How a Small Apartment Building Made Me $40,000/Year

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In this post, I want to demonstrate to you the incredible power of apartment building.  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 to help you achieve financial freedom, just as multifamily has helped me and many others.

4 Ways Apartments Make You Money

I love apartment buildings because there are 4 ways to make money:

  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% of the purchase price).

You can also charge an “asset management fee” (typically 1% of the money raised each year you own the building) and an “asset disposition fee” (typically 1% of the sales price when you sell the building).

Unlike any other investment in the world, apartment buildings have 4 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 this deal added $40K to my net worth every year for 5 years, 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 renovation
  • 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 3 years.

After 5 years (as I write this), I have it under contract to sell for $850,000. Overall, this building made me a profit of $198,434 in 5 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 3 of the 4 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 years (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 five years.

The total profit from these 3 profit centers was $325,310. Since I have a 50% share, my portion of those profits are $162,655.

Let’s Not Forget the Sponsor Fees!

In addition to owning 50% 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% of money raised) and a 1% 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 3-5 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.

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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?

Let me know with a comment!

About Author

Michael Blank

Michael Blank’s passion is being an entrepreneur and helping others become (better) entrepreneurs. His focus is buying apartment buildings by raising money from private individuals. He’s been investing in residential and multifamily real estate since 2005. He is the creator of the Syndicated Deal Analyzer and the eBook "The Secret to Raising Money to Buy Your First Apartment Building".

29 Comments

  1. John Bierly

    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

  2. Joel Owens

    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.

    • John Bierly

      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.

    • Luke M.

      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?

    • Michael Blank

      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.

  3. Jerome Kaidor

    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.

  4. Henry Salinas

    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

      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.

      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.

  5. Bruce Bartlett

    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.

  6. Michael Lee

    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.

  7. margaret smith on

    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?

  8. 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.

  9. 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.

  10. Peter Mckernan

    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!

  11. 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!

  12. James Schoeman

    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

      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!

  13. James Schoeman

    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

  14. Deddrick Barnes on

    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.

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