Apartment building quick financial evaluation

8 Replies

So I have a few units and I'm looking to expand into small multi-families.  I've explored financing options and have that secured.  I am hoping to use a mixture of my own money and passive investors but want to evaluate every deal like it is 100% someone else's money.  That way if I cannot pay a preferred return and have a strategy to return capital in a reasonable amount of time (and repeat the process), I will not do the deal. 

The problem is that every deal I analyze, I end up with negative cash flow after accounting for debt service.  Looking at my spreadsheet below, what do you guys think of my evaluation?  This is a "quick eval" spreadsheet so some values are assumed.  Am I obviously overstating some expense or is it just coincidence so far that every deal I've analyzed somehow ends up in negative cash flow?  Using the 50% rule as a ballpark should put my total operating expenses around 19,000 annually whereas I get closer to 30,000 annually with my analyses.  This deal, and others I've looked at, are in Cleveland, Ohio and surrounding areas. 

Any thoughts?

I have no idea how Commercial MultiFamily works but is it the same basic premise as Residential regarding 1% Rule? (I.E. If you are buying a $250,000 property you need to be getting at least $2,500/mo in Gross Rents? 

If so....and you're getting $3,200/mo in Gross Rents then you may be on to something? I'm really not sure man because my assets are mainly duplexes.

@Nick Ferguson

@Nick Ferguson

What stands out most for me is that you are including all of your utilities.  I pass those costs on to the tenants and that seems to be the norm for this area.  So that will get you some better numbers.  Also, I see you have itemized the following: "lawn and snow", "pest removal", "landscaping / lawn care".  These items seem similar to me - are they all required?  

On another note, I see you have 20% down.  All of the lenders I've spoken to require 25% down for investment properties.  I believe that is a Fannie Mae requirement...if that pertains to you.  

Good Luck, 
Mike

Originally posted by @Nick Ferguson :

So I have a few units and I'm looking to expand into small multi-families.  I've explored financing options and have that secured.  I am hoping to use a mixture of my own money and passive investors but want to evaluate every deal like it is 100% someone else's money.  That way if I cannot pay a preferred return and have a strategy to return capital in a reasonable amount of time (and repeat the process), I will not do the deal. 

The problem is that every deal I analyze, I end up with negative cash flow after accounting for debt service.  Looking at my spreadsheet below, what do you guys think of my evaluation?  This is a "quick eval" spreadsheet so some values are assumed.  Am I obviously overstating some expense or is it just coincidence so far that every deal I've analyzed somehow ends up in negative cash flow?  Using the 50% rule as a ballpark should put my total operating expenses around 19,000 annually whereas I get closer to 30,000 annually with my analyses.  This deal, and others I've looked at, are in Cleveland, Ohio and surrounding areas. 

Any thoughts?

Don't include CapEx in your analysis. You are trying to understand the operating picture of your property.

Cap ex is not part of day-to-day operations. In it's place you could use depreciation (but that's another story and not relevant for your analysis).

If you can't get bill back utilities, then you don't have too many options. 

You're doing the right thing and sticking to your guns. It takes sifting through a lot of bad deals to find a gem. 

Hang in there!

Originally posted by @Brian Garlington :

I have no idea how Commercial MultiFamily works but is it the same basic premise as Residential regarding 1% Rule? (I.E. If you are buying a $250,000 property you need to be getting at least $2,500/mo in Gross Rents? 

If so....and you're getting $3,200/mo in Gross Rents then you may be on to something? I'm really not sure man because my assets are mainly duplexes.

@Nick Ferguson

So no idea about how or why something works... What's with the comment? lol

@Nick Ferguson,

I think the heart of the matter is that you should find the formula you are most comfortable with and stick to it.  If it doesn't work, don't force it.  Don't let any emotion sway your decision.  Easier said than done though.  So if the numbers don't work, either walk away or make an offer to the seller based upon what will work.  You probably already know this, but sometimes its worth hearing again.  I'm not an expert, but this is also me sort of talking to myself as well :)

For what its worth, I've been analyzing some commercial apartment buildings in the area, and the prices are way too high.  

All the best.

George Hoover, Real Estate Agent in OH (#2016000496)
440-821-0203

Thanks for the feedback @Omar Khan and @George Hoover

I definitely agree about passing on expenses when possible @Mike Hayes .  This property currently has gas/electric in owner's name and I like to get 2 pictures, what is it and what could it be.  I think a purchase has to be based on what it is, at least from a purchase price standpoint.  In evaluating quick glance numbers, I don't want to assume that I can easily pass expenses to tenants and then find out I'm wrong once I get further into a deal.  On this deal, passing on the expense would mean submetering the gas, or installing electric baseboard heaters in each unit. 

In regards to lawn and snow, pest removal, etc.  Lawn/snow should just say snow removal.  Landscaping/lawn care is mowing.  Both of those numbers were 2017 actuals for this property.  I would not consider either optional, unfortunately. 

Thanks for the good feedback guys.  Do any of you or anyone else local have some long term figures on how much you've spent on maintenance/repairs (and even capex) for multifamily in the area?

With those numbers you'll never buy a property. 

Your spending $1500 on exterior maintenance. That ways too much. 

Electricity for common hallways is way too high too. Water and Sewer little high, how many units is there? for $250,000 I'm assuming 6. 

Cleveland apartment prices have jumped sky high in the last 6months, so DEALS aren't really out there as much these days.

Hey @Federico Gutierrez thanks for the input.  I agree completely with the exterior stuff.  Those were the actuals provided by the seller, unfortunately.  Obviously, I would do what I could to make them lower but I don't want to bid based on the future improvements I will make.  Do you think I'm off in my thinking there?

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