Golden, CO · Member since 2014 · 3 posts · 0 votes
I'm interested in purchasing my first apartment building. I've been researching financing and am wondering if I'm looking at the math correctly.
Is the spread between the cap rate and your interest rate your gross profit margin? I believe it is. For example, if your cap rate is 6% and interest rate is 5%, would you only cash flow $50,000/yr on a $5,000,000 apartment building (5,000,000 X 1%)?
If that is true, I'm confused how anyone makes substantial cash flow on new apartment investments when the spread cap rates and interest rates seems so small. Are apartments really only a good investment for someone who can pay cash and avoid the mortgage interest expense? Is there a minimum spread experienced apartment investors look for? Am I looking at the math correctly - is the spread a good guide for cash flow?
Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes
10y
Ryan, you forgot the down payment. In your example, 20% down is $1M. So your spread is $300K - $200K = $100K. That's 10% cash on cash. That is a very simplistic formula and it does not account for a lot of things.