Owning an apartment complex straddles the line between an investment and a career. On the one hand, it usually takes a meaningful sum of money to buy an apartment complex, and what you make from it is usually related to how much you put into it. On the other hand, apartment complex ownership can be much more involved than owning other types of assets, such as stocks or bonds. Show Capitalization RateIf you have no debt on your apartment building, what you will make is equal to all of your collected income less all of your expenses. If you collect $500,000 in rents and pay $300,000 in expenses, you have made $200,000. Most investors measure income from their apartments relative to the value of the building with a metric called a capitalization rate. Calculating a capitalization rate starts with calculating a Net Operating Income. The NOI subtracts your operating expenses from your recurring income. Add up all of your collected rent and other income, such as laundry room receipts. Subtract your operating expenses from the income to find the NOI. Operating expenses includes everything that you spend to run the building, but it excludes major capital expenditures that you make to either extend the life of the building or increase its value. Once you have the NOI, you divide the price or value of the building into it. For example, if you have a $200,000 NOI, but you paid $2.4 million for it, the cap rate would be 8.33 percent. Returns After MortgagesIf you have a mortgage, your return isn't the money you collect in your NOI. It's what you have left after making your mortgage payments. To calculate your after-debt return, called a cash-on-cash return, you divide that net cashflow by your down payment. If you put $700,000 down on that $2.4 million property, you would owe $1.7 million. If your annual debt service was $130,000, and you took it out of the $200,000 NOI, you would end up with a $70,000 annual cash-on-cash return. When you relate the $70,000 to your $700,000 down payment, you would end up with a 10 percent cash on cash return. Profits on SalesWhen you own an apartment building, you hope to make money when you sell it. There are a few different ways that this happens. Apartment buildings frequently get sold on the basis of their cap rate, which is effectively a multiple of the income they produce. If you increase your building's income by raising rents or cutting expenses, you should be able to sell for a profit. When you sell in a better market or improve the quality of the building, buyers may be willing to buy your building at a lower multiple of earnings, giving you additional profit. Finally, if you had a mortgage, you probably paid it down. Since you have less of a mortgage to pay off than you originally took out, you will be able to collect this equity when you sell. Additional Revenue OpportunitiesSome apartment owners manage their own buildings. Management fees vary greatly, but typically fall in a range between 3 percent and 7 percent of the rent collected. If you manage the building yourself, you can reduce that expense. On a building producing $500,000 in rent, a 5 percent management fee would add up to $25,000 a year. Doing your own maintenance work can also reduce your repair expenses and let you put more money in your pocket. Apartment construction has a number of different variables involved, so pricing this type of job can be difficult without specific details. A new construction project is a big undertaking, and it is important to know all the aspects involved to get the most accurate estimate. The U.S. Energy Information Administration reports that the average apartment is 861 square feet, which works out to a 24-foot by 35-foot space. Based on a building with 12 average-sized units, the national average for construction is about $125 per square foot. Some contractors, however, may charge as much as $200 per square foot depending on the work required and the rates of subcontractors. This project will require the assistance of an architect and a general contractor. The architect services will require about 10-15% of the total project budget, while contractors account for about $200,000 in fees for their day-to-day project management duties, including permit pulling, hiring subcontractors, sourcing materials, and keeping the project on task. Apartment construction will include labor and materials for all exterior and interior work, including: building materials, fixtures and appliances, flooring, doors and windows, heating and cooling systems, plumbing and electrical work, roofing, finish and trim work, and cleanup. Apartment construction: three-story masonry unit with 12 total apartments, mid-range materials, full basement, and turnkey finishing. ItemCost per UnitCostArchitect services $600,000-$900,000Contractor fees $200,000Labor costs$125 per square foot$1 millionTotal Cost $2 - $2.2 million per project12 units @ 871 square feet 10,452 square feetPer Unit Cost $64,500-$86,000Other considerations and costs
DIY considerations
References
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