So, you’ve embraced your Wealth Chakras and are now part of a group that will invest in an apartment complex.
Let’s take a look at an apartment complex case study and learn six key steps to make a strategic investment that’s sure to pay off.
The Property: A 300-unit apartment complex located in a highly desirable market—a growing metropolis in the South. An extra value-add is the proximity to work opportunities for apartment residents. Almost 10% of the property has been renovated, meaning that there’s also an opportunity to increase value by renovating more of the property.
The Cost: The property has a purchase price near $35,000,000, and requires a group investment of about $15,000,000.
The Loans: There is an opportunity to procure a fixed loan with a 10 year term and interest-only payments for 5 years on a 2.8% interest rate. Incredible!
Step 1: Money, Money, Money
Look at the different options within the partnership structure of the group investment and what kind of passive income you can make – both in ongoing cash flow and profits at sale.
There are two questions that you need to consider:
- How much are you investing?
- What’s your projected return?
It’s time to create a spreadsheet. You’ll want to format it like this:
This will help you assess the returns.
Step 2: Location, Location, Location
Once you have your projected returns mapped out, you’ll want to really evaluate the location of the property.
The multifamily apartment complex in this case study is in a premiere location in a growing Southern metroplex. There are multiple locations in the area where apartment residents can find jobs with well-known employers, and it’s only a few minutes away from a new retail center in the area.
The location of a property provides clues about growth and desirable traffic that you need to keep an eye out for. If your property is a few miles from a new Coca-Cola plant, or a new Tesla corporate office, that’s a big win.
Write down all of the different things that are in the surrounding area of the apartment complex (within a 5 miles distance). Could these provide jobs for residents? Is it a selling point to be close to bustling city action, like a new shopping center or cultural district?
When weighing your options, be sure to take all of these things into account.
Step 3: Look at the Property
Considering that you’ll be investing a large chunk of change into this property, you want to make sure that the property itself has strong selling points.
For the property we’re looking at in this case study, there are a lot of things on the pros list.
- Units — 300 ….so large scale
- Year Built — 1990 ….so not too old
- Occupancy — 98% ….so it’s stable with strong tenant base
- Average Unit Size — 700 sqft ….so it’s not too big or too small for a young tenant base
- Land Area — 10 acres with ample green space, mature trees, and a lake ….so it has desirable outdoor features to attract a young tenant base
- Buildings — 25 building with three floors, four apartments on each floor ….so it’s not overly spread out making maintenance easier
- Parking — Public parking in the apartment complex with views for visitors ….so it’s desirable for residents and visitors
- Community Amenities — Clubhouse, swimming pool, fitness center, sand volleyball court, laundry center ….so it offers amenities that would attract a young tenant base
You’ll also want to look at the construction of the property:
- What’s the roofing and exterior?
- How are the stairways or breezeways?
- Is there Heating/AC?
- What are the cabinets and countertops made of? The flooring? The appliances?
- Are there washers and dryers in any units? W/D hookups?
Mark down these facts alongside the current deposits and fees that the apartment charges (administrative fee, application fee, deposit, pet deposit, and pet rent if applicable). These fees add to the overall income generating potential of the property.
Make sure you also look at the staffing needs such as office managers and maintenance crew. If it’s staff heavy, that could mean a bigger fixed expense.
You’ll also want to take note of the schools in the surrounding area and any flood information that is available.
The person managing your group (perhaps you’re the one) needs to analyze these income and expense items very closely. For instance, here’s a simple worksheet that can provide a quick view of the apartment mix. This helps you figure out the variety of floor plans available and how much income you can generate from each type.
Step 4: Evaluate the Business Plan
When you have the property and location information at hand, it’s time to begin looking into your business plan. Are you going to add in renovations or unit upgrades?
For this case study, the investing group is going to renovate around 100 units (only a third of the total) and increase rents by $150 for the upgraded units. They will also enhance landscaping and upgrade the pool and clubhouse for the complex.
Remember: There are always additional value-add opportunities, such as valet trash (for which you can charge $20/unit) or a smart home package (increase the appeal for young tenants).
Evaluate the capital improvement budget. How much money will your group have for these renovations? Map out how much it will cost for each unit, and how much in total including exterior improvements.
Step 5: Financial Analysis
Now it’s time to compare and contrast. Gather together 3-4 other apartment complexes in the area and evaluate the cost compared to your potential investment.
Step 6: Review the Market
Take a look at the surrounding area.
What is it known for?
Why is it a great area to live in?
THESE are the selling points.
- The total metropolitan statistical area (MSA) population
- The population growth
- The unemployment rate
- The employment growth
Do your research and see if your area has earned any accolades in this past year.
Are there any universities in the area? That’s also a value-add.
What does the economy look like? What businesses are there?
What does the job market like?
How about the overall growth in the last ten years?
These are the questions you need to ask yourself when considering the market for the property.
These are the most important steps to evaluate a property for a group investment. When most of these factors check out positively, you can develop a sense of assurance that the project has a high likelihood of success.
Receiving passive income through these types of group investments is the key to spin your wealth chakras and build a fulfilling life for you and your future generations. You can create your own group to do this yourself, or you can work with us to build your group and income-generation opportunities, or you can join our group and enjoy the cash flow.