Apartment Building

[AlexS]

Someone I know is planning on purchasing an apartment building with 18 apartments in it. He says he will earn 7% cash flow after ALL expenses, that includes an apartment manager who will live in and manage the place, the mortgage etc. This property is also downtown toronto in an ok area.



The good:

2.7% fixed mortgage 5 year



18 rooms means you will still have income if someone decides to leave. it's also good because many people are willing to pay the rental fee which will be around 800/mo



This location is in a city which means increased potential property value... it is also his target location because he lives there.



The property manager will be responsible for many things (tending to tenant concerns, cleaning, bringing in new tenants, handling many day to day operations, snow removal etc.)



The bad:

This is a very large building and is a lot of work.



Managing a building with this many people will require some previous experience which he has but not a property this large.



Potential maintenance costs.



Based on the experience the community here has, what are your thoughts on managing a property this huge? Do you think this is a good opportunity? What should he watch out for? I have all the documents and agreements if you need any extra information.

 

[Thomas Beyer]

Depending on the cash-to-mortgage, mortgage level and required repairs 7% may or may not be doable.



Boardwalk Equities, Canada's largest landlord, with a 50% mortgage across the portfolio can barely do a 6% cash-flow (AFFO / Market Cap).



7% cash-flow is VERY hard to do.



You can make a 7%+ annual return, likely well over 15%, if you count the mortgage paydown and the likely value appreciation minus all costs over a 5, better 10 year horizon. But that is not cash-flow.



Most older apartment buildings require ongoing cash outlays to fix the property, some on an ongoing basis and some only every 10 to 20 years: new carpets, new paint, new bathrooms, new floors, new hallways carpets, new light bulbs, newly paved parking lot, new roof, new boiler ..



We co-own over 1000 units within the PrestProp group .. and manage close to 2000 in our associated property management firm Fireside Property Group .. believe me a lot of money is spend monthly on R&M (repair and maintenance) and capital upgrades. Some years have terrific cash-flow .. and sometimes it is negative, depending on vacancies, the overall local economy and the state of repairs !



Feel free to send me some real numbers for a closer look.



18 units is not a large building. It is very easy to manage.



But then I guess, it is also easy to fly a 777 airplane .. after a few years of training !!

 

[AlexS]

Thanks Thomas, i'll send it through email

 

[Thomas Beyer]

Received it .. needs more building specific details on expenses, rents and property major items.



Didn't see 7% cash-flow either .. more like 4% or so which is what I expected .. and in reality, at least year one it is usually subzero due to upgrades / rough tenants / evictions / turn over until building is stabilized !