How much is enough cash flow and what to offer?

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How much is enough cash flow and what to offer?

Alon Rokach
Rental Property Investor · Toronto, Canada · Member since 2018 · 28 posts · 10 votes

Hi BP,

I am in the midst of potentially making an offer on my first property purchase, I was hoping someone could shed some light on a problem that I am having. Hoping to put in an offer on a 6 unit building and struggling to find the right amount to offer. The property is in good condition and doesn't really need anything significant except a new water heater in a few years. 

The unit is priced at $279k, NOI is $21,878 - debt service, which we estimate will be $1062. That leaves us with $89/door. Question is, what is the minimum that you would accept per door and how do you determine what to offer?

I know most people don't touch a property unless they are getting at least $100/door, but there is room to make improvements and raise rents. That being said, I know you buy a property based on what it is worth today and not what it could be worth.

Unfortunately there isn't much else in the area to determine a GRM.

Just want to make sure we don't offer more than what the bank will give a mortgage for the property. 

Thanks in advance!

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Jaysen Medhurst
Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
6y

This property is valued at a 7.8% cap rate, @Alon Rokach. Is that in line with similar properties in your area?

$89/door would not be enough for me. What do yo think you can get that up to? How much will it cost?

I like to see at least $150/unit/month and a CoC ROI in the mid-teens or better.

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  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    This property is valued at a 7.8% cap rate, @Alon Rokach. Is that in line with similar properties in your area?

    $89/door would not be enough for me. What do yo think you can get that up to? How much will it cost?

    I like to see at least $150/unit/month and a CoC ROI in the mid-teens or better.

    3Reply
  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    6y

    Did the seller provide the NOI of $21,878? Does that include all the expenses related to maintaining investment properties (CapEx, Vacancy, Insurance, PM, Repairs)?

    It doesn't feel like a good deal in my mind but I we need more numbers to determine this. 

    1Reply
  • Alon Rokach
    OP
    Rental Property Investor · Toronto, Canada · Member since 2018 · 28 posts · 10 votes
    6y

    @Jaysen Medhurst The issue is that there are not any multi family for sale in that area that is rented. I can try comparing to doubles I guess. The rents are just low regardless, for example, two bedrooms in the area renting for $825 and these are renting for $690. But minor things could add value. 

    @Jaron Walling The seller did provide all the numbers and that includes everything. The $89/door is after all expenses and debt service.

    Think of making an offer that gets us around $140/door.

    1Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    Talk to local commercial brokers and lenders to get a sense of the local cap rate, @Alon Rokach. If you can pump rents by $135/unit, that's not insignificant.

    0Reply
  • Alon Rokach
    OP
    Rental Property Investor · Toronto, Canada · Member since 2018 · 28 posts · 10 votes
    6y

    @Jaysen Medhurst So you're saying unless I can't get close to $200 its' not worth it?

    Whats crazy is this guy bought it for $155k 4 years ago, put a new roof and boiler, didn't increase rents (asked the tenants) and is now asking $279k.

    0Reply
  • Scott Anderson
    Rental Property Investor · AZ · Member since 2018 · 212 posts · 183 votes
    6y

    Don’t use the sellers numbers.

    You should aim for more per door. At least $300. Capex and repairs/maintainence will crush you.

    If you think you can value add you better figure out how much at what price so you can run those numbers.

    0Reply
  • Alon Rokach
    OP
    Rental Property Investor · Toronto, Canada · Member since 2018 · 28 posts · 10 votes
    6y

    @Scott Anderson $300 per door...there is no way we can get that much. We are hoping to get $200 eventually. This property is in Buffalo and apparently thats the number people aim to get. 

    We can raise the rents to market level, but it would take time and I don't think it would give us $300 a door.

    1Reply
  • Jacob Sampson
    Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes
    6y

    @Alon Rokach I calculate cash flow as gross rent - 30% (vacancy, maint, capex) - PITI = true long term average cash flow.

    With that in mind I want my cash flow to be $100-$150 per month per door.

    2Reply
  • Scott Anderson
    Rental Property Investor · AZ · Member since 2018 · 212 posts · 183 votes
    6y

    If you don’t take future costs into consideration you’re only investing in hopes and dreams.

    I would offer what gives me NEEDED Cashflow to cover PITIA/capex/maint and a little extra ($100/door). If you don’t receive this you’re losing money for YEARS. That’s not an investment to me. 

    1Reply
  • Jacob Sampson
    Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes
    6y

    Also, I will go up to a max of 60 times monthly rent for a rent ready property in a C+ or better area.  So, for example, if it will generate $500 per door or $3k a month in rent I would top out at $180k.

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  • Alon Rokach
    OP
    Rental Property Investor · Toronto, Canada · Member since 2018 · 28 posts · 10 votes
    6y

    So I guess at $100-$150/door net is not that bad. Does that sound about right?

    0Reply
  • Jacob Sampson
    Investor · Topeka, KS · Member since 2015 · 1k+ posts · 1k+ votes
    6y

    Its not bad if you include appropriate numbers for vacancy, maint, and capex.

    1Reply
  • Amy A.
    Portland, ME · Member since 2012 · 616 posts · 550 votes
    6y

    Assuming it's in a good area, a 7.8% cap rate isn't too bad right now. When I buy a property, I include a vacancy rate and verify all expenses. Call the city to verify taxes, call the electric, water, trash, insurance, plowing and oil/gas companies to verify expenses. Find out if rates are going up for 2020. They probably used rates for 2019. Assume a % for repairs/maintenance and CapEx. Once you get the real NOI, offer around an 8% cap rate. Years ago I offered 10%, but that's hard to get now. At least interest rates are lower to make up for it so your cash on cash return should be good. I look at % returns, not a certain $ amount per door. Also, don't expect to make much cash flow the first year because inevitably something will come up. Also, make sure there's nothing holding back the rent increase - such as a lack of parking, extremely small rooms, etc. Once you have all your data confirmed, make your offer with confidence.

    3Reply
  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    6y

    $140 per door is great starting point. That new roof and boiler system was expensive which is great for you. Sounds like a good property, but the seller is asking to much. Good luck on the negotiations!  

    0Reply
  • Alon Rokach
    OP
    Rental Property Investor · Toronto, Canada · Member since 2018 · 28 posts · 10 votes
    6y

    Thanks for all the replies, it really helped. I have decided to go in super low and I set a ceiling...if we can make a deal, it will happen. Even at a super low offer I am not going to be getting $140 a door, but close to it. I think it's still a good starting point and I see potential in the property. 

    At 8% cap rate it's so far below his asking that there is now way he will take it. 

    Gonna make a low offer and go from there.

    1Reply
  • Jake Heiar
    Member since 2019 · 1 post · 0 votes
    6y

    @Jaron Walling do you include property yearly taxes when finding cap rate?

    0Reply
  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    6y

    @Jake Heiar Yes. I self manage for PM. 

    1Reply
  • Jaysen Medhurst
    Rental Property Investor · Greenwich, CT · Member since 2015 · 4k+ posts · 2k+ votes
    6y

    @Jaron Walling, 4% each for Repairs and CapEx is pretty low. I'd expect 2X that over time.

    2Reply
  • Jaron WallingPro Member
    Rental Property Investor · Indianapolis, IN · Member since 2018 · 4k+ posts · 4k+ votes
    6y

    @Jaysen Medhurst I've since adjusted it 6%. I guess it depends on how the nice property is to start with! 

    0Reply
  • Alon Rokach
    OP
    Rental Property Investor · Toronto, Canada · Member since 2018 · 28 posts · 10 votes
    6y

    I put 5% for each cap ex and repairs. As far as I know unless the place is a dump then thats the going rate. But some people like to put a dollar figure.

    1Reply
  • Matthew Irish-JonesBusiness Member
    Real Estate Agent · Buffalo, NY · Member since 2017 · 2k+ posts · 2k+ votes
    6y

    @Alon Rokach I think you are way underestimating your CapEx and Repair costs.

    Irish Jones Realty4.947 Reviews
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    1Reply
  • James Hamling
    Real Estate Broker · Minneapolis, MN · Member since 2011 · 5k+ posts · 6k+ votes
    6y

    I am surprised how vastly different I evaluate and look at things than all of the above. 

    First off I evaluate all systems I expect to have a life expectancy expiring in the next 5-7yrs, for example, a roof replacement, or heating plant. I estimate age remaining, take current market rate for such and use a time multiplier to account for inflation. I take all these monies, add together and divide by time window, and divide that by market rents removing all emotion or guesstimation to lock in my realistic rate I need to establish for such items. I than add a % for unforeseen based upon age of unit, the older the bigger "fudge factor". I can not count how many investors I work with on a weekly or monthly basis who have a heating plant go out or water heater and are lamenting how deep that expense is going to cut them. 

    I also never use a flat $ per door to say if any 1 property is good or not, how is that even possible as any indicator? That dosn't account for the outlay to generate said $, and that is my #1 importance I factor. 

    Cap rates, debt coverage ratios, ROI, NOI, these are my decision masters. If I am missing something here please correct me as I simply do not see it.

    I will close by saying 90% of the buys I get presented are off market investor purchases, 75%+ of which are investors who didn't properly account for maintenance items and have either suffered a declining asset/ tenant/ rents cycle from deferring such items or are not capable or willing to make such cost improvements. They all have the same story, they picked some random % to allocate, not based on real #'s and condition, and reality came back to rob the bank, and now sell at discount. 

    0Reply
  • Jonathan R McLaughlin
    Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes
    6y

    Did you include the likely increase in property tax with an increased sale price in your NOI? Also, how old is the property?

    Check for seller capex which is really ongoing maintenance in disguise....

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