September 13, 2014 – LIVE, from Denver’s Cherry Creek neighborhood! Hi, I’m Kyle Malnati and you’re listening to the Kyle Malnati Radio Show! We are broadcasting from Stewart Title’s Cherry Creek Branch. I would like to thank Stewart Title, as well as Dustin Thome of Keller-Lowry Insurance, as our radio show sponsors.
Last Episode, we had talked about apartment buildings and why people buy apartment buildings, mostly related to a purpose-driven idea of either retirement, having the ability to cash-flow apartment building investments for someone’s college education, and also to leave a legacy. That was a fun topic that we had talked about and today we are going to dive more into why people buy apartment buildings, as opposed to single-family houses. So, we’ll compare the differences between buying a simple single-family home and buying an apartment complex.
As I’ve mentioned before, where I help people buy apartment buildings is in the city of Denver, specifically and usually 8 to 100-unit apartment complexes. Where I’d like to come along side of you as the apartment investor is, maybe you have owned one single-family rental for a few years, or you have accumulated a number of single-family rentals and all of a sudden they are dotted all over the map. What I’d like to do is try to make your life more efficient, and maybe you could do a 1031 exchange out of one or two of those houses into an apartment complex, and just make your life a little bit easier.
The benefits of the reason why people buy apartments instead of single-family homes, or after they have invested in single-family homes, is efficiency. You have the ability to have multiple rental units under one roof. Let’s pick a six-unit apartment building, you might walk to it, it might have the same lot size and grounds as a single family home, but you’ve got three units on the first floor, and three units on the second floor stacked on each other. So, you only have one roof to maintain, but you’ve got six units contributing to the investment and cash flow of your apartment building. You’ve got single operating systems, like I was talking about that roof, as well as your boiler or furnace. You only have one sewer line instead of having six sewer lines in six different homes. When you have a vacancy, you are not 100% vacant; in the example of a six-unit, you’ve got one or two vacancies, you still have the other units pulling the weight, so that you can make sure that you’re paying for all of your operating expenses. The reason why people buy apartment buildings as opposed to single-family homes is your not competing with home owners that might be a little bit more emotional as they have found their perfect house. When you are buying an apartment building, the people that you are competing with are other investors, so the pricing tends to be a little less emotional, and tends to be a little more financially driven.
Just think about it, you have bought a single-family home before, it’s your dream house, the extra amount of money you have to pay to buy that property may be insignificant because you might live there personally for ten years and you start to think about your kids, and your white-picket fence, all of these wonderful emotional things that home ownership brings. Well, that doesn’t happen with apartments, apartments are investments. There’s an inverse relationship in the apartment market with the single-family market, that’s another reason why people choose to invest in apartments as opposed to single-family homes. Think about it this way, the single-family housing market is really increasing because of liquidity, there’s lots of banks willing to give first time home-buyers loans, those first time home-buyers are usually moving out of a rental property, and moving into their first house.
Well, what happens there is the apartment market starts to decline. When the single-family housing market is dipping, the inverse relationship happens. That’s been what’s occurring for the last six years in our market place. As the financial downturn occurred in 2008 and 2009, most of the single-family home owners that had to move out of houses that they had owned, for whatever financial troubles they may have had, moved into apartments, and that really bolstered our apartment market. So, what’s going on basically is you’ve got the ability to say, look if the housing market is really hot, I might be able to buy an apartment building at a deal, at a discounted price. And then, as the housing market declines, your apartment investment is all of a sudden going to go up.
I’d like to remind you that we are sponsored by one of my good friends and colleagues, Dustin Thome. Dustin Thome is an insurance broker with Keller-Lowry insurance, Dustin can be reached locally at 303.756.9909, that’s his telephone number. And he also can be reached at a toll-free 1-800 number, its 800.753.9909. Dustin can be reached by email, at Dustin@kellerlowry.com. A couple of notes about Dustin Thome, I have worked with Dustin for gosh, I can’t even remember how many years now…it’s probably been seven years. We actually used to work in the same office building when I worked for another company. Dustin works with targeted insurance carriers, they have special policies designed for property owners. Not every insurance company will insure commercial properties, most of the people that you might relate with in your single-family home owners insurance polices, or if you’ve got an umbrella, or your auto policies, they may not insure your apartment buildings or your other commercial properties. Dustin specializes in insuring commercial properties, which is why you should be working with someone who obviously specializes in commercial properties. Dustin is wonderful, he handles all of our clients’ needs. He has actually been able to bind a policy just a few days before a closing, I wouldn’t suggest that you wait that long, but Dustin’s got the ability to work very quickly if needed.
Moving onto our next topic on the Kyle Malnati Radio Show, where should you invest? Well, this is not going to be much different than the old adage in residential real estate: location, location, location, that’s still the driver. Location is still the most important factor when you are buying any piece of real estate. The tenant profile is the next important thing and that is going to be driven by your location. I would suggest that you research heavily the area demographics of the neighborhood that you are buying in. That will largely determine if you are self-managing your building, what type of people that you are going to be interacting with on a daily basis as you are renting apartments.
The proximity to neighborhood amenities, man this is so important! If you are owning, we’ll use that six-unit example again, if you own a six-unit apartment building in an urban area, these apartments might be 500 or 600 square feet. I’m sure you can all remember the days that you were in college, or the first apartment that you had, it’s a teeny little shoe-box of an apartment. And that’s fine, everybody gets their start in a smaller place like that, but it is vital to be close to the scene, and what I mean by the scene is how close are you to a park? That’s free entertainment. You can go to a park with your friends, throw a frisbee around, go on a walk if you’ve got a dog. How close are you to other open spaces and public rec centers? Your tenants are really going to need to have the ability to get out and about, especially if you live in a climate with wonderful weather like we have here in Denver, it’s just paramount. Retail, these are your coffee shops, your restaurants, and your bars. You know, some of your tenants may actually work in these establishments, and further; the tenants that don’t, need a place to go out and socialize. So, being close to neighborhood amenities is so important because most of these smaller apartment buildings don’t have a fitness center, don’t have a pool, and you really need to have that extra fabric of the neighborhood helping to benefit your apartment building.
So, a self-management tip: if you are going to invest in an apartment building, the location of where you invest is really vital. Here’s the example, if you work at Point A and your house is Point B, you’re naturally driving between Point A and Point B every single day. Well, it makes a lot of sense when you say this theoretically, but practically: why in the heck would you want to own an apartment building that wasn’t somewhere between that line of driving distance everyday?My biggest suggestion is try to own something close to where you live. The fear there, and I will try to dis-spell that right now, is that you are too close to your tenants. You might not want to be near your apartment building, but I promise you, it will enable you to get over to your building to see what’s going on more often. The big difference with real estate vs. investing in the stock market is you don’t just unplug from your investment, and have someone else manage it for you. You really need to make sure that you are accurately observing what’s going on at the property. That means you need to visit the property a couple of times a month, and I promise you, if it is within that daily drive, your Point A to Point B, it’s going to be much much easier for you to get over to the property just from a convenience standpoint.
As I’ve shared before, we love inspiration, and unfortunately the world lost a wonderful leader this week. Truett Cathy, the founder of Chick-fil-A, passed away. I thought it would be wonderful to share a few quotes from Truett. I wanted to pick just one quote, but I couldn’t settle on just one. Truett’s has two quotes that I really enjoy, I’m sure his family is obviously gripping with the loss of him and all the Chick-fil-A employees, I know even though Truett’s son runs the organization now, are mourning the loss of their great founder and leader. Truett says, “Nearly every moment of every day we have the opportunity to give something to someone else – our time, our love, our resources. I have always found more joy in giving when I did not expect anything in return.” Man that’s powerful! Here’s the next quote from Truett Cathy, “I’d like to be remembered as one who kept my priorities in the right order. We live in a changing world, but we need to be reminded that the important things have not changed, and the important things will not change if we keep our priorities in proper order.” Sage wisdom from a man that was in his nineties and, I just hope that at some point in my lifetime I get to be blessed with the ability to leave such an incredible legacy like Truett Cathy has. He really, even though he’s gone, leaves a wake of positive influence in our world, and in such a scary world, what a wonderful blessing to have someone like Truett involved in our lives, that we had for so long.
I’m looking forward to our next episode, I really want to thank our sponsors, our sponsors are Laurel Rossi of Stewart Title in Cherry Creek. Laurel and Stewart Title Cherry Creek’s commercial closing department handles most of my apartment transactions; and they can certainly help you, whether you are here in Colorado or nation-wide, they’ve got nation-wide services. As well as Dustin Thome from Keller-Lowry insurance.
I’m Kyle Malnati, I am a real estate broker with Madison & Company Properties, I’m a partner and shareholder of the company, which means I am one of the owners, and help direct that wonderful company in our four offices. I can be contacted at 303.358.4250 on my personal cell phone, you can also connect with me on Linked In, my name is Kyle Malnati, and my twitter handle is my name as well. Thanks for listening and for watching the Kyle Malnati Real Estate Radio Show, till next time, I’ll see you soon.