I was speaking with a very successful businessman one day. This gentleman had made millions in construction. He was planning his escape from his current company and was looking for a business that would pay him an income that he did not have to work for on a daily basis. When I spoke with him, he was in the process of buying an apartment complex in the southern part of the United States. That was his solution.
I was advising an elderly lady that I was talking with one day and asked her why she was contemplating getting into the multi-family real estate business having never been the owner of real estate in her life.
“I am responsible for the care of my disabled daughter and I need to find a source of revenue that will pay her an income after I am long gone.”
“And you think owning apartments is going to do that for you?” I asked.
“Absolutely. All I have to do is hire a management company and they will take care of the property and send her a check every month.”
“Hmmmmmmmm,” I thought. Very interesting.
Some things just make you go “Hmmmmmmmm.”
What these two people are looking for is not found in the multi-family business. What these people are looking for can only be found with a life insurance company. It’s called an annuity; a financial vehicle that provides a guaranteed income for life. With an annuity, you deposit a chunk of money with the company and they send you checks every month for the rest of your life, no matter how long you live (provided that’s the distribution option you choose). You never have to do another thing. No tenants, toilets or trash. And most importantly, and this is one thing that they never warn you about in the seminars, the asset does not depreciate, the tax code remains the same, and the neighborhood does not change.
So, that’s what the people that I mentioned above are looking for, but that’s not what they are signing up to do.
What they are signing up for is really the precursor to the annuity stage. With an annuity, you need a pot of money for starters. With a multi-family business, you get to earn the big pot of money while being paid an income. Kind of sweet.
That’s the major difference between an annuity and an apartment complex. It can be summed up in one word – Capital Appreciation. Okay, two words.
With an annuity, the idea is that you have nothing left over when you die. With real estate, you get the income and the appreciation and the asset gets passed on to your heirs. But the difference is that you have to earn that income and appreciation through hard work. It does not just drop from the sky in your lap.
Some of you are thinking, yes, it does. My great uncle owned 1,000 apartment units and it seemed he never worked a day in his life.
Okay, let’s say that’s true, that it seemed he never worked a day in his life. Let’s say that your great uncle Donald, owned nothing but class-A property in the best part of town, drove the nicest cars, played all day long and had a marvelous management team tending to the properties’ every need. There is still one thing that Donald was always concerned about every time his head hit the pillow. Okay, not just one thing, but many things.
For instance, he was always wondering; will the city re-zone the property around my buildings? Will the government change the tax rates for capital gains? Will the courts swing the pendulum in the favor of my tenants? Will the city fathers make my property a rent-controlled property?
See, these are things that the annuity holder never has to consider, but the apartment owner thinks about on a daily basis. What’s the trade-off? The apartment owner, if he manages the property correctly, can reap huge profits from the increase in value of his property. The annuity holder? Not so much.
So, should I still buy multi-family property in spite of all the questions and concerns that Uncle Donald had to put up with? Absolutely! When you own the right property, in the right area and under the right terms, it is a fantastic part of anyone’s investment portfolio. Besides that, my guess is Uncle Donald really didn’t work all that hard (but I bet he worked very smart[1]).
The problem I consistently come up against when advising my clients is that the person looking to buy a property is more interested in owning a property than they are in owning the right property. Let me say that again. The new investor is more interested in being able to make the claim that they are apartment owners than they are in making sure that they own the right property.
Let me be the first person to accept guilt on that one. I was once the same way. Fortunately, the first property I purchased was a great asset. Some of the other ones? Not so much. But you learn from your mistakes (or not). And you move on to bigger and better things.
So what’s the lesson to learn from all of this? First, change your perception of this business. It is not a get-rich-quick, massive-passive, put-everything-on-remote-control, type of business. You have to watch it EVERYDAY. But if you do, and you know what you are doing, it is truly a phenomenal business to be in.
Secondly, work hard. Everyone says, no problem, I am a hard worker. Well, that’s not exactly what I mean. When I say, work hard, I mean learn the business, understand the market, know how to run a property through the ups and the downs and know how to manage your management company.
As one property manager informed me the first time I met him (and every subsequent property manager said the same thing every time I met them), this business is not rocket science. You can learn and understand every facet of this business in short order. Nevertheless, experience is the best teacher but experienced advisors are the greatest asset as well.
Don’t leap. Look. Learn. And then get going. As Woody Allen once said, ninety percent of success is just showing up. If you never take the leap, you will never be like Uncle Donald. And don’t think for a minute that Uncle Donald didn’t have his challenging times as well. He did. No successful person has become successful without failing once or twice.
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