HOW TO BUY APARTMENT BUILDINGS WITH NOTHING DOWN
by Peter Conti
In order to buy apartment buildings with nothing down, you’ll need to take three steps. Step one is the same as buying a nice home with nothing down -- you’ll need to find a motivated seller who will be open to your creative offer.
Step One -- Find a Motivated Seller
We heard about Carrie from a real estate agent named Tim whom we had established a relationship with. Tim was out fishing for listings when he found a 24 unit apartment building owned by a gal named Carrie who needed some help.
Carrie had worked hard all of her adult life looking after and managing this 24-unit apartment building she owned. As she cleaned, fixed, and rented the units over the years, I’m sure she had a good feeling of comfort knowing that all of her hard work would allow the apartment building to support her in her old age.
Unfortunately, an unpleasant surprise was in store for Carrie. At the time that Tim heard about her, she was 88 years old and living in California with her children. She had succumbed to Alzheimer’s disease and needed to go into a nursing home where she could receive special care. The problem was that this apartment building wasn’t producing enough money to pay for the nursing home. Despite hiring three different management companies in three years, the building was only making about $2,000 a month after paying the management company and all of the expenses.
Tim offered to list the property and sell it for Carrie’s Trust, which was how the property was set up due to Carrie’s declining health. Her kids didn’t want to sell the property outright because a large part of the money from the sale would have to go toward paying capital gain taxes. Tim called us because he knew we are always looking for situations where property owners are motivated and he knew that he was unable to help Carrie himself. (We in turn send Tim properties that don’t work for a creative nothing-down offer but work great for a listing and a sale for him).
Step Two -- Run The Numbers
Then you need to “run the numbers” to see if you’ll be able to make a profit. You’ll want to know with certainty that any property you get into is going to make you money, not cost you money. The best time find this out is before you commit to a deal. We looked closely at the income and expenses from the building to see if there was any way to improve the cash flow. We knew right away that because the management fees were close to $1,000 a month, we could pay Carrie the $3,000 a month she needed. The question was, could we make a profit?
We felt certain that we could at least break even and were fairly confident that the upside was pretty big. The rents seemed to be on the low side, which meant that there was room to increase the cash flow in a positive direction after taking control of the property.
Step Three -- Use the Cash Flow to Pay For the Deal
Step three to buying an apartment building for nothing down is creating an offer that uses the cash flow from the property to pay for the deal. We offered Carrie a “master lease”, one of the seven purchase option techniques that would meet both her needs and ours. In return for our monthly payment of $3,000, which would be paid from the rents from the property, we received the opportunity to purchase the building for $450,000 (it’s current value based on the rental income it was bringing in). We would be able to exercise our option when Carrie passed away, thus saving Carrie’s family some taxes.
We immediately began increasing rents. Rather than increasing everyone’s rent at once, we sent notices to one-third of the building each month for three consecutive months. Some of the tenants moved, but others griped a bit about the rent increase and decided to stay. Within four months of taking over the building, we had raised rents to market levels and were receiving an additional $85 per unit on average. This meant the total income from the property increased from $7,100.00 a month to $9,182 a month.
This is a monthly increase in cash flow of $2,082. We were thrilled to realize that we had just created an annual income of $24,987. This is as much money from one property as some people work 40 to 50 hours a week all year to make.
The really exciting part is that because income property in the area sells at a 10% capitalization rate, any increase in cash flow from the property increases the value of the property by ten times. This means that the annual increase in cash flow of $24,987 makes the building worth $249,870 more than it was worth just four months before.
The nice thing about great cash flow like this is that you can afford to hire a property management company to run the property while you sit back and wait for it to increase even more in value. This is exactly what we did with this property. You can do the same thing if you follow these three crucial steps.
You will probably have to sort through quite a few properties before you find one like this. Once you do, you’ll know two things for sure. You’ll know that it’s definitely worth the effort and you’ll also know that you want to do more deals like this again!
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