How to play defense as an apartment investor
If you want to build wealth, real estate is a great option. The ability to earn cash flow over a long period of time while having tenants pay down your debt is powerful.
But there are times when we must protect our asset. And protections goes beyond LLC’s and insurance.
At this point, you must have your defense in order. And there are specific ways you must play defense while investing in apartments.
DO NOT OVER LEVERAGE
Greed can be very risky. In an attempt to beat greed, you must stand firm in playing defense when investing in apartments.
This happens by not over leveraging your property.
Having no money in an apartment deal sounds golden to most. But seasoned real estate investors understand the importance of having equity in a deal.
Having equity and not using too much debt has its perks. It gives you cushion to lower rents during an economic downturn. And it allows you to sleep at night knowing you’re still able to meet your debt service even if you had to lower your rents and receive less cash flow.
KNOW YOUR BREAKEVEN OCCUPANCY
Economic downturns will happen. Theres not much you as a real estate investor can do about that.
That is why it is important for you to understand your breakeven occupancy.
The breakeven occupancy is the amount of rent or occupancy level needed in order to pay your operating expenses and debt service.
The formula is simple. Its your operating expenses + debt service / potential gross income.
INTEREST RATE LOCK
Rising interest rates are totally out of the control of real estate investors. And its difficult to predict when the Federal Reserve will raise interest rates.
As real estate investors its important that we defend ourselves mid acquisition from rising interest rates by using an interest rate lock.
What an interest rate lock does is simply lock the interest rate the bank has qualified you during the mortgage approval process.
This is great protection against rising interest rates and lowers your risk of cash flow and debt service problems.
Its important that as apartment investors we don’t strictly focus on ways to increase NOI, or ways to lower expenses. Those are ways to play offense.
But in everything that we do, there are protections and defense that needs to be played.
If you do not over leverage, know your breakeven occupancy and use interest rate locks, your defense will be ready to defend your asset along with LLC’s and insurance.