Apartment Complex Opportunity

[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?

[John McKee]

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.