How Much Can You Make Owning an Apartment Complex?

Realistic Projections On Owning An Apartment Community

BAM Capital believes in apartment communities, not complexes. Single people, and people with families all live and do life in these buildings. It is those people that transform a complex into a community. To do apartment investing correctly is to build that sense of community for residents. It has a two-fold benefit, happier tenants and thus, less churn and higher profits. 

For those who are looking to diversify their investment portfolio while generating passive income, real estate investing can be a good strategy. Read the previous article, “Purchasing & Running An Apartment Community” to learn more.

Apartment complexes can provide a consistent stream of rental income, offering investors a reliable source of cash flow. This income stability is particularly attractive in comparison to other types of real estate investments, as apartments tend to have multiple units, spreading out the risk associated with potential vacancies.

However, owning an apartment community is not just an investment. Some people consider it a career because of how time-consuming it is being a landlord. Additionally, it takes a meaningful amount of money to buy a large multifamily property in the first place. This is why most investors want to know how much they can make from pursuing this type of investment. [1]

While the potential for profit is substantial, there are various factors that can influence your earnings. To succeed in multifamily real estate investing, you need to be familiar with these different factors.

Factors Affecting Profitability of Apartment Communities: Location

As a real estate investor, your return on investment (ROI) will be influenced by various factors, the first of which is the property’s location.

Location is one of the biggest factors affecting the profitability of your apartment complex investment. A prime location can significantly enhance the desirability of the property, attracting tenants willing to pay premium rents.

A good location is one that enjoys proximity to key amenities such as schools, shopping centers, markets, warehouses, public transportation hubs, green space, and employment opportunities, as these can help drive demand. Well-located apartment communities tend to have high occupancy rates and minimal vacancies. [2]

Areas with strong economic growth and low crime rates also tend to foster stable rental markets, which is ideal for risk-averse investors.

If you want to maximize your potential income, it is important to evaluate a property’s location meticulously. Try to find out how the area is expected to evolve over the investment period. If the property has open land behind it, find out what they are planning to build there as it may diminish the desirability of your apartment community. Get in touch with the town hall or other public agency in charge of urban planning for more information. [2]

Initial Investment

Purchasing a multifamily real estate property typically involves a significant upfront cost, including the purchase price of the property, closing costs, and costs for necessary renovations or upgrades. The size, location, and condition of the complex will also impact the initial investment.

This is important to remember because the amount of initial investment directly impacts the apartment community’s potential income. It determines the investment’s financial structure, including debt service and operating expenses.

A higher initial investment may lead to higher monthly mortgage payments or financing costs, which can initially reduce cash flow. On the flip side, a lower initial investment may result in lower debt service but might require additional capital for renovations or repairs, impacting income in the short term.

Rental Demand

Another factor that influences how much your investment property will make is rental demand.

A high demand for rental properties in a given area can lead to increased occupancy rates, allowing landlords to charge higher rents and reduce vacancies. Unfortunately, this is not something investors can easily control. Just because a property seems to be in a good location does not automatically mean people will want to live there. Rental demand is influenced by several factors such as population growth, employment opportunities, and lifestyle preferences. [3]

Areas experiencing robust economic growth and job creation naturally attract more renters, driving up demand for housing.

In some cases, demographic shifts can also boost demand such as an increase in young professionals or retirees looking for rental accommodation.

Rental Income

Rental income is the investment property’s main source of revenue. The amount of rental income generated depends on the property’s size, the number of units, and the occupancy rate. Setting appropriate and competitive rental rates is crucial to ensure a reasonable ROI.

Areas with high demand and limited supply typically command higher rents, while oversaturated markets may experience downward pressure on rental prices.

Landlords can also charge higher rents if the property is in great condition or offering several amenities like parking, gyms, and laundry services. Tenants would be more willing to pay higher rents if such amenities are in place.

Investors often measure income from their investment properties using capitalization rate. To calculate cap rate, you need to calculate Net Operating Income (NOI) first. The NOI subtracts operating expenses from the property’s recurring income. Add up all of the rent you’ve collected along with other income and then subtract operating expenses to get the NOI. Next, divide the NOI by the price or value of the building to get the cap rate. [1]

A lower cap rate implies that the property is more valuable and less risky. If you have a $200,000 NOI, for example, and you paid $2.4 million for it, the capitalization rate would be 8.33 percent. [1] Learn how BAM Capital Creates Positive Leverage by acquiring properties that are underperforming the market. 

Operating Expenses

Operating expenses can also significantly impact the profitability of a multifamily property. These expenses will be influenced by the property’s location, size, age, and amenities, so each investment property is different.

Operating expenses include property taxes, insurance, maintenance and repairs, utilities, property management fees, marketing, tenant screening fees, leasing fees, landscaping, snow removal, pest control, HOA fees, and professional service fees. [4]

On average, operating expenses for apartment complexes typically range from 35% to 50% of the property’s gross operating income (GOI). Investors need to budget for these expenses accurately to make sure that rental income covers all operational costs and leaves room for profit.

Appreciation

Appreciation is one of the key advantages of owning real estate, and it also plays a role in determining their profitability. Appreciation refers to the increase in the value of the property over time. It is influenced by the investment property’s location, market demand, and economic conditions. [5]

Over time, the value of the property may increase because of inflation, economic growth, and developments in the surrounding area. Property appreciation can significantly enhance the overall return on investment for apartment owners. [5]

Investing in areas with growing economies and an increasing population can lead to increased demand for rental properties.

Some investors go for strategic renovations and upgrades to enhance the appeal of their multifamily property and contribute to higher appreciation. Investors who want to maximize profitability can find ways to take advantage of appreciation to secure greater long-term returns.

Risks and Challenges of Apartment Complex Investing

While the potential for profit in owning an apartment complex is substantial, it’s essential to recognize the risks and challenges associated with this investment. Economic downturns, changes in market conditions, tenant turnover, and unexpected maintenance issues can all impact profitability. [6]

During times of economic instability, tenants may struggle to pay rent, leading to increased vacancy rates and lower rental income. A downturn in the real estate market can also diminish the value of the property, impacting your ability to sell or refinance the asset.

Apartment investing is also much more involved than owning other asset types like stocks or bonds. Investors need to directly work on the property unless they hire a property manager. If you choose to self-manage the property, it will take a lot of time, effort, and expertise. [1]

Real estate investors find themselves dealing with difficult tenants and handling emergencies like plumbing issues or structural damage, even during their free time. So while it is an excellent source of passive income, it is not a completely passive investment.

As the landlord, investors also need to manage operational and maintenance costs. Unlike single-family properties, apartment communities require more frequent maintenance, repairs, and management. Purchasing a multifamily property means taking care of its day-to-day operations. [6]

The good news is that the strong cash flow from multifamily real estate often justifies the cost of hiring a property management company.

Mitigating the risks of multifamily real estate investing requires thorough market analysis and stress testing to ensure the investment can weather economic fluctuations. You will also have to decide early on whether you want to take on the responsibilities of a landlord or hire a property manager to help you out.

Best Alternative for Accredited Investors: Multifamily Syndication

Owning an apartment complex can be a lucrative investment opportunity for those willing to take on the associated risks and challenges.

By carefully managing expenses, setting appropriate rental rates, and staying on top of market conditions, owners can use their property to build long-term wealth. However, this can only be achieved with the help of thorough due diligence.

If you are an accredited investor, there is another option for you to consider that makes multifamily real estate investing a lot easier. It is called real estate syndication.

A real estate syndication deal is a type of investment that involves multiple investors pooling their funds together to purchase a single real estate property. A syndicator or a sponsor puts the deal together and then looks for accredited investors who will provide most of the capital needed to acquire the property. [7]

While a syndication deal can be done with just about any type of real estate property, multifamily syndication is the most popular type due to the strong and reliable cash flow generated by apartment communities and condominiums. As we mentioned earlier, these larger properties have the potential to become a good source of passive income.

The syndicator is an experienced real estate professional or company. They will be the general partner (GP) in the syndication deal while the investors will be limited partners (LPs). As the GP, the syndicator takes on most of the responsibilities in the syndication deal. They will look for the investment property, conduct due diligence, create the business plan, and look for investors who will participate. [7]

Because multiple investors are involved, it is much easier to purchase these larger and more expensive properties that are normally out of reach for lone investors. Even high-net-worth individuals (HNWIs) may think twice about purchasing an apartment community by themselves because of the risk involved.

While real estate investing is generally safer than other investment strategies, purchasing a large multifamily property all by yourself is still risky. Multifamily syndication lets you enjoy the benefits of apartment investing without the headaches that usually come with it.

The LPs simply need to provide most of the capital as well as pay certain fees to get the syndication going. In return, they get their share of the property’s rental income, which may be distributed on a monthly or quarterly basis. [7]

Depending on the deal structure, they may also earn a share of the equity upon resale. But because each deal is different, accredited investors should take a look at the private placement memorandum (PPM) or syndication agreement before investing.

The investors have no further responsibilities beyond that. In fact, the syndicator will also take charge of property management. They will either hire a third party property management company or handle it themselves. In any case, the investors don’t need to worry about the property’s daily operations. They can take on a more passive role in this investment and focus on their other priorities. Read, “The 3 Phases of Real Estate Syndication”, to learn more.

This makes multifamily syndication a true passive investment in real estate. This approach solves a lot of the problems investors have with traditional real estate investing.

Work With BAM Capital for the Best Multifamily Real Estate Syndication Deals

It’s no secret that owning an apartment community can be very lucrative. However, most accredited investors do not have the time or energy to run these large real estate properties themselves. This endeavor also requires some professional expertise, so it may be challenging if you do not have experience being a landlord.

Multifamily syndication is a great alternative. Just keep in mind that most of these deals are exclusive to accredited investors.

Additionally, since the syndicator will be the one to handle everything in the syndication deal, it is best to work with a syndicator you trust. Work with BAM Capital if you want to invest with a syndicator that has a consistent track record for excellence.

BAM Capital is a leader in their industry thanks to their award-winning investment strategy that mitigates investor risk while creating forced appreciation.

This Indianapolis-based syndicator focuses on Class A, A, and B++ multifamily properties, particularly those with proven upside potential and in-place cash flow. In fact, they now have over $700 million AUM and 5,000+ units. [8]

As a vertically-integrated company, BAM Capital can guide you through every step of the syndication process. They can handle every step of the syndication deal, from acquiring high quality multifamily properties to managing and renovating them. [8]

No investment is without risk. Make sure to consult your investment advisor or speak to a BAM Capital investment team member before making any financial decisions.

For accredited investors who want to enjoy the passive income and all the other benefits of being in a multifamily syndication, schedule a call with BAM Capital and invest today.

 

Sources:

[1]: https://work.chron.com/much-money-make-own-apartment-complex-15772.html

[2]: https://www.investopedia.com/articles/investing/110614/most-important-factors-investing-real-estate.asp

[3]: https://luxurypropertycare.com/determine-rental-property-profitability/#

[4]: https://www.stessa.com/blog/operating-expenses-rental-property/

[5]: https://smartasset.com/investing/real-estate-appreciation

[6]: https://www.forbes.com/sites/forbesbusinesscouncil/2023/09/29/the-benefits-and-risks-of-investing-in-multifamily-properties/?sh=23b689b63c9c

[7]: https://multifamilyrefinance.com/apartment-investing-blog/multifamily-syndication#important

[8]: https://capital.thebamcompanies.com/