Commercial Real Estate

How a Small Apartment Building Made Me $40,000/Year

Expertise: Business Management, Commercial Real Estate, Landlording & Rental Properties, Real Estate Deal Analysis & Advice, Mortgages & Creative Financing, Personal Development, Real Estate Investing Basics
126 Articles Written
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In this post, I want to demonstrate to you the incredible power of apartment buildings. By using a real case study, I'll show you how I added $40,000 per year to my net worth with a small 12-unit apartment building. I hope it will inspire you to take a closer look at multifamily investing, a powerful strategy that can help you achieve financial freedom—just as it’s helped me and many others.

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4 Ways Apartments Make You Money

I love apartment buildings because there are four ways to make money from them:

  1. Cash Flow: This is the amount of money that is left after ALL expenses and the mortgage payment are covered.
  2. Appreciation: This is the difference between what you bought the property for and what you sell it for (minus expenses).
  3. Loan Reduction (aka "Amortization"): The amount by which your tenants paid down your mortgage balance.
  4. Sponsor Fees: If you’re going to raise money for the deal (which you should!), then you are entitled to certain fees for “syndicating” the deal.

For example, you can pay yourself an acquisition fee when you close on the property (typically around 3 percent of the purchase price).

You can also charge an “asset management fee” (typically 1 percent of the money raised each year you own the building) and an “asset disposition fee” (typically 1 percent of the sales price when you sell the building).

Yes, unlike any other investment in the world, apartment buildings have four profit centers.

Astounding.

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Introducing the 12-Unit Case Study

I’m going to use my first deal as an example to demonstrate to you WITH REAL NUMBERS how powerful apartment building investing can be.

I use this particular case study because it’s the kind of first deal that you can do anywhere in the country. Even though this is a small deal (12 units), it still added $40K to my net worth EVERY year for five years.

And I didn’t use any of my own money.

Let me show you exactly how, and I hope in the process you’ll see that you, too, can do a deal like this.

Here’s how I bought the property:

  • Source: MLS (listed by residential broker)
  • Purchase Price: $530,000
  • Renovations: $54,000 or $4,500 per unit (it needed a lot of renovations)
  • Cash Needed to Close: $227,000 raised from 5 investors in return for a 50/50 split
  • Projected Returns: 15% per year for the investors
  • Acquisition Fee: $15,900 payable to me

After closing on the property, I renovated the exterior of the building and many of the units. This allowed me to slowly raise the rents, fill the vacancies, and evict non-paying tenants.

This wasn’t an overnight process. In fact, it took about three years.

After five years, I had it under contract to sell for $850,000. Overall, this building made me a profit of $198,434 in five years—or about $40,000 per year.

Let’s break down each of the profit centers to better understand the “$40K per year” profit.

Related: 12 Creative Ways to Add Major Value to Apartment Buildings

How This Small Apartment Building Made Me $40,000 Per Year

Here are three of the four profit centers:

  • Cash flow over 5 years was a total of $130,545 (after all expenses and my fees). That’s about $181 per unit per month. Cash flow was tight the first couple of years, but it picked up in the last 3 (as we raised the average rent from $595 to $825).
  • The appreciation was $146,500 after closing and sales costs, NOT including loan repayment and sponsor fees.
  • The loan principal was reduced by $48,265 in 5 years.

The total amount generated from these three profit centers was $325,310. Since I have a 50 percent share, my portion of those profits was $162,655.

Let’s Not Forget the Sponsor Fees!

In addition to owning 50 percent of the building, I also received certain "sponsor" fees for putting the deal together, managing the property manager and eventually selling the whole thing for a profit.

I paid myself $15,900 at closing when I bought the building. I also charged an asset management fee of $2,275 per year (1 percent of money raised) and a 1 percent disposition fee of $8,500 when we sold the building.

All told, my sponsor fees totaled $35,779, putting MY net profit at $198,434—about $40,000 per year.

What Did I Really Do With This Property?

I found a property with some problems that I felt I could fix in three to five years. I renovated the property, increased the rents, and reduced the vacancy.

Related: Why Apartments Are the Single Best Way to Escape the Rat Race Within 3-5 Years

Was This Difficult?

Yes and no.

Yes, because I had to take action. I had to educate myself, actually buy the property, and hire the right property management company. And I had to be patient.

But on the other hand, it wasn't that difficult. Anyone could have done a deal like this. I bought it for fair market value. In other words, I didn't have to buy it at some kind of huge discount. People do deals like this all the time.

And I Believe You Can Do a Deal Like This as Well

I can hear the skeptics getting ready to comment below. I don’t want to hear it.

The only reason you're going to post something below like "it can't be done" and "you're making all of this up" is because you have limiting beliefs that multifamily won't work for you.

I’ve done it, and others have done it. And I know you can do it, too.

You just need some encouragement and some education. Commit right now to take a serious look at multifamily investing to help you achieve financial freedom.

Let me hear from you below. Where are you in your real estate investing journey?

Share with a comment!

Michael Blank is a leading authority on apartment building investing in the United States. He’s passionate about helping others become financially free in 3-5 years by investing in apartment buildi...
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    Billy Smith from Shawnee Mission, KS
    Replied over 2 years ago
    Buying apartments is not in my short-term future, the churn of renters alone seems more then I would like. The amount of upkeep is too much. I am sure an investor that has done this thinks these are not issues like myself. I would not buy in the lower end of quality B, C so that makes A quality too expensive for me. I like liquid real estate, this would not be easy to unload.
    Sam Page from San Francisco, California
    Replied over 2 years ago
    Hi Michael, thanks for sharing this case study. Did you structure the equity with investors to receive any preferred return in exchange for the 50/50 back end?
    Sam Epperson Real Estate Agent from Bloomington, IN
    Replied over 2 years ago
    You mentioned a couple of times that “[you] renovated the property.” Just curious, are you saving money on the renovations by doing the renovations yourself? You made it sounds like it took you a long time to do the renovation, which made it sound like you did them yourself or at least had a large part in doing the actual work. Are you hiring it out or doing the work yourself?
    Andrew Alva from the Inland Empire, California
    Replied over 2 years ago
    Thanks for this post, it’s definitely helpful to see actual numbers in a case study. And I’m curious, what are your biggest challenges with multifamily right now vs the time of the case study?
    Donald S. Accountant from Saint Louis, MO
    Replied over 2 years ago
    Hey Michael I’d love to know how you found the partners to raise the money? Did you already have a successful track record, and these were people you knew, or did you post an ad somewhere looking for cash partners? I’m always wondering how people find cash partners. I’ve been asking everyone I know that has money and all I get is, “oh I know this one guy and he’s had nothing but bad experiences in real estate…” blah blah blah.
    Ernest Adams
    Replied 8 months ago
    All of these stories are fine but none of them tell you where did they get the money, what good lenders to apply with. Getting the money is more important than theses stories. Everyone does not have 401K, rich families or friends to lend them the money. Otherwise it is useless.
    Daniel Rakitin
    Replied 8 months ago
    You must have not read the article - it was 100% investor financed. Better question is, where do you find investors willing to give away 50% of the equity. THAT'S what I want to know.
    Daniel Rakitin
    Replied 8 months ago
    You must have not read the article - it was 100% investor financed. Better question is, where do you find investors willing to give away 50% of the equity. THAT'S what I want to know.
    Jessica Moseley
    Replied 7 months ago
    Daniel, find out what each potential investor want. Not everyone wants the same things out of the Deal, and not everyone has the knowledge or the willingness to make a Deal happen. Find out what they want, and if it complements what you want, then structure a Deal that makes everyone happy. There are plenty of potential investors who would be happy to "give away" 50% of the equity, because without that Key person creating the Deal, the investors wouldn't have any equity. You can meet people on Bigger Pockets, at REI groups, Realtors, contractors, and I highly recommend making a running list of everyone you know, whether you think they have money or not. Then, you can ask people, "Who do you know who might want to invest in an apartment building deal?" Maybe that person knows someone, and maybe that person wants to himself.
    Jessica Moseley
    Replied 7 months ago
    Daniel, I take back what I said about there being "plenty..." of potential investors who would be happy to "give away" 50% of the equity, and I'm rephrasing that: there may not be "plenty," but they are out there. I tend to be an enthusiastic Commentor, but if I were writing a RE Post, I would be more conservative than my Comments. They are out there, though, depending on how well you can solve whatever problem they most want to solve, and how well they fit your Investor criteria. Also, full-disclosure, although I have done some creative real estate transactions that I'm proud of, and I am working on my first large-scale Deal, and I've been studying and networking for hundreds and hundreds of hours, I have not actually completed this large-scale deal, and am still developing my investor syndicate, a process I'm enjoying very much! I love working with people--and that's not just Commentor Enthusiasm : )
    Keith Sanders from Absecon, New Jersey
    Replied 8 months ago
    Michael- Thank you for the information outside of the traditional fix & flip buy & hold rental model... my heart is in this commercial space... I want it now!!! I am a disabled Veteran & I've been study the business on & off for a little more than 24 months from what I learned so far the same energy & skills it takes to do Wholesale, Fix & Flip, Buy & Hold Rental... can be used in a commercial deal the difference between them all is the knowledge & Who's teaching that knowledge is it a scam guy who doesn't really do real estate or is the knowledge experience based can from someone who genuinely cares for the underdogs because he or she once a underdog themselves.... Great write up I'd love to work you to learn more !!! Thank you- [email protected]
    Daniel Umstead Real Estate Agent from Philadelphia, PA
    Replied 7 months ago
    I honestly was looking at house hacking, but this is more appealing with the right investors, thank you for writing this!
    Jessica Moseley
    Replied 7 months ago
    Michael, thanks for your Post! I was excited to see it as I'm working on my first apartment deal, and taking the very approach you're talking about. I know it's going to work, and reading your Post further fanned my flames of enthusiasm! Judging by the time-stamps on a lot of the Comments, you originally posted this 3 years ago or so. I'm going to go check out your Profile, to see what you've been up to since then! Congratulations for really making things happen with the great head you've got on your shoulders! : )
    Jessica Moseley
    Replied 7 months ago
    Michael, I want to clarify one point about my previous response, and that's that in the Deal I'm working on, I'm not actually seeking 50% Equity for myself, but more like 15%.
    Jim Watson Rental Property Investor from Davis, CA
    Replied 15 days ago
    In contract for 707 for an underperforming 14# in a stellar location in OH. Lots of rent upside (600>720). Was going to split cost (223 total w/ remodel costs) w/ another investor. This sounds a lot more interesting. Your cashflow was 130,545 for 5 years. You mentioned tight cash flow for the first couple of years. Each investor in for a 15% return. Is this a mix of cash, equity and tax write? Investors get no cash when there's little or no NOI for those first years?
    Garrett Lynch Rental Property Investor from Phoenix Arizona
    Replied 13 days ago
    Hey Jim, It's a combination of cash flow and equity. Typically little or no cash for the first years while you build the project.