For the average real estate investor, apartment investing may seem a little overwhelming. If you understand a few key points, however, you can play the game and start building wealth too.
The B.R.R.R.R. stands for Buy, Repair, Rent, Refinance, and Repeat. Simply put, it is a philosophy of investing in multi-family buildings that involves buying a distressed property, making the necessary repairs, finding renters who are willing to pay more for the upgraded units, refinancing for a better interest rate, and repeating the process with your next building.
Upgraded apartments can rent for more, which will increase your cash flow and allow you to refinance, possibly even pulling money out of the deal to use as your next down payment.
Residential vs. Commercial Lending
If you are new to apartment investing, it is best to stick to four-plex units or smaller. Multi-family buildings with four or fewer units can be purchased with traditional, residential financing. Buildings with five or more units, however, must use commercial financing.
While this does not make the deal unattainable, it does make it more complicated. Commercial lending has many more requirements for both the building and the potential owner. You may want to consider working with an apartment investment advisor on any commercial transactions.
The 50% Rule
When determining if an apartment is a good investment, many investors use the 50% Rule. This rule of thumb states that your operating expenses — repairs, taxes, insurance, property management fees, utilities, and general maintenance — should not exceed 50 percent of your gross profits. There are many variations on this, and each investor will have their own level of comfort with investment risk.
The 1% Rule
Before investing in any property, you must analyze your projected cash flow. This is where the 1% Rule comes into play. Basically, your monthly rent for each unit should be equal to 1 percent of the purchase price and the cost of repairs. For example, if you purchase a four-plex for $200,000 and spend another $50,000 to upgrade the property for a total investment of $250,000, each unit in the building should rent for a minimum of 1 percent of that total, or $2,500 a month.
If your market cannot support rents at that price point, you need to re-work your offer on the property to ensure a positive cash flow.
Apartment investing and multi-family properties can be a lucrative option for many private investors, especially when they know the basics.