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.

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Tags: apartment building investing, apartment building investments, apartment building investor, apartment investing, apartment investment returns

Buy an Apartment Building Today?

In today’s turbulent financial markets many investors are looking for ways to grow their money that will offer a steady flow of predictable income and limited market risk. More and more people are buying apartment buildings to help diffuse the effects of inflation on their portfolios. Apartment buildings offer many exceptional advantages over traditional investments such as stocks, bonds and mutual funds. This is especially true in a recessionary market environment. In fact there are many attractive attributes of an apartment building investment that many investors who are new to commercial real estate may not even know about. There are some interesting facts about buy multi-family property investing that could radically change your perception about this fascinating and lucrative part of the investment world and inspire you to go out and buy an apartment building of your own.

Warren Buffet once said that “wide diversification is only required when investors do not understand what they are doing.” This quote seems especially true about the average investor in the United States who is listening to the advice of a financial adviser who in reality knows little more about the markets then himself. Usually financial advisers will recommend that a client be well diversified in investments ranging from stocks, bonds, mutual funds or maybe even a real estate investment trust. The adviser is putting his or her client into a group of “diversified” investments that were recommended by the firm’s top adviser and the research department. Unfortunately, however, for the individual investor is the fact that these investments are basically designed to preserve the firm’s capital under management and they don’t take into great regard the individual investor’s need to grow his capital.

The most successful investors and those that see the greatest returns are those that specialize in a particular sector. And the timing has never been better to begin specializing in apartment building investing for the average investor. The stock market is under intense earnings and inflation pressure. Investors need to look at a direct investment in an income producing apartment building to establish a profitable stream of cash flow that could last for decades to come. Many thousands of individual investors have been able to secure their financial futures by specializing in this unique niche and leaving behind the mediocrity of financial advisers and stock pickers.

If there has ever truly been a recession proof business it has to be apartment building investing. Even with the US economy is turmoil and business cutbacks people will always need a place to live. The actual demand for rental units in the US has never been higher then today. A total of 36 million of all households in the US are renter occupied. In total, a full 83% of all households under age 25 in the US are occupied by renters. Furthermore, a full 55% of all households between 25 and 35 are renters. The growing senior segment of society will be living longer and looking for rental properties as well. These are a few impressive statistics that demonstrate the strong current and projected demand for rental housing.

Tags: apartment building, apartment building investing, apartment building investor, apartments, buy apartment, buy apartment building, how to buy apartment buildings, learn apartment investing, learn how to buy an apartment building, learn how to invest in apartment buildings, multi-family investing, multi-family property

Apartment buildings are the most profitable of all commercial real estate investments partially because they give the owner and investor so many ways to increase the bottom line. The bottom line or profit margin as it is known in other industries is called the net operating in commercial real estate investing. The NOI is devised by subtracting all expenses, including financing, from the gross monthly income. Therefore, in order to increase the NOI of an apartment building investment the investor/owner can chose to either reduce expenses or increase income.

Ownership of an apartment building exposes the investor to numerous costs on a monthly basis. By reducing monthly costs by incremental and seemingly small amounts, the apartment building investor can increase the net monthly cash flow and simultaneously increase the overall value of the real estate. Some of the areas where it can be easy to cut costs are:

1) Taxes

2) Insurance

3) Management

4) Utilities

5) Maintenance and Repairs

The first thing that a new apartment building investor should do after buying his apartment building is to examine his tax situation. He should determine if his or her building has been taxed at the correct rate. Many investors are unaware that they are able to contest their tax rate by contacting the tax assessor. If the tax assessor discovers that too high of a tax has been levied the investor will be charged less in the future and possibly even credited back for years past.

Insurance policies for apartment buildings typically last one year. It is important for the investor to shop for a new policy about two months before the policy expires every year to make sure that the best rate and terms are being acquired. The difference in prices for similar coverage offered by different insurance companies can be dramatic.

The next cost to consider is the management company that you have managing the property. Every two years or so you need to assess the job they are doing managing the property. The investor must examine whether the company is doing a good job of keeping costs in line and whether they are maximizing the rented units.

If the property owner is paying tenant utilities there are several things that can be done to remedy this situation and pass on these considerable costs to the tenant. One alternative is to contract a company that specializes in residential utility bill back. This company will bill each tenant for his portion of the electric bill based on the square footage of the apartment. In common areas you can then install energy efficient lighting.

Now, let’s see how these simple efforts have “turbo charged” the bottom line and economic value of the investment like I promised. Let’s assume that we saved the following amounts of money:

1) $100.00 in insurance premium

2) $110.00 in taxes

3) $70.00 on utilities

That equals a total monthly savings of $280.00. This may not sound like a lot of money but let’s take a look at how it affects the bottom line.

Your annual savings would equal $3,360.00. Let’s assume that the cap rate for your apartment is equal to 8.5%. If you divide $3,360.00 by .85 you arrive at the increase in your property value, which is $39,529.40.

The investor just increased his property value by almost $40,000.00 in addition to collecting an additional income annually of $3,360.00. That is what I call a “turbo boost” to the bottom line and it was all accomplished with little out of pocket expense or effort.

Tags: apartment building investor, Commercial Real Estate, cost cutting, forced appreciation, multi-family investment, real estate, real estate investing