The 5 'wants' that changed my investment strategy.

What do you want out an investment? Of course, you want a good return but finances are only one facet. One reason real estate investing is so attractive is there are so many different avenues to explore. But how do you begin choosing where to start? To be sure, my ‘wants’ were different when I started. A few years into it, I have noticed that what I ‘want’ from real estate investments has evolved. The following is my personal short list. My hope is that it would lead you to ask, “besides a good return, what do I truly ‘want’ in my investment?

1.  I want truly passive income.

More specifically, I want truly passive income that stays passive as I scale. Think about your 1, 5, and 10 year goals in real estate. Does it involve creating multiple investment streams over time? You plan may sound like:

• oYear 1 - I want 1 rental property.
• oYear 5 - I want to have at least 2 single family houses and maybe a duplex.
• oYear 10 - I want six or seven properties.

Not a bad plan and not overly ambitious – you can do this! But realize - as you scale, your passive investments can become less and less passive! The more doors added, the more time required. Plus, your investments don’t live in a vacuum! Add kids, career demands, and so forth and you may find yourself with an increasingly demanding “passive” investments.

My choice has been apartment investing because I can scale my business without taking away from building the business itself. My actual work has transitioned from installing toilets and screening tenants to networking, educating investors, and evaluating properties. All of these are much more suited to my gifting. Again, that’s the beauty of real estate investing – there is a niche for everyone.

2.  I want more control.

I did not buy my single-family property with the end in mind. I’m not that much of a planner. I’m more of a squeeze it for all it’s worth, then when it no longer makes sense, sell it. But eventually I will sell it. And when I do, the determining factor for what I get for the asset is…the market. Comps. Now, I’m not a control freak, but I also don’t like people telling me what to do (after all, I am a Texan!) and the market tells me how much I can ask for my single family. No matter what I have done to the property, at the end of the day the market determines my price.

Apartments are valued differently, they are priced according to the Net Operating Income (NOI). Simply put, the equation is Total income / expenses. So, if I can increase the apartment’s income, I can demand a higher price when selling it. The asset has increased in value, so the price of the asset increases accordingly. Think about this – a 100 unit apartment complex is able to raise rents $20 / mo. An extra $2000 per month is generated, creating an additional $24,000 / year. A measly $20 / mo. has made this complex more valuable. Or how about this one – the magical marriage of forced appreciation and economy of scale. 50% of those tenants say they would pay an extra $20 month for reserved parking. Half of the parking spaces get RESERVED APT. XXX painted on the asphalt. You just increased the annual income another $12,000. Your property has become more valuable because you have increased the value, not because the market tells you so.

3.  I want safety in numbers 

“I want more control” is related to the reward side of investing. What about the risk side? Think of vacancies as income disrupters. If I own a single-family property, it is either 100% occupied or 0% occupied. I have to keep it filled or I am paying mortgage, taxes, etc. out of my pocket. This is precisely why duplexes have become so popular (triplexes and quads as well). A duplex is either 0%, 50%, or 100% occupied, offering a safety cushion.

By contrast, the most recent multifamily complex I invested in had a “stress” analysis included in the investor summary. If you can love a spreadsheet, I loved this one. The syndicator ran the numbers and I double checked them – if the monthly revenue was off by 10% and the vacancy rose to 25% (a ridiculously worst case scenarios for this investment), the investor would still be making 1-2% on his investment. Not ideal, but also not devastating.

4.  I want choices in how I fund 

The deal flow in Texas last year was strong. So far in 2018, it is shaping up and I have already had one solid deal and another one coming shortly. This year, I may have more opportunities than cash on hand. Thankfully, I can keep investing through a Self-Directed IRA. Many investors I come across do not even know this option exists. The only time most of us think about IRA’s is when the statement shows up. Since they can’t be touched without penalty until 59 ½, they become a second thought. In my estimation, this is precisely why using IRA’s can be an attractive option for funding a multifamily syndication deal. The money earned by the investment still cannot be accessed without a penalty, but I was not planning on cash flow from that money anyway. If the deal makes sense, I am personally more comfortable with my IRA being in a physical asset than in paper.

5. I want a team. 

As much as I like to think that I am a jack of all trades, I’m really not. I’m a good strategist. I’m an OK accountant. I’m a poor landlord. I’m a horrible handyman. Problem is, I have to be all of these things with my own properties. The answer is a property manager, right? But just how many properties do I need to be able to justify that expense? Getting to that magic number brings me back to my first point – didn’t I do this in the first place to have passive income? This final reason was my personal deal breaker on amassing my own properties. The scale of multifamily not only demands a team of professionals, but can afford them with profit to spare.

The giant question is, how do I get into multifamily investing? Your first step is networking with syndicators. I suggest searching BP and going to Real Estate meet ups with the purpose of meeting multifamily syndicators. Many of them offer mentoring programs. A good mentor can accelerate your learning curve and get you familiar with these investments.