What Dating and Apartment Investing have in Common
It was terrifying. No matter how experienced you are, when you purchase a new property, you can’t eliminate all the risks. Fear of the unknown. This includes all the problems you are about to inherit that the seller didn’t mention.
As I mentioned in my post What Your Psychologist Knows about Becoming a Landlord, EVERY apartment building I purchased caused anxiety that poured into my personal life.
The stress comes from the very real possibility that the property will not perform as well as you anticipated. The ideal thing to do then is to imagine what the property will be like to own in 6-12 months.
I dated more than one girl that thought she was not dating me for what I was, but for what I could become after she made her improvements. This is a dangerous gamble in the dating world, but it’s exactly how you want to think about apartment investing. You’re not buying the property for what it is, but what it will become after you make your improvements.
These are the steps I take to determine if I want to pursue a long-term relationship with an apartment:
- Make a list of all the capital improvement projects you need to undertake. How much will these improvements cost?
- What is your down payment? Add the cost of the improvements above to the down payment. This is your Total Investment in the property.
- What will the rent roll be like after all the improvements have been made and the rent raises have gone into effect? This is your Total Rental Income for the year.
- What will your debt service (mortgage payment), capital reserve, and total operating expenses be after your improvements?
- From the above steps, you can now determine your annual cash-flow after all capital reserve requirements.
- Add annual debt reduction and anticipated appreciation back into your cash-flow figure. This is your before-tax benefit of owning the property.
- Divide the benefit by the Total Investment. This is your annualized return.
In the end, you have a pro forma income statement that includes all the biggest sources of return to the investor. This includes cash flow, asset appreciation, and debt reduction.
Is this the return you were expecting? Remember, you have to kiss a lot of frogs to find Prince Charming. Keep looking for that one special apartment and be patient.