Turning my million dollar building into more cash flow

28 Replies

Im a young investor - relatively new to the game. I have built up to acquire a 16 unit apt complex worth roughly a million. Here are the numbers

Gross rents - 13200/month 158,400 /yr
Operating costs avg range-82-88k /yr
Net - roughly 67-75k factoring in 2% -5% vacancy range

The mortgage is at 200k at 2% over 10 years so about 24k a year bringing my net down to 43-51k

The building is in MA and I'm currently living in Texas- I'm managing remotely using people for books, repairs and rentals (my net factors in their pay). I have about 80k in stocks and 50k in cash on hand and am renting in Texas.

My question is this: what are my best options in my position to parlay what I have into something more. Should I trade up to a bigger property? Should I leverage it to buy a few smaller fixer uppers in Texas to rent? (Austin area) I feel that with my situation (800k roughly equity- 50k passive cash flow-130k cash) I could be doing much more and generating higher returns. Aggressive ideas, medium risk ideas? Thanks!

Hey Ryan, just curious, where in ma? If its worth a million and you only owe 200, have you owned for a long time or did you buy, fix up, and lease? I'd say with 800k equity, it wouldn't be too difficult to pull a little cash out. If it were me, I'd pull a little out, partner with some experienced in flipping, and reinvest your profit from those deals into rentals. Depends on your goals obviously, but I bet that could multiply pretty quickly.

I'm not familiar with your market at all, but from the outside looking in if your NOI is 67-75k then wouldn't your building is nearer to $670,000-$750,000 not $1,000,000? That aside, that is still a large chunk of equity!

Good point Kurt... If this is near me I mass, caps are closer to 13 or 14 so value would be even lower. I'm guessing its closer to Boston. There's properties in the Boston suburbs selling at 6 or 7 cap rates.

Hi Ryan,
I also would be curious where in MA. Looking at those rents real quick, you're around 800-1000 per unit? So the location would determine what I'd look to do with the property. What is zoning, public transportation access? Commuter location or a central location? Springfield, Worcester, Boston? I know, lots of questions, but I think with 16 units in MA at those rents, the location could really factor in. Especially when considering what different areas of the state that would support a property like this could offer.
I agree with Carl in this could be a good partnering situation with someone familiar with it's location and the local market.

Its in the metro west area. It was appraised at 1,050,000 In mid 2009, Im guessing I wouldnt get within 200k of that selling in this market... It's 16 550 sq ft 1 bedrooms rent between 800-900 avg about 835 currently, water sewer and taxes are through the roof the buildings assessed at about a mil through the town - I just filed for abatement. My rents might be a little low on the avg maybe? Should I look buy something larger and do a 1031? My goal is too create some more passive income then the 65-70k I currently am getting...

With those numbers wouldn't my cap rate still be about 7.5%? For that metro west area is that possible? What is considered standard for a complex of that size?

Kris- it's Ashland area - downtown location- mile from commuter rail- 6 miles from rt 9- 30 min to Boston- the apartments are in pretty good shape - some more updated then others - the tenant quality is a C at best... but the units are small 1 Bedrooms so I've been hesitant to put too much work into them other then general maintenance... For point of reference there are 2 bedrooms 1 baths next door going for 1150-1250 some are updated some aren't and also 2 bdr 2 baths in a brand new building down the street renting at 1350+

Ashland...so I'd stay residential with the property. I had been thinking depending on location you could do a mixed use. It seems like one of those areas where, not knowing the condition etc, it's performing about as to be expected, maybe a little under. I have seen listings for multis there (2-3 fams) for the 300-500k range. I'd be inclined to agree with Carl and access some of the equity.

Have you considered and evaluated the prospects for converting the utilities to being individually metered per unit and then paid by the tenants? That is usually one of the things to consider when looking to reduce expenses / improve net income.

For the purposes of 1031 exchange, you should consider what your basis is in this property. Let's say for example that it is now worth $800K; if you paid $800K or more (total basis, not just purchase price), then there is no capital gains for which you would be seeking deferment, so no point to the 1031. If your basis is way less than value of a sale, then a 1031 makes sense to consider. You could 1031 from that one building to many single houses, but that could be really tough to do within time constraints limits for a 1031 exchange (especially if you really are holding out for good deals to buy).

I see I guess I misspoke on the 1031 my basis is higher or about equal to what I might hope to get now- I guess I meant should I look to buy something larger?

Wouldn't it depend on what you're looking to achieve? If you're looking solely at the ROI as a percentage, leverage is going to be the best. Then you could refi as high as possible, take the cash, and leverage as many properties as possible. That will give you a great cash on cash return because you're putting as little of your own money into the deal as possible.
If you're looking for the most cashflow without a lot of debt, you could take, say 200k out on a refi, and buy as many properties as possible with the cash(somewhere like cleveland). You'd have no leverage, so you're cashflow would be higher, but your CoC would be much lower.

Money is unbelievably cheap right now. That equity is doing nothing for you right now so I would definitely suggest you pull some of it out and get it working for you.

Assuming your numbers are correct and discounting the 200k less you think it actually would appraise out, it would be worth 800k (roughly). You should be able to refi it for 560k and pay off your existing note plus leave yourself with 360k to play with.

Not sure what the best options in Texas are so I can't really help you there. But no matter what you did, it would have to have better cash on cash returns than what you'd pay in interest on the loan (5% maybe??) if you put it all back into real estate.

If you used that as your down payment, you could buy a million dollar complex there in dallas. Assuming a 10% cap rate, you'd be looking at 100k NOI, plus another mortgage payment on the new property of $4,600 mo, leaving you with a net of $5,400 a month.
And now you'll have to complexes that will continue paying down mortgages and continuing to appreciate.

Here's what you have today:
1 property:
Value: 1mil
NOI minus mortg payment (2k): 4k per month
Principal Paydown: 18k/yr
Appreciation (assumes 2%): 20k/yr

Here's what you could have if you pull out 360k in equity and can get a 10cap complex worth 1mil with 30% down (300k).
2 properties:
Value: 2 mil
BLD 1: NOI minus 2 mortg payments (2k + 2,300 equity loan): 2,500
BLD 1: Principal Paydown (2 mortgs): 18k/yr + 10k/yr = 28k/yr
BLD 1 Appreciation: 20k/yr
BLD 2: NOI (100k) minus mortg payment on 700k loan (4,600) : 5,400.
BLD2: Principal Paydown: 20k/yr
BLD2: Appreciation: 20k/yr

TOTAL Monthly income (both properties): 8k/mo
Total principal paydown: 48k/yr
Total Appreciation: 40k/yr

Again, I'm not sure if 1mil complexes in texas can be had at 10cap. But I have to believe that you're getting to get far more in return on your money than the 5% you'd be able to pull it out for.

If you could find a 10 cap in that price range, you would double your monthly income in your pocket. Double your appreciation and more than double your principal paydown every year.

I would definitely get that equity out of there.......


I 2nd Steve's idea about seperating the heat and or gas overall. Are you paying the heat currently? It may be a big upfront cost now but if you plan on holding long term you will make your money back in a few short years, the property will be worth more to another investor should you ever decide to sell, and you monthly/yearly + cashflow will be substancially more.

WIth so much trapped equity you could pull out just enough to seperate the utilities and maybe by another apt. building or say 2 quads?

If you feel you won't hold this property long term then scratch the idea of seperating the utilities and just pull out cash and invest it elsewhere to diversify.


Chris- I currently pay heat and hot water but not electricity. I don't find in ma I see tenants paying for heat or hot water much, in any case if I separated those how well would tenants transition? Should I expect some people to leave? What about people with leases (I have a few maybe 4) can I not change it on them? My largest expense is water and sewer through the town, I never seem to see tenants paying for that in Ma. Here in Texas renters typically pay for everything - all utilities- water, heat, hot water ect. If I do go that route who do you contact to change it and how much will it cost? This is for heat and hot water or also the water sewer (am I even allowed to make tetanus pay the town direct for that?)

As far as pulling money out won't it be hard to find a rate at 5 for a commercial loan? Also if I buy in Texas and I leave eventually I'll have to hire a management company to handle everything because of lack of connections down here-won't I lose a ton of NOI being "hands off" ? Mass seems to have much lower cap rates on multiplexes then Texas - I see 10-13% down here possible but only 8-9% in mass.

Ryan Taylor,

What was your purchase price/initial basis? How long have you owned it? Did you use cost segregation? If you did it could be worth it to consider utilizing a 1031 to move up or out to other properties.


Hi Ryan,

Here is the guide I go by on utilities. You need to check if it is common for the area for the tenant to pay utilities. If it is not then you will be wasting your money and will lose tenants.

There is a difference between a building in an area where the tenants pay that is old and just hasn't been converted over time to an area where almost every building has the utility included. Those tenants are conditioned for that tenant base to get the unit with landlord paid utility.

Many parts of Mass. have cap rate compression so you can get premium pricing. By selling and moving your equity into a different market or area you can create more value for yourself again with your cash.

You need to take your comparable sales and then deduct your selling costs minus loan payoff and 1031 costs to see what kind of cash you would have to put into one or more other properties.

joel- It seems as though most apt's in the area include heat and hot water... my real expense is water and sewer (I'm getting hit for over 25k a year).

Steve- My basis is I think 950k in the property- so In this market im not even sure its worth quite that- so I don't think I'd have to worry at all about a 1031 at this point... I guess my next real question would be about strategies in terms of finding a good deal with a good cap rate in a commericial multifamily- and If buying in the same area would be worth not getting the best cap rate for ease and continuity in my management and team of people I already have set up. Also what kind of interest rate could I expect on a refi... i'm only showing about 60k a year in income

$25K per year for water sewer? that's $1562 per unit per year, or about $400 per quarter or $130 per month per 1BR unit? Seriously?

I don't have property in the Ashland area, so don't have first hand experience in Ashland with water/sewer, but there is something seriously wrong here. It's hard to believe rates are that high.

First I'd contact the utility and find out what would be average usage per unit for other buildings. Have them go back and look at the historical useage for that building and see if the usage has been gradually or abruptly increasing.

I'd say you either have one or more leaks, or someone is running a car wash and laundromat out of your building. If each unit has a washer/dryer connection, they could be doing laundry for their entire extended family and friends.

You then need to have someone perform an audit of the fixtures. Replacing toilets with 1.6 gal (not the cheapest ones, you can get good ones for about $180 that also save you money and still flush properly) low flow shower heads, etc. Whoever checks should look for dripping faucets and showers, etc.

Your property manager should be able to help you out with this. But I wouldn't accept 25K in water usage without doing some more digging. If your property manager can't help you, I can put out an email to my network to see if there is someone I know who can either help you, and give you a name of someone to help you. Send me a colleague request with your direct email.

You are allowed to charge tenants with a water bill. Could charge a minimum if not metered. I agree with Ann on usage. I like the house prices in Texas and would flip properties if I were you.

my last bill is a 93 day billing period- Water CD reading is marked "actual" and read at 116,700 (previous was 85,100) usage says 31,600 Sewer CD reading is marked "other" and present and previous are blank- usage is marked 31,600 ... so usage for both is marked exactly 31,600.. does this mean its an estimate? I'm confused. The charges for water is $1442.49 for water and $4,813.33 for the sewer for that quarterly billing period. The town tells me the meters are working fine and not to worry. Here is ashland's new rates [URL=http://image.torrent-invites.com/view.php?filename=398photo.jpg][/URL]


Ryan Taylor,

I just pulled out two recent water bills for two buildings.

Both buildings have only 1BR units. No washers or dryers in building 1, and one washer in building 2, and there is an outside spigot in building 2, but it's turned off for winter. I took my cubic feet used for the 89 day period for each building, and divided by the number of people living in the building, not the # of units.

Buiding 1: 382 CF per person for 89 days
Building 2: 420 CF per person for 89 days (has outside spigot and one washer in one apartment)

They meter they water and charge the same # for sewer, so if you are watering the lawn or washing cars, you are charged for sewer even if the waste water doesn't go through the system.

Your number of 31,600 CF breaks down to 1975 CF per unit per 3 month period. So unless you have a washer in each apartment plus over 4.7 people living in each unit, you have excessive usage.

If you take the 31,600 and divide by the # of people in the building, you'll get your usage per person per quarter. Kids are going to use more, probably, but I think you said you have all 1BR units so

That looks to me like a leak or another issue. The water is going somewhere. I'm no expert on water usage, but it doesn't look like the rates are the problem, it looks like the usage or leak is the problem.

And you have no management locally to help you with this, per your PM. I'll see if I can find someone to help you audit this. Also, if any of the Massachusetts / MA investors on BP have a resource, please chime in. @Ryan Wright , suggest you post a separate thread looking for plumbing help to do an audit on water usage, someone local may have the right person to help you.

Ann, thank you for such a detailed response. I'd love to get to the bottom of it. I'm assuming I certainly have multiple people living in some of these 1 bedrooms but I don't know that would be enough to account for this. Could simple drips cause this or would the leak have to be large? Are there people who handle a usage audit like that and how much do they typically charge? Should I still attempt to follow up with the town?

I too agree those numbers are high. Here in CT we also have to be very careful with water useage. I remove all spigots leading outside for this reason. Also with that class of tenant you have to be very careful about who is living in each 1br and who is bringing outside laundry. Trust me this happens and have caught friends and neighbors using washers/dryers.

If your audit does not find the leak, see if you can build out coin-ops in the basement and slowly remove machines from the units.

Also regarding the heat and hot water. As your removing laundry from units it would be a good time to put in separate heat and hot water in.

This will not be an easy feat and will take a bit of time especially since you are not local.

Does this location have Natural Gas service?

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