First, I wish to describe three stages an investor passes through if they persist and succeed at investing.

• Entry Level Investors – Novice to knowledgeable investors, typically investing in market vehicles or everyday savings. Low to moderate net worth.
• Sophisticated Investors – Knowledgeable investors that expand investments to options trading, or real estate, and market investing. Moderate net worth.
• Accredited Investors – Highly knowledgeable investors with highly diversified portfolios. SEC has defined this as greater than one million dollars in net worth; other criteria apply.

Under SEC rules, an investment syndicate, such as a group of people who pool resources to purchase an apartment complex, may allow a limited number of Sophisticated Investors to join their investment vehicle. The SEC permits investment syndicates to take on unlimited Accredited Investors.

Our Real Estate Investor Education Program

The path my wife and I took from Investors to Accredited Investors involved joining a real estate investment group. The purpose and goal of the group are to turn investors into Sophisticated Investors through a well-defined and crafted education program. The program we chose was “Lifestyles Unlimited” (LU). Their three-track training program provided extensive video training seminars. Topics covered everything from investing in single-family houses to passive investing in apartment complexes to how to become a lead apartment syndicator.

The education is extensive at every level and includes all the processes and documentation required to succeed in real estate investing. For each type of investment, they provide checklists and spreadsheets to evaluate investments, such as how to evict bad tenants legally. (A topic that required a great deal of change with the advent of COVID-19 eviction moratoriums.)

The Single-Family Home Rental Path For Success

After we joined Lifestyles Unlimited, we met with our mentor and followed their education guideline for investing in single-family homes. Then we got pre-approved for lending. Next, we purchased our first single-family house and performed the rehab to meet the LU mantra, “best product, best price.” This ensured we provided a clean, sound, and affordable house that any family would be delighted to live in.

The primary goal of the LU investment model is to buy and hold homes and apartment homes and live off the rental income. Depending on your down-payment availability and risk tolerance, you can purchase an almost move-in-ready house or buy a fixer-upper. The latter entails more risk but greater ROI.

Our first house required some rehab but not extensive work. I created a punch list of tasks to get the house ready and bid that out to several contractors. After research and interviews, I hired an experienced, mid-priced contractor. I supervised the work throughout the project to ensure quality and quick task completion. We rented the house within three months of purchase with a $450 monthly cash flow and 19% ROI.

The second house only required $250.00 in minor rehab work to prepare to rent. That house was so clean! We purchased another minimal rehab house a year later and rented it out within two months. Investing in all three of our nearly move-in-ready houses required more up-front funds but was a relatively low-stress experience.

A friend of ours, Oliver, chose to go down the fixer-upper route and bought cheap distressed properties that required down-to-the-studs rehab. He paid less up-front to invest but required obtaining a bridge loan for the extensive rebuild. He got a better ROI but certainly experienced a lot of stress in the process, as finding competent contractors was difficult and required constant oversight.

Multi-family Investment Success Requires Networking

After our Single-Family investment success, we took the training and sought to invest in Multi-Family syndicates. To date, we have invested in twelve properties and are currently active in eight. Finding these investments required constantly working with our contacts to find new deals and stay in touch with leads and other passive investors. Like any endeavor, reaching out to a like-minded community is the best way to ensure success.

Investing in apartment buildings may follow two paths:

• Lead Investor – A person who, upon completing qualification training, searches for and purchases a multi-family complex, either as an individual investor or as a syndicate that pulls in funds from multiple investors.
• Passive Investor – A person who, upon completion of training, seeks syndicate lead investors who meet their investment goals and joins in their syndicate deals.

Lead investors seek to invest in one of three types of multi-family properties:

• Yield Investments – High-quality properties with established rent rolls but lower risk and ROI
• Hybrid Investments – High to moderate-quality properties with room to add value. Some risk and slightly higher ROI.
• Value Play Investments – Moderate to low-quality properties that cost less to purchase but require rehab and tenant recruiting efforts to put value back into the property. High risk and high ROI potential.

Apartments are classified as Class A, B, C, and D, with the former being nearly new and the latter decades old and often in serious need of rehab. Class A and B complexes are usually the best choices for yield investing goals.

Hybrid investments should start paying quickly, but opportunities exist to increase the Net Operating Income (NOI=Gross revenue minus expenses). For example, a syndicator lead may find a Class B complex where the current owners converted a rental unit into a maintenance or storage facility. The lead could decide to return the unit to a rental. This recovers the income lost and increases the value of the property through increased NOI.

Investing in a value play usually doesn’t result in income distributions for some time. Still, the value added by rehabbing and bringing occupancy to desired 95% or greater allows the syndicate lead to sell or refinance the property at a substantial profit, typically within 2 to 4 years.

Understanding Property Valuations

Naturally, when you’ve entered the investment world, you want to know what it’s worth. You must assess if buying the property meets your goals, and due diligence requires determining value. Valuing real estate properties differs between single-family and multi-family (and other commercial) properties, as described below.

Finding Single Family Valuation

The value of single-family homes is obtained by comparing the value of similar houses in nearby neighborhoods. Formally, one can ask a real estate agent or house appraiser to provide a “comp” of your property or a property you’re considering purchasing. The realtor will query the MLS and other sources to find the value of nearby houses that match as closely as possible regarding bedrooms, baths, garages, and other criteria. They produce a report showing your potential property’s value based on the comparison. In addition, they can provide similar rent comparisons so that you can evaluate the rent you can charge tenants.

Of late, I have found the rent valuations of Zillow are sufficient for determining rent increases as needed when lease renewals come around. Please note that the valuation of duplexes, tri-plexes, and quad-plexes are also obtained through comparative analysis.

Finding Multi-Family Property Valuation

Although banks use a form of comparison valuations for evaluating apartment complex loans, the primary means of determining the value of multi-family properties (those with greater than four units) is based on Net Operating Income. This is based on the formula:

Value Equals Net Operating Income Divided by Cap Rate.

Cap Rate is the market-based expected percentage of return on your investment. Properties with higher risk carry higher Cap Rates, and Class A properties carry lower risk and lower Cap Rates. A Class B property earning $600,000 NOI at a market-determined Cap Rate of 5% would be valued at $12,000,000. The primary objective of a lead investor is to drive increases in revenues while reducing expenses where possible to increase the NOI and, thus, the value of the investment.

Conclusion With Caveat

The path we took to achieve financial independence through real estate investing required that we possessed the funds to invest. Some people have succeeded with the no-money-down method to invest in real estate with little or no assets. However, this requires a great deal of worth high risk. We didn’t need to choose that path. We tripled our net worth by applying the strategies and methods learned over the six years since we joined Lifestyles Unlimited. If you have funds socked away in various accounts you wish to divert to real estate investing, I would highly recommend joining one of the groups like Lifestyles Unlimited that provide the tools and education to help you succeed at real estate investing.

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