With the decline of single-family home ownership in virtually every corner of the country, the American Dream that once featured the house and white picket fence has dissolved into a national hunger for rentals as millennials compete with baby boomers for apartments. This is important since baby boomer demand has driven every major economic shift since 1946.
Real estate investors and analysts alike are expecting a veritable tidal wave of new renters to enter the market in the next decade, a trend fueled by empty nesters seeking to cut living expenses tied to their suburban lifestyles and the presence of an aging workforce unlike anything the nation has seen before.
One of the very reasons I wrote my No. 1, best-selling real estate book, How to Make Big Money in Small Apartments, is because I know the surge of interest in multifamily properties has been met by the perfect storm of opportunity, where a renter in their twenties could wind up as neighbors with their peers – or their parents. The whole country is going through this right now, and that’s why you see all these new complexes going up in every major city nationwide.
But, what is driving that demand? It’s being driven by a combination of the millennials who are driving up rental demand, and it’s also being driven by the baby boomer generation who are starting to downsize from the big homes and all their stuff they have accumulated. And both groups are moving into apartments.
Fortunately for real estate investors, the resulting increase in apartment occupancy rates and rents are creating major windfalls in wealth and cash flow, with more yet to be claimed.
A recent Harvard University report finds the robust demand for multifamily rentals is strongest among the millennials, born between 1977 and 1995, and the baby boomers, born between 1946 and 1964. Together, these two forces alone could create as many as 4.7 million more renter households by 2023, a figure that has apartment investors salivating.
Tim Blackwell, contributing editor of Property Management Insider, said while the trend is now coming to the forefront, more than half the increase in rental demand in the last decade came from residents aged 45 to 64.
The exodus from the suburbs can be attributed to the flexibility that comes with rentals, including the freedom from costly maintenance and responsibilities related to home ownership, and the convenience and attractiveness of a more urban lifestyle, the 2014 State of the Nation’s Housing reports.
Yet another benefit of apartments are their proximity to jobs and the availability of public transportation that could prove useful as America’s workforce grows older. While 15 percent of Americans over 65 were still in the labor force in 2006, 19.7 percent of those at retirement age or over were at work in 2014. The Bureau of Labor Statistics expects that figure to jump to 20.7 percent by 2050.
All the while, apartments remain an attractive and viable option for college graduates, young families and millennials, who favor rentals for many of the same reasons.
Real Estate’s Sweet Spot: Apartments
The benefits which await residents and investors in apartments are no surprise to me. I stumbled upon this market while looking to get into single-family houses in 2002. Spurred by a conversation with my mentor who urged me to start in small apartments, I sought and found my first multifamily deal – a four-plex – that I was able to purchase with no money down and no bank qualifying.
I was stunned. Working in a company where I was only as good as my last quarter, and with my family’s livelihood in my boss’ hands, my first deal represented a ticket towards more control over my financial future – and more money in less time than I could ever imagine.
Working part-time over the next three years, I was able to move up: doing another four-plex, a 10-unit apartment complex, a 50-unit property, a 56-unit property, and then an 85-unit project using no cash or credit of my own. Using a calculator, some elementary math and the Internet, I am able to make offers and close on deals across the country, sight unseen, based on nothing but the apartment’s simple financials.
I ignored the “conventional” real estate investment route of starting with single family houses and, instead, skipped the heavy competition there to discover the niche of small apartments – a space with low competition. And then, I did something I never thought I might accomplish: I quit a 20-year corporate career to pursue real estate full time.
I walked into my boss’ office on a Friday morning, and I handed him a slip of paper that essentially said, ‘I’m done. I don’t need this anymore.’ There are few feelings as powerful as being able to tell your boss you are done working nine-to-five to pay your bills.
Since firing my boss, I have closed on apartment buildings from three units to nearly 300 units, and launched a national, multi-million dollar training business that has prepared thousands of students since 2007 to invest in small apartments using other people’s money.
Apartments are a gold mine in the real estate industry because they contain the five major attributes of the IDEAL investment, including their ability to generate passive income and grow equity, the tax benefit of depreciation, the increase in value of your property through market or forced appreciation, and the ability to amplify investment yields through leverage.
Meanwhile, the apartment business offers entrepreneurs three ways to create wealth, but none of them will require the 40-year rat race towards retirement.
As I show my students in my small apartments training, you can wholesale apartments to create active income, that is to get a property under contract and then sell (flip) the contract to another buyer, where you will collect a wholesaling fee exponentially larger than that of a single house contract flip.
You can also build passive income using the buy-and-hold strategy I teach, where you’ll collect mailbox money from rents without ever dealing with tenants or toilets. Third, you can use forced appreciation to create cash flow and equity to do more apartment deals and to build wealth.
Incredibly, investors can do all of this without a real estate license, and without any cash or credit of their own.
Myth Busting and Mindset Building
What I discovered about the power and the possibility of apartments changed the course of my life, and I know it can change yours so long as you have the ambition and the vision to enter the arena.
While apartments are in high demand, I operate in the segment of the industry I’ve labeled small apartments – any property with two to 30 units – because they are the perfect launching spot for everyone from novices to seasoned single-family investors and other real estate veterans.
Yet, with so many benefits to investing in apartments and many more investors already jumping in to meet the demand of the baby boomers and millennials, some might conclude it is too late to get into the hot apartment market. This assertion is categorically untrue.
While a great many individuals are currently competing in the single-family housing space, the banks are moving large swaths of cash to buy up portfolios of not just houses, but large apartment complexes, too. That is why the small apartment distinction is so important, and how I can claim with great certainty that the competition is low among these cash cow properties. Small apartments are the realm of the individual investor.
Next, the would-be investor needs to address his fears about qualifications.
One of the three prevalent, limiting beliefs I hear is that somehow you have to graduate from single family to multifamily. I have had students across the country begin real estate investing with multifamily properties, and in fact, I recommend it. There is no graduation process. You are already qualified.
Case in point: I began my own real estate venture with the four-plex mentioned earlier, but there was more to the story. Not only did I get the property with 100 percent seller financing – meaning I used none of my own cash or credit – I also had nothing-down cash flow on day one.
But, more importantly, the transaction made a believer out of me. That was an ‘Aha moment’ for me. On my first deal, as an absolutely green newbie, I bought this property at 85 cents on the dollar…[and] it was at that point that my little voice finally admitted, ‘My gosh, I can really do this.’ The whole point is you do not have to graduate from single family to multifamily. There is no cap and gown ceremony for you to attend.
The second limiting belief that keeps would-be real estate investors from succeeding in small apartments is the fear that apartment investments require lots of cash or credit of your own. You think of an apartment complex as a higher-ticket item, because surely it has to be more expensive then the place you live in right now. But, don’t be fooled. You do not have to use your own financial resources to do these deals.
Considering oneself as an investor may stir some trouble getting the vision right. But, with more than $5 trillion in IRAs alone and 97 percent of it earning less than one percent, the real estate entrepreneur has the power to fund any property he wants by matchmaking good apartment deals and private dollars. When you declare yourself as an entrepreneur, people understand it’s not going to be your money. And more important, your little voice understands that it’s not about your money or credit.
Finally, one of the most often heard fears that keep people from entering the small apartment business is the fear they will suddenly be saddled with responsibility for both tenants and toilets. I wouldn’t be in this business if I had to deal with tenants and toilets. That is why we teach our students to hire a property management company to deal with these day-to-day needs so you can make best use of your time and focus on your real estate business.
The secret is not to hire any single person to manage your property, but to find a company that specializes in small apartments. Check that the company is comprised of people, processes and technology to ensure your properties are taken care of properly.
Property management companies offer the real estate entrepreneur the chance to leverage their economy of scale to save money on maintenance, material cost, and the immediate addition of apartment experience when raising private money.
Most property management companies will have a roving maintenance staff that can fix your air conditioning units or provide assistance with a leaky faucet at cost, rather than having to call in an independent contractor who might charge trip fees to make a profit. Savings are also found in the buying power of a company that manages several hundred units, which could mean rehab materials and other home improvement supplies at a fraction of the cost.
Another area of savings may come in the form of a master insurance policy sponsored by your management company, which features your properties as a rider. Your savings in your insurance savings could be greater than the cost of your management fees.
Finally, in addition to helping manage your tenants and toilets, your property management company will become an important source of experience from which you can leverage to raise private money for your apartment deals. You use your management company’s resume when putting together your project packet to present to investors or a bank.
Your First Deal and Beyond
The first deal you make in the small apartment space is your most critical, and can mean the difference between reaching the increased demand of baby boomers and millennials alike – or none at all.
Completing that critical first deal will provide you with the proof that not only does this work, but it works for you! Just as with my first four-plex, that critical first deal opens your eyes to the financial possibilities for you in the apartment business.
Once you understand the basics of apartment investing and complete that first transaction, you’re able to scale up and get into larger apartment complexes.
Using what I like to call the Flip-Flip-Flip-Hold process, new real estate investors can not only pay their entire year’s rent or mortgage with a single apartment wholesale deal, they will be within reach of financial freedom within the next three to five years.
Get that critical first small apartment deal done and then the larger deals miraculously appear possible.
FREE Real Estate Investing Book
Lance Edwards is a real estate investor and the best-selling author of How to Make Big Money in Small Apartments. Since 2002, he’s done apartment deals ranging from three units to nearly 300 units. He’s also taught thousands how to get started in small apartment investing, using other people’s money, since 2007. Learn how you can get started in small apartment investing with a free copy of his best-selling real estate book at http://www.FreeApartmentsBook.com.