An investor who owns 4,000 apartments explains why multi-family real estate is the best investment h
In my opinion, real estate is the best way to grow wealth. If you want to get super rich, get involved in real estate — but I'm not talking about just any real estate.
I recently wrote an article that explained why buying a house is for suckers. A home is not an investment, because it doesn't pay you each month — you have to pay it.
It's a liability to me, not an asset. Not only does a house leave you less mobile, it ties up your money so you can't use it for real assets.
There are many indications that multi-family apartment investments will continue to be great:
75 million Baby Boomers are headed into retirement
Many of today's apartment complexes may be converted to retirement communities in the future
Many millennials aren't buying homes
It's getting more expensive to build new apartment units
Your initial challenge is getting a down payment. Once you do, it's easier to get a loan on a multi-family unit than any other piece of real estate. Multi-family is the easiest way to get rich once you're in the game. I can go online today and find a 49-unit property priced at $35,000 per unit with an 8% cap (the return on investment based on the income a property is projected to create) for $1,750,000.
If you pay cash for this deal at $1,750,000, you would make $140,000 free cashflow per year after expenses. With $450,000 down and financing $1,300,000, the debt payment would be $78,000 per year. This would make you $62,000 cash flow per year. This cannot be done with a home.
I had a guy call in on my show, The Cardone Zone, and tell me he owned $100,000 equity in a three-bedroom house with a family of five. I quickly searched online to find a property for this caller and came across a $179,000, 20-unit building with a 15% cap rate. He would pay $48,000 per year on the mortgage and the return would be $22,000 per year. He's paying for the house he currently lives in, but the multi-family building produces income over the mortgage.
For the vast majority of people, college never leads to riches, nor does a home. If your goal is to build up $300,000 of equity over 30 years, then buying a home is a way to park your money the same way you would in a savings account or under a mattress. If you want to leverage your money and grow wealth, buying a home is not the way to go.
When I was in Houston, I tried the investment housing thing. My renter left and I had trouble filling the place again. If you have a building with 16 units, even if a couple are vacant, you still can make it work. The more doors, the better.
I ended up buying my first apartments back in the early 90s, a 38-unit deal for $1.9 million, putting $350,000 down. I looked for a market where they don't allow building, and where permits to build cost more than the existing buildings. At that time in San Diego, it would cost $28,000 to permit one unit. I was buying units for $70,000. So, to go build a new one, it would cost $28,000 for a piece of paper, and you hadn't even put a nail or a stud in a piece of cement.
Apartments in the Soho neighborhood of New York City. Flickr/Fuzzy Images
If you go into multi-family the right way, over the next decade it could be the best investment of your lifetime — and I put my money where my mouth is. I currently own almost 4,000 apartments and will soon have over 5,000. They are not building enough multi-family apartment buildings to keep up with demand. On average, 770,000 new rental households have emerged each year since 2004, according to a 2015 article in The New York Times.
Real-estate investing can give you the ability to use debt — a $400,000 purchase can be purchased for 25% of the price, allowing you to leverage $100,000 to control 4X the value in property. Income-producing real estate investments can also provide excellent appreciation in value. Properties usually increase in value when the net operating income of the property improves through rent increases and effective management of the property. There are also tax benefits and hedges on inflation.
If you want to get involved in multi-family real estate, start with a minimum of sixteen units, avoid single family residences and condos, and only buy multi-units at one address.
If you struggle with producing enough income to save enough for a significant down payment, check out Cardone University today. In the creation of wealth, you have to have income before you can invest. Invest in yourself today so that you can have something to invest big tomorrow.
Grant Cardone is an American entrepreneur, New York Times bestselling author, speaker and motivator. His books, audio packages, and seminars provide people of all professional backgrounds with the practical tools necessary to build their own economies towards the path to true freedom. He’s authored four books since 2008, including the New York Times bestseller "If You're Not First You're Last," and serves as an expert contributor to Fox News, CNBC, MSNBC, The Huffington Post, and Entrepreneur.
Source: Business Insider, 18 August 2016, Grant Cordone