Apartment Building & Expected Cash Flow per Door

[Dustin Burke]

We are currently evaluating our first apartment complex deal. Cap rate looks good but what is an acceptable cash flow per door for a small apartment complex? Say 10 to 20 unit?  Thanks, Dustin

[Nathan Gesner]

Personally, I would want a minimum of $100 per door.

[Dustin Burke]

That's where I was at too. We use $100/door for SFH's as an absolute minimum but didn't know if this was realistic for apartments. I actually thought apartments would be much greater then SFH's.

I'm currently sitting at $36/door but  am using some conservative assumptions while waiting on all the current information to be provided. Thnaks for your feed bach @Nathan Gesner 

[Scott Skinger]

$36/door is really thin. On a 10 unit you're talking $360/month or $4,320/year. One missed expense or problem you weren't expecting and you're negative cash flowing. Even if you are right, is $360/month worth your time? If $36/door is a year 1 number and you have a lot of value add that will raise this number up, a little different story, but still the same warnings as above. 

Personally, I'm modeling for over 10% CoC year one, over 15% CoC by year three and IRR at 20%+ for a 5-10 year hold. This is more in the ballpark of $200/door.

If you model (and buy) at $200/door you are getting good/reasonable returns and you have a much higher margin of error.

Good Luck!

[Nathan Gesner]

Yes, $100 would be my minimum. I actually expect apartments to perform better than single-family. I bought an 11-plex last year that is cash-flowing just over $200 per door.

[Todd Dexheimer]

I agree with the $100/door. You should be looking to get close to that in profit/unit. Look at the DSCR to be 1.25 or better and the cash on cash to be at 8% or better.

[Karen Schimpf]

@Dustin Burke To get financing, you will need to DSCR to be 1.25 or better which means the property makes more than just paying the mortgage payment. Many sellers try to sell projections but lender's will only use actual income and expenses to calculate the DSCR.

[Dustin Burke]

Thanks ALL for the help. I will definitely stick to $100 + per door. I am borderline with the DSCR but I we are still in negotiation phase.

[Hadar Orkibi]

@Dustin Burke I would buy at minimum $100 per door, 1.3% DSR, 9% COC.

This based on ACTUAL numbers, once you apply the value add play i would expect minimum $150 pd, higher DSR and minimum 10%. 

The $100per door would be cash flow AFTER All expenses including 10% management, 7% capex, 7% maintenance, and 8%-10% vacancy.

[Dustin Burke]

Thank you @Hadar Orkibi for your comments. Yes, agreed - $100/door minimum. 

It's interesting to hear everyones opinion on percentages assumed for management, maintenance, cap ex, & vacancy.

[James W.]

Seems hard to make any money on $100/door to me unless it is with really conservative numbers (high vacancy and high cap ex estimates).  There would need to be strong upside in increasing cash flow for it to be something I would consider myself.  

$100/door does not lend to much cushion in a downturn where you could have decreased rents and a high level of vacancy.  Good luck covering costs in that scenario.

[Dustin Burke]

Agreed @James W.. It is a bit risky. Id things went South we could definatly find ourselves in trouble... 

[Hadar Orkibi]

I think that accounting for PM. Maintenance etc us must. rather be conservative then not!

As mentioned I agree with @James W., $100pd is only a starting point if there is good value add opportunity. 

[Henri Meli]

@Dustin Burke I'm not sure you have looked at the complete picture. I wouldn't evaluate a deal simply based on the $100/door number, which doesn't seem to be clear if it is at the time of purchase or following rebranding/reposition of the asset. Can you expand on what you mean when you say "Cap rate looks good"? 

Are you purchasing a value add? Do you have room for rent increases that can be sustained by the market? Do you have room for management efficiency improvements? In other words, are there areas where you can cut costs without impacting the quality of the asset?

If it is cash flowing $100 / door and there is room for $200+ in rent increases within the next 24 months with minimal investments (let's say deferred maintenance items) ... I wouldn't walk away from it yet.

Is there room for additional income stream in that property? Maybe you could look at other factors as well?

I think what most investors look for is value add. Basically, if the asset is already performing well .... why should the seller sell it?

[Bjorn Ahlblad]

I have a 12 unit building currently cash flowing 375 per door per month; but I am not servicing any debt. If there was debt to service it would come down considerably, but I never projected those calculations of additional expense and recoupment.

[Ola Dantis]

@Dustin Burke We shoot for at least 150/door. 

Interestingly, some investors do not even look at Caps these days. 

[Jason D.]

There's more to cash flow than just dollars per door. Any property can cash flow if you throw enough money at it. I would look for $100 per door at 100% financing, that way you know you aren't simply buying cash flow to make a spreadsheet look good and you can, at any point, take cash out, and know the property still makes money.

[Grant Rothenburger]

One more vote for $100/door @Dustin Burke

[Todd Dexheimer]

Originally posted by @James W.:

Seems hard to make any money on $100/door to me unless it is with really conservative numbers (high vacancy and high cap ex estimates).  There would need to be strong upside in increasing cash flow for it to be something I would consider myself.  

$100/door does not lend to much cushion in a downturn where you could have decreased rents and a high level of vacancy.  Good luck covering costs in that scenario.

 $100/per door (after debt service) times 200 doors = $20,000/month. Depending on the loan terms that will be around an 8-9 cap. 

If you are buying at $100/door and it's a duplex, then yes, those numbers are slim, but once you start getting into 50+ units $100/door is solid. You still should look at Cash on Cash, debt service coverage ratio, prevailing cap rate, neighborhood demographics, ROI, IRR, etc.

[James W.]

Originally posted by @Todd Dexheimer:

Originally posted by @James W.:

Seems hard to make any money on $100/door to me unless it is with really conservative numbers (high vacancy and high cap ex estimates).  There would need to be strong upside in increasing cash flow for it to be something I would consider myself.  

$100/door does not lend to much cushion in a downturn where you could have decreased rents and a high level of vacancy.  Good luck covering costs in that scenario.

 $100/per door (after debt service) times 200 doors = $20,000/month. Depending on the loan terms that will be around an 8-9 cap. 

If you are buying at $100/door and it's a duplex, then yes, those numbers are slim, but once you start getting into 50+ units $100/door is solid. You still should look at Cash on Cash, debt service coverage ratio, prevailing cap rate, neighborhood demographics, ROI, IRR, etc.

I agree that it can work with a lot of doors like your example, but the OP was saying 10-20 doors which is only $1,000-$2,000/mo.  That is not much money and does not lend much room for error in his situation.  That is 1-2 vacancies away from losing money each month in this current high rent environment.  

I'm small time, but I probably over analyze most deals looking at the conventional cap, Cap with Cap Ex, DSCR, Fannie/Freddie impact, COC and Total return with amort. I usually run several scenarios with different vacancy levels, decreasing rents, operating expense increases and varying cap ex levels as well.

[Dustin Burke]

@Henri Meli - what I meant by cap rate looks good is that the average cap rate of the market the apartments are in is 10%. At current asking price the cap rate is 7%. After paint and carpet the rents will increase raising the cap rate to 14%. 

However, I am still struggling with getting it to cash flow. I am still waiting on all the info so I have some hopefully conservative numbers I am using. It is an interesting deal with some creative financing possibilities. 

The story I'm getting why the owner wants to sell is that he has gone bigger and wants to off load some of the smaller properties.  Thanks for your feedback. You had some very good observations. 

[Dustin Burke]

You all gave us some good things to consider. This deal would be a great start for us if it works out but we are not going to force it If it works out great if not we will just move on to the next one. Thanks for all the help. I will definitely post the outcome if we land it.

[DEBORAH R.]

I am just starting out with smaller rental units like SFR's, duplexes and 4-6 Plexes. What should I expect the cap rates, Cash on Cash Returns, DSCR and Cash Flow to yield?