Saturday, June 18, 2011

Getting Started with Apartment Building Investments: Lesson Seven: How To Retire Rich

Getting Started with Apartment Building Investments: Lesson Seven: How To Retire Rich

by K-Diddy Rocio
This is not meant to scare you, but according to The Wall Street Journal, the average 35 year old person in the United States will need to have saved a nest egg of at least 3 million dollars by the time they retire at age 65.  That may seem like an astounding number and it basically leaves investors a few choices to build a nest egg of that magnitude.

The first choice would be to play the lottery and hope.  Unfortunately, right now this is the plan that many millions of Americans are undertaking right now.   You might be one of them.

The other, and more common route, is to contribute to your 401k and maximize on your employers matching contributions.  This has worked for some people in the past but as good, high paying, professional careers become more scarce in the United States this route doesn't appear to be a wise choice for most people.  Most people's 401ks are mostly invested in a basket of stocks, mutual funds and bonds.  The problem with putting your nest egg into a 401k is the fact that you are basically counting on the fact that the stock market will be in a bull market when you are ready to retire.  If not, you will end up like many people who in 2008, when the stock market nose dived, were forced postpone their retirement by another decade because the value of their retirement nest egg had dropped so dramatically.

So what is the answer to securing your retirement future?  It just might be a strategic apartment building investment.  Here's why:

1) Other People's Money. As opposed to investments in stocks apartment buildings offer the opportunity to invest with other people's money.  In fact, investing in apartment buildings allows you to purchase the building with up to 100% other people's money by using a combination of partnerships and traditional bank financing.  In addition, the balance of the mortgage is paid off over the life of the loan using other people's money in the form of rent payments made by your tenants. 

2) Scarcity and Demand.  A record low number of multifamily units will be completed this year. The increase in rental housing demand is being met by a sharp reduction in the supply of new apartments. Just to put this into perspective, over the 10-year period from 1998 through 2008, there's an average of about 240,000 new rental completions per year. Last year, there were 160,000. And this year, completions are expected to be below 80,000 units, which would make it a 50-year low. This level of new completions is actually less than the estimated annual loss due to obsolescence, meaning that we're seeing essentially a net zero increase in the stock at a time of strong demandNew starts are not expected to approach historical levels until late next year, 2012, which means it would likely not be until late '13 and into '14 that we'll see completions return to historical levels. And obviously it's the completions that are what's important in affecting the supply demand fundamentals.

3) Demographics.  Roughly 3 million young adults had been living with family during the past five years, according to data from the Census and real-estate investment brokerage firm Marcus & Millichap, and housing experts estimate that they now generate about one-third of rental demand.

4)  Instant Returns.  Factoring in maintenance costs and other variables, an investment property should produce at least a 6% return on the initial cash investment in the first year after it is purchased. For example, an investor who puts down $250,000 in cash on a $750,000 property would need to clear at least $15,000 in the first year.

What does all of this mean to you as an investor?  It means that the time to begin buying apartment buildings is right now.  I am not promising that you will be the next Donald Trump but I certainly believe that apartment building investing now offers one of the safest and securest ways to secure the comfortable retirement that you deserve.

The next step is to get started.  But don't go out today and begin buying apartment buildings unless you are properly prepared.  You need to arm yourself with all of the tools, information and market knowledge to ensure that you are investing in the right property that will not only continue to pay for itself over the years but also offer you a hefty monthly cash flow that will put money in your pocket.

Thursday, June 2, 2011



Home prices are low, interest rates are low - real estate is basically having a summer clearance sale! But unlike buying a clearance-priced car or computer, making the wrong move in this real estate 'sale' can have disastrous effects, from losing your dream home due to a bad bid to ending up with a money pit of a property.
Here are a few money-saving, pitfall-avoiding tips and tricks for buyers who want to do some smart home shopping this summer.
1.  Have a vision in place, before you start your house hunt. Actually, have several visions in place.  Have a financial vision, complete with a clear picture of what your total income and expenses look like, in the  “after homebuying”  view, including what you pay out for your home and related expenses, like HOA dues and homeowners’ insurance.  Have a vision of your life in your new home, including what you want to do, with whom and where you want and need to go - in the work, family and recreation areas of your life.
If you kick off your conversations with your mortgage broker and real estate agent with a clear understanding of the lifestyle you are looking to create, you’ll be much less likely to get derailed. With a clear vision in place and, ideally, on paper, you can clearly communicate your wants, needs, goals and financial boundaries to your professionals, telling them what you can afford, rather than trying to shoehorn your financial plans into one-size-fits-all mortgage guidelines. With a vision, the temptation of an uber-low-priced, but completely inappropriate, home will not lure you into buying the wrong place for your needs. (Nor will an amazing home that is simply out of your personal price range - no matter how great a value it is for the money!)
2.  Don’t let affordability get between you and reality. High affordability doesn’t necessarily mean you can get every single thing you want - and name your price. The fact is, even people who are spending millions for their homes don’t get everything they want!  I’ve seen buyers insist that they need X number of bedrooms and Y number of bathrooms in move-in condition for a price that is just not going to happen, even in this clearance sale climate, and end up looking and looking, ad infinitum.
If your agent has shown you home after home that is what you want, but has sold for more than you want to spend, and you’re confident that you can find or cut a better deal because the market is down and you just so happen to be a brilliant negotiator (!), you might be at risk of falling into this trap.  There are deals to be had, but if you don’t stay grounded in reality, you’ll end up chasing your tail and missing out on the tax and lifestyle advantages of homeownership.
If you’ve been house hunting for months and months on end, your agent keeps trying to tell you that you should search in a lower price bracket, you have repeatedly gotten overbid or you just can’t seem to find the precise home you seek in the location and price range you seek, at least consider the possibility that you might have an outsized wish list for your budget. Take a step back, revisit your vision, and remind yourself what’s really important.  It’s okay to save some “must-haves” and “deal-breakers” for your next home purchase!
3.   Get a local expert to brief you on the local market, then screen out the noise.  Now more than ever, it’s essential to have laser beam focus on the information and strategies that will get you what you want - whether it’s an amazing deal on the home you’ve always wanted or simply success at becoming the owner of your first home at a price you never thought would ever be possible. Otherwise, you’ll end up all over the place, spending your time, money and sanity attending auctions, getting worked up over distressed properties that aren’t yet for sale, trying to negotiate deals with sellers who are in no position to cut them and having your lowball offers on bank-owned properties rejected time after time.
Don’t let a news story about a guy in Minnesota who got a home for $3.27 be the basis for your entire home buying strategy. Instead, ask around and get referrals to a local broker or agent who has a track record of helping the people you know.  Read their answers on Trulia Voices and ask them your own questions to get a sense for whether they might be a good fit for you - if they are, and you trust them, then consult with them on the dynamics of your local market.  The market is down everywhere, relative to 2006.  But some markets - and some neighborhoods within markets - are still seeing multiple offers and home prices which are relatively recession-proof, compared to what you’d expect from the national news. 
Once you have a strategy in place, work it - don’t let your acupuncturist or shoe repair guy convince you that your strategy is wrong, that you could get the place for cheaper or that the bank should absolutely do every single repair, or you should walk away from the deal.  Many would-be buyers lose out on great homes because they take negotiating advice from their holistic veterinarian over that being offered by their broker or agent.
4.  Read everything. Good faith estimates. Contracts. Disclosures. Inspection reports.  There is a long, long list of multi-page documents that are very easy to “just sign” when you’re in the heat of the hunt and think you’re on the scent of an amazing deal. I’m not suggesting you ask for a week-long pause button to read every document, either - rather, read them when you get them, ask questions, and keep asking until you understand the documents.
Many buyers this summer will make offers on more than one home before they get into contract on “the one,” and many of those properties will be short sales or foreclosures.  With distressed properties, every contract is different, so it behooves you not to go on autopilot, just skimming the papers as you might otherwise. Also, inspection reports might reveal red flags and condition issues that you’d normally expect to see in the seller’s disclosures.  It’s especially critical, in these situations, to fully understand as much as you can about the property, your loan, and your obligations and due dates under the contracts.
5.  Stop your mental accounting and do the actual math - on paper.  In the field of behavioral economics, mental accounting refers to the tendency we humans have of doing math in our heads, separating things like easy money (e.g., the so-called “instant equity” from buying a home for less than it’s supposedly worth) from hard-earned wages and salary, and making spending decisions differently from these different mental accounts.
On the scent of a good deal, and in the heat of the hunt, even the most meticulous homebuyer can go up a few thousand in offer price to beat out other buyers.  No problem, right?  Well, but then when the inspector uncovers a few needed repairs, they make a mental guess as to what they’ll cost, and add that in - again, mentally. Then, when the lender requires a few extra thousand bucks than expected to close, that goes on top, but again, only mentally.  And mental money tends to stretch a bit longer than real money does! 
So, you can see how it’s possible to break the bank when you thought you were in great shape because you scored such a great purchase price for the property itself. 
Even if you hate budgets with every iota of your being, buck up on this one project, pull out the calculator or open up a spreadsheet and keep track of every line item. Get actual repair bids during your inspection period, to the extent possible, and get your math mojo on. It’s fine to buy and incur these overages here and there, but keeping track of them is key.  You know what I like to say - surprises are for birthday parties, not for real estate transactions, and not for your bank account, either! 
Keeping a strict tab on the expenses you incur during the transaction - or will need to incur afterwards -- will save you so much drama later.