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How to Buy and Sell Apartment Buildings

SteveO

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Authors: Eugene and Stephen Vollucci

This book has been around since the early 90's but has been updated once along the way. The examples and numbers used are old but the basic principals are still very valid.

Most of my investing process has been designed around the principles outlined in this book. I used it exculsively to get started.

The biggest point of this book is the realization of how fast your money can grow if you catch the upslope on the rental market. The author steps through three examples over a 10 year period that take 6K to 1M. The ability to start with the low 6K number is accomplished by a group of investors pooling their money to purchase midsized apartments. I think that number would be more realistic at 25K these days. The 1 million over 10 years should be fairly easy though.

There are a number of reasons cited that discuss why apartment investing is good. They outline the fact that there is plenty of data available to allow you to buy in improving markets without a lot of guesswork.
 

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andviv

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I was about to start a thread for this book as well!!!
I will add a chapter-by-chapter review later.
Great book!!!
 

Jason_MI

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I finally finsihed reading this book, and thought it was good, but difficult. I plan on starting on it again next week and rereading it and taking notes.
 

andviv

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I agree, it wasn't an "easy read" but the information it contains is very useful.

To me the most important chapters were chapter 3 with the example of getting to a million dollars in three moves, and chapter 13 about putting partners together in a Tenants In Common (TIC) structure to buy bigger properties.
 
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SteveO

SteveO

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I did not read the newer version. The first one obviously has some older examples for deals. The examples are relevant as far as getting their point across.
 

TNT

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I was the one that ask if the new version has a big differance from the 1993 printing.
I am glad to hear the it is only the examples. I can deal with that. I will be ordering it tonight. Thanks

Talmadge
 

andviv

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As I mention before, chapter 3 is the most important in this book. I am adding a review of this chapter here.

DISCLAIMER:
I AM POSTING THIS TO GIVE YOU A SMALL SAMPLE OF THE IDEA IN THIS BOOK. IT WOULD BE STUPID FROM YOUR PART TO ONLY READ THIS AND THINK YOU KNOW WHAT THE BOOK IS ABOUT. YOU HAVE TO READ IT -MANY TIMES- TO UNDERSTAND IT AND TO GRASP ALL THE GOOD INFORMATION AVAILABLE IN THIS BOOK.

3. The New Approach to Investing in the 21st Century
Vollucci's first point is that foreclosures are a "Big illusion", where he basically says that foreclosures are not the way to go. It seems he does not like it at all!!!

A subsection is titled Why Apartment Are The Best Investment:
1. Competition: Fewer buyers for mid-sized or larger apartments.
2. Limitations: Because of the economy of scale approach, there are fewer limitations as far as location is concerned in buying rental property. You can buy anywhere these pockets of opportunity exist because of the economy of scale.
3. Frequency: You do not have to do as many transactions because you are dealing with larger properties.... you have more time to analyze each deal to make the best decisions.

The next subsection in the chapter, and probably in the book, is the one called:
BECOME A MILLIONAIRE IN ONLY THREE MOVES
This is based on the concept of "Group Investing"
Vollucci's idea is to research the area where to buy. Focus in finding the right location, with the greatest potential for appreciation as there is where the real money is.

Step 1. Research. In short, they track vacancy rates movements as they are the best indicators of the health and potential profitability of the market. Vacancy rate trends are used to predict future rental rates. His point is that "If we could successfully predict changes in vacancy rates, we could predict future rental rates"

After finding the right location (Phoenix, 1982), they put together 10 investors that put $6,000 each. With this investors pool money ($60K) they went shopping. The plan was to put 10% down, so with this 60K they could get a property up to 600K. Price per unit was $23,000, so they went looking for a property with 26 units.
This transaction looked like this:

Purchase price: $600,000

First Mortgage (70%) 420,000
Second mortgage (20%) 120,000
Down payment (10%) 60,000

They hold the property for three years and then, when the Phoenix market had improved, sold for $860,000. Each investor had now $35,465 instead of the original 6,000.

Step 2: Decreasing the group size
For the second property they only used 5 investors that reinvested the $35K that they made in the previous property. The area identified was then Boston. They bought a $1,750,000 property (44 units) that they held for two years later for $2,325,000.

Step 3 Sole Investor
Each investor now had $145,000. With that, he went and bought a property by himself for $1,450,000 in Seattle. He held it for three years and sold it for $2,267,043. He now had a total profit of $1,007,995.

His yearly returns were almost 100% in the first deal, 162% for the second, and 200% for the third deal (I repeat, these returns are PER YEAR).

So, this shows how he went from $6,000 to a million in ten years.
 

Bilgefisher

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I just finished reading chapter 3. My reading comprehension might be low tonight, but it appears that Vollucci never actually made the purchases exampled he just used sample (simulated) buildings to show how to achieve 6k to 1mil. He also assumed seller carry back of 20% every time. Is that really doable? I ask, because I want to use this book and Berges's book to make my plan and I don't want add incorrect items.
 

JScott

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Volluci makes some assumptions around financing that, in my business plan, I have changed a bit...

- Always try to put down the minimum you can in down payment. Volluci suggests never more than 10%. While this is probably doable with seller carry-backs, it's probably much harder in today's credit markets than it was a few years ago (even though the book was written well before "easy credit" existed). Volluci continually espouses that high leverage equals high IRR, which while true, creates some risks that I'm not willing to take. In my business plan, I call for always having at least 20% equity in my properties, meaning at least a 20% down payment.

- Volluci continually implies that the key to great financing is seller carry-back, and rarely refers to conventional financing. I'd love to hear from people who are doing this about whether seller financing is pretty typical or not these days. It seems reasonable that in very weak markets you can probably get sellers to handle part of the financing, but in anything by very markets, I wonder if most sellers would balk at this. In my business plan, I call for conventional financing most of the time, but if others' experience is that seller financing is pretty common, I'd love to hear about it.
 

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SteveO

SteveO

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It is possible to get seller carrybacks. Four of my first five deals had them at 5-15%. A buyer's market and a motivated seller go a long way with terms.

I have found that there is sometimes a tradeoff with terms and price. The seller carryback may lead to a higher price.

Conventional financing can be used in conjunction with carrybacks. The lender may still require that you have at least 10-15% down. As JScott stated, the lax lending environment was allowing deals to be done at 0-10% down on occasion.

In regards to the numbers that he used, very realistic for the time of the example. The numbers would be a bit larger in the current market but the ratios are valid. I have outperformed those numbers in his examples more often than not.

Volluci continually espouses that high leverage equals high IRR, which while true, creates some risks that I'm not willing to take. In my business plan, I call for always having at least 20% equity in my properties, meaning at least a 20% down payment.
This is a risk that I am not only willing to take but will take it everytime if the deal pencils out for me. I have taken 5M deals with no money down and sold them for over 1M in profit less than 2 years later. My equity came from a rising market (calculated by rent growth) and value added opportunities.
 

Diane Kennedy

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Interesting thread.

There was a time when I would be looking closely at all the details to do this myself. To be honest, today I find people that I trust and that have proven success and then invest in THEM...

For me, I've finally come to the realization that the one thing I can do well is make money and multiple streams of income from my own business. That's where I'm going to focus my time and when I have excess cash to invest (outside of what I want to put in my business or offshoot start-ups), I'll invest with people I trust.

That realization came largely from this forum, when I met a whole bunch of other directionally challenged people!

I'll see if this renewed focus translates to more income and wealth, but I can absolutely say I have more peace today then I did two months ago because of it.
 

JScott

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This is a risk that I am not only willing to take but will take it everytime if the deal pencils out for me. I have taken 5M deals with no money down and sold them for over 1M in profit less than 2 years later. My equity came from a rising market (calculated by rent growth) and value added opportunities.
I realized immediately after I wrote my statement that it wasn't clear enough...

Based on the fact that I'm new at this and am not fully confident of my assessments, I wouldn't consider holding less than 20% equity in a property; that said, I could imagine a time in the near future where I would do so under specific conditions:

- Expected the investment would be short-term (1-4 years)

- Had enough money in the bank that I could cover a quick sale at a 20% loss (in the worst case scenario)

I'm guessing that having more experience will dramatically change my risk profile; meaning, I won't be willing to incur more risk, but I will be able to incur the same amount of risk doing "riskier" things... :)
 

Jorge

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I have never read this book, I don't think it could apply to my country since mortage interests rates are really high, but I'll give it a read, I'm sure there are things to be learned.

I leave the link to read it online for free on google (not all the book),

Thanks SteveO ;)
 
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SteveO

SteveO

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I know I could write a better book if I would just get off my a$$. There is so much that could be added.
 
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SteveO

SteveO

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I have never read this book, I don't think it could apply to my country since mortage interests rates are really high, but I'll give it a read, I'm sure there are things to be learned.
Someone must invest there. How do people get loans for apartments there?
 

Jorge

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Someone must invest there. How do people get loans for apartments there?
They usually don't. The process in here is like this:

1) You're "poor": Rent for life

2) You're young with good credit:
a) 30% down, 10yr mortgage at fixed 14,25% (19,13% Final Cost)
b) 30% down, 20yr mortgage at variable 9,75% (14,12% Final Cost)

3) You're mid-class and up: Save the money and buy upfront (this is the most usual way of buying houses in here)

From the day I joined the forum I've wanted to make a thread to see if numbers are worked so a cashflow-positive situation can be achieved, but I have to get some more information first.

BTW, Yesterday I told your history to a friend after playing cashflow 101. You've really inspired me :notworthy:
 

Bilgefisher

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Steve, do you have any other books to recommend for apartments besides;

"How to buy and sell Apartments" Eugene and Stephen Vollucci
"The complete guide to buying and selling apartment buildings" Steve Berges
"Real Estate Game" William Poorvu (deals with commercial properties)??
 

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Yankees338

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They usually don't. The process in here is like this:

1) You're "poor": Rent for life

2) You're young with good credit:
a) 30% down, 10yr mortgage at fixed 14,25% (19,13% Final Cost)
b) 30% down, 20yr mortgage at variable 9,75% (14,12% Final Cost)

3) You're mid-class and up: Save the money and buy upfront (this is the most usual way of buying houses in here)

From the day I joined the forum I've wanted to make a thread to see if numbers are worked so a cashflow-positive situation can be achieved, but I have to get some more information first.

BTW, Yesterday I told your history to a friend after playing cashflow 101. You've really inspired me :notworthy:
If there are that many renters (especially renters FOR LIFE), wouldn't that make for a great opportunity to invest?
 

Jorge

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Yeah! But first you need to get the money/system to buy the properties :pullhair:
 

Yankees338

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Yeah! But first you need to get the money/system to buy the properties :pullhair:
That's when you have to be creative!

Perhaps it's different in Argentina, but can't you structure deals to be done with $0 down, or something close to that?
 

Jorge

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AFAIK theres not such deals, soon I'll make a thread out of this with specific details, I hope to get the insight from the fastlaners :)
 

PWog

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I know I could write a better book if I would just get off my a$$. There is so much that could be added.
SteveO,

What are a few of the main things you would add to what's been covered in How to Buy and Sell Apartment buildings?

PWog
 
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SteveO

SteveO

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I would tear some pages right out of Berges book and paste them in.

Vollucci has a great process for "Where and When". I would change the "How".

There is a lot of time and effort that need to go into understanding a region. The main reason that people tend to shop locally is because of the basic knowledge, contacts, and ease. You will need to build that information and relationships before you make an investment.

I am currently shopping the Houston market. Being that I don't seem to be environmentally sensitive, I have burned over 12 full tanks of gas just interacting in the city. Shopping, talking, adding minutes to my wireless plan are all part of getting to know my market.

You also need to understand income and expenses in detail. Insurance, property taxes, management fees, utilities, labor, along with, rent and vacancy rates for each little submarket within the city.

There is a lot of good information in the book. It is easy to gloss over the main ideas.

The real learning comes from practice. Educated practice I might add.
 

Sid23

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Another interesting book that I've read lately is "The Best Damn Commercial Real Estate Investing Book Ever Written!"

It's written by Monica Villasenor. I've found it to contain some details that the other two books didn't.

Steve, I still think you should put something together.
 

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