How do apartment complex investors/owners make money?

I am not sure if you are talking about John up the road or the more established investor that already has 5/10/300 properties. Longer term appreciation is obviously one aspect but most people also think they can increase monthly/annual cash flows by either driving rents (maybe with focused cap ex) or just by driving down costs and operating property management more efficiently.

I mean large complexes that always seem to be changing hands. Like a 300 unit complex for $47 million. Management costs can only be lowered so much and it won't generally affect the return. Same with rent increases, assuming the property is totally overhauled. This is of course would be a major expense. I just wonder how these companies get rich. It appears they hold for medium time frames (like 3 to 6 years) and then sell when the market prices are often higher. Like they bought the complex for $47 million in 2016 and now are selling it for $53 million in 2020.

It appears the companies that really get rich are those that find properties that need smart significant investment. Then they make a fortune on a relatively quick sale.

OP is clueless if he thinks a 10%IRR is unacceptable. Most multi-family properties are bought at cap rates much lower.

That's what I meant.; very low. I just used 10% as an even number. Still that's low for a return in any business. I am somewhat clueless that's why I asked. I see though all these apartment complexes (like in southern California) changing hands and I wonder: How do they make money?

My very successful clients look for projects with "unrealized value" which usually means average rents below market, unnecessary personal expenses buried in the business financials, higher vacancy rates due to poor management, included property usable for expansion, or any other factor that leads them to believe they can increase net revenues beyond the current multiple the property is selling for.

ftyjfjy wrote:

: How do they make money?

They get gullible people to invest in their company, pay themselves exorbitant salaries, and then go bankrupt leaving the investors with nothing.

"My very successful clients look for projects with "unrealized value"/

That's what I was looking for. But isn't unrealized value very difficult to find? I mean when you own an asset worth tens of millions most people will be using the most economic means to maximize profit. There may be minor differences in say expenses but enough to make a huge profit on a resale?

the real estate is just a front wrote:

ftyjfjy wrote:

: How do they make money?

They get gullible people to invest in their company, pay themselves exorbitant salaries, and then go bankrupt leaving the investors with nothing.

And a variety of tax breaks, loopholes and subsidies... but I’d say developers get most of that slice of the pie.

Real estate is supposed to mean safe money. What is risky is buying 25 acres in Las Vegas, NV desert and building one or more casinos. In this scenario, you will either make it big or you will lose. Buying a 300 unit apartment complex still has risk. If the neighborhood changes, power individuals in city, county or state may want to tear down your property and only give you pennies on the dollar.

ftyjfjy wrote:

"My very successful clients look for projects with "unrealized value"/

That's what I was looking for. But isn't unrealized value very difficult to find? I mean when you own an asset worth tens of millions most people will be using the most economic means to maximize profit. There may be minor differences in say expenses but enough to make a huge profit on a resale?

First, you have to realize that commercial properties are very different from residential. There’s no assessor that comes and determines the sale value. The property price (and banks’ willingness to underwrite them) are based on the financial performance of the building. Like was already said above, this includes rent, vacancy, expenses, etc.

It is not uncommon for these complexes to be poorly run, and an investor will add value by buying the property (often with other people’s money) then improving the financials. That could mean the old owner didn’t have the cash on hand to renovate a complex that was in an area that demanded class A buildings. It could mean poor management that hurts vacancy rates. Etc. The new investor fixes that issue and either has a higher cash flow (because they bought at a discount for an underperforming property) or re-sells at a higher price. The cash flow scenario is more likely than flipping.

Also, realize that investment companies will monitor their ROE (return on equity). While having too much leverage is risky, having not enough leverage can result in leaving money in the table. Just like in residential transactions where people use 1031 exchanges, a commercial investor may see a financial reason to sell one property and buy two new ones (higher debt, but also higher cash flow), thereby improving their ROE.

ftyjfjy wrote:That's what I was looking for. But isn't unrealized value very difficult to find? I mean when you own an asset worth tens of millions most people will be using the most economic means to maximize profit. There may be minor differences in say expenses but enough to make a huge profit on a resale?

And this, my astute young friend, is how the EMH was conceived.

ftyjfjy wrote:

That's what I meant.; very low. I just used 10% as an even number. Still that's low for a return in any business.

10% is high (when you say it's "low for a return in any business" do you mean profit margin? That's a very different concept). Equities are the asset class (investment) with the highest returns, and they are a little below 10% on average. Property earns a lower return than equities.

You can earn a lot more or less than the average by trading equities. Transaction costs are low (low commissions for trading). Buy and sell prices are quoted and change almost continuously throughout the day (you can always buy or sell and always know the price at which you can do so) so the main factor is what you buy and sell. If someone told you what stocks they bought and when, you can look up the prices and see roughly what return they're making.

Property is very different. There aren't quoted prices. When you buy or sell you are negotiating over a unique asset. So if you are selling, the only specific price information you have is the price you paid. If you are buying, you may have even less information. You may be able to compare to other prices, but you may not have full information.

The transaction costs are also a lot higher (you probably pay agents and you certainly pay for surveyors), so trading property is very expensive. Consequently people tend to buy property for much longer periods of time (a lot of properties are owned by pension funds, because they are primarily interested in a stable rental income).

ftyjfjy wrote:There is no way to make a lot of money in the short term?

Rentals usually aren't a short term play though.

Unless you renovate them, which allows you to charge more for rent.

You get steady income (10% isn't a bad steady return, view this as the dividend on the investment) and then you get appreciation over time (this is really the investment part).

why are you posting a non-running topic on a running forum?

ftyjfjy wrote:

That's what I meant.; very low. I just used 10% as an even number. Still that's low for a return in any business. I am somewhat clueless that's why I asked. I see though all these apartment complexes (like in southern California) changing hands and I wonder: How do they make money?

I'm currently helping manage 12 rentals. Assume a 6% rental return and here's the math.

Property: $1,000,000

Rental return of 6% or $60,000/year

Annual appreciation of property: 2.5% or $25,000

Mortgage of $800,000 at 4%: $4,770/mo or -$57,000

OOP: Out of Pocket investment is $200,000 (one million less the $800k mortgage)

Return prior to vacancies, excessive repairs, maintenance: $60k + $25K - $57k = $28k

Return on Investment of $200k is $28k/year or 14%. Note that due to depreciation, that's 14% mostly tax-deferred... not the same as tax free but still a great deal.

We're currently renovating a property. The cost will be about $12,000. Rent will probably increase by about $200/month after renovation. In five years, the owner will recover the entire $12,000 cost, plus the improvements increased the property value by about $30,000. Plus, rents should increase another $100-$200/month over the next five years.

In ten years, property appreciation and cumulative rent increases should total about $80,000 return on the initial $12,000 investment.

One thing that is touched in above..... lot of these RE investors had very successful funds through let’s say 2006 but then had other funds that obviously were disasterous as left holding the bag in 2008/2009.

One of my clients is went BK in 2009 and since restarted with new investors and is patting themselves on the back for their returns 2010 to 2020 - which has really just been appreciation in the property market and nothing really to do with them.

I had one client raised a fund in 2006 and then gave money back (with minimal interest) as said market was over valued. Still their main selling point.

One other question for folks on here - and weird question for someone who works with RE clients - I keep hearing people talk about owning houses is the American dream and the one thing that gives you stake in society etc. Obviously normally want to get govt out of the way but I really think Something should be done to single family REITS as you could say the continued growth of these will significant reduce the % of American families which can own their own home. I do distinguish apt REITS from SF REITS. Thoughts?

rental property guy wrote:

Return prior to vacancies, excessive repairs, maintenance: $60k + $25K - $57k = $28k

Aren't those pretty big ticket items? Also, are you getting paid for managing these rentals?

I won't claim to have your experience, but what I've heard from friends and family who rent residential properties is that the returns can vary pretty widely from year to year, and if you don't want to invest more for periodic renovations (every 8 years or so), then you can end up with almost zero cash flow.

rental property guy wrote:

ftyjfjy wrote:

That's what I meant.; very low. I just used 10% as an even number. Still that's low for a return in any business. I am somewhat clueless that's why I asked. I see though all these apartment complexes (like in southern California) changing hands and I wonder: How do they make money?

I'm currently helping manage 12 rentals. Assume a 6% rental return and here's the math.

Property: $1,000,000

Rental return of 6% or $60,000/year

Annual appreciation of property: 2.5% or $25,000

Mortgage of $800,000 at 4%: $4,770/mo or -$57,000

OOP: Out of Pocket investment is $200,000 (one million less the $800k mortgage)

Return prior to vacancies, excessive repairs, maintenance: $60k + $25K - $57k = $28k

Return on Investment of $200k is $28k/year or 14%. Note that due to depreciation, that's 14% mostly tax-deferred... not the same as tax free but still a great deal.

.

The thing with real estate is it gets better over time. Think about where our guy is in 20 years. He know owns 2 million dollars of real estate. He is getting 120k/year of rental payments and he only owes like 400k on that mortgage. So now the math is

120k -57k +50k = 127k/year off that 200k investment.

Obviously this is way too simplistic but you can get the rough idea of how fortunes are made in real estate. Granted we are also assuming things go well. There is a lot of risk that can show up.