So You want to Purchase an Apartment Building

Rental properties can be profitable.  But there are risks involved.  How do you decide if you can afford to become a Landlord? And once you are a Landlord, how much money can you earn with the rental income - or how much will you earn selling the property in the future?  Will you lose money during the process? Will your investments be worth the risks involved? 

There are lots of questions you must consider before risking an investment. The current owner may be making a profit solely because his mortgage is smaller than what yours will be.  Is the monthly rental income able to cover your price for the building?  Is it enough to cover the mortgage plus the property taxes and insurance? 

How many apartments/units are you looking for in a building, 4, 10, 20, 30, over a 100? Naturally the more apartment units you have the more the monthly income can be, but the building will be more expensive too.  Depending on your geographic area, the price for each unit could be between $70,000 - $100,000.  Therefore a 20 unit apartment building could cost  $1,400,000  -  $2,000,000.  Suppose you bought one at $85,000 / unit, cost will be $1,700,000.  If all the units have two bedrooms, and receive a monthly rent of $650, the monthly rental income will be $13,000.  Will this be enough to cover all your expenses?  Of course, that example assumes you have 100% of the mortgage to cover and doesn’t consider any mortgage rates.  So let’s delve a little deeper for a more accurate example.

How much deposit are you putting down on the mortgage? Are you going to take out extra mortgages or loans to cover the deposit? Assuming that you are putting a 20% deposit down and needing a 2nd & 3rd mortgage loan to cover the down-payment deposit:

For example:

First Mortgage
2nd Mortgage
3rd Mortgage
Building Cost
 $  1,700,000.00
$    200,000.00
 $     140,000.00
 $     340,000.00
 $                        -  
 $                        -  
 $  1,360,000.00
 $     200,000.00
 $     140,000.00
Mortgage Rate
Mortgage Term Years
 $          9,183.00
  $          1,376.00
 $             972.00

Total Monthly Payments
 $       11,531.00

What are your monthly operating costs?

All costs assumed. Each State/City has different Rates of Taxes

Cost / Year
Cost / Month
City Taxes
 $       12,000.00
 $          1,000.00
Building Insurance
 $          2,500.00
 $             208.00
 $          1,000.00
 $               83.00
Building Supervisor
 $          3,000.00
 $             250.00
 $          1,300.00
 $             108.00

Total Expenses
$       20,500.00
 $          1,649.00
Mortgage Payment

      $       11,531.00

Total Monthly Expenses

 $       13,180.00
Monthly Income

 $       13,000.00

 As can be seen the rental does not cover the monthly debts, you could be losing $180 every month (-$2160 / Year).

It may not seem like a good deal, but you may be willing to lose a little up front for a better long term investment. For example, if the rents are low, and the following year’s rents are raised say 3%, (Check your local by-laws for any rental increase laws).
This 3% would increase the monthly income $250 and yearly $3,532 including the previous year’s loss the accumulated rental yearly income will be $1372. Of course, we have not yet taken into consideration a vacancy percentage  (you may not have all the apartments filled every month of the year), and other expenses – for example in addition to your rents going up, the city taxes will increase..

You also have to consider any future improvements to be done to the building (new roof, painting, flooring, repairs, etc) and when you expect to do them – this year or next or sometime  in the 5, 10, 15 & 20th year. Will the rental cover these future costs too?  Will these improvements to the building bring you higher rents or add to the buildings value when you sell it?

In addition to increases in the building value due to improvements, there is also an average increase in the building value over time.  With a 4% annual increase in real estate – not including any improvements to the building, the apartment building for $1,700,000 after 5 years might sell for $2,070,310. Now subtract realty fees of 6% and your final amount is $1,946,090 - a profit of $246,090!

But don’t forget, when buying the building there are closing costs to pay, Lawyers, Building Inspectors, Bank Inspectors,  possibly land transfer taxes, surveys and title insurance too.  This is money you have to have upfront; cost may be $20,000+.  But don’t get too discouraged, these costs taken from the profit would still show a profit of $226,000 in 5 years.

 What can be done to Increase your Revenue?

Are there empty apartments if so can they be revitalized by a fresh coat of paint and any other faults that are found, fixed?

What are the rents that other apartments in the area are receiving for a 2 bedroom unit?  If for example your competitors are charging $725 then you could ask for $695 for your empty apartments.  If you could rent your apartment now for $695 or hold out for the full $725 what should you do?  It depends – if it takes you 4 months to get a new tenant at $725 verses one month to fill the vacancy at $695, and tenants stay on average 2 years – then every 2 years you would earn $15985 for the $695 rent and only $13775 for the $725 rent.  You would earn less by charging more!  Plus your tenants are apt to stay in your apartment longer to avoid paying higher rent elsewhere – which means less work for you cleaning and painting each vacancy period between tenants.  But every situation is different, if you don’t have much competition then you may not have to deal with long vacancy periods and can charge the higher rent and earn more. 

Do you have laundry facilities?  if not is there somewhere in the building they can be installed, other than the cost of plumbing you could have a firm install the laundry fixtures at no cost and receive up to 40% of the intake.

To better your chance of having a 100% occupancy can the building surrounds be improved by landscaping, is the building dreary and in need of a fresh coat of paint. If you have great apartments but the outside of the building is stopping prospective tenants from coming in to see them you could be losing monthly income due to vacancies.  The cost to improve the curb appeal may be $5000+ but it could also increase the selling price of the apartment by 2% since all improvements reflect on the resale of the property.  You may even be able to write off the landscaping on your taxes too!

There is a lot to consider when buying an investment property.  Fortunately, there is software available to help.  All calculations shown above were done by the Real-Estate-Investor-Software at  You can run any scenario on any investment property (from a single family home or cottage rental, to a small or large apartment building) to help discover if the property is the right investment for you. 

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