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How Much Money Can You Make From An Apartment Complex

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How Much Money Can You Make From An Apartment Complex

Once you buy an apartments complex for sale in The United States of America, you have to make up your mind whether you want it to be an investment or a career. It usually takes a lot of money to purchase an apartment complex. What you make from your investment is usually related to the money you put into it. On the other hand, owning an apartment complex can be more involving than other types of assets such as bonds or stocks.

 

Capitalization rate

For someone without debt on their apartment building, what they make is equal to all their collected income less their expenses. This means that if you collect five hundred thousand dollars in rent and pay three hundred thousand in expenses then you will make two hundred thousand dollars.

Most investors measure their income from the apartments they own relative to the value of the premises with a capitalization rate metric. When calculating a capitalization rate, it is important to start with a Net Operating Income.

The net operating income subtracts the operating expenses from recurring income. You then have to add up your collected rent and other types of income such as laundry room receipts and so on.

You should then subtract your expenses from the income to be able to find the net operating income. Operating expenses include things that you spend to run the complex, but it excludes the major capital expenditures one makes to either increase the value of apartments for sale or extend the life of the building. Once you have the net operating income, you divide the value or price of the building into it. e.g., if you have a two hundred thousand dollars net operating income but you paid 2.4 million dollars for it then the capitalization rate will be 8.33%.

 

Returns after mortgages

For people who have a mortgage, their return is not the money they collect in their net operating income. It is what they have left after they make their mortgage payments. To calculate the after-debt return, known as cash-on-cash return, you simply divide your net cash flow by your down payment. For example, if you put seven hundred thousand dollars down on a 2.4 million property then you will owe 1.7 million dollars. If you had an annual debt service of one hundred and thirty thousand dollars and you took it out of the two hundred thousand dollars net operating income then you will end up with annual cash on cash return of seventy thousand dollars. When you relate the seventy thousand dollars to your seven hundred thousand down payments, you will end up with a 10% cash on cash return.

 

Additional revenue opportunities

You can buy apartments complex for sale and decide to manage your own buildings. Management fees may vary but fall in a range between 3% and 7% of the total collected rent. If you manage your own building then you can reduce the expense. Doing your own maintenance can also reduce the repair expenses and you will put more money in your pocket.  

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