In order to buy apartment buildings with nothing down you’ll need to take three steps. Step one is the same as buying a nice home with nothing down. You’ll need to find a motivated seller who will be open to your creative offer.
We heard about Carrie from a real estate agent named Tim with whom we had an established relationship. Tim was out fishing for listings when he came across a 24-unit apartment building owned by a gal named Carrie who needed some help.
Carrie had worked hard all of her adult life looking after and managing this 24-unit apartment building that she owned. As she cleaned, fixed, and rented the units over the years, I’m sure she felt comfort in knowing that all of her hard work would allow the apartment building to support her in her old age. But Carrie was in for an unpleasant surprise.
At the time Tim found her, she was 88 years old and living in California with her children. She had come down with Alzheimer’s disease and needed to go into a nursing home where she could receive special care. The problem was that this apartment building wasn’t producing enough money to pay for the nursing
home. Despite hiring three different management companies in three years, the building was only making about $2,000 a month after paying the management company and all of the expenses.
Tim offered to list the property and sell it for Carrie’s Trust, which was how the property was set up due to Carrie’s declining health. Her kids didn’t want to sell the property outright because a large chunk of the proceeds would have to go toward paying capital gain taxes. Tim called us because he knew that we are always looking for situations where property owners are motivated and he was unable to help Carrie himself. (We in turn send Tim properties that don’t work for a creative nothing down offer but work great for a listing and a sale for him)
Step two when buying an apartment building for nothing down is to “run the numbers” to see if you’ll be able to make a profit. You’ll want to know with certainty that any property you get into is going to make you money, not cost you money. The best time find this out is before you commit to a deal. We looked closely at the income and expenses from the building to see if there was any way to improve the cash flow. We knew right away that because the management fees were close to $1,000 a month, we could pay Carrie the $3,000 a month she needed. The question was, could we make a profit?
We felt certain that we could at least break even, and were fairly confident that the upside was pretty big. (We used a nifty little shareware computer program called the “Cash Flow Estimator” which you can get off the internet for free at www.resultsnow.com) The rents seemed to be on the low side which meant that there was room to increase the cash flow in a positive direction after taking control of the property.
Step three to buying an apartment building for nothing down is creating an offer that uses the cash flow from the property to pay for the deal. We offered Carrie a “master lease”, one of the seven purchase option techniques, that would meet her needs (and ours too!). In return for our monthly payment of $3,000 (which would be paid from the property rents), we got the option to purchase the building for $450,000 which was it’s current value based on its rental income. We would be able to exercise our option when Carrie passed away, to save her family some taxes.
We immediately began increasing rents. Rather than increasing everyone’s rent at once, we sent notices to 1/3 of the building each month for three consecutive months. Some of the tenants moved, others griped a bit about the rent increase and decided to stay. Within four months of taking over the building, after raising rents to market levels, we were able to increase the rents an average of $85 per unit. This meant the total income from the property increased from $7,100 a month to $9,182 a month.
This is a monthly increase in cash flow of $2,082. We were thrilled to realize that we had just created an annual income of $24,987. This is as much money from one property as many people work 40 to 50 hours a week all year to make.
The really exciting part is that because income property in the area sells at a 10% capitalization rate, any increase in cash flow from the property increases the value of the property by ten times. This means that the annual increase in cash flow of $24,987 makes the building worth $249,870 more than it was worth just four months before.
The nice thing about great cash flow like this is that you can afford to hire a property management company to run the property while you sit back and wait for it to go up even more in value. That’s exactly what we did with this property and you can too if you take the three steps toward buying apartment buildings with nothing down.
First, find a motivated seller. Next, run the numbers to make certain you’ll make money each month. Finally, create an offer that uses the cash flow from the property to cover your payments and expenses each month.
You will probably have to sort through quite a few properties before you find one like this. Once you do you’ll know two things for sure. You’ll know that it’s definitely worth the effort and you’ll also know that you want to do more deals like this again!
