#41: 6 Ways to Invest in Apartment Buildings

Foreign. Welcome to the Passive Income MD podcast where we talk about creating your ideal life through multiple streams of income. I'm your host, Peter Kim. If you enjoy hearing about this stuff, make sure to hit subscribe so I can bring it to you every week. Now let's get on with the show. Hey everyone, how's your 2021 going so far? We're only a few weeks in. Obviously things have been a little crazy out there. I'm wondering how things have been for you personally. Have you set some goals for 2021? I have and one of the major goals for myself is to continue to invest heavily in apartment buildings. As you know, I love real estate. It's definitely a passion of mine. It is a mission of mine to, to let other physicians and high income professionals know about the power of cash flow and multi family or apartment investing. Sometimes people come to me and they, you know, I talk about it and they're like, hey, how do you actually invest in apartment buildings? I mean, besides maybe just owning it yourself? And I always tell them there are so many different ways to get involved. It's actually pretty broad topic. And so for this podcast I thought it'd be nice just to talk about the different ways to invest in apartment buildings. So here's the first one. Let's talk about it simply to buy it yourself. And this is one is the one that probably comes to your mind whenever you think about investing in apartments. You buy a building, whether it's 4, 5, 6, 5000 units and you rent it out, you have hopefully some professional management in place, you set up a whole team, meaning that you have brokers, you have property management, you have lenders, you have contractors if necessary. But ultimately you own the property yourself and decide the business plan and how to implement it to get you to your goals. Whether it is cash flow, whether it's something called forced appreciation, meaning that you put value into the building by maybe doing some renovation and increasing rents and operating income, or you're just hoping that the market in that area will continue to get better and you're gonna make money that way. But there's so many different ways to make money. Right. When it comes to apartment buildings. But owning your own property is just like owning a business. You bought that property because you know it's going to operate in a certain way. You think maybe even you can make it operate better. Yeah. Someday you either decide to sell it or let it be a cash flow machine for you. So that is one way to own the property. That's probably again, the One that everyone thinks of by yourself. Okay. The other thing is to actually buy it with a partner. You know, it's funny because it seems so easy because, I mean, seems pretty simple. I mean, people say all the time, like, oh, I don't have enough to buy an apartment building, so I'll, I'll buy a single family home. But I really want to kind of step up to multifamily. Well, I say, look, if you really want to get there, think, you know, of what resources you have. What is the limiting factor for some people, they say, oh, it's the amount of capital they have or the money. So I tell them the story of how I bought my very first apartment building. And I bought that with a partner. He's a friend of mine, he's another physician. We had both never invested in apartment buildings before, but we knew that we were both kind of striving for the same thing. We wanted to get a place to learn on, to learn how to invest, to get cash flow for ourselves and let it be a springboard for other types of investments. And so we decided to go 50, 50 on a building. We could have each individually actually invested on our own and probably purchased that building. But we decided to do it together to, I say, in a way, mitigate the downside, right, to take less risk. Of course that limits the upside as well, but, but for us, we were pretty realistic about this very first building. We said that if we learn and we spend, you know, this kind of allows us to get totally educated on how to own an apartment building. By the way, it was like a five unit apartment building then that would have been worth so much just by itself. Now obviously, if it makes money, that's the goal. That's, that's gravy as well. And so we actually went in there, 50, 50, and we're able to buy it with a partner. Now, I just want to caution you, obviously you have to find the right partners to invest with because ultimately it can be very difficult to exit that partnership. If things don't work out, you have different plans for it. Somebody wants to sell the building, somebody wants to keep it for a lifetime. How do you set those partnerships up? These things have been done before, so you can set it up before. And that's one thing I tell people. Do a great job on the front end, planning for any contingencies on the back end, and it'll make life a lot smoother for you. Then there's always the question of who's gonna actually run it or be in charge of it if it's 50 50. But that's something you have to work out with your partner. But when it comes to putting in money together, it's not a bad option because, again, it limits the downside and you're able to have somebody else to kind of learn with and from as you go through this thing. So that is definitely an option available for you. All right. The third way to invest in apartment building is investing in something called a syndication. I've talked about that quite a bit on this podcast. For those who've been on the blog or the Facebook group Passive Income docs, we talk a lot about different syndication opportunities. And for those who may not know what that means, it's simply the pooling of funds in order to purchase a property. In this case, we're talking about apartment building. So remember when I talked about all those things that you need to do when you buy apartment building? Well, it's possible that a professional goes in there, runs this whole investment, and basically all you need to do is invest your capital. I mean, this is pretty much passive investing. At its core. You provide capital investment. They run and operate the, you know, the department building, and they cut you a check, whether it's quarterly, yearly, whatever it might be. And so the people actually running the syndication might be referred to as syndicators, general partners, operators. And you as like an investor, which is essentially a silent investor. You're what's known as a limited partner. They make all the decisions, they actively run the property, and you're trusting them to do a great job with it. Now, the benefit for you is that, like I mentioned, it's totally passive. So if you're a busy physician, you have a busy family life, or lot of times you're getting into these investments not because you want another job. You don't want to spend more time doing things outside of your normal day job. You want to make money with a day job and then funnel it into something that creates more income for you. And these passive investments, like syndications, are a perfect way to do that when it comes to real estate. Now, the key with these syndications, and you'll see the next topic too, is understanding how to do the proper due diligence for them. And I can't stress that enough. How. How do you make sure that you're investing with the right person? How do you make sure that you're investing in the right deal, in the right market, these type of things? And that takes time. That takes time. It sometimes you gotta invest in a couple of these On a small level, to understand them, to get the, you know, get used to the inner workings. Then you have to actually study and educate yourself on how to do the proper due diligence. I mean, that's where the work comes in. When it comes to these investments, I always say it is very passive, but upfront, you have to put a little bit of work understanding how to look at these things and then deciding whether that deal is good for you. You then after that, it becomes totally passive. So I want to talk about the fourth way to invest apartment buildings, and that's investing in a real estate fund. Now, what's the difference between, what's the difference between a fund and a syndication in this type case? Well, a fund is really capital that is raised or put together with the intention of buying multiple apartment buildings. It's typically called a blind fund, meaning that you, as an investor, when you invest in this fund, oftentimes you don't know what buildings are going to go out and buy. Now, there are some exceptions to this rule. If they're raising money for a couple years and you invest in the tail end of those years, sometimes they've had a few apartment buildings that they've already started buying with some of those funds that have come in years earlier. But for the, you know, for the most part, you're investing in this thing blind. You're trusting the operator or whoever's running this deal. You know, you give them your money and everyone's pulling that money in. And you know that they're going to build a portfolio of multifamily or apartment buildings that will really meet their goals and meet your goals as an investor. So the nice thing about this, about real estate funds, and we talked about some of the pros and cons of funds versus syndications, it's that you get instant diversification. You're not just investing in one property, you're investing once, but you might be investing in anywhere from 5 to 10 to 25 apartment buildings all at once. That way, if some of them don't do as well, maybe they underperform, then it kind of smooths out the returns with ones that, you know, do a little bit better. Now, again, doing the proper due diligence, it becomes a little bit harder because you're not looking at the apartment buildings themselves. You're actually really vetting the, you know, the syndicators or the fund managers or the operators. And so you have to really understand how to look at track records, which is the main thing for you to look at, understand their business Plans understand what their goals are and things like that. And again, that can be learned with time and with doing these repeatedly. So the fifth way to invest in apartment buildings is to invest in what's called a reit. R E I T reit. REIT stands for Real Estate Investment Trust. Now, it's a little bit different from a real estate fund because it's a large corporation, I'd say, that runs and manages multifamily properties. So when you invest in a reit, the reit, you're actually buying shares in the corporation, not actually in the properties themselves. So I hope that's very clear for people. You'll see these REITs oftentimes on the stock market. So you can buy into a reit. So that big corporation, basically you own stocks in that reit. You don't actually own pieces of that apartment building itself. That's what's different between a REIT and a fund. When you actually invest in the fund, you actually own pieces of each of those apartment buildings. Now, just so you know, when it comes to a reit, there are public ones and there are private ones. As I mentioned, the public ones are bought and sold like stocks. They're totally liquid, meaning that you can easily convert that to cash. You can just buy and sell like you would any stock. However, the downside to them is they're often pretty loaded with fees. I mean, these large corporations have a lot of people and a lot of mouths to feed, so they're pretty loaded with fees. And when it comes to the tax benefits, we don't really have time to go into all of those right now. They're not really as great as the real estate funds when it comes down to it. And that's something that you have to recognize, especially if, you know, getting some of those tax benefits or depreciation or deductions is your primary or one of your major goals, then maybe this might not be the right type of investment for you. Now, I mentioned public REITs, but there's something called private REITs as well. Those are created by, you know, certain companies, and they're not publicly traded on the stock market. But you're also doing very similar. You're buying into a share of this REIT that goes out and buys multiple apartment buildings. The difference is that they are not public, so they're not necessarily held to the same standards. But they also can be quite profitable if they're investing in apartment deals or investing in multiple apartment buildings. That can ultimately pay off for you in the end. And so you just have to recognize whether this is a public or private. I wouldn't say one is better than the other. It's just again, depends on who's actually running this. And look at the fees and then of course, the outcome or the returns that you might get. Now, the last way or the sixth way to invest in apartment buildings or multifamily is to become a syndicator or an operator. In that case, you are the general partner, meaning that you go out and, and you actually raise money for this deal. Let's say you want it to be your business to go find apartment buildings, to operate them and that's fun for you, but you want to, you know, raise money from investors to help you buy that. So you raise money and get those limited partners that we mentioned and you become that general partner. Now obviously this requires a ton of work and of course, definitely there's a ton of regulation when it comes to this. But the payoff can obviously be huge in the end. And I think that the work and putting the more active time in that pays off if that's what you're looking for. Now, for many people, again that are listening to this, my guess is that the goal for you is to build a passive income stream. So for most people doing this one, the six way, becoming your own syndicator doesn't seem to make sense. But there are a lot of people I know, there are even some physicians I know that have gone into this field and done quite well. So as you can see, there are tons of ways to invest in apartment buildings. I don't even think I named them all, but these are the six major ways to get involved. And so next time you hear, hey, I want to invest in apartment building, you're not sure how to do it, refer back to this podcast. I have a blog post on this somewhere as well too. But either way, enjoy your week, have a great time. And of course, like always, just make it happen. Enjoy the show. Let me know by dropping a review and the podcast app you're listening to us in. And if you haven't already, make sure to hit subscribe. Are you part of our community yet? Join thousands of physicians who are also on this journey to creating their ideal lives through multiple streams of income. You can join us on our Facebook group Passive Income Docs and you can always learn more at our website, passiveincomemd.com thanks again for allowing me to be a part of your journey. See you next time.