investing

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The 4 Types of Successful Apartment Investors

Cyril Soigneux

You may find many articles on how to buy apartment buildings. It seems easy after all…

But what if you follow all these steps only to find out that you have overpaid, you get no or negative cash flows and that you will lose money when you dispose of the property…

The one-size-fits-all method for regret

man comforting crying sorrowful woman with hands together
  1. Find a good property
  2. Get it under contract
  3. Do the inspections
  4. Get bank financing
  5. Hire a local property manager
  6. Close the deal
  7. Realize the deal was not that good and/or did not fit into your strategy and/or was outside your skill set!

The Builder

man wearing black denim pants with carrying hammer on holster
  1. Buy the property
  2. Renovate the buildings and amenities
  3. Stabilize the income and tenant turnover
  4. Improve the Net Operating Income to show strong cash flow during a 12-month period (seasoning)
  5. Refinance to cash-out the forced appreciation gained through the improvements
  6. Repeat the process

The Holder

man and woman walks on dock
  1. Buy the property
  2. Renovate the buildings and amenities
  3. Stabilize the income and tenant turnover
  4. Live off totally or partially from the strong cash flows
  5. Keep the property as a long-term investment (passive income)

The Exchanger

contemporary tall building with glass facade
  1. Buy the property
  2. Renovate the buildings and amenities
  3. Stabilize the income and tenant turnover
  4. Enjoy the strong cash flows on the medium term
  5. Sell the property to cash in the forced appreciation
  6. Immediately reinvest the proceeds tax-efficiently for a larger property
  7. Repeat and enjoy the snowball effect and the deferred taxation

The Syndicator

woman in white long sleeve shirt standing beside woman in white long sleeve shirt
  1. Have relationships in place to find and convince partners
  2. Extensive legal documentation to have in place (especially if the deal falls under security laws) to highlight rights and duties of the parties involved and the strategy
  3. Buy the property with investors
  4. Renovate the buildings and amenities
  5. Stabilize the income and tenant turnover
  6. Improve the Net Operating Income to show strong cash flow during a 12-month period (seasoning)
  7. Collect fees at the different stage of the scheme
  8. Exit / Sell the property
  9. Pay back the investors with the proceeds
  10. Repeat with another deal

Challenge the numbers from the seller or their agent (past vs present)

close up photo of survey spreadsheet
  1. Income : add the vacancy rate of the area to decrease potential income
  2. Expenses: do not use the standard 30% rule, know your market to find the relevant cost per unit
  3. Net Operating Income : to recalculate with the adjusted income and expenses
  4. Cap Rate : may be accurate from the start but to be checked with recent transactions
  5. Property Value: greatly revised down when income and expenses adjustments are factored in
  6. Use this value as a base for your offer

Prepare a pro-forma to find out projected values (future)

man using a laptop
  1. Income : do your research to find the potential rent increase per unit
  2. Expenses: use the relevant figure per unit in the market (same as when adjusting the seller’s figures)
  3. Net Operating Income : to recalculate with the rent increases and correct expenses
  4. Cap Rate : conservatively keep the same current rate
  5. Property Value : derive the potential future value given the projected Net Operating Income
  6. You just found out the upside potential of the deal

To sum up

person writing on notebook
  1. You verify the numbers (past vs present vs future), if you cannot, do not go further
  2. A goal : buying under-priced properties, in a good location, with the ability to raise rents
  3. Know what type of investor you want to be
  4. In-depth description of the four investment strategies will be provided in further articles
Acknowledgements

Peter Harris from Commercial Property Advisors in this video

vibrant green trees and small cottages in town in sunlight

Investing outside your local market

Cyril Soigneux

Most of the times, investing in your local market can be simpler and safer. But what if your city is expensive, not suitable for cash flow investing or no longer attractive? Why not going elsewhere to get larger properties, higher cash flows and better return on investment?

Investing local is easier

narrow pedestrian street between old residential buildings at twilight
  1. You can drive by your local market to look for properties
  2. You live there so you know the market and the trends
  3. You know the demographics and therefore the type of people you will rent to
  4. You are familiar with local landlord / tenant laws
  5. Eventually, you will feel safer

Going long distance may be worth it

vibrant green trees and small cottages in town in sunlight
  1. Properties are more affordable outside large cities
  2. With lower price points, you can buy larger properties
  3. Potentially, higher cash flows and return on investment
  4. Eventually, you can build your portfolio faster
  5. Take advantage of other long distance investors who failed to manage their properties properly
  6. The benefits of long distance investing are likely to outweigh the risks

What long distance investors do wrong – Learn from the mistakes of others

yelling formal man watching news on laptop
  1. They invested beyond their knowledge
  2. They were under-capitalized and ran out of money
  3. They did not manage their property managers

Best practice for long distance investing – the MOP methodology

battle black blur board game
  1. Market knowledge (income = rents ; entry point = price per unit ; exit point = market cap rate)
  2. Operations (expense ratio, expense per unit, CAPEX for big ticket items)
  3. Property management (have a system in place to manage the manager to keep them accountable for the money, the marketing and the maintenance)

Acknowledgement

Thanks to Peter Harris from Commercial Property Advisors in this video