Rental Property Analysis--Is this right?

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Rental Property Analysis--Is this right?

Laura C.
Fontana, CA · Member since 2017 · 88 posts · 36 votes

I just completed a "Four square rental property analysis" for a fourplex in my area, and according to my calculations it has a negative cash flow. Am I missing something, or is this property just that "bad" of a deal? I have outlined my analysis below, and would appreciate any insight. Thanks!

Property: Fourplex in Southern California, Inland Empire area; each unit is a 2 bed/1bath, shared laundry, in a B class neighborhood; current rents are 1050-1200; market rent could be closer to 1300/1400.

Background: I used the information and numbers given on Redfin, to make these estimates; plus, I predict a sale price of $700,000 instead of the asking, $899,900. Based on the information they give about "net operating income," this property should cash flow around $2000/mo. (if you add in vacancy, repair, and CapEx, which they do not), but that is not what I'm seeing.

Analysis: (based on current rents)

Total Monthly income = 4700

Rental income = 4400

Laundry = 300

Total Monthly expenses = 6530

Taxes = 660

Insurance = 100

Water/Sewer = 150 

Trash = 70

Electric = 45

Gardner = 70

Vacancy = 215

Repairs = 400

CapEx = 400

Mortgage = 4420 

Cash Flow = -1830

Cash on Cash ROI = -63% (-21960/35000)

Total Investment = 35000

Down Payment (3.5% Owner Occupied) = 25000

Closing Costs = 5000

Rehab = 0

Misc. other = 5000

https://www.redfin.com/CA/Upland/880-N-Redding-Way...

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Sam M.
Investor · Diamond Bar, CA · Member since 2012 · 79 posts · 24 votes
9y

If you pay $175K per unit and get $1175 rent per unit, I am not surprised that it does not cash flow after considering financing, insurance, taxes, repairs, vacancies, etc. You can use the 1% rule as a rough guideline (monthly rent must be around 1% of purchase price). Of the units that I own in SoCal, I have a 3-plex that takes in 1.5% of the purchase price and it's profitable. I have other units just under 1% and they are pretty much break-even. The 1% rule is just a rule of thumb. You are doing the right thing by calculating your net income and considering all costs. All I'm saying without going through your numbers in detail is that since the rent is at 0.67% of purchase price, it's not surprising that it doesn't cash flow. What is the cap rate and how does it compare to the going cap-rate in the area? 

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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    9y
    Originally posted by @Jeff Petsche:

    @Matt R. Isn't it interesting that the LA metro area has the fourth-highest share of renters in the nation. Using 2015 Census data, the study found that just under 54 percent of LA homes, condos, and apartments are renter, rather than owner, occupied. However, in another study about the 5 Best and Worst Cities for Affordable Rents, Los Angeles was #4 as the WORST U.S. city for affordable rent (Average Rent: $1,940 and rent as a share of income was 37%).

    Being a born and raised Southern California guy, it's always amazed me that people are willing to over extend themselves to live in California where we have the highest state income tax of any other state, home prices are some of the highest in the country and obviously it's not cheap to rent here either, but peeps want the sunshine, etc. lol

    Based on an article in Forbes surrounding the 5 Best and Worst Cities for Affordable Rents, here were the findings: (Not sure if this information matters much OR will help other RE investors make informed decisions on where they choose to invest for BUY/HOLD properties, but I'm a believer that we all need to be educated and informed, and share with one another, so here you go)  

    The 5 worst U.S. cities for affordable rent

    #5 Orange County, California (Average Rent: $1,900; Rent as a share of income: 28%)

    #4 Los Angeles, California (Average Rent: $1,940; Rent as a share of income: 37%)

    #3 Manhattan, New York (Average Rent: $3,500; Rent as a share of income: 54%)

    #2 San Diego, California (Average Rent: $1,750; Rent as a share of income: 30%)

    #1 Miami, Florida (Average Rent: $1,390; Rent as a share of income: 36%)

    The 5 best U.S. cities for affordable rent

    #5 Columbus, OH (Average Rent: $850; Rent as a share of income: 17%)

    #4 San Antonio, TX (Average Rent: $910; Rent as a share of income: 20%)

    #3 Kansas City, MO (Average Rent: $870; Rent as a share of income 16%)

    #2 St. Louis, MO (Average Rent: $830; Rent as a share of income 17%)

    #1 Indianapolis, IN (Average Rent: $800; Rent as a share of income 17%) 

    Original Article If Interested

    Yes LA has really crazy affordable stats for renters. Big supply issues moving forward and really no way politically to resolve. Although, Gov. Brown did sign into law the additional unit per lot thing and that just likely made some places worth even more perhaps. This might be good news for investors and horrible news for renters we can understand. I have not studied the relatiionship for renter affordabilty and actual investor profits but there must be some strong association there.

    I have seen some stats for demo shifts locally. Where as the majority who leave Ca make less than 50k and the majority of new arrivals make over 100k. We also have other factors like the suburb baby boomers empty nesters are not selling and moving to more traditional retirement locations. Some suburbs have really high average median ages populations. These normally would be changing hands ( more inventory). It is just hard for the Newporter or Anaheim Hills baby boomer to bail for AZ of FL like they do in many other areas apparently.

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  • Trevor Lohman
    Investor · Redlands, CA · Member since 2013 · 177 posts · 76 votes
    9y

    @Matt R.

    Touché my friend touché.

    I sure wish my dad had bought those beach front homes 50 yrs ago, no doubt about that!

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  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    9y
    Originally posted by @Trevor Lohman:

    @Matt R.

    Touché my friend touché.

    I sure wish my dad had bought those beach front homes 50 yrs ago, no doubt about that!

     Well if your dad was Warren Buffet, he is selling his Laguna Beach vaca home for 11 mil, he paid 150k? I forget exactly how much and it was probably at the peak for those times (70s) still. Since his wife passed he does not use it anymore and is why he is selling. I imagine your double in value in a few dozen months is like a mini Warren Buffet you could say and or represents multiple thousands per month just meeting your personal housing needs.

    Good luck!

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  • Andrew SyriosPro Member
    Moderator
    Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
    9y

    That's not particularly surprising. Indeed, the affordability of the property values is why we moved from the coast to the midwest in the first place.

    Podcast Guest on Show #121
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