Maximizing Profits Using Other People’s Money

If you’ve been following this series on the IDEAL advantages of apartment investing, you know that IDEAL stands for…

  • Income
  • Depreciation
  • Equity
  • Appreciation
  • Leverage

“Little hinges swing big doors.”

Buying apartments is like that.

You give me the right leverage and I can make millions – and so can you.

L = Leverage

Leverage is using other people’s money – the bank, other investors, etc. – to fund the majority if not the entirety of the purchase of an asset.

You get the full benefit of the use of the property while only taking on a part of the risk. When it comes to buying apartment complexes – this is a common practice.

How much of the purchase price you can leverage depends on several factors including

  • The value of the property
  • DCR – Debt coverage ratio, does the NOI cover the loan payments and then some
  • Sometimes depends on your personal financial status.
  • The whim of the lender

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Leveraging a purchase

Let’s look a little closer at some of these points.

We’ll start with the whim of the lender. How much of a down payment you’ll have to contribute, be it your own cash or another person’s cash is somewhat arbitrary.

If you’re a seasoned investor who’s done a few deals, the lenders are far more generous since you have a track record.

Generally most lenders will lend at 70% to 80% of the value.

Next we must consider DCR.

DCR is the ratio of how many times the NOI will cover the mortgage payment. Most lenders want you to cover 125% or 1.25 for the debt service.

A DCR WHAT??? You might be confused…

In other words:

If you have a loan with an annual mortgage payment of $400K, then your NOI needs to be $500K to cover the DCR of 1.25% (500k/400k).

Got it?

Regarding your personal situation – whether or not you will need to personally guarantee the loan depends on your experience and on the lender.

Generally speaking, commercial loans on apartment complexes are non-recourse.

So let’s go back to our good friend the 200 unit apartment complex that was bought for $5.5 million with an NOI of $550k.

Let’s assume we put down 25% or $1,375,000 to buy the property and our annual mortgage payment is $265,000.

With an NOI of $550k and an annual debt service of $265k – you more than cover the minimum DCR.

Do you see though how the $1,375,000, which could have been your own cash, or the cash assembled by an investment group like Adams Investor Group can be leveraged to purchase a property worth 4 times as much money?

Then there’s the other side of leverage – using a loan to get your money back. Let’s take a look…

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Leveraging out your cash

Do you recall from the Equity how we increased rents and added auxiliary income like the laundry machines and got the NOI up to $601k?

Well like any good asset you want to get your initial cash back. So how do you do that?

You can sell the property outright, do a tax deferred 1031 exchange, or you can refinance (refi) your property and get your cash back.

A refi is what we’re going to do in this example. So, you want that $1,375,000 back, right?

That means we need to get a valuation of around $7,325,000 or a new first mortgage at $5.5 million ($7,325,000 x 75%).

A $5.5 million loan will increase your mortgage payment to $354k annually.

Now, we have to cover that 1.25 DCR, which means that your property must make a minimum NOI of $442,500… well, guess what?

The NOI is $601,000! So you’re covered.

Now look what happens:

  • You get your initial $1,375,000 cash back.
  • You have an NOI of $601k.
  • You have a mortgage payment of $354k.
  • You earn $247,000 in NET cash flow each year.

So what is your ROI?

Your return on investment of that $1,375,000? It’s an infinite return!

You got all your cash back.

How’s that for leverage?

How’s that for using other people’s money to make money?

Now you can go out and buy ANOTHER apartment complex and do it all over again… and again… and again!

If you aren’t excited yet, I don’t know what else I can say.

Investing in apartment buildings has so many advantages and so few disadvantages it’s almost a no-brainer.

Want to know more?

Curious to learn more details and see some actual deals that we’ve done just like the example in this series of emails?

Then get in touch with me now and let’s talk about how you can get your feet wet in this amazingly profitable pool.

Want to get started in apartment investing?

Invest with us