Apartment Complex Opportunity
My investment account is currently worth $380k. Would you cash it in in order to make a 25% down payment on a 16 unit apartment complex? I would have to pay about 35k in capital gains.
Here are the numbers:
$1.4 million purchase price
25% down, $350k
$10k in closing costs
$1,050,000 loan amount @ 5.25% interest 15 years
$8,441 monthly mortgage payment - $101,292 yearly
$7500 yearly insurance
$20,000 yearly property tax
$10,000 maintenance?
Total yearly cost - $138,742
Average rent currently $850 per unit,
Year revenue = $163,200
163,200 - 138,742 = $24,458 profit. Feels like not a great number.
Each unit is 2 bed, 1.5 bath, 4 buildings, 4 units per building. Built in the 1990s. Roof is 8 years old. No issue keeping it occupied. Minor improvements needed. I believe rent could be raised $50-$100. That seems to be were the opportunity lies, in increased rent. $50 increase in rent = 10k a year for all units.
Thoughts?
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Quote from @Matt Fabian:
My investment account is currently worth $380k. Would you cash it in in order to make a 25% down payment on a 16 unit apartment complex? I would have to pay about 35k in capital gains.
Here are the numbers:
$1.4 million purchase price
25% down, $350k
$10k in closing costs
$1,050,000 loan amount @ 5.25% interest 15 years
$8,441 monthly mortgage payment - $101,292 yearly
$7500 yearly insurance
$20,000 yearly property tax
$10,000 maintenance?
Total yearly cost - $138,742
Average rent currently $850 per unit,
Year revenue = $163,200
163,200 - 138,742 = $24,458 profit. Feels like not a great number.
Each unit is 2 bed, 1.5 bath, 4 buildings, 4 units per building. Built in the 1990s. Roof is 8 years old. No issue keeping it occupied. Minor improvements needed. I believe rent could be raised $50-$100. That seems to be were the opportunity lies, in increased rent. $50 increase in rent = 10k a year for all units.
Thoughts?
When you say 15 years, is the loan amortized in 15 years? or is it a 15 year with a balloon?
No balloon. amortized.
The initial return on equity is 6.9%. (profit/downpayment). The positive is the rental increase of $100 which will almost double that return number. Is there other ways you can increase the revenue such as adding coin laundry, storage rental, vending, gym access etc? Are you going to self manage it or have an additional expense of a property manager? It's not a bad deal when you see a lot of these things trading at a 3-4 cap and your at at 6.9. Since the housing market is slowing it will only further the demand for rentals.
It's not always about the cap rate. Just think in 15 years you will have at a minimum a property that is paid in full and worth at least 1.4 million dollars. Most people take their entire lives to earn that kind of money and your doing it in 15 years. Obviously with the rental increases along the way your property will be worth even more.
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What is your investment rental experience? I think its a great start if you know this is what you want to do. Can you find a 20-40% financial partner? That would be better for a lot of risk areas and you can keep some of your chips in the market.
If I was buying multi family, these are the deals I'd buy. Instead I just have industrial property...
Be sure to do LLC, PSA review, title/survey objections, review those leases carefully! Loan documents are also critical when personal guaranty is involved.
Eh, if those are actually the numbers, it would take about 15 years to recoup your 380k - Not accounting for rent increases. If you are actually able to increase the rent then it could be an okay opportunity, it would still take a while to recoup your investment. Are the apartments rented out at market rates? Typically a better return would be to find an apartment owner who is below market rents and raise them to market rents. I know that is rare but they are out there.
Quote from @Ronald Rohde:
What is your investment rental experience? I think its a great start if you know this is what you want to do. Can you find a 20-40% financial partner? That would be better for a lot of risk areas and you can keep some of your chips in the market.
If I was buying multi family, these are the deals I'd buy. Instead I just have industrial property...
Be sure to do LLC, PSA review, title/survey objections, review those leases carefully! Loan documents are also critical when personal guaranty is involved.
I have one duplex I bought a year ago. Its a pretty nice duplex. 2,000 sq ft per side, 3 bed, 2 bath. bought right before housing market went crazy. Just has a tenant move out, fixing up that side. I am hoping to get 2k per month, 1,800 minimum. The other side pays mortgage, taxes and insurance. So if I get 2k a month, that would be 24k a year profit on the duplex. So that makes me question my numbers on the apartment
I would manage the apartment complex myself, so no management costs. There is no space for other services like laundry or gym.
The numbers look sound to me based on the data you provided. Your bank will be your second set of eyes on the numbers. Not every deal has to be a home run and deals are harder to come by every day. Remember that there is a big expectation difference between a developer/flipper than an investor with minor improvements. Sounds like you are the latter. The question you have to ask yourself after going through the paralysis by analysis stage is this:
Do you feel secure in the asset?....if so take on the debt.
@Matt Fabian Those numbers sound decent to me. Not a home run but not every deal will be. At a basic level in 30yrs you are going to look like a genius and everyone will be saying I wish I would have bought when you did. What could you resell the building for immediately is a great way to analyze it as well? The market is taking a dip and if you can sell it for a profit immediately you did well.
Another way to look at this is the opportunity that you will have in a few years to trade up and keep that money growing. Keeping it in stocks you could get lucky and get one that explodes and then we will all be saying wish we would have bought that one. That happens much less than people saying wish I would have bought real estate 10, 20, 30 yrs ago. Real estate you’ll get the appreciation, your $24k cash flow, but also you’ll have about $25k, however the terms are structured, or so in principal pay down per year.
I’d be happy with the money sitting in the stock market but super stoked to have that money in real estate.
Always up to chat about it over the phone. PM me if you want.
Mmmm, 24k profit per ANNUM on 16 unit?
No, thanks. I would probably negotiate the financing and looking into a longer term in order to free up some more cash flow. Someone mentioned that they have a duplex and they making as close to your profit numbers.