Big Apartment Complex Math

[Vincent Chen]

Right now I am in my study and research phase of Real estate investing.

Really like the apartment complex property as the final goal,right now,I am thinking big for really large apartment complex (say,100+ units),it seems investors have to use partnership or other investor group money.

When it comes to math of wealth building,then the equity and cash flow part of the large apartment complex will be divided by the investors/partners.The investor himself/herself only get part of equity and cash flow.

When it comes to financial decisions (refinance/sell/increase rents) will have to go through by investors as well.This might make the strategy hard to make.

If that is the case,what is the real benefit to jump into the really large apartment complex?

One can start with small number (20 units) and with the cash flow and refinance to get bigger number (40 units) and going on and on  to get whole wealth ownership of the units.

So which one is better for wealth building for long term?Anything missing here for my analysis?

Any comments will be welcome,right now I am deciding my long term strategy now,so please enlighten me if I miss anything. 

[Tom Mole]

@Vincent Chen,

Allow me to expand on what @Chris Tracy said. Its sounds like you're concerned with keeping the deal affordable so that you can handle them alone. You indicated that you'd prefer to have all the control and all the profit. Of course you also get with that ALL the risk. Real estate investing is a team sport for a reason.

If you insist on having total ownwrship of your portfolio, then you will surely end up with a smaller portfolio than you might. The work will be greater and the rewards lower. You had better not make any mistakes since any losses are all yout own, paid for out of your personal assets.

While your cash flow may be higher, your ROI (Return On Investment) will surely be lower. Really, how many small apartment building can you buy with the money in your checking account? By leveraging your investment capital through debt and equity partners you can maximize your ROI and limit your exposure. You'd be able to purchase more larger projects with leverage than small deals without it.

While it it's true your personal cash flow would be reduced by sharing with partners your number of income streams should more than make up for that. Let's do a little example

You're considering two potential deals. #1 is a 20 units apartment and #2 it's a 120 unit building. They are both in the same area of town and are priced at $30k/door. Each unit rents for $950/month and expenses run $450/month in either project. You check your account balance and determine that you have enough cash to buy #1 outright, but #2 would require taking a loan. The debt service would cost $350/door, reducing your cash flow to $150/door.

Now, the heart wants what heart wants so you figure your cash flow for #1 first. 20 doors x $500/door per month gives you $10k/month cash flow. Being a great investor, however, you're compelled to consider the potential of #2, which requires you to use leverage. 120 doors x $150/door per month comes to $18k/month. Not bad right? It gets better.

Let's take a leap down the rabbit hole. Consider what happens when you offer your equity investors $100/door per month of your cash flow in exchange for all of the acquisition costs, so you pay nothing from your own pocket. Sure your cash flow gets pretty thin. It's down to $50/door per month, a meager $6k/month, but remember, you haven't spent a penny to make that money. Woohoo! How many deals like that could do before running out of investment capital?

It's really a matter of shedding the shackles of the limited thinking of our parents and teachers. We must think like investors, not employees. Employees think "how much" does this building cost. Investors think what is the "rate of return".

I hope this helps.

Cheers!!