Steppingstone number three—Class A New Construction:
At this point in most of my client’s investment careers, they have been “hustling” deals like the ones outlined above for 5-15 years or more sometimes. But if they do that, they are able to leap to the third steppingstone and purchase a brand new, class A apartment building. This is an amazing feeling for them! This is possibly their legacy. Many investors choose to stay on this stepping stone. With $4-10 million in capital pulled together from multiple past investments and rolled forward through the leverage of the 1031 exchange, investors reaching steppingstone number three are looking to purchase a $16-35 million dollar property. That might be a 50-100 unit apartment building. The rents on these units are going to be the top of the market. Everything will be brand new and cutting edge. These are the ”trophy” properties we all dream about when we start our investment journey. When you reach this steppingstone, you will likely have retired from your day-job. You are now collecting $25,000-$45,000 PER MONTH from your investments (see example 80 unit property income and expenses below). You might even be able to get a HUD loan that stretches payments out to 40 years and gives you insanely low rates which could pump up the volume on your monthly cash flows to, for argument’s sake—let’s say, $50,000 or $60,000.
This is a sweet place to be. On top of all of that income, you now have an absurd amount of tax write-offs for interest on the debt, depreciation, and capital improvements, not to mention the appreciation you can likely expect to see at 3-5% average. On these numbers, that can be over $1 million a year and all the while, the residents at your property are making your mortgage payment for you and reducing the amount you owe, further growing your net worth!
A lot of my clients like this steppingstone so much, that they probably won’t ever leave it; however, this steppingstone does still require some level of involvement from the investor to ensure that the property is being operated at peak performance over time. Even those who choose to hire third-party, professional property management need to continually evaluate their own goals for the property and make sure that the management company is working toward those goals all the time or find one that will. Quarterly and even monthly check ins are necessary to ensure that projects don’t fall by the wayside as the business of property management often falls prey to the tyranny of the urgent. The hottest fires get put out first and the routine maintenance and upkeep of a class A asset may not be the hottest fire. For that reason, this is not truly passive income. You still have to work in tandem with your chosen partners to ensure the plan you have laid out is carried out to completion.
The cashflow coming in on a monthly basis of over $40,000 per month is life changing and can be a fantastic legacy to leave for future generations as well. In addition to the cashflow, you are also paying down your mortgage at a pace of about $200k-300k per year in the first couple years. PLUS, you can count the depreciation of the building as an expense and offset some of your income on your taxes. There is bonus and accelerated depreciation on top of that, and you can quickly see how quickly this type of property can build your wealth!
Stay tuned for the final steppingstone!
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