All Cap: Focusing on Apartment Investing
Updated: Oct 10, 2021
quote of the week: “Landlords grow rich in their sleep.” level 1: we are (multi) family.
sister sledge made their name with complex harmonies...why not make your name in apt complexes? Real estate investing consistently comes up as a top area of interest for the gravy community. Most understand the benefits, so why is the focus so often on single-family homes (SFHs)? Does buying buildings feel inaccessible?
There are def legit reasons to go the SFH route, and any form of ownership wins at the end of the day. But, a wise man said, "have goals so big, you feel uncomfortable telling small-minded people," so let's dig in.
Benefits of investing in apartment buildings:
Less Work: buying 50 SFHs is more work & time than buying a 50-unit.
Lower Costs: per-unit expenses for a building are less than for SFHs.
⎍ Stability: vacancy in multifamily is bad. SFH vacancy is catastrophic.
Forced Appreciation: maximize property value with strategic upgrades.
How to start your apartment journey:
Choose a Market: go deep on market research (sample analysis here).
Build a Team: get to know brokers, accountants, etc. (full list here).
Learn to Analyze: get familiar with methods & tips to value properties
level 2: all cap (rate).
apartment investing is the only time its cool to talk cap.
It's always a good time to buy real estate if you understand the local market cycle. Here's where 54 cities are currently sitting in their local market cycle :
apartment market cycle analysis (Q2 2021)
source: Mueller, Q2 2021
Where's your city? As we can see, SF is near recession, while Atlanta, Austin & Miami are at the peak of the expansion phase. Here's how to move in each market phase. You can read up more on the 4 market cycles here & here. Now, let's get into the numbers that investors look at when trying to assess the value of an apartment building, starting with the top two metrics:
Net Operating Income (NOI): a proxy for profitability (more here).
Capitalization Rate (Cap Rate): expected rate of return in a market.
Investors looking to understand a property's market value multiply its NOI by its Cap Rate. The chart below shows how value, NOI, and Cap Rate all relate, which is key for understanding the example below on "forced appreciation": NOI & Cap Rate Formulas
Let's say the owner of a 50-unit in Baltimore that brings in $1K/mo per unit conducts a survey that finds tenants would pay $25/mo more for a gym that would cost her $20K. Doing so could increase her monthly NOI by $1,250 .
Based on the NOI increase of $15K/year at her 4.17% market cap rate, she'd see her property value (and net worth) bumped up by $360K. And we're not touching on how she could cash-out refinance to buy another property .
level 3: become a master. s
master the craft like dragonfly jones...or maybe not dragonfly, per se. Accredited investors without the time or desire to be hands-on can invest via apartment syndicators or online platforms like Cadre. That said, here are some major league strategies apply for those of us who want to do it big. Advanced apartment investing strategies to consider:
Cost Segregation Study: allows a property owner to write off assets at a more accelerated rate than traditional straight depreciation limits allow.
Marry Well: If you're a W-2 employee and your spouse is a real estate professional, you can offset your income with passive real estate losses.
Be the Bank: use a dividend-paying whole life insurance policy to fund deals on flexible, tax-advantaged terms while also protecting your family.
Syndicate: Launch your own syndicate to pool resources from others to invest in properties that are bigger than what you can afford on your own.
Many of these strategies apply to real estate investors generally, not just those focused on apartment buildings. As always, holler at a tax professional before putting these strategies in place. Now go get your mogul on! join the conversation:
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