Most months several potential investors contact me to buy apartments. The task is harder than most of them realize. They expect to win and are often baffled when they don’t prevail … quickly. They don’t understand the San Diego market is a tougher league than most of what they encounter. My job is to help them prevail against the odds.
Most of them have high income, high net worth, and want to own apartment rentals. Folly and stupidity are rare among those we serve. Yet, most fail to buy. Here are some thoughts about why and how that happens based on my 30+ years of helping winners achieve this difficult objective.
Why do millionaires want used apartments?
San Diego County rentals have appreciated at a compound rate of 7%. An investor, let’s call him Isaac, who puts 40% down can buy 2.5x his equity. So, he puts down $400,000 and borrows $600,000 to buy the million-dollar asset. Suppose next year’s appreciation is $70,000. $70k increase/$400k equity is a 17.5% annual increase, about twice the long-term return on the S&P 500 index. That does not include any cash flow and tax benefits. Steadily the loan pays down. Being a rental owner can be a low-risk escalator to wealth.
Isaac has government policies to thank for this profitable situation. Southern California government policies have limited apartment construction to about half as many condos and apartments as new households need.
Our government fees and development costs are among the highest in the nation. In Carlsbad, a developer might pay $80,000 for development fees per apartment. That is only for permission to build. It excludes land, labor, and material. New construction can exceed $400,000 per apartment. As a result, only apartments renting above $3000 per month get built. Most households can’t afford that rent. In contrast in many Midwestern cities, $80,000 will buy newer apartments with higher-income tenants in place.
The first conversation
Let’s focus on Isaac Investor who wants to build wealth safely, and steadily. In our first conversation we each attempt to determine if we might be a mutually profitable fit.
Isaac wants to know if I’m competent and knowledgeable. He must assess whether our team will boost his success chances.
I attempt to learn if Isaac has the financial capacity and emotional intelligence to be a good owner. I try to assess his commitment to buying in our highly desirable and competitive market. Many first conversations go no further because the investor doesn’t have enough liquid assets or income. Sometimes the investor has unrealistic expectations.
Isaac and his competitors, who investigate options through our team, receive some of my articles published in San Diego’s best business newspaper which explain why San Diego is a low-risk escalator to wealth, how to turbocharge their equity growth, and why financial leverage builds wealth faster than a property’s zip code. After reading those pages the prospective investors know more than most local rental owners understand about why local rental equity grows so much faster than other markets.
Ways things don’t work out.
Knowledge is important, but it’s not enough. Most investors who get this far don’t buy despite having knowledge, sufficient assets, and a personal history of success. Our team provides information on for-sale properties. The potential buyers drive or Google the properties; then we talk.
Then, it’s mostly up to the investor. Most don’t buy. The skills and talents that made them successful are usually not enough for them to become income property owners. Here are several common reasons why.
Many investors are uncomfortable dealing with households whose income and education are lower than their own. Rental owners deal with people who earn less, with little savings and limited margin.
Many investors appreciate the benefits of competition but hate competing. They are used to being the judge and they don’t like being a contestant. Investing in apartments means buying used income property from another millionaire who will never deal with you again, and who probably is considering multiple offers. People who won’t write an offer if someone else is also trying to buy, probably won’t buy local income property.
Many buyers want newer, bigger units in fancier neighborhoods, but won’t pay a big enough premium to buy the preferred assets. Most rental properties are 50 years old. They lack garages and the kitchens and bathrooms have not been upgraded.
Many investors drop out when they learn the market won’t fulfill their fantasy. They want to believe that wishing would make it so. I can’t create what does not exist.
Other people expect a Nordstrom personal shopper expedience. Their thinking might be “Do all the research, and when you find something that any investor would buy, bring it to me and only me. Ignore your other clients, some with longer and or stronger relationships or who have or will generate more commission.” Emotional intelligence matters.
Many buyers freeze when it’s time to pull the trigger. If Isaac has not bought after seeing options for 90 days, I often review what we recommended. Typically, at least a third of what we recommended has sold or is in escrow. So other investors bought what Isaac rejected. He saw the better options but didn’t even try for them. Not all buyers understand they can decline the asset if it doesn’t meet their expectations.
As I wrote in Building Legacy Wealth, great investors pounce. In more than three decades, I’ve never been able to predict which investors will pull the trigger and which ones will hold back, waiting for something better.
If Isaac hasn’t made an offer on any reasonable properties, it is time for a heart-to-heart talk. Some people are too busy to focus on building wealth. It is hard to make big decisions. OK, we respect Isaac’s choices.
Win, win, win
Our team helps economic winners succeed in a low-risk investment arena against scores of unseen competitors. We help investors find and intelligently compete for the few better opportunities. When we team up with good investors, everybody wins.
Obviously, the investor wins. And our team wins. Most of our clients became millionaires slowly and steadily. And tenants win. 100,000+ people have enjoyed the apartments which my clients have improved.
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When have you succeeded in a new arena which was difficult for other people?
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Terry Moore, CCIM, is the author of Building Legacy Wealth: How to Build Wealth and Live a Life Worth Imitating. Read his “Welcome to My Blog.”