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 building deals with a special focus on raising money. Through his investment company, he controls over $30MM in performing multifamily assets all over the United States and has raised over $8MM. In addition to his own investing activities, he’s helped students purchase over 2,000 units valued at over $87MM. He’s the author of the best-selling book Financial Freedom With Real Estate Investing and the host of the popular Apartment Building Investing podcast Apartment Building Investing podcast.

    John Bierly Rental Property Investor from Bainbridge Island, WA
    Replied about 3 years ago
    Michael – thanks for posting, case studies with real numbers are always helpful. Curious about the partners, were they LP’s and you the GP? Or was it an LLC with you as the manager? Did you have any issue with qualifying investors (i.e. did they have to be accredited?). thanks
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied about 3 years ago
    This was the latter: an LLC with me being a manager. Investors don’t have to be accredited but you should have an SEC attorney create a PPM etc to comply with SEC regulations.
    Marvin McTaw Rental Property Investor from Atlanta, GA
    Replied about 3 years ago
    Thanks for sharing this case study with us. Can you tell me a little bit more about the structuring and securing of the deal? I basically have many of the same questions as John Bierly above.
    Michael Broderick Investor from Miami, Florida
    Replied about 3 years ago
    Thanks Michael! Great read. Like John and Marvin, I as well would be interested to hear more about how you raised the capital and structured the deal with your investors.
    George Hoover Real Estate Agent from Westlake, OH
    Replied about 3 years ago
    Thanks Michael. I would like to know the same as the previous comments. I am starting to set my sights on syndication. So please feel free to expand on the details of the that leg of the stool.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied about 3 years ago
    See my reply above and see if that answers your questions. Thanks!
    Joel Owens Real Estate Broker from Canton, GA
    Replied about 3 years ago
    Just so readers know that 5 years ago was 2011 about the bottom of the multifamily recovery cycle when it was just going up again. So while it is still possible to do deals today they are very far and few between to come by. With multifamily for the middle class renter rents are topping out compared to income,cities and counties are raising property taxes at a fast clip and multifamily you do not get reimbursed from tenants like some other asset classes, and utility companies like the water company even with no leaks are raising the water and sewer per gallon usage rates. All of these things eat into potential returns when that asset class is peaking. 5 years ago with low taxes, low utility, high chance of rent growth, and a lot of potential cap rate compression multifamily had more upside to it. Today sellers are pushing 6.5 cap based on 3% vacancy, 5% rent growth, 35% annual opex. Those are bubble numbers over the last 12 to 18 months and not sustainable over decades. Historically you are looking at close to 10% vacancy, 2 to 3% rent growth annually or less, and 50% opex annually. When you factor that in you are buying in the 5’s for cap rate. Might as well buy other asset classes that throw off that return or better for more passiveness. The government is also starting to highly regulate residential landlord and tenant laws. In some areas ground up development is cheaper for cap rate to cost versus buying on old building someone turned around with lipstick on it selling to you at a low cap rate. The ground up even with demand there is push back at the zoning hearing from communities with houses that do not want apartments there as they feel it attracts transients and crime and brings down the value of houses in an affluent area. 300 unit complexes in my county have been vetoed in zoning 3 times in the last 6 months by varies developer submittals. What did get approved was a senior living community of 100 upscale detached ranch homes for retirees. Just be careful on multifamily that you as an investor are not overpaying these days and getting sucked into all the national hype about multifamily and you can;t lose buying them etc. Study market cycles and know when to get in and get out of an asset class or have financing in place to hold on long enough for the next up cycle to sell. Short term financing unless doing a big value add with no pre-pay penalty should not be used for long term holds. Some investors use interest only or short term loans of 3 to 5 years fixed to makes deals work and cash flow going in. That is a big no-no. Get longer term debt and price in the higher debt service with a lower offer on the property to achieve the same cash flow metrics.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied about 3 years ago
    Joel – these are all good points. You should never compromise your buying criteria, and that includes overpaying or using exotic financing to “make the deal work”. As a result, it’s been harder to find deals. Having said that, you can buy a deal at a 6% cap if it’s a value-add deal. i.e. if you’re able to put $4500 into each unit and raise the rents by $150 per month (for example), the numbers work. As with almost anything with real estate, you gotta buy right.
    Kevin Koffman Investor from Fort Lauderdale, Florida
    Replied about 2 years ago
    Agreed! X2
    John Bierly Rental Property Investor from Bainbridge Island, WA
    Replied about 3 years ago
    Agree with your point Joel – I think most people who bought MF in 2011 should have a success story to share. I know I wish I’d bought more then. This year, for the reasons you describe, I’ve built two duplexes but have not purchased any existing properties due to cap rate contraction in my market. A couple other advantages of new construction: – low repair expenses (first year should be covered by warranties, and that typically is when defective products and/or installation shows up). After that repairs are typically low until around year 5 when things start to wear out a bit – sweat equity in lieu of cash. Assuming you have some skills as a GC you should be able to build for 15-20% less than it would cost to hire a builder which at 75% LTV on a loan mean your cash investment is only 20 – 40% of what would be needed otherwise. On my new construction I had been able to purchase the land at a discount, self financed through construction on my LOC, and have just refinanced at just about exactly what my costs were.
    Ross Williams Rental Property Investor from Boston MA, Big Sky MT
    Replied over 2 years ago
    Joel, Appreciate your comments and agree that everyone that bought in 2011 looks like a genius. In the Boston area, its very difficult to get financing any further out than 5-7 years, 30 year amortization. How are you getting longer term debt? Thanks. Ross
    Luke M. Rental Property Investor from Brooklyn, NY
    Replied about 3 years ago
    Great take on the market. Your comments are always informative. I’ve been trying for the last two years to get a multi, but everything is incredibly overpriced. I wouldn’t mind building a 4-plex or two though. Are here any areas you’ve seen where a ground up build makes sense?
    Jerome Kaidor Investor from Hayward, California
    Replied about 3 years ago
    So how did your investors do? I’ve been in MF for about 20 years. Never did any syndication or OPM or anything like that. Just saved up a bunch of money programming computers and bought a fourplex. Then an 8-unit building. Then a 52-unit complex. Etc. Definitely the “get rich slow” plan.
    Cody Ray Part-Time Investor from Chicago, Illinois
    Replied almost 2 years ago
    Bravo. I’m on the same path, but 17 years behind. Currently a software engineer, own a 3-plex. Looking for my first small apartment building now. (Chicago)
    Calvin Lipscomb from Brooklyn, New York
    Replied over 1 year ago
    What area(s) in Chicago are you thinking about for your first small apartment building?
    Adam Carrington
    Replied 18 days ago
    I've also just started and am in the process of trying to close in Chatham on a foreclosure. (Chicago)
    Steve Foster Investor from Beaumont, Texas
    Replied about 2 years ago
    Sounds like a fine plan–
    Henry Salinas from Concord, California
    Replied about 3 years ago
    Interesting points all around. There are still “buy right” deals out there for multi-family that I would love to get into but lack the upfront costs. Micheal: your answer to John Beirly is still not clear to me. If it’s not too personal to disclose: – who are your investors: family, friends, new or past partners? – how did you propose the “investment opportunity” part of the deal? – how is the bank loan structured: who’s the borrower? If the LLC, how is an LLC qualified for a loan? What was the loan terms? Not sure if I’m overstepping my boundaries with all the indepths questions here but I want to know if what you are saying can really be possible for me too.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied about 3 years ago
    Hi Henry – it was friends, family and one high net worth individual. WRT how I proposed the investment, this article might help: https://www.biggerpockets.com/renewsblog/2014/09/08/step-step-script-first-investor-meeting/ On a small loan like this, you’ll have to personally guarantee it. Loans > $1M you can get much better non-recourse loans. If your personal financial situation is not good enough, you’ll have to recruit a co-sponsor. Hope that helps.
    Justin R. Developer from San Diego, CA
    Replied about 3 years ago
    Obviously only the OP can speak for this particular situation, but thought I’d chime in your 3rd question about the loan. If optimizing for lowest fees and best terms (from a traditional bank), I’ve consistently seen the loan in this situation be recourse and placed in the LLC’s name, with a guarantee by all managing partners. In addition, a requirement that at least 70% of ownership shares need to guarantee the loan. If 50% of ownership is silent investors, you can imagine the conundrum. It’s negotiable, of course, and if you’re not looking for long-term financing, there’s plenty of other options out there. But, that’s a start if you’re planning to B&H.
    Bruce Bartlett Wholesaler from Hermosa Beach, California
    Replied about 3 years ago
    Getting a 50-50 split in a multi family syndication is highly unusual. In my experience if the syndicator is taking full fees, and in this case he was, a 70/30 split, favoring the investor, would be much more common. 50-50 is typically seen in single-family flip deals. As in every deal, everything is negotiable. If you can get your investors to agree to a 50-50 split on a multi family deal and still take full fees, great for you. However, most experienced investors will pass on this sort of deal. In this case, if there had been a 70/30 split, it would’ve reduced his earnings by about $60,000. That’s a big cut.
    Abraham Kauffman from Beverly Hills, California
    Replied about 3 years ago
    Family members? From an investors standpoint that deal was pretty poorly setup for them.
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied about 3 years ago
    Yes, this was generous towards me, but the deal allowed for it. It was a bit unusual, and you’re right, in many cases the split is 70/30 (or better) towards the investors. Another argument for doing bigger deals!
    Michael Lee Investor from Coppell, TX
    Replied about 3 years ago
    It’s real easy to look at the past and tell why something could have been done diffently. Some people made decent comments but I liked your writing very well. Yes, it does take some guts and timing to be that successful but most of that is not avoidable. I appreciate your success and making that happen. I was previously have not heard that there are fees you can make like a an investor.
    margaret smith
    Replied about 3 years ago
    Hi Michael- Love the article, excited at the prospect, and yet… I agree with most of the posts here. You are leaving us with too little info, my man! As a hard money lender, I am very interested in how to bring in others to fund deals – single family so far, but willing to enter into the multi market if I have the right structure and guidance. SEC attorney? How many of those are there? Expensive, or within range of we smaller potatoes investors? Is this what you teach in your education sessions? Also, how important might it be to try to find owners who will take back seller financing, and be willing to enjoy cash flow each month while leaving behind all the …ahem… joys of property maintenance and management?
    Chris
    Replied about 3 years ago
    The rising tide raises all ships. 5 years ago you could have thrown a dart at deals on the MLS and did ok. Appreciation is easy in a rising market as is increasing rents. Congrats you were in the right place at the right time. You overpaid but 5 years of work and thankfully a rising market saved you.
    John Cheng
    Replied about 3 years ago
    Great article, Michael. And also thanks to Joel for the counter points. I’ve always wondered about going into business with a group of trusted friends who are eager to finance my finds. No hurry right now. Perhaps when the market corrects itself again.
    Peter Mckernan Residential Real Estate Agent from Newport Beach, California
    Replied about 3 years ago
    Hello Michael, Great post! This gives a lot of clarity since I was unsure that the asset manager like yourself in the scenario gets a portion per year to manage the investment and at selling. I only thought that this profit would come at the purchase. Thank you for sharing!
    Mohammad Ejaz
    Replied about 3 years ago
    Thanks for the really encouraging content. I have been inclined to invest in multi-family real estate investing but being in California, nothing is affordable and investing out of state has always caused me worries of the “unknown” “what-ifs”. I am not sure how to overcome this problem!
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied about 3 years ago
    Most multifamily investors are learning to invest outside their area …
    James Schoeman
    Replied about 3 years ago
    Hi Michael, Great article. Can you shine more light on the numbers please? This is what I have so far: Purchase Price $530,000 Renovations $ 54,000 Total $584,000 Cash to Close $227,000 – Acquisition Fee $ 15,900 Total $211,100 How was the $211,100 split between Down Payment and Closing Cost? Thank you, James Schoeman
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied about 3 years ago
    I love that you reviewed the numbers! Whenever I post something with numbers, people love it but others will invariably find some kind of error, so it’s always risky for me 🙂 WRT your question, I honestly don’t remember, I’d have to go back into the HUD-1 etc … but I hope my main point stands: multifamily is the best way to replace your income in the next 3-5 years … thanks for reading!
    James Schoeman
    Replied about 3 years ago
    Hi Michael, Thank you for your quick response. I fully agree with your main point: “Multifamily is the best way to replace your income in the next 3-5 years …” I do not know of any better way. The reason why I asked about the breakdown of the numbers is to figure out what percentage of the purchase price would be a reasonable number to cover the closing costs. I am looking for a number that can be used as a “rule of thumb”. Closing costs is a gray area for me, hence the question. Cash to Close $227,000 – Acquisition Fee $ 15,900 Balance $221,100 -Renovation $ 54,000 Balance $157,100 If the Purchase Price was financed with an 80% LTV loan the Down Payment was $106,000 Balance $157,100 – Down Payment $ 106,000 Balance $ 51,100 Closing Costs is $51,100 That is 9.64% of the Purchase Price If the Purchase Price was financed with an 75% LTV loan the Down Payment was $132,500 Balance $157,100 – Down Payment $ 132,500 Balance $ 24,600 Closing Costs is $24,600 That is 4.64% of the Purchase Price Any guidance on closing costs and what to use as a “rule of thumb” would be of great help. Thank you, James Schoeman
    Michael Blank Rental Property Investor from Northern Virginia, VA
    Replied about 3 years ago
    Here’s a rough breakdown of the potential closing costs for this deal (which also gives you some rules of thumb): http://screencast.com/t/rvJqY1c64y Hope that helps.
    Deddrick Barnes
    Replied about 3 years ago
    Hi Michael Blank, Thanks for the motivation im need of an apartment investment to build up my cash flow and retirement start with one and continue to buy them up. I love the military just looking to amplify my cash flow monthly.
    VJ R. from Morrisville, NC
    Replied almost 3 years ago
    Thanks Michael blank and all the commentators, such a educational piece. I thoroughly enjoyed it!
    Zach
    Replied almost 3 years ago
    Good post! Always love numbers. If newbies make the mistake of underestimating costs/overestimating profit then novices (an arbitrary step up from a newbie) make the mistake of underestimating their ability to force appreciation and rent increases. This is exactly the kind of high-level thinking that allows successful investors to find great deals in plain sight!
    Mike Carr Investor from Newark, Delaware
    Replied over 2 years ago
    Awesome post. Thanks for the information and motivation. Do you hold apartments long-term? Or does that really depend on the investors you work with? I know the ROI goes down because of the higher loan balance/payment after a refi but I just like the idea of buying it right once and cash flowing long-term. Thanks again for the great content
    Billy Smith from Shawnee Mission, KS
    Replied about 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 about 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 about 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 about 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 almost 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 19 days 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 19 days 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 19 days 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.
    Keith Sanders from Absecon, New Jersey
    Replied 17 days 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 about 15 hours ago
    I honestly was looking at house hacking, but this is more appealing with the right investors, thank you for writing this!