Let’s take a look at some of the actual returns for a small apartment building investment over a period of five years. Whenever you are making projections into the future concerning investment returns it is always necessary to make some assumptions. In this case we will keep our assumptions very conservative and well in line with historical averages.
Also, I will be using as an example an eight unit apartment building with a purchase price of $300,000.00. I want to use a smaller property with smaller numbers because I believe that just about anyone, who properly prepares him or her self with the proper education and preparation beforehand can realistically purchase, manage and profit from an apartment building this size. There are many methods for securing the money for a down payment that I discuss in my course but I don’t have the time right now to list and explain them all.
The purchase price for our eight unit apartment building is $300,000.00. We are using a bank loan for 75% of the purchase price and we are making a down payment in the amount of $75,000.00. The Net Operating Income of the building is $27,750.00. Our annual mortgage payment on the property is $19,952.76 based on our 25 year bank loan with a fixed interest rate of 7.5%. After paying our mortgage payment the building’s cash flow is $7,798.00. This cash flow gives us a cash-on-cash return of 10.4%. (the cash flow of $7,798.00 divided by the down payment of $75,000.00.)
Let’s take a look at what happens to your returns after five years. We will assume that the building’s income has grown by 3% a year. We will also assume that the expenses have increased 3%. The fixed rate mortgage payment remains the same for the life of the loan.
The Net Operating Income has increased from $27,750.00 to $32,169.86.
The new Cash Flow for year five is:
The new Net Operating Income of $32,169.86
The mortgage payment of $19,952.76
= $12.244.00 Cash Flow at Year Five
The cash-on-cash return has increased from 10.4% in the first year to 16.3% in the fifth year.
In the mean time the actual value of the building has increased by 3% each year to $347,782.00. And increase of $47,782.00 after five years
In addition, the mortgage balance has amortized. The principle amount of the 25 year fixed rate loan has decreased by $20,106.76. The remaining loan balance is now $204,893.24.00.
Putting aside the income returns seen from the Cash Flow every month for 60 months and just looking at the appreciation and loan amortization you have a total return of $47,782.00 + $20,106.76 or $67,888.76. That is a whopping 90.5% cash-on-cash return for a period of five years.
These kinds of returns for many investors who are stuck in the stock market might seem too good to be true. But, remember that we only used one real assumption and that was a growth rate of 3% which is well within historical average norms.
Apartment Investing - A Look at Five Year Investment Returns by Ted Karsch