Truth Behind Advertised Apartment Returns: Do They Match Reality?

What I'm referring to here is the advertised returns after a deal goes full cycle and has sold.

Although these people are definitely not dishonest, the returns are almost always lower than advertised.

This is due to how the numbers are calculated.

The metrics only start measurement until the deal is closed on purchase.

What the metrics don't account for is the time it takes to actually close on the deal while it's under contract.

The process to close on an apartment deal usually around 2-3 months.

If it's a HUD loan assumption, it can take around 7 months.

Although it isn't a huge difference over the course of a multi year hold, it's something to be noted.

Let's say you sell the deal 5 years after purchase, 60 months.

It takes you 3 months to close.

For example, let's say you invested $100,000 in a deal and doubled your money. The advertised return would be:

($100,000 profit / 60 months) x 12 annualized = $20,000 per year 20% average annual return

In reality, you really should be accounting for the extra 3 months to close like this example

($100,000 profit / 63 months) x 12 annualized = $19,047 19.05% average annual return

$19,047 / $20,000 = 95.2%

Around 5% less than advertised numbers.

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