As a multi-family-property investor, your ultimate goal should be to get the most appreciation in the shortest possible time.
This is done by using a variety of techniques.
1. Buy a property that is below market value due to a burned-out seller – someone who never learned that successful multi-family investors always have management companies to deal with their tenants, while they go out and find more deals. (It’s the fool who wants to be in the tenant business.)
2. Boost your appreciation by buying a property that has below-market rents or below- market occupancy. Be sure you buy the property based on today’s cash flow. (Sellers are always trying to sell based on future cash flow.) When you then raise the rents and/or the occupancy, you will have increased the value of your property.
3. Buy a property in need of repairs. Buy it at a discount, make the repairs, and sell it at a premium.
4. Buy in an emerging market. You get to buy at today’s prices and watch the market take off like a rocket. In a very short period of time, you can become very wealthy. (This is what I like doing best, and what I’ve trained thousands of other people to do.)
These are four great strategies, and I’ve used them all with much success. (I still do.) But the very fastest way to get five years’ worth of appreciation in just one year is to …
… Do a Condo Conversion!
A lot of multi-family investors have many a four-letter word to say about condo converters. Nevertheless, a condo conversion is often the perfect way to exit an emerging market. It’s also a great way to enter a market that’s so far ahead in the market cycles that properties are selling with little or no cash flow.
Multi-family investors get upset with condo converters because they can afford to buy with extremely low capitalization rates – thus driving prices through the roof.
Not only that, but they take apartments off the market when they convert them to “for sale” units, thus decreasing the supply. When supply decreases and demand either stays the same or increases, prices rise. Another thorn in the multi-family buyer’s side.
Well, if you can’t beat ’em … join ’em! To give you some perspective, we typically look for a 40 percent return before we leave a market for the next emerging market, and that usually takes three years to accomplish. Condo converters are regularly getting those returns and better – much, much better – in hot markets. Those are the same markets that we as multi-family investors have turned our backs on.
Here’s another way to look at it: How would you like to sell 50 or more single-family units in less than a year? How would you like all of those units to be at the same location, and not spread out all over the place? Then what would you think if the renovation of those units could be done in cookie-cutter fashion? No running around meeting contractors … no driving all over the county to secure your properties … no chasing of dozens of buyers. (You’ll have a sales team.) Everything’s in the same location!
From someone who’s done all that chasing (me), I can only say “Hooray!”
What’s the downside, you ask? Sure, we’ve all heard of the “Condo Bubble” that’s taking place in Florida, Chicago, and Southern California. But there are many other good spots do be doing condo conversions RIGHT NOW. Better yet, these opportunities are not going to go away. They are only going to become more abundant.
We are in the infancy of the “Condo Conversion Era,” and it all has to do with demographics. (My specialty.) Two trends will only become stronger over time: The rise of non-traditional families and the aging baby boomer population.
Mark my words: These two groups will increase the popularity of – and need for – more and more condominiums as the years go by. We are at the ground floor of the need level for this type of housing stock.
You have a choice: You can sit on the sidelines and watch other people get rich … or you can jump in and join in the joy.
Before you start spending your profits, there is some important information you need to get your hands on:
Know the specific condo ordinances in the town you are looking to do the conversion in. These regulations are mainly there to protect the tenants. You must follow the ordinances very closely, or you will be in big trouble. Invest in areas where the affordability index (the ability of the average worker to afford a home) is low. Be in the right neighborhood at the right time. That’s called “feasibility.” You’ll be looking for specific demographic clues to determine if it’s feasible to do a conversion in this city, in this neighborhood, at this time. Get up to snuff on financing. You’ll need “interim financing” at the outset – and a commitment from a good quality lender for “end loan” financing, so you can cash yourself out at the end. Know all you can about project management.
Then you should do a conversion that needs only minor repairs. After you’ve done a couple and gotten your feet wet, start taking on larger repairs if you like. Some converters convert only “easy” properties: “A” and “B” type properties in “A” and “B” type areas.
You must discover the proper formula to determine whether a deal is truly a good deal or a money pit. As a rule of thumb, you don’t want to get into a conversion that has less than a 30 percent cash-on-cash return. Remember, though: The returns can be much, much higher.
Then you should know the most effective techniques for marketing your complex, so you can achieve “sell out” in the fastest amount of time. You’ll have certain strategies for selling to existing tenants and other strategies for selling to outside buyers. You need to decide between an “in-house” sales team vs. hiring a real estate company to handle it. If you’re going to use an in-house team, you must decide how to compensate them: Will you give them salary, salary plus commission, or straight commission?
I know it sounds like a ton to find out, but condo conversions are a lot easier than you might think. With the proper guidance, you can easily add this skill to your real estate repertoire. That will allow you to do bigger deals, in shorter amounts of time, for bigger profits.
Remember: The faster you go big, the faster you become wealthy!
“Your big opportunity may be right where you are now.” – Napoleon Hill
(Ed. Note: David Lindahl, also known as the “Apartment King” successfully invests in single-family properties, apartment complexes, and condo conversions.)