Apartment Investing Advise

[Aaron Millis]

Hi BP,

So I am looking to get into multi family properties in the pretty near future and I just wanted to get anyone’s 2 cents that owns a commercial multi family property and to see how you started.

I have one rental property now that I live in (house hacking) and i am in the process of doing a HELOC on the property. So once that goes through I'll have roughly 50K of capital to play with.

I live in Auburn Alabama and the market here is pretty crazy so I have been looking at surrounding cities like Montgomery and Birmingham that are bigger and more affordable.

I know that the typical down payment someone’s needs for commercial is 25% so short of me getting seller financing, or a partner, or some other creative finance path my purchase power leads me towards properties that are typically in lower income areas- at least for the ones I’ve spotted. (200K ish)

I’ve listened to pretty much every podcast multiple times and often hear people saying that when they begin they focus more on cash flow and as they grow they look more towards appreciation opportunities. The kind of properties that are in my price range mostly seem like they would not see much appreciation in the foreseeable future.

So If you were me what would you do? Im definitely not the “analysis paralysis“ type of person therefore my worry Is that Ill jump Into something I shouldn't. Also probably worth mentioning I would definitely be wanting to self manage any acquired property, partly for the experience and also just because I have plenty of time to invest. Thanks.

[Jason Cory]

First, if you are comfortable with the Auburn market, stay there. You are renting in a college city that always has demand & a lack of supply. You also have the benefit of having parents pay the rent instead of the actual tenant. 

It doesn't matter if the prices are high. They will always be high for the reasons I stated above. They will also always appreciate. They never depreciate. College towns like Auburn don't function like other places. They function like medical properties. They offer long-term stability because people will always need an education like they will need healthcare. 

Second, if you look in other markets be sure to look into the long-term stability aspects of the city, the total number of units in the city, compare that to the total number of SFR. You can find this information from places like Costar or core logic. If you see more than 10% of complexes having a cap rate higher than 8% and an overall city occupancy rate under 85% it's not a good place to invest unless you are buying to change the property class. It may mean you have more owners or it's not an appealing market to rent for whatever reason.

The area has to be able to support the change in class or you'll ruin your investment. That means looking into the median income, school system, linkages(proximity to employment, shopping, churches, etc). 

Third, look at the principle of substitution. Why or what would make someone rent in your complex vs one down the road? If the same item is on sale at Walmart you will buy it there instead of Target. Renters & homeowners do the same when evaluating spending their money. That's the principle of substitution. 

Fourth, call an appraiser not an agent to get the information if you can't find it. Even if you pay them for it, it will be money well spent. They are reporting information to you not trying to sell you something. That's what an agent does in the process & should be the only thing they do.

I might catch grief for the last comment but whenever you invest & are unsure of something you should employ the person trained in the specific area. If sales weren't needed we wouldn't have agents. If reporting value & market information wasn't needed we wouldn't have appraisers. Rely on the experts for each aspect without crossing over their respective expertise.