Best formula to determine multifamily purchase

16 Replies

I’m curious what formula investors in this forum use to evaluate multi family investments…

For example, if property is 350k how much are you expecting to cash flow annually? (Net - after Expenses) I would probably attempt to put 10%.

Not sure if mortgage lenders  require more skin in the game with multi family investments. 

I like to use the One Percent Rule (monthly gross rent is >=1% of purchase price) as a rough rule for my market in Columbus, Ohio at least. Some areas that is never possible, and others it's every single property. Take into account all of the other expenses associated with the MF property as well. Does the area have high property taxes, hoa fees, condition of the roof, appliances, units etc. 
Are you asking whether lenders require a larger return as it is a multi family property versus single?
-Josh

@Jeff Gold I think this goes to the age old question of what do you want out of it? For me personally I'm a long term buy and hold investor, it just works with my personality better. So from your example above for a $350K property, for me to buy that property, assuming it was in a location I like to invest in and am familiar with, and lets say its a duplex because in my market you can still maybe get a duplex for that price thats in decent shape, I'm going to look to make sure that I have at least $100 per door pure cashflow after all my expenses and budgeting for expenses. At least in year 1, and if I can achieve that with what I consider conservative rent numbers then I'd pull the trigger. So I suppose that ends up being $2400 annually of pure cashflow so a .6% of the purchase price....but if I'm putting 20% down to purchase thats a 3.4% CoC return on my downpayment...I think I did that right...so yeah thats the way I shop when considering cashflow.

@Joshua Janus . So you are saying you shoot for 1% net after expenses or gross?

Based on what’s in place now conservatively I’d make 5k/year on both units combined. if I purchased duplex I would raise rent as they are paying under market value so can probably Squeeze out another 400 a month total or so. So, 4800 more/year making it a combined 9800/year..

@Michael K Gallagher … I appreciate your insights. I’m familiar with the area. I would probably shoot for 10% down if I can get a lender to do this. So, you would consider  $2400/year profit on a 350k property as a return you would be okay with?

Unless I’m missing something…Based on this formula you would need 1000 doors to make 10k/month?

Seems like a lot of work to make a minimal amount. 

Originally posted by @Jeff Gold :

@Joshua Janus . So you are saying you shoot for 1% net after expenses or gross?

Based on what’s in place now conservatively I’d make 5k/year on both units combined. if I purchased duplex I would raise rent as they are paying under market value so can probably Squeeze out another 400 a month total or so. So, 4800 more/year making it a combined 9800/year..

Typically when people talk about the 1% rule they are saying that the GROSS monthly rent needs to be > 1% of the purchase price. So if you purchased it at $350,000, the gross rents should be $3500 a month or more. Less than that and you are likely to lose money every month (negative cashflow). So currently we'd be at $42,000/year GROSS rents. Lets take out our expenses - $350/month for repairs, $280/month for vacancy, $350/month for property management, $300/month for insurance, $120/month for taxes, ~$1400/month for mortgage payment, $100/month for lawncare, $250/unit per year for turnover and $100/unit/year for accounting/legal. This bring me to a total cashflow of $6,500/year which IMO is GREAT if you can hit that for a single duplex. If you also have to pay utilities that is another ~$ 300/month, bringing your cash flow to ~$2,900, which would still be good for a duplex IMO. Especially if you are able to put only 10% down and the units don't need rehab, this would be an 8.2% COC in year 1, pretty dang solid deal.

So, what are the rents currently at?

I think a lot of that depends on your general goals for investing in real estate. Are you looking for more cash flow or appreciation? This will also point you in the direction of different markets since some have better CF over appreciation and vice versa. I would check out some cities in the midwest. Cities like COlumbus have a good combo of both. @Jeff Gold

@Brian Armstrong

Appreciate your insights!

Place was just rehabbed about 18 months ago. 350/month for repairs seems high, there are already tenants in place that are paying 2100 combined and leased through July 2022 but based on the rents in the area I should be able to get 2500/month.

If I hire a manager it’s 10% annually (that should be of rental amount, so 3000/year)

I have to check insurance but in this area is shouldn’t be more than 175/month based on what I’m being charged with my current str.

 $100/month for lawncare seems about right and taxes should be around 150/month, mortgage about 1400.

So you are right… I really need to have rents totaling 3500/month for deal to make sense and I know I couldn’t get 1850/door in this area. Top would be 1400/door for 2/2. 

If I can get deal down to 300k and self manage (which I really don’t want to do) I think I’m still making pennies on the dollar… 

Option 2: turn it into a short term rental. This area you can do str or Ltr.

Now your got me thinking! 

Originally posted by @Jeff Gold :

I’m curious what formula investors in this forum use to evaluate multi family investments…

For example, if property is 350k how much are you expecting to cash flow annually? (Net - after Expenses) I would probably attempt to put 10%.

Not sure if mortgage lenders  require more skin in the game with multi family investments. 

 I invest here in Columbus, Ohio. I typically purchase properties if I think I can buy into about 20%-30% of an appraisal value in a B area. About 10-20% in A area. 40-50% in C

Originally posted by @Jeff Gold :

@Remington Lyman interesting… can you give me an example of a deal or 2 that you have closed on based on this approach?

I’m a numbers guy so this would help me picture things better.

Thanks!

 No, but I can give you an example!

123 E Main St is in a B area and worth $100,000. Buy it for $70,000. Then profit.

Originally posted by @Jeff Gold :

@Remington Lyman. Not sure if the IQ of the people you normally deal with but your example is really meaningless.

 Typically, they are significantly higher than mine. Lots of tech guys.

Originally posted by @Jeff Gold :

@Brian Armstrong

Appreciate your insights!

Place was just rehabbed about 18 months ago. 350/month for repairs seems high, there are already tenants in place that are paying 2100 combined and leased through July 2022 but based on the rents in the area I should be able to get 2500/month.

If I hire a manager it’s 10% annually (that should be of rental amount, so 3000/year)

I have to check insurance but in this area is shouldn’t be more than 175/month based on what I’m being charged with my current str.

 $100/month for lawncare seems about right and taxes should be around 150/month, mortgage about 1400.

So you are right… I really need to have rents totaling 3500/month for deal to make sense and I know I couldn’t get 1850/door in this area. Top would be 1400/door for 2/2. 

If I can get deal down to 300k and self manage (which I really don’t want to do) I think I’m still making pennies on the dollar… 

Option 2: turn it into a short term rental. This area you can do str or Ltr.

Now your got me thinking! 

Generally speaking, if you're making $2500/month on a $350k deal you will be lucky to break even cash flow-wise. Don't forget you also are building equity though. I like to figure 4-5% for repairs and 4-5% for CapEx (think new roof, repainting, replacing countertops etc). You may spend less than that in the short-term but if you are considering holding for 10+ years then these expenses will certainly come into play, so I wouldn't lower them too much in your estimate. Same with property management, even if you are going to self-manage I'd include it in your analysis so you know how much you are making from management and how much you're making for the actual investment.

I think getting multi-family and turning into a STR could be a great business model and is something I'm looking into currently, but it carries more risk for sure. From the numbers I've run the cash flow will be 2-3x better typically

@Brian Armstrong I like the way you lay out the actual numbers to make sure it’s a wise investment and future planning for maintenance of property. 

This would make a good str because of location but the property itself after looking at it today won’t be appealing as a str.

At this point I plan on skipping on the deal based on the numbers. It has to make fiscal sense especially with the direction home values are going. 

Many “investors/buyers” are Unknowingly walking into bad deals and their brokers are often not giving them a heads up because they are more worried about their own pockets.

Buying the  right property is a key for me. No rush….

Appreciate your insights… it’s helped to give me a perspective I didn’t have before. 

Originally posted by @Jeff Gold :

@Remington Lyman . Not sure if the IQ of the people you normally deal with but your example is really meaningless.

In the current RE market it would be a slow way to acquire property and take a lot of work.  I am at the phase where I have to be very discerning if I am buying a non-commercial RE.  Therefore if I find a property every 2 years that is a homerun, that works because I do not need to scale in non-commercial RE (I am out of F/F loans).

My last purchase (11 months ago) was off market at $620K with a $20K finders fee (total not including closing is $640K), Worth ~$850K at time of purchase. Market rent is $7350, so this was better than 1% property based on purchase price in a market that 1% properties are a unicorn find. Purchased at ~25% discount. PITI is $2549 (so cash flow is outstanding). This qualifies as a homerun in my market.

The issue with this type of purchase is 1) they are rare 2) they take a lot of networking, etc. to be able to build the contacts and reputation that this property comes to you rather than any other investor.  As indicated, we paid $20K finders fee, but our negotiated finders fee was $15K.  By paying $20K and performing on my commitments, I have increased the odds that other such properties may come my way.

I do not recommend someone start by looking for this type of unicorn property.  They do not have the contacts, reputation, etc. to have this type of property come to them any time soon.  By the time they have purchased a half dozen or more successful investment properties and have performed on their commitments, they can start expecting better deals.

For commercial MF (more than 4 units), the expectation is a debt-service coverage of at least 1.25. This means rents should be 1.25 times the P&I. In my market this is a difficult find at 70% LTV. With the current rates (near all time low), this would reflect a negative cash flow at the 50% rule, but very near cash neutral if counting the principle paydown. In my market the 50% rule is conservative and the 50% rule is meant to be applied to small unit count (SFR or non-commercial MF) so becomes extremely conservative at commercial MF unit count.

Good luck

@Dan Heuschele

I appreciate you sharing the “behind the scenes” perspective. It’s quite helpful. Getting ahold of outside the market deals is a wonderful route and I agree that it requires guiding relationships with people in the community.

Getting in below market value & having that 1% gross profit based on sales price is key. Hard to find this combination in this market.

Something to think about and be patient about. I’m okay with waiting and looking for the right deal. 

Getting a sense of the real numbers is so helpful.  Appreciate your insights. If it’s okay, I’d like to connect with you sometime and chat.

Thanks again Dan