Somehow it seems easier for a real estate tycoon like Donald Trump to invest a few million dollars in a 200 unit apartment complex or 500 unit high rise office building and make a fortune than for the average investor to purchase an eight unit apartment building for a more modest $300,000 and make a killing. In these two examples the economy of scale is tilted severely in The Donald’s favor but that doesn’t mean you won’t make a nice little return on your investment.
Exactly what sort of percentages constitute the “norm” when it comes to smaller multi-unit investments? Here are some “average” numbers to ponder. A mortgage on $300K, assuming a 25% down payment, works out to an annual mortgage bill of around $19,952. The net operating income of the building, money made from rent, should be around $27,750. Subtract the mortgage payment from the income and you’re left with a cash flow of $7,798. Do the math and you discover that, for your first year of operation, you earn about 10% on your investment.
By the fifth year of your apartment investment, the percentage of annual profit has increased to over 16%, a number that starts to stir a bit more interest in the heart of an investor. But we haven’t yet taken into account that the property has grown in value at the rate of approximately 3% a year, increasing the value of the property to about $347,782 by the five-year mark. Simultaneously the loan has been reduced by a little over $20,000.
In the final analysis, and taking into account the preceding discussion, this little apartment investment of decidely non-Trumpian size has returned a healthy 90% cash-on-cash basis return over five years. As the property continues to increase in value annually, and the size of the mortgage decreases, another unavoidably profitable point is raised – you, friend, are going to be the free and clear owner of this asset which you borrowed 75% to purchase AND that will be paid off by tenant rent. What this means is that you bought your investment for only the price of the down payment, a mere 25% of the purchase price.
The MHP Listings Team
Flickr / Joi