It sounds totally impossible, to take a large apartment building and award the contract for tens of thousands. Can you really do that, and if you can, how is it done?
Well the answer is yes, you can flip an apartment building. People no smarter than you are doing it across the country every month, maybe every day. The way you do it isn’t that different to the way you flip a house, but with a few tweaks. In fact, it’s probably a bit easier than flipping a house.
You may be familiar with this series of events. 1) find a profitable deal, 2) get the deal under contract, 3) find a buyer with cash, 3) assign the contract to your buyer for an assignment fee, 4) deposit the check into your bank account.
The variations are in 1) and 3).
First, when you’re trying to find a property at a wholesale price that the end investor is still interested in, you need to know what value creation goes into in apartment buildings.
There’s more to it than just looking for run-down properties with deferred maintenance. You are looking for quality properties whose owners have been laid off for whatever reason and are in a bind for it. One must have factor is the location. The poor location is hard to beat.
The deal has to have advantages; there must be things currently wrong with the property that will result in increases in value once they are changed. So, if the property is 20-30% vacant, the rents for the occupied units have not risen in 5 years, and there are repairs that have not been done, creating a potential advantage. A buyer you resell to could walk in, change all of these factors and cause a huge increase in property value.
Large apartment complexes do not normally attract first-time investors. The people you resell to are going to be professional investors who know what a good deal looks like. If your offer doesn’t have these positive factors and you don’t have a location to work for, they’ll see you right away and say goodbye.
Also, when you have all three of these elements present in the property, the homeowner is likely to be financially disadvantaged and motivated to sell cheap just to get out of the property. Deferred maintenance drives away good tenants, rents have to be lowered to fill units, lower rents attract lower quality tenants, lower quality tenants are tougher on the property and don’t pay, and the downward spiral continues.
It is these same elements that you put to work in your negotiations to obtain the economic price of the contract that you need. Without a big upside, no end investor will be interested, so you need to be aware of these items.
The other thing that is different with apartment investing is the type of buyer you will be selling to. Home rehabbing has become so popular that you often find yourself reselling to relative newbies, which comes with its own problems. When investing in apartments, almost all the time you are dealing with professionals.
These are people with multi-million dollar lines of credit, bank accounts with a few million cash in there, or both, who have absolutely no problem with you making a $50,000 profit by assigning your contract to them. They know full well they’ll get a couple million off the property in two years or so, so fifty thousand dollars is a small price to pay.
The truth is, by saving the end investor the time and hassle of having to go looking for the property, you have created a great deal of value for them. He/she will gladly pay your fee, making sure he/she gets the money because they want you to go out and do it for them again.
This is the world of flipping apartment buildings. It may be a little different than what you are used to.