Do the numbers work out? How do you choose?

3 Replies

Hi all so I've been running the numbers on properties during the past year in southern california LA, OC and Inland Empire.  Im seeing very little in the way of cash flow properties but wanted to seewhat you all though about my inputs.

Im making a few assumptions mainly looking at multifamily up to 4 units with 10% down (I know this is low but I've found banks that'll do that in my market for properties under 500k) then I account for maintenance/debt servicing from past experience (wondering if people have a better way that would take into account property age and condition for maintenance estimates), finally I set vacancy at 1 month a year (not sure if that is reasonable either).  I'll plug this into the investment property calculator offered by BBT.com assuming 2% yearly appreciation.  Nearly nothing even in inland empire seems to cash flow.  I've seen some cash flow properties in Bakersfield so I know its possible but I'm not all that familiar with this area so I would rather stick with OC/LA/Inland Empire riverside area.  

What do you guys usually use as your assumptions for back of the envelope evaluations? Is 10%down too low to expect a place to cash flow?

With my tax situation (higher end of the bracket)  even though properties don't cash flow the calculated returns on the bbt.com investment property calc seem good (considering depreciation) would any of ththe pros ever invest in this scenario knowing that they can cover the negative cash flow.

Thanks

Don't be disillusioned, as harsh as that sounds. If you are looking for multifamily properties on the MLS or LoopNet, you won't find a deal. You could, but you'll have to make a strong offer on the first day or you'll need to know the agent. As soon as it hits the MLS, if it's a deal, they'll get 10 offers on the first day. In the run up in real estate prices from 2011, a bunch of institutional investors realized how safe of an asset multifamily was. As a new investor, you have to get a loan to be able to "Get into the game." But a loan charges 5% interest. These institutional investors are bursting at the seams with cash that isn't making any money. So an income producing property that returns 4% sounds pretty good to an institutional investor. What this means is that cap rates are pushed below what it costs for you to get a loan.

All of that being said, you have three options.

1. Wait around for a deal to come to you.

2. Start making friends with people that get multifamily listings or have access to distressed multifamily owners.

3. Find distressed multifamily and add value by fixing it up or renting it out or whatever it takes to push the cap rate above the cost of your loan, management, expenses, etc.

Yes 10% is too low to cash flow here, 1 month vacancy is also a bit on the high side once you get the property rent ready the first time.  Most people won't buy something with negative cash flow even though it offers a return on paper, they just put more down so that it does cash flow or at least break even

@Pouyan Golshani as far as the numbers are concerned there are many different schools of thought.  I would use as many of the actual numbers from the property that you can find, but beware that some numbers may be missing or edited to make them look better, so you should have a rough percentage that you use for your calculations.  

If cash flow is what you are looking for, I would not recommend LA/OC/Bay.  Bakersfield is somewhere that is growing with new jobs, new development, and new infrastructure.  We still have the ability to get positive cash flow.  What type of portfolio would you like to see for yourself in the long run?