
Exit Strategy: Bruce and Renee are going to stabilize the property and get the NOI up. With an increased value of 4 million, they will do a cash-out refinance, pull out the original down payment, and buy more property.
As Bruce says, “Rinse, repeat, rinse, repeat. Once you have your momentum and you're in the game, and you understand what it is you need to do, you just build on that.”
Beginner Investor Tips from Bruce and Renee
Tip #1: Take Action and Persevere
If you feel this is something you want to do, then you need to act now. Don't listen to all the noise telling you it can’t be done. Have the confidence in yourself and don't give up. You're going to have challenges fall, but you learn from those challenges and keep going. Perseverance is key. Go after your dream and don’t give up on it. Renee and Bruce’s dream are to have financial freedom, to travel with their children and then leave a legacy for them when they’re gone. And they’ve stayed true to that dream.
Tip #2: Fall in Love with the Numbers, Not the Deal
You fall in love with the numbers and not the property. If the numbers make sense, then you move forward. If the numbers don't make sense, remove your emotion from the situation or the equation, and then you move on.
Protégé Program Testimonial
Renee: We're just so thankful that we are working with Peter. It just gives us so much more confidence in doing these larger scale deals. We've learned so much. The confidence level has just gone up significantly because of us working with Peter and having our calls with him and walking us through. He answers all the questions and takes his time. He has a lot of patience.
Bruce: It's refreshing to have a mentor that is going to take the time to make sure that you're going in the right direction. If he sees something that's not making sense, he tells you now so you can fix that instead of wasting weeks down the wrong path. Whereas before, without Peter’s help, we could still be playing around with a deal that is a bad deal. We really appreciate him and what he’s offered us. I would tell the others that are out there, that if you really are serious about your future and financial security, then you need to make the call. Call Peter and his team. If anything, just talk to them and see what he has to offer you. You'll be amazed if you just take that first step.
Bruce and Renee are a powerful husband and wife investment team. Their deal was a four-month transaction of going back and forth; they persevered and got the deal done. They were awesome in knowing the numbers, understanding how due diligence works, and they fought tooth and nail to get their financing done. I always say the key to this business is relationships, and they soared in this area.
How to Invest in Apartments from Single-Family Rentals
They did a great job, but they're everyday people like you and me. That means you can do the same thing! If you're considering purchasing single-family homes, that's an okay place to start. But because investing in apartments over single-family rentals makes the most sense over the long run, you will need to sell down the road and start buying commercial.
Secondly, if you already have single-family rentals and you want to transition to commercial real estate you have a couple options to consider:
- Refinancing and pulling money out
- Selling the single-family homes and then do a 1031 exchange into an apartment building
Start with Commercial Real Estate Investing
You don’t need to start in single family rentals, you can start by investing in commercial real estate. If you are considering commercial real estate, we have resources that can help you get started.
- Commercial Property Advisors has the #1 rated YouTube channel on Commercial Real Estate Investing.
- Get your free copy of my book Commercial Real Estate Investing for Beginners.
- Enroll in my free online course.
- Fast track your success and apply for our Protégé Program.