How to finance an apartment complex?
Real Estate Investor · Member since 2011 · 35 posts · 3 votes
How to finance an apartment complex?
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Specialist · Cleveland, OH · Member since 2011 · 1k+ posts · 852 votes
15yHi Chenelle,
You can absolutely pull it off. You need to stick with the smaller buildings. I have a prospect to call tomorrow that has a 4 unit building with only one unit rented. the payment is around 1700 per month. I can get it no money down, but the cash flow is not gonna really be there. It will only bring in 2400 per month on a perfect day before vacancy an repairs. You will get your best deal working with a cash partner and stealing good deals.
An example I saw of that a couple of weeks ago, my buddy bought a 29 suite for 25k! Sure it needs a little love, but it was a steal!!!
There are a lot of "tired" landlords of mid size buildings that will let you take them over.
Just remember, bad deals are like HERPES, easy to get, and impossible to get rid of! LOL! Good luck! :mrgreen:
38 Replies
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes15y
"I've met a few people who have done apartments without their own money but want to sell their knowledge."
Can they verify this with you?? Do they have documentation to prove it??
Talk is cheap and the devil is in the details.
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Horatio with 50,000 yes you can get into an apartment complex.Where do you want to invest??
What kind of CAP rate do you want to hit??
What is your time horizon for holding??You don't have a location so I don't know where you are located.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes15y
Akali,
I checked out your website.Are you actually a lender or just a point taker with a website set up in the transaction??
Your website has a bunch of error 404 page not found on your tabs for Rates,Calculator etc.,etc.
Your website was just formed a few months ago.
Registered through: GoDaddy.com, Inc. (http://www.godaddy.com)
Domain Name: COMMERCIALHARDMONEYUSA.COM
Created on: 13-Apr-11
Expires on: 13-Apr-12
Last Updated on: 17-Apr-11So these things do not give a professional image to people who might want to do business with you.I personally vet lenders for my buyers before adding them to my network as it can kill your reputation handing a buyer off to a lender who can't get a deal done under the terms promised.
Having your website registered for multiple years at a time shows more commitment to it and fixing errors on your website will help.
Can you share how many deals you have funded?? That would be great to put on your website as some of my other lenders do that for credibility.
Hope it helps.
- Member since 2011 · 5 posts · 0 votes15y
Joel, I want to buy the property in Houston, Tx. And my apologies but what is a CAP rate? I am just trying to make sure the deal I make includes all the operating expenses, insurance, taxes, propery mgmt and etc and plus the monthly payment on the loan and after that, I would like to make at least 3k monthly off the apartment. I figure that this is a good start for my first apartment.
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes15y
Horatio,
Cap rate or Capitalization Rate is a commonly used metric for commercial real estate. It is simply the "net operating income" / purchase price. A cap rate of 10% is generally considered good. That is, NOI is $10,000 a YEAR (not month) and the purchase price is $100,000.
NOI includes all your operating expenses, such as taxes, insurance, maintenance, management costs, legal costs, lawn care, pest control, eviction costs, vacancy, lost rent due to holdover tenants or incentives, etc., etc., etc.
There are also big ticket items that are paid for periodically, like a roof or sewer line.
Cash flow is the amount of money left in your pocket after all the money you spend EXCEPT the mortgage (the P&I part, not taxes and insurance.) A rule of thumb is that the expenses, vacancy and capital (which is, unfortunately, VERY lumpy) will average about 50% of gross scheduled rents.
Most folks would consider an apartment that generates $500 in rent that could be purchased for $25,000 to be a reasonable deal.
You're probably going to need about 25% down for an apartment loan, maybe as much as 30-35%. You will need some money for up-front costs. But let work through an example of using $50K for down payment and buying a $200K apartment building that consists of eight $25K units. Unfortunately, I'm going to show you that your $3000 a month goal is totally unrealistic.
You have eight units with gross scheduled rents of $500. That's $4000 a month in gross scheduled rents. After all expenses, vacancy, and capital, you'll average $2000 in NOI a month, $24,000 a year. Dividing by the $200,000 purchase price, that's a cap rate of 12%, which is quite good. I assume no rehab is needed for the units.
I'll assume you can get a 6.5% rate loan on the $150K loan with a 20 year amortization period. This loan probably has a balloon in 3-5 years. The P&I payment on that loan is $1,118 a month. Subtract that from the $2000 in NOI and you get a cash flow of $881 a month and $10,580 a year. That's a cash on cash return of 21%, which is quite good.
Wanting to make $3000 a month, $36,000 a year, from $50,000 investment is unrealistic, IMHO. That's a 72% return on your money. Its certainly unrealistic for any sort of passive investment.
If you were to actively manage this eight unit complex, you could probably pocket another $75-100 per unit per month by doing the management and minor maintenance yourself. That would push your cash flow each month up to $1600 or so.
- Property Manager · Livonia, MI · Member since 2011 · 4k+ posts · 1k+ votes15y
i will sound negative when i say that i am shocked that in 2011 you think (and probably still can) buy a house with zero or fifty bucks down.
every time i contact my lender he says "you have 25% down, right"? :mrgreen:
they would not even pick up the phone if you dont have 5% down. and that's for homeowners and special programs.
- Member since 2011 · 5 posts · 0 votes15y
Jon, thanks for the break down on this. So what will be a reasonable investment for me to generate 36k a year. I'm asking cause I have look at some web site and they have NOI of 30k, 40k for like a 300k - 500k apartment complex. So I guess I was assuming that my expectation is reasonable. So would it be reasonable to say that in order to make 36k a year, I need to invest 100k of my own money as a down payment and look for apartment complexes that's 300k - 500k?
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes15y
Really would be better if this were a separate thread, but I'm unable to split it out at the moment. Sorry for the thread hijack, Chenelle.
Keep in mind NOI does NOT include the mortgage payment. And, you can rest assured that any NOI figure you find in a listing is overstated and reality is less. Also keep in mind that if a owner shows you an APOD (annual property operating data) that shows very low maintenance expenses its usually because they've been neglecting maintenance and you'll have lots of work to do to clean up the mess. If NOI in the listing is more than about 55% of the gross scheduled rents, its not correct. End of story.
You're probably looking at 25-35% for down payments right now. 20 year amortization is possible (I hear, haven't tried myself), but it will be a short loan, 3-5 years right now. Banks assume interest rates are going up and don't want to be locked in.
A "good rental" would generate about $100 a month in cash flow after all expenses (and vacancy and capital) and assuming 100% financing. So, with 25% down, you'll have more cash flow. If you do the maintenance yourself you'll get more cash flow still. If you do the property management, you'll generate more cash flow. Its not unrealistic to think you could generate about $200 in cash flow for a $500 rent unit if you do a lot of work yourself. If you can buy those units for $25K (including any fixup) you would need 15 of them to get to your goal. That's $375,000. You would need about $100K for down payment and the costs (apartment appraisals are NOT $300 like for a SFR.) I have no doubt buildings of about that size are available in Houston. I don't know how their priced, nor do I know what your personal situation is as far as qualifying for the loan or being able to do the work.
I think this isn't a bad plan, though. It's something I think about quite a bit.
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes15y
Horatio don't believe what you see on websites as far as returns.There are many ways to structure a deal without putting 25% to 35% down.
Typical commercial appraisal will run about 3,800 and up.
Your investing goals will depend on if you are counting on this money to live on and pay your bills if you invest 50k or 100k or is this just extra cash you have to start investing with??
- Member since 2011 · 5 posts · 0 votes15y
Thanks Jon and Joel for the advice. Joel, I want be living off of this. So this will be just my very first investment. I was told that you will get more money from an apartment complex vs a house. Eventually, I would like to quit my job as I acquire more Apartment complexes. With some of the figures that are being quoted here, it doesn't seem like apartments are that much better than a house. I really thought if I got a 300k house with 25% down, it could generate 36k after expenses and mortgage. Maybe I am being naive about my expectation. Is it possible to get a 300k apartment complex and profit 36k a year? Has anyone ever done this before? I really thought this was a reasonable expectation. Maybe I should reconsider apartment complexes as an investment. Any ideas?
- Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes15y
Some other options include owner carry or "master leases". A master lease is like a lease option for an apartment building. You lease the entire building from the owner and sublease the individual units.
I would be curious what other ideas on the down payment you might have, Joel.
A $300K house will make a crummy rental. It certainly won't generate $3000 a month. It probably won't even generate $3000 a month in rent, let alone enough to have $3000 in profit. The note on a $300K house would be $1300 (with 25% down), so you would need rent of something like $9000 a month in rent to have $3000 in cash flow. Just not going to happen.
Generally, you have to be in lower priced properties for more profit.
Personally, I've been eyeing other cities that aren't too far from Denver. Here in Denver, the answer is that you definitely cannot find a $300K complex that generates any profit, let along $36,000 a year. I've seen buildings in other cities (not Detroit) as low as $10K a unit. I suspect they need some work, but being all in at about $20K a unit and generating $500 a month in rent seems possible. I think that might be possible in Houston, too, but I've only made a couple of passing looks there.
Assuming 25% down, you're financing $15K per unit. That's $107 a month at 6% for 20 years. Call it $100 to make the math simpler. $500 a month in rent gives you NOI of $250. Less the $100 and you have cash flow of $150/unit/month or $1800/unit/year. You'll have first year interest of about $900 and depreciation of about $600 (rounding) so your taxable income is only $300/unit. So, you'll have a bit of tax, but less than $100 even if you're in the 33% bracket.
If you do the property management and some maintenance, I think you could bump up your income by $75/unit/month or $900 a year, for a total around $2700/unit/year (pre-tax.)
At 25% down, that's $7,500 per unit. Add on something for costs and you need (say) $8000 to acquire that unit.
That's giving a 34% cash on cash return. To generate $36,000 (pre-tax) a year, you need 14 units. At $8,000 per unit to acquire, that's $112K in cash. That's pretty close to your goal, and the thing that's attractive to me about a deal like this.
Now, there are two hitches. One is you're managing it. With 14 units, you're probably dealing with a vacancy every month. That means you're taking calls and showing a unit pretty much all the time. And you're dealing with little maintenance issues fairly frequently. This is HIGHLY tenant dependent. I have some that are almost completely trouble free and some that have lots of issues. If you have a PM (or, hired manager with enough units, about 50, I'd guess), then you're giving up a cut of the take but getting free time. A PM would cut your take by about a third in this example, so you need 20 units rather than 14 and you would need to invest $160K.
The other is the acquisition. If you have to do rehab work, you'll probably end up paying a down payment for the acquisition and then paying for the rehab out of pocket, too. So, your investment is higher than just 25% of the total all-in amount.
Now, if there's a way to acquire a place like this with a lower down payment, I'm very curious. Owner financing or master leases are possibilities, but then you're much more limited in the properties you can choose from. Finding a deal that's both a great deal and that has great teams seems like searching for a needle in a haystack.
- Member since 2011 · 5 posts · 0 votes15y
Jon, I've seen quite a few Apartment complex Units in Houston, Tx that are 32 Units for 300k. That seems like that's the potential to do good or maybe I'm just naive. According to you, I can only expect to make 10k a year from a Apartment complex. That just seems not even worth it. I think I need to go to my original plan and take some classes on this cause I'm just not getting your math. But thanks anyway for the advice.
- Real Estate Investor · Member since 2011 · 35 posts · 3 votes15y
One other option I find, since I enjoy doing the "hard work", is government grants. I've been watching a large amount of these offered by the local and state government for commercial sized apartment complexes averaging 50+ units in areas they want developed. Does anyone with experience have some positive tips with government grants?
I also have been seeing hard money lenders advertising financing for real estate projects. So, what are the positives and negatives of hard money lending for commercial sized apartments?
- Real Estate Investor · Member since 2009 · 8 posts · 1 vote14y
ways to raise $ for the DP
1) BUILD business credit (get LOCs $50K or more)
2) equity partner
3) seller carry 2nd - Investor · Los Angeles, CA · Member since 2011 · 242 posts · 61 votes14y
If you can provide the great deal and the leg work then all you need to find is an equity partner. Look into self directed IRA's. Educate someone and maybe they will invest with you. Make sure it's a win win situation for both. Good luck!
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