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:
- Cash Flow: This is the amount of money that is left after ALL expenses and the mortgage payment are covered.
- Appreciation: this is the difference between what you bought the property for and what you sell it for (minus expenses).
- Loan Reduction (aka “Amortization”): The amount by which your tenants paid down your mortgage balance.
- 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.
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.
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.
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!