Apartment Complex Financing

[Account Closed]

Hello BiggerPockets community! I have been listening to Grant Cardone for the last 6 months and he truly inspired me to be ambitious! He talks about how he always prefers to buy more than 16 doors rather than 1 door. Has anybody acquire an apartment complex? If so what is the best way to finance it and how do you start with such a big project like this?

Thank you!

[Andrew Johnson]

@Account Closed At the moment I'd say you're putting the cart-before-the-horse and here's why (hopefully this doesn't come across as too brash..):

1.) Here's the deal today:  http://www.loopnet.com/Listing/20393342/3402-Lynri... It's literally over a year old in one of the hottest real estate markets (Austin) in the entire country.  Every local and out-of-state investor has to have seen it over the past 14 months.  What do they know that you don't know?

2.) They state the NOI is $115K per year and that's the "actual". I never trust those numbers (they're usually high) but let's take them at face-value just for giggles. If you get 25% down and have a $1.5MM mortgage at 5% with a 20 year amortization period (you don't get 30-year fixed rate loans with commercial properties) it's $9,900 per month which gets you to around $119K per year in mortgage payments. So what you have is a negative cash-flow property.  

3.) Let's say you can get a 25 year amortization period on the mortgage, that yield a mortgage payment of around $105K per year. So (remember, this is optimistic) you have $115K per year in NOI and debt payments of $105K so you get $10K per year in cash-flow. $10K/$500K down payment = 2% cash-on-cash return. AND you'll likely want a piece of that so what's left for the equity investor? 1%? I can get more than a 1% cash-on-cash return in a savings account...

By the way, all of this is ignoring that not everybody wants to invest a complex of *only* one-bedroom apartments that are 488 sq ft.  I have one of them but it's in a college town.  Not all of my units are rented to students but it's nice to have that back-stop when it comes to a tenant base.  I could argue "it's neither good nor bad" but I think most people would find it, well, limiting.

Taking that and putting it to the side for the moment, if you have an investor that wants to play the appreciation game then this property might work.  But in that scenario how are you going to make money?  You don't have to nest egg right now to invest so odds are you'll want cash-flow for the next deal.  Being generous you'll get $5K per year out of this property (that's assuming that your equity partner will split returns evenly with you even though you're a rookie with no skin in the game) and I wouldn't bank on that.  

Now, going to a local bank and saying "give me financing for a property with negative cash-flow" is another deal all together.