When I was 19, I was about to finish my first year as a mechanical engineering student, but something just wasn’t right. I loved my friends, I loved playing for the school’s soccer team, and the parties were awesome, but deep inside I knew that this was not the right road for me. As with any major change in life, we first start with a feeling that there must be something else out there in life for us, and so I began searching. My search led me to stumble upon the book by Napoleon Hill titled “Think and Grow Rich” in which he states that all riches, all achievements, come from an idea. The idea that I had was that I wanted to become wealthy through real estate and online business, and that’s what I did. For that reason, in this article I will be speaking about the topic of real estate and why I have chose apartments and syndicating as my road to wealth and freedom.
There are hundreds of business methods one can use in real estate, however, it all comes down to the basics of the transaction; there’s a piece of property someone wants to buy, and there’s someone that is selling it. In between these is a whole list of other factors and people that come into the equation. You have a listing agent, title companies, escrow companies, insurance agents, loan brokers, inspectors, and the list goes on. Because this article is focused on the mission of making money, this article is focused solely on one type of real estate, and that is syndicating, which is just a fancy term for raising money.
These syndication happen and are created in order that the organizer of the syndication, typically a corporation of partners, can raise money from investors to purchase an asset that will create a return suitable for said investors. Now, why would anyone in their right mind want to create a syndication in the first place? Well, because it allows the syndicator to use other people’s money and literally create a return on investment that can be unlimited. If you make any amount of money on an investment where you didn’t use any of your own money, you’re making an unlimited return since anything divided by zero is infinity, or undefined.
Syndicating to purchase apartment buildings is in my opinion not only the best real estate business, but the best business in the world, for the following reasons:
- Cash flow
- Debt pay-down
- Tax incentives
- 1031 Exchanges
At our company, we focus on apartment buildings that are 100 units or more in size because these tend to provide more cashflow, security, and the vacancy rates are lower. Investments like these are seen as more favorable and “safe” by the banks because they make enough money to pay for their own mortgages. Cash flow is defined as the total amount being transferred in and out of a business, the amount of cash that flows through the business and into its respective sections like taxes, insurance, and other expenses. Once all expenses are paid off by the cashflow, there will be some left over and this is called the net operating income, or NOI. This net operating income is what the owners of the syndication will profit from and will split with their investors. The greater the NOI, the more money the building makes.
Because we own the deal in a syndication, we have control of the length of time to hold the asset, and the exit strategy. In our own business, we look to hold our apartment buildings for 3 to 5 years or once we meet our desired returns, whichever of the two happens first. Real estate has only gone up throughout the years, and so in three to five years our properties will have increased in value by around 3% per year. In five years that’s a total of 15% so if you own a property that is 100 units and is worth $10,000,000 when you buy it, in five years it will have appreciated by $1,500,000. Within that same time frame, your tenants paid down the mortgage for you AND you received cashflow every month.
The United States loves business owners and entrepreneurs and so we are given certain tax incentives in the form of write-offs for owning real estate. These can be expenses incurred to fix the property, business trips, meals, and other items which you will have to consult your tax adviser since we cannot give legal advice on this.
Our main goal or “exit strategy” is to refinance when the property has increased in value so that we can pay back the investors, still own the deal, and now re-start the process while getting paid to do so. If refinancing is not the wisest choice at the time, then one can do what is referred to as a 1031 exchange, a process where you can trade your current property for one that is very similar, smaller ones that add up to the total units of the current one, or a much bigger property. Finally, we left this out until the end because it is the best thing I have ever stumbled upon, and this is the “acquisition fee” that a syndicator collects at the time of closing for putting the deal together. This fee is anywhere between 3 and 5% of the total purchase price of the deal, so imagine what the acquisition fee of a $15,000,000 deal is. Yes, it’s a lot.
In conclusion in this article we discussed the topic of real estate and investing in apartments via syndicating. This is a secret that very few people in the world know and understand, that there are people out there (investors) ready to put their money into the right deal, and it is up to you to do the hard work and put the deal together. If you learn enough about this and do it correctly, you can change the trajectory of your life tremendously and become the success you were meant to be.