Owning an apartment complex is a fairly unique financial move, in that it’s partly an investment and partly a career. On the investment side, luxury apartments for rent usually take a huge amount of capital, and the revenue you get from them is tied closely to what you’re able to invest. On the career side, owning an apartment complex is nowhere near as simple as other assets, even within the property niche. If you’re wondering how much you stand to gain, then read on.
The first thing you probably want to know is the capitalisation rate. If you own an apartment complex with absolutely no debt tied to the asset, then your revenue will simply be your income minus your expenses. If you spend $300,000 in expenses and collect $500,000 in rent, then you’ll be up by $200,000. To work out exactly what you’ll make, you need to pin down the complex’s net operating income. This is basically a subtraction of your operating costs from your recurring income. Add up the current recurring rent, or talk to your urban planner to get an estimate if the project’s still in development. Take away your operating expenses, and you’ll get your NOI. From there, you divide the value of the complex into the NOI. The result is your capitalisation rate.
Getting some projections from an apartment complex is straightforward enough if you have the capital to buy it outright. However, if you have a mortgage on the property, things can get a little more complicated. In this scenario, your overall income won’t be the money collected through your net operating income. Instead, it’s what you have left after making all your mortgage payments. You’ll need to calculate your after-debt return by dividing your net cash-flow by your down payment. Let’s say there was a property that cost $2.4million, and you made a down payment on it of $700,000. This leaves you with a debt of $1.7million. Then, let’s say your annual debt service came to $130,000, and you took it out of an NOI of $200,000. This would leave you with $70,000 annual return. Obviously the figures aren’t usually this clean-cut. However, you can refer to this scenario to see how a 10% gross would work.
Finally, your profits on selling the complex. Unless you want your complex to see you through indefinitely, you’ll probably come to a point where you want to sell it. you can do this in a few different ways. Most apartments are sold based on their capitalisation rate. You can bolster this by raising rents, lowering expenses, or both. Provided you can accomplish a shift in cash flow like this from the day you buy point of sale, you would have made a profit. Also, if you have developments done which improve the quality of the building, buyers will take the property for a reduced multiple of earnings. Simply paying down your mortgage is another good way to secure profit. If there’s less of a mortgage when you sell than when you bought, you’ll be able to collect this equity.