12 Unit Apartment Complex (young Canadian Looking For Answers)
Hello from Canada. I am 20 years old and am currently a student at the University of Alberta in Edmonton. I am so glad I stumbled across this forum; I have many questions to ask that I hope most won’t mind answering. I am currently living in a smaller 12 Unit Apartment complex near the University. They charge approximately $600/Mnth for there cheapest 1 bedroom/bath. Utilities are extra and the tenants are responsible for phone, internet, cable, power, etc. so there is no liability on the owner(s). This building is a nice small size so upkeep is not huge job on the landlord’s part and there is never a vacant apartment. My overactive brain started thinking; next thing I know I’m crunching numbers on EXCEL thinking to myself, wouldn’t it be great to own such a complex and have a steady flow of income. Assuming the following scenario…
$500,000.00 12 Unit Apartment Complex w/ $100,000 Down
Cash Flow (In) - Income:
Rents $700.00 x 12 Units = $8,400.00/Mnth
Rents $8400.00 x 12 Months = $100,800.00/Yr
Cash Flow (Out) - Operating and Debt Service:
Mortgage ($6,156.00 x 12 months) $73,872.00 x 6 Years
Operating Expenses $14,400.00/yr (I actually have no idea what this would be so I threw out a number)
Total Cash Outflow $88,272.00
Positive Cash Flow
$12,528.00
Now after you have paid you’re mortgage off you would have a consistent cash flow of over $80,000 a year??? So is this how it works, it has to be more complicated than this so let me have it. What kind of expenses would a person be looking at? I am really interested in doing something like this, if it works out great than there would be nothing stopping me from investing in a second complex that I could have paid off in half the time. What’s the catch guys? Thanks a million.
P.S. I have the resources to get a $100,000 down payment, however how hard would it be for a 21 year old to aquire a commercial loan for something like this? Thanks again
You are on the right track, need to refine your numbers more.
General rule of thumb: well run properties take between 33% and 35% of the gross to run, that is approximately 35% in operating costs. Older buildings often take more, newer building take less, and situations such as you describe where tenants pay extra for utilities instead of the owner paying lower your operating costs. However, you still will have costs: vacancies, snow removal, lightbulbs, advertising, cleaning, carpet, painting, appliance repair/replacement, mowing, management, etc. The point: you may be able to run such a building with 25% to 30% operating costs, or less if you do the management and much of the basic work such as cleaning. The percentage is just a quick reference figure to evaluate the deal, you need to fully understand CAP rates (you research and estimate actual operating costs in order to arrive at a CAP rate). Once you are certian you have properly forcast/estimated all major operating costs and the vacancy rates you will then be able to accurately evaluate the deal.
As Mr. Merchant pointed out you typically want to include a higher vacancy rate, especially for students as it can be hard to enforce a year long lease (students have a greater tendency to walk out on a lease than many others in my eperience). Consider having their parents sign also and create a 11 month or and 11 month 2 week lease, or similar, to give yourself at least two weeks to clean up the places before next school year. Offer some kind of incentive for current renters to stay with you (if they are good tenents).
Once you have the operating costs and realistic income figures you can then figure out the Net Operating Income (NOI) with which you can calculate the CAP rate for evaluation and with which you can then subtract financing costs to get an idea if the property has a positive cash flow or not.
On the surface the property you outlined seems a good prospect, be certian to check all of the numbers before buying and to make certian that any contract you sign has several "out" clauses that allow you to cancel the deal (and get back escrow money) if the financials are not satisfactory or the inspection reveals more faults than expected, etc.
Lastly, the amount you listed as a mortgage cost seems high, about twice as high as expected. a 25 or 30 year ammortization on a fixed rate commercial loan is running about $6500 to $8000 per month depending on your interest rates and credit, etc. Is theree a reason why you have to pay such a high financing cost ($6156/month on 500k)? Look for better financing.
Keep it up, you are wise to begin thinking of this at your age and trying to get started now. Combine it with a bit of further education and try to find a few more experienced investors to mentor you and you will be way ahead of the game.
The units I am in are not for sale...I said assuming the scenerio (12 unit complex for $500,000.
Thanks Konte
A building with a 5.3% cap rate I seriouly doubt this will be a positive cash flow property unless you have some unusually great financing terms. Expenses on this size and age of building are closer to 35%-45% of gross income.
Also, projecting a 16% annual appreciation is suicide. I would pass on this.
I would become a hard money lender.