6 Unit Apartment Update -Action Economics

3 years ago we made our largest real estate investment and purchased a 6 unit apartment building for $171,000. Since we bought it we have stabilized the property through rehabbing all of the units and making major upgrades to the building.

Status At Start:

When we purchased it 5 of the 6 units were occupied, with all of the tenants paying far below market rates for rent. All utilities were included in the rent and the average tenant was paying $400 a month. The units had significant deferred maintenance and the tenants smoked in the building. The data we received from the sellers was that the building grossed $32,000 and netted $19,000 in 2021. Big red flags here were that the total maintenance costs for the year totaled $250, which is incredibly low, and the electric bills totaled $6,800, which was incredibly high.

Where We Are Now:

We renovated 5 of the units into short term rentals and we have 1 unit as a long term rental. We turned the garage that was full of junk into an arcade room. We removed the overgrown bushes out front and added 6 parking spaces. In total we have invested $80,000 on top of our original purchase price in this property for a total investment of $250,000. We have also consistently worked down our debt and owe around $120,000 on this property. $103,000 on the mortgage and $17,000 on our Heloc (home equity line of credit). We have added significant equity and the property is likely worth around $325,000 to $350,000 today.

In addition to the money invested, Mrs. C and I have invested well over a thousand hours in the rehabs in this building over the last 3 years.

For 2024 we had gross income of $65,000 and net income of $19,000. We had 1 unit not produce revenue for 4 months when a tenant who was behind moved out and we needed to convert it to a short term rental. It doesn’t sound like a win compared to the net income being $19,000 when we purchased the property, but there are several factors that are going into this:

The net income is lower than normal due to the cost of rehabbing the final unit, as well as replacing carpet in the common areas and 1 other unit. Our repair expenses were about $8,000 higher than what they normally would be.

Another major factor has been our interest expense. We have a 5 year mortgage that was for $119,000 at 4.25%, which has a $935/mo payment. In addition to this we financed the down payment and our repair costs for the property on our Heloc. With interest rates skyrocketing last year our interest expenses have been much higher. Throughout the year we reduced our heloc debt for this property from $100,000 to $16,000. This will greatly increase our net income for next year as well. When the previous owner had the property he did not have a mortgage on it, so no interest expense.

If our revenue stayed flat, our income for the property should increase to roughly $32,000. I expect that with all units being up and running for the entirety of the year for gross income to reach $70,000 and net income to hit $36,000. We will continue to pay down the debt on this property and expect to have it paid off in the next 36 months.

I strongly believe the biggest issue with the previous owners electric bill being high was space heaters. The property had an ancient forced air heating system that he set at 60 degrees. We replaced this with a 96% efficient system and keep the heat up, preventing tenants from desiring space heaters. We pay a bit more for natural gas, but have cut the electric bills in half.

3 Year Projection:

In May of 2028 the property should be paid off. Between now and then I expect rental rates in general to increase and believe we should be around the $85,000 mark in total revenue, with $60,000 in net income.

Major Expenses:

New Furnace/Central AC: $16,500: This is way more than a normal furnace, due to the size and ability to create different zones for different units this was much more expensive.
New Water Heater: $3,726: We had a new high efficiency on demand tankless water heater installed.
Foam Insulation Installation: $7,400: We did this after a ton of noise complaints. The foam insulation has taken the edge off and noise complaints are down, but it is not as good as we expected. Since we did interior walls and ceilings, they had to cut several small holes, about the diameter of a coke can into the drywall. They “repaired” these holes by throwing a massive glob of mud on them with the mesh tape. They stood out about 1/2″ from the wall. I had to go through and repatch all of them. You can still see in most rooms where this was done, but it isn’t as bad as it was.
Laundry Room Set Up: $6,700: This included 3 stackable washer and dryers, cabinets, and running electric and plumbing to the laundry area. We have 2 stackable units, we worked the original stacked unit out for a new high capacity one.
Driveway Expansion: $1,760: This was more manual labor than cost. I built 3 driveway pads with 2 parking spots each. Long term I will remove all 3 of these and have the entire area paved. I spent north of 100 hours ripping out the massive bushes that were there and destroying the root system. Long term I would love to asphalt this area.
Garage Arcade: $1,865: This is a big draw for people to choose our place. I got virtually all of the arcade items on deep discounts. It’s been 2 years and I still haven’t seen any sales to rival the prices I paid.
New Stair Carpets: $1,213 We had carpet installed on the stairs and upstairs hallway, as well as in 1 room in one of the units.
Rehabbed 5 of 6 units: Avg cost per unit: $5,500: This includes everything from paint and flooring to the furniture. A couple of the units were a bit higher because we needed to replace the showers. I have 1 more shower in the building I need to replace. The 5th unit has a long term tenant in it and we do not plan to change that one until he moves out.
Bedding, Towels, etc: $1,800: This covers 2 sets of everything. Will likely get on a schedule of replacing all bedding every year.

Where We Sit In The Market:

We are the most affordable option on Airbnb. We are also more affordable than the cheapest hotels in the area for our studio and 1 bedroom apartments. We certainly are the most affordable that will allow pets.

We chose to price towards the lower end of the market. Getting an apartment over a whole house is a big compromise, so our pricing needs to be significantly less than that of renting a house. There are very few apartments for rent in our area on airbnb for comparison. We end up with a lot of guests who are transitioning between permanent housing situations and stay for 1-3 months. This is most typical in the winter time frame and during the summer we get more tourists. We also have many guests who are visiting for work at the two local nuclear power plants, DC Cook and Palisades.

What’s Different Than Originally Planned?:

When we got the building I projected we could be pushing $100,000 in total revenue. For 2025 we will be around $70,000 to $75,000. Part of this is that we have kept 1 unit as a long term rental. The guy staying there is Mrs. C.’s oldest kid’s dad. Having him there has been extremely beneficial. He mows the yard, plows the driveway and in general keeps an eye on the place in exchange for reduced rent. If we turned his unit into a short term rental we could likely increase revenue by around $7,000, hitting roughly $80,000 in revenue.

We have a few units that with some more upgrades we could up the rates. We rushed to get these to be a “minimum viable product” and have not had the opportunity to upgrade them yet. That could lead to another $5,000+ in revenue. I do not think we will hit 100K anytime soon, which is fine. At $75K of revenue this property is a great money maker.

Rehab costs: I had planned when we first bought the property to invest closer to $40,000 in it, we have doubled that. This has been a rough few years to get it where it is now, but now we are firing on all cylinders.

Basement: I had planned to do SOMETHING in the basement. Either rent our storage, create common space like a gym, or make another unit. So far we have only used the basement to store building materials.

Long Term What If I Can’t Do Short Term Rentals?:

Long term I do not know if Airbnb will continue to be allowed in our township. This is the major risk for all short term rental properties. I am positioning the building so if we need to transition to long term rentals in the future we will be able to do so and still be profitable enough for it to make sense. Replacing the furnace with a super efficient furnace was a big part of this.

These are my estimated rents for all units if they were long term rentals. Keep in mind this is all utilities, water, sewer, trash, natural gas heat, central air, and electricity being provided by the landlord.

Studio 1: $750
Studio 2 $750
Studio 3 $750
1 Bedroom 1: $800
1 Bedroom 2 $800
2 Bedroom: $900
Total Yearly: $57,000- 5% vacancy of $2,850 = $54,150.

This property would still be profitable if this became reality. This is about $15,000 less than what I am predicting this year for top line revenue and about $30,000 less that what I am expecting our revenue to be at in 3 years.

Alternatively I could rent them all on Section 8 and know exactly what they would rent for. There is a huge demand for Section 8 rentals for single people living alone, and the studios and 1 bedrooms lend themselves well to this. The 2 bedroom would typically be for a family of up to 4 people. Once in a place that accepts Section 8 most tenants do not move out, so I would not be concerned about a vacancy cost.

Since all utilities are included and I have no easy method of separating utilities for the units, then I could charge the full FMR (Fair Market Rate) rental rates. These rates increase every year. For 2025 they are as follows:

Studio 1: $790
Studio 2 $790
Studio 3 $790
1 Bedroom 1: $878
1 Bedroom 2 $878
2 Bedroom: $1152

Without renting out the garage or making any other changes I could rent out all of the units on Section 8 for a combined $5,278 per month, or $63,336 per year. This is likely the route we would go if we were unable to do short term rentals any more. This is comparable to 2024s total revenue.

Further Optimization for Section 8:

Section 8 has a small benefit for changing a studio to a 1 bedroom, and a large benefit for changing a 1 bedroom to a 2 bedroom. Changing a studio to a 1 bedroom also does not charge the number of people approved for the unit, a 1 bedroom and a studio both can be up to 2 people.

Action 1 Studio to 1BR: For the smallest studio apartment, add a wall with a door to create separation for a bedroom. This would take a day or two to do and cost under $500. This would increase the rent by $88 per month and add $1,056/year to the top line.

Action 2 Studio to 1BR: For an upstairs studio unit that has 3 rooms, but no bedroom: Remove a closet and add a new door to the unit from the hallway, which would allow the first room to be a bedroom. This would increase the rent for that unit by $88 per month and would cost around $500 and a weekend of work. This would pay for itself in 7 months and add $1,056 per year to the top line.

Action 3: Add a door and a wall to move a bedroom from Unit 1 to Unit 3. This will take these units from being 2 1 bedroom units to 1 2 bedroom unit and 1 studio. The studio will cause -$88 in income per month, while the 2 bedroom will cause + $274/mo for a net change of +$186 per month, or $2,232. This would cost around $1,000 and a weeks worth of work and be paid for in 6 months.

Action 4: Remove the game room and turn the garage into storage space: With 4 total units of a 10X20, 2 7X20s and 1 6 X20 I could rent them out for an average of $100/mo each or $400/mo for a total income of $4,800/ year. This would cost around $2,000 and pay for itself in 6 months, with a weeks worth of work. I could probably pay for most of it with selling the arcade equipment.

Combining these 4 actions brings in $9,144 per year for a total revenue of $72,480.

Action 5: Action 5 is a bit extreme, but is feasible. I could add a basement unit to the property. This doesn’t make sense with short term rentals, as I don’t think anyone would want a basement unit as an STR. For an LTR I could make a conforming unit. The major costs would be the plumbing for the bathroom and an egress window or two. I have done these in the past. I could add 2 egress windows and have a legal 2 bedroom unit in the basement. I think I could do this for around $15,000. This would add $1,152/mo in rental income or $13,824 per year. for a total revenue of $86,304.

Expenses:

The expense setup would change a lot if these were long term rentals.

The following expenses would be reduced:

Cleaning expenses of $3,160 would be $0
Commissions of $550 for Beyond Pricing would be $0
Comcast expense of $1,548 per year would be $0
Insurance would reduce from $3,166 to around $2,500
Electricity costs would increase by around $2,400.
Total: Net $3,524 in expense reduction.

The bottom line is that many properties that are rented as STRs are not sustainable as LTRs. This property is now positioned so that not only would it be sustainable as LTRs, but would actually provide more total revenue, and likely with less work on our parts.

Overall this property has been a success for us. We have invested considerable resources into making the property what it is today and it will likely remain a cornerstone of our real estate holdings for the long term.