Developer · Houston, TX · Member since 2008 · 488 posts · 121 votes
I am looking to start the search next year for my first multi-family property, and wanted to look at cashflow statements of those already running performing multi-family properties.
Investor · Mapleton, UT · Member since 2014 · 52 posts · 11 votes
11y
I'd recommend that you ask the seller to review their tax filings regarding the properties for the last couple of years. That can give you a better understanding of what the maintenance expenses actually might be. Regarding the vacancy rate, reviewing the seller's tax filings will also be helpful for you. Additionally, you can contact a local property manager and ask them what average vacancy rates are for your area.
I'd also recommend creating a recurring capital expenditures budget amount to set aside each month to hedge agains upcoming replacements for major items like roof, furnaces etc.
Investor · North Richland Hills, TX · Member since 2013 · 1k+ posts · 1k+ votes
11y
Debt service is not an expense. It goes below NOI. Also make sure that your NOI is at least 30% higher than your debt service. (debt coverage ratio > 1.3)
Real Estate Consultant · Mobile, AL · Member since 2015 · 78 posts · 96 votes
11y
I assume PI is Principal/Interest. As mentioned above the property can operate without financing so this is not included in your operating expenses. At the end of the year when you do your taxes your interest will come back into play but is calculated outside of the OE.
A couple of more items to take into account are:
Landscaping
Trash Removal
Termite and Pest Control
Fire and Safety Inspections (Fire Extinguishers and Smoke Detectors)
Supplies (Office and Maintenance)
Never assume a vacancy rate. You can find out what the market rate is from many sources; Broker, Appraiser, Property Managers, REIS Reports and Costar.
I would not assume the debt service coverage ratio, DSCR. If you're purchasing 5 or more units contact some local lenders and ask what they require. You will more than likely hear something like, "1.2 DSCR or 75%LTV, whichever is lower." If you don't know how to calculate any of this contact me and I can help you.
Debt service is not an expense. It goes below NOI. Also make sure that your NOI is at least 30% higher than your debt service. (debt coverage ratio > 1.3)
Nick - you know I love you. But, 1.3 DSCR is a sure way to lose your shirt :)
Debt service is not an expense. It goes below NOI. Also make sure that your NOI is at least 30% higher than your debt service. (debt coverage ratio > 1.3)
Nick - you know I love you. But, 1.3 DSCR is a sure way to lose your shirt :)
Why? That's a minimum required DSCR that banks ask for. Also, one well known syndicator underwrote his recent deal for 1.27 DSCR in the first year :-)
Debt service is not an expense. It goes below NOI. Also make sure that your NOI is at least 30% higher than your debt service. (debt coverage ratio > 1.3)
Nick - you know I love you. But, 1.3 DSCR is a sure way to lose your shirt :)
Why? That's a minimum required DSCR that banks ask for. Also, one well known syndicator underwrote his recent deal for 1.27 DSCR in the first year :-)
Hahaha - just cause the banks allow it doesn't mean it's good for your health.,.
And, the well known syndicator you are talking of discounted his economic loss numbers in the 1st year, which were generous to begin with by most people's standards, by close to 250%! Not going to give you any more details, but the DSCR is based on that highly discounted number. He is out-performing like a bandit, by the way - talked to him today in the morning. Dare I say, you don't know the whole story. But, happily, you are paying attention, Nick :)
Investor · PO, WA · Member since 2015 · 197 posts · 95 votes
11y
Interest discussion on dscr. Personally I don't focus on that number, I let the banks do that. I found that if I found an investment that meets all my criteria and I stick to 25% down the dacr works out such that the banks don't have a problem and I have no less than $200/door net-net income per month. Net-net income is net operating income less P&I, I.e. The amount of $ left after I pay all bills and expenses including the mortgage
Debt service is not an expense. It goes below NOI. Also make sure that your NOI is at least 30% higher than your debt service. (debt coverage ratio > 1.3)
Trying to wrap my head around this - why is debt service not an expense?
Interest discussion on dscr. Personally I don't focus on that number, I let the banks do that. I found that if I found an investment that meets all my criteria and I stick to 25% down the dacr works out such that the banks don't have a problem and I have no less than $200/door net-net income per month. Net-net income is net operating income less P&I, I.e. The amount of $ left after I pay all bills and expenses including the mortgage
From what I am gathering NOI does not equal Net Net income, as you can operate the property without the debt service expense with paying cash - correct?
I am looking at 25% down and have calculated my numbers based on your net net assumption above.
What is the benefit of the NOI calculation without debt service included? Is this something banks underwrite with in lieu of net net, or do they consider both?
Debt service is not an expense. It goes below NOI. Also make sure that your NOI is at least 30% higher than your debt service. (debt coverage ratio > 1.3)
Trying to wrap my head around this - why is debt service not an expense?
Debt service varies depending on the financing options. The same property may be performing well or not performing at all depending on the debt you put on it. You compare properties based on NOI
Debt service is not an expense. It goes below NOI. Also make sure that your NOI is at least 30% higher than your debt service. (debt coverage ratio > 1.3)
Trying to wrap my head around this - why is debt service not an expense?
Debt service varies depending on the financing options. The same property may be performing well or not performing at all depending on the debt you put on it. You compare properties based on NOI
Thank you - this make a lot of sense now.
Is there any other key metrics you use or banks use to qualify properties?
Investor · Downers Grove, IL · Member since 2015 · 135 posts · 55 votes
11y
@Danny Daythis can definitely be confusing. NOI typically excludes the debt service because you're trying to essentially answer the question - what kind of profit/cash flow does this asset generate regardless of how it is financed? Because assets can be financed a variety of different ways, with different terms, etc., NOI is a valuable metric as it allows you to compare assets, and the profit/cash flow they generate, on an apples-to-apples basis.
Obviously, you will also want to take into account debt service obligations you will have when you acquire a property in terms of understanding the true cash flow that the property will kick off to you, how much cushion you have if things don't go as expected, etc.
Investor · PO, WA · Member since 2015 · 197 posts · 95 votes
11y
The metrics the banks review depends on the type of loan. Commercial vs residential . Typically I found that banks look at the appraisal and estimated NI and your credit scores with transaction involving a residential loan. Commercial loans have greater underwriting oversight, confirm all the figures more thoroughly including sellers tax returns for the property and they want to understand you as an investor. They basically want to ensure that not only the the property cash flow can support the loan but that your financial condition/investment skills can also support the loan
Don't sweat the banks too much. If you find a deal and you have good credit they will work with you. If they don't like the look of the deal they will tell you and likely ask for larger down payment If the bank isn't willing to lend the money and you have good credit then you might want to reconsider the deal.....I am not a believer of hard money loans as an alternative personally so if banks says no I'll walk away
Debt service is not an expense. It goes below NOI. Also make sure that your NOI is at least 30% higher than your debt service. (debt coverage ratio > 1.3)
Trying to wrap my head around this - why is debt service not an expense?
Debt service varies depending on the financing options. The same property may be performing well or not performing at all depending on the debt you put on it. You compare properties based on NOI
Thank you - this make a lot of sense now.
Is there any other key metrics you use or banks use to qualify properties?
Price per door, rent / purchase ratio, etc?
I look at IRR and how that IRR is achieved. Another important metric for me is how soon I would get my money back. It dovetails into IRR.
Of course, cash flow has to be there as well. I would not invest in a negative cash flow project even though some of them may provide the highest return eventually.
...What is the benefit of the NOI calculation without debt service included? Is this something banks underwrite with in lieu of net net, or do they consider both?
It is used along with the cost of the units to calculate the cap rate (capitalization rate)... many often look at the cap rate when analyzing any multi family deal. For estimation, expenses (not including debt service) should be somewhere at 50% of revenue/rental receipts. Do you have an estimate for what the cost of the units are?