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Apartment Investing

SteveO

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Very much appreciated and yes, totally understand you won't know the area etc. I am looking to do an owner occupy. They're in a great town in a good neighborhood and they've never had a problem renting. Again, I very much appreciate you taking the time. If you need additional info let me know! Thanks!

Asking is $220,000

Rents are $700/unit

NOI- $21,216

Cap- 9.6%

Monthly Income- $2800

Monthly Expenses- $1843.70

Monthly Breakdown:
  • Vacancy-$140.00 (better safe than sorry I suppose!)
  • Water/Sewer/Trash- $176.00
  • Repairs - $196.00
  • Insurance - $83.00
  • Taxes - $247.00
  • Mortgage - 811.70 (This will be higher if I do owner occupy. This is based on a 30 yr 4.25% that a lender quoted me)
  • Other Maintenance - $190.00

Monthly Cashflow- $956.30

One other note. When I see a cap rate advertised at 9.6, it usually ends up around a 4 or 5 when I get done with my analysis. I have never purchased on a cap rate over 5 on real actual numbers. It is actually a worthless calculation when you really think about it. But, I find ways to add value in other areas. I have purchased zero cap rate properties that made me a lot of money. You just need to add value.

I have some old posts on this forum pertaining to cap rates and value add. Search for them, there may be some value in it.
 
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MTF

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I was checking some local deals and realized that the most I can expect in yearly yield is maybe about 5-6% (average is 4-5%). How can it be Fastlane with such abysmal return rates? Is it about using leverage? Forcing appreciation? I can't see it working well in any other way than by appreciation play unless I'm missing something here.
 

Sauce

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I was checking some local deals and realized that the most I can expect in yearly yield is maybe about 5-6% (average is 4-5%). How can it be Fastlane with such abysmal return rates? Is it about using leverage? Forcing appreciation? I can't see it working well in any other way than by appreciation play unless I'm missing something here.
Have you included tax benefits and principal pay down in your overall return or is it strictly cash on cash?

Real estate can be fastlane if you do it right.

If you want to buy one house a year for 20 years, then it's not fastlane. If you start buying apartment complexes then it could be fastlane.

Let's take a look at the commandments
Need- check. If you buy in the right pace there I always a need for a place for people to stay

Entry-level check. Most people lack the capital or knowledge of how to get the capital to take on a larger endeavor. They also may lack the knowledge of how to put systems in place to run the units.

Control- this is the commandment I think that may not be met. Most commercial financing comes with a balloon after 5 or 10 years. At that point you need to get it refinanced. What if rates have a huge jump? What if values plummet and you can't justify the value on the refi? Even if the asset is cash flowing you could be hosed.

Scale - check. It can be scaled by buying apartments, lots of houses, etc. You can leverage other people to do most of the day to day.

Time - check. If you put management in place and have competent contractors, your revenue and your time are not tied to one another.

What do you guys think?
 

AntonSm

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To my thinking the most profitable option is a short-term rental property in big cities (the closer to universities/business districts/medical centers the better). By renting out apartments for short period with efficient management the owner can earn up to 5% net yields (higher than long-term rentals), while keeping risks at bay (i.e., at the same level as long-term rental earning 2–3% yields). A convincing article here https://tranio.com/traniopedia/tips..._and_profitable_overseas_property_investment/
 
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ck4750

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I like to calculate the actual amount of capital needed to get the property up to my standards initially. Sometimes this is negotiated with the lender as I present them with a pro-forma of what my rents will be after the improvements. This is a risk as your pro-forma must be accurate.

That's great advice!

By other maintenance, are you assuming capital improvements?

Yes, just to put into a fund for capital improvements. What would you suggest to be a reasonable monthly number to set in an emergency fund?

Why are the rents so low?
When I say great area it's a for sure B neighborhood. I would have no problem sending a family member over to collect rents whatsoever. The units are by no means fancy there is a lot of room for doing some updates that I think would justify higher rents. In fact I intend to update the unit I occupy. Then do the same to the others eventually. They were built in '88 and honestly haven't had a ton of updates since other than carpet/paint.

I have one other question for you. I've read your stuff on here as well as some on BP and was curious why you say to be careful with apartments in today's market. As long as the numbers make sense where is the danger?

Thanks again
 

MTF

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@Sauce, yes, I refer to cash on cash, specifically not as your primary business, but an addition to reinvest money from your primary business. I don't live in a country where you can buy property for little to no down. And frankly, I don't like this idea much because leverage can work both ways as many people learned in 2007 and 2008. Looks like it can't really work well without financing then, or maybe I look at it from the wrong perspective (perhaps there's more to it than just net yield and I'm unable to see it).

By renting out apartments for short period with efficient management the owner can earn up to 5% net yields

That's still a very low return. You can easily get 2-3% with paper assets (and much more with P2P lending) and little to no work. 5% doesn't seem worth it when you consider so much additional work and risk.
 

SteveO

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That's still a very low return. You can easily get 2-3% with paper assets (and much more with P2P lending) and little to no work. 5% doesn't seem worth it when you consider so much additional work and risk.
There is a much bigger world out there than you are seeing. It is not for everyone. The numbers you are witnessing are from a very narrow view that is seen by many.
 
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SteveO

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I have one other question for you. I've read your stuff on here as well as some on BP and was curious why you say to be careful with apartments in today's market. As long as the numbers make sense where is the danger?
Because things are not usually in line with what is advertised. If it is in line, it will not likely sell.
 

SteveO

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The units are by no means fancy there is a lot of room for doing some updates that I think would justify higher rents.
Verify this!
 

SteveO

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Yes, just to put into a fund for capital improvements. What would you suggest to be a reasonable monthly number to set in an emergency fund?
Determine this when you do your due diligence. You will have a property inspection that will give you lots of information. Look at the appliances, floors, roofs, parking, landscaping, upgrades that you want to do, etc.
 
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MTF

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There is a much bigger world out there than you are seeing. It is not for everyone. The numbers you are witnessing are from a very narrow view that is seen by many.

Do you mean that the best opportunities aren't available publicly?
 

SteveO

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Do you mean that the best opportunities aren't available publicly?
Partially. Sometimes a great deal will come your way because you are in the right place at the right time. But mainly I mean that there is money to be made if you have the right process.

I like to use two avenues, value add and timing. Both are very viable and are where the real money can be made. Here are some old links to discussions on these topics.

https://www.thefastlaneforum.com/community/threads/apartment-appreciation-targeted.588/#post-4307

https://www.thefastlaneforum.com/community/threads/finding-apartment-deals.4321/

https://www.thefastlaneforum.com/community/threads/amazing-apartment-returns.7763/#post-26157

https://www.thefastlaneforum.com/co...-markets-due-to-overbuilding.5480/#post-18319

https://www.thefastlaneforum.com/co...d-other-value-play-investors.3774/#post-13697
 
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Sauce

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@Sauce, yes, I refer to cash on cash, specifically not as your primary business, but an addition to reinvest money from your primary business. I don't live in a country where you can buy property for little to no down. And frankly, I don't like this idea much because leverage can work both ways as many people learned in 2007 and 2008. Looks like it can't really work well without financing then, or maybe I look at it from the wrong perspective (perhaps there's more to it than just net yield and I'm unable to see it).



That's still a very low return. You can easily get 2-3% with paper assets (and much more with P2P lending) and little to no work. 5% doesn't seem worth it when you consider so much additional work and risk.
@MTF in the US, there are a lot of other factors that can increase your overall yield. For example, lets say you buy a $1MM apartment complex. You are allowed to depreciate the buildings (not the land) annually which will reduce your tax burden significantly (It could be as much as ~$30K). Additionally, you are able to deduct the interest and any ordinary and necessary business expenses against the property to reduce your overall income.

So for me, even though I am cashflowing, I show a net loss for the properties when you take in to account depreciation and deductions. Does that make sense?

As far as over-leveraging, I agree with you completely. However, using secured, long term leverage can be a game changer. Keith Weinhold explained it very well in his podcast here. Start listening at 3:30 through about 12:30.
 
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Vigilante

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Did you ask a flooring expert? You might just want to google that as you can find the answer to the question yourself.
 

SteveO

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I had a question regarding the renovation. I had brought an apartment in its construction stage at a low cost, the painting and flooring works had to be done. I have to do it in a cost down manner. My friends suggested me to do the epoxy painting for the flooring. But I love chess board designs, is it possible to do with epoxy? Do I need to shift to tile flooring? Which is cost efficient, tile or epoxy? I need shining and sparkling floor.
Flooring is one of the most MAJOR considerations. It is costly and will continue to be a high cost item as you move forward. It is a big deal to the renters and is subject to trends.

Research what the other developers are doing. Don't put something down that will be tough to deal with later. Are there any issues with tiling over the epoxy? Once you put tile down, it is expensive to replace.

One trend that I saw was simply staining the existing concrete. I really like that option and was happy to see that was popular. Not sure where the trends are heading now though.
 
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