Buy One Multi-Family Property To Achieve Financial Independence

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by: David Delray
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Date: Sat, 24 Dec 2011 Time: 4:23 AM
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Just how does one get to financial freedom? It's actually not the monumental life shift you think it is. Let's just look at it for a second. First, think of every expense you have that you pay each month, then list all of them out and add all of them up. Multiply that total by 1.2 (the extra 20% represents spending money to enjoy yourself) to get a new total. This number is your financial freedom mark.

Imagine your total for living expenses every month is $3,000. That includes your car payment, car insurance, your rent or mortgage payment, home insurance, power, water, internet service, cell phone bill, regular phone bill, cable bill, and of course food. And the twenty percent extra is $600 (spending money) which puts the financial freedom mark at $3,600.

Now, say you choose multi-family properties as your financial freedom vehicle. If you do a merely adequate job of buying a multi-family building and turning it around, you would end up with a minimum $5,000 monthly net spendable income. That means, if you spend the next 4-6 months buying and turning around a multi-family property, you can hit your financial freedom mark and, if you want to, quit your job.

Alright, how do you bring this all about? Probably the main criteria is to look for an apartment building at least 100 units in size. I know, you are thinking that's crazy, or totally unrealistic. Well, take my word for it, it's not crazy, it's very realistic, and you can do it. For sake of an example, let's look at a 100 unit building in the Mid-West, say in Indiana, and the units rent for $790 a month.

When you have all the units rented out at full market rent the monthly gross rents will be $79,000. After all the expenses, including 5% vacancy, are taken out, what is left is the Net Operating Income. Factoring in 50% for total expenses this puts the NOI at $37,000. Then subtract the mortgage payment, insurance and property taxes, and what is left is a net monthly income of $10,000.

OK, but how do you make that happen? Well, we look for multi-family properties that are currently performing below their potential, due to the owner not doing a good job of managing the property. We look for 100 unit properties that are 30% (or more) vacant, that have units rented out below market rents, that are in poor condition and need repairs.

The value of a multi-family property is derived from the amount of income it produces. When a multi-family property has a lot of units sitting vacant and unrented, the lower income level from having fewer paying tenants necessarily translates into the property having a lower value. You acquire the property at this low value, then you put your rehabilitation plan into action, renovate all the vacant units, give the property a total makeover and turn it into a shining jewel. Then you rent out all of the vacant units at top market rent to tenants glad to pay for a nice place to live.

OK, but how do you pay for all this? Where does the money come from? It is called private money, people who have cash reserves and want to earn higher that CD rates without taking undue risk. When you show them your deal and your turnaround plan, they see the increase in value you are creating and recognise the profit opportunity. So they invest their money with you to participate in the profits. You raise private money to cover all the cash needs of your deal. All of the fees to do with closing, the down payment, the rehab costs, they are all covered by private money. You pay zero out of your own pocket.

After you have rehabbed the property and filled it up with tenants paying market rents, it will be worth it's maximum potential value. Now you refinance the property at this new high value, and pay off your private investors. The property is now wholly owned by you, generating ... how much net income?

Ten thousand dollars. But your financial freedom number was only $3,600. I guess buying a multi-family property gives you more walking around money than you thought.