Creating cashflow with apartment wholesaling. If you were talking about this with another real estate entrepreneur the conversation would probably revolve around doing more deals. A series of lump sum cash assignment fees occurring more frequently.
This would definitely be the case if you were flipping single family homes. The deals are simpler to do, they don’t take as long. But it’s different with apartment buildings.
Apartment buildings are income property. So 3-6 months after you wholesale a property to a new buyer, that investor (assuming they get straight to work on their turnaround plan) will soon be earning increased amounts of net operating income.
This creates options for you as an apartment wholesaler you don’t really have when flipping houses.
Your edge as an apartment wholesaler is to put extra time, effort, and emphasis on marketing and negotiating in order to assemble a lot of sellers with seeds of motivation in their ownership of the property, that then germinate and grow into a full on crisis that requires rapid liquidation of the property at rock bottom price.
Due to this being all you do, you can afford to put all your time and effort into identifying motivated apartment owners, and following up with them. This is how you get your double discount cash prices, and inordinately favorable (to you) terms for owner financing.
You Create Value
So even when you mark up deals with your assignment fee, they still stand out as a smoking hot deal in the company of all the other retail or mediocre listing prices, and investors start bombarding your phone, email, and LinkedIn inbox.
20 units, worth $1.1M fully stabilized. 55% vacancy, below market rents, needing repairs, you negotiate $405K with the seller, and start promoting the deal with your $50K assignment fee factored in, at $455K.
Before the week is out you have 15+ buyers you have identified as “serious”; one in particular who is completely unfazed by whatever obstacle you put in front of him. He clearly wants the deal.
At this point you have some options in how you take your $50,000 assignment fee.
You can take it as an all-cash payment, which is typical. But, you can also take it as a note; say, interest only payments of $417 per month, with a three-year balloon. You can take it as a combination; $20K cash at closing, a $30K note paying $250 per month with a four year balloon.
Whatever you and the new buyer agree to, whatever makes sense for the deal and both parties involved.
Usually, carrying a note for your assignment fee will be negotiated in as a way to lower the cash required the buyer needs to bring to the closing table, and thus a big plus for him/her. Part of the conditions for you doing that would be the note is secured by ownership units in the LLC, rather than sitting in 2nd position behind bridge or other financing. So in the case of any default, there’s no messing around with foreclosure, or being foreclosed off.
Buyer doesn’t want to do that? Fine, just pay the entire fee in cash at closing. Your choice.
For the most part though, your buyer screening will have netted you a serious buyer who is appreciative of your creativity and flexibility, is well funded and has no intention of doing anything except executing on their turnaround plan in military fashion to increase the NOI, so they can refi at the earliest opportunity.
You, A Banker?
So which position would you rather be in? The apartment operator who is running around every month fixing properties, leasing units, whipping tenants to get the rent paid in? Or would you rather be the noteholder, whose main concern each month the payment due them is paid in on time?
Sure it’s less money, but you are leveraging the time and effort of the apartment operator, who is doing everything they need to do to collect rents and make sure the property is a viable business unit … so the payment can be made to you on the first of the month.
Does this sound familiar?
It should. This is what banks do; create notes, let their borrowers work their buns off to make the money to pay the interest each month. Banks do it using other people’s money to make the loans. You are doing buy using another person’s property to create a value-add upside opportunity for an apartment investor
Bigger Deals, Bigger Payments
The example used here was a 20 unit building. Nothing changes when the property is a 100 unit, or 200 unit building, except the size of the note. $250 per month becomes $2,500 per month, or $4,000 per month.
Over time these notes add up, and you are developing some meaningful cashflow. You may have to take a property back here and there, but it’s transfer of ownership, not foreclosure. You get a second bite at the apple on the same property.
It is more efficient, and in the end, more profitable.
If you are looking at creating cashflow with apartment wholesaling, this is how to do it.