Is it realistic to expect $1,000 clean cash flow from 4-unit?

18 Replies

It's somewhat of a "it depends" answer to this question which is why I'm providing more details below, but I would like to know if it is realistic to expect at least $1,000 clean cash flow from a four-unit apartment building in a blue collar area in Lancaster County, PA, particularly Ephrata, Lititz, Denver, or similar area. If that's not realistic, then what is a realistic cash flow number I should be looking at?

4-unit buildings around here cost about $250k.

So here are the details I can provide to narrow down my question and make it more specific:

1. We would do a 20% downpayment which is $50k on a $250k 4-unit building. Mortgage bill will be about $1,100/month.

2. Rents per unit are about $700/month (times 4 = $2,800/month).

3. Taxes are $3,500/year

4. Other expenses (utilities, maintenance, other) I'm not sure about, but some of you who are in the business can fill in the blank to this point.

I can do the math all day long, and it looks good on paper, but I want somebody who is actually doing this in practice who can tell me from personal experience if it is realistic to make $1,000 clean cash flow per month with the above details, and if not, what's a realistic number? Let's assume the rental units are recently remodeled (utilities upgraded) and should therefore be relatively low maintenance. My main priority in this investment is NOT to have a high ROI (but of course I would like it to be as high as possible). I'm more concerned with having steady cash flow with as least amount of headaches as possible (even if that means it will be a smaller cash flow amount) so therefore I'm trying to stay away from city properties. This is why the price on 4-unit buildings is so high along with the taxes in this question of mine since I want to buy it in a nice area with working-class tenants who understand the value of working and acquiring money.

All of your answers and help is much appreciated! 

Max,

Welcome, I also am from the Lancaster area. 

While you should always run the numbers yourself, my guess is that this proposed property will not get anywhere close to $1000/month in cash flow.

The "back-of-the-napkin" equation BP'ers use is the 50% rule. By that rule, you would spend half of the rent on expenses, with the other half left as NOI, or about $1400 per month. You would then spend $1100 per month on your mortgage, yielding about $300 per month.

Of course some months you will cash flow $1000, but this does not take into account your months with vacancy or a major expense.

A realistic goal in this rent range ($700/door) is to net after expenses and mortgage payments about $100 per door. Note that this also fits with the 50% rule above.

Good luck and always do plenty of due diligence!

Originally posted by @Russell Brazil :

I would question whether your taxes are too high. That is a tax rate of 1.4%, which is high for most locations.

Believe it or not, those are actually quite low for this area. I have a rental unit in the city which is worth about $130k (a SFR) that has taxes of almost $4,000.

The taxes in the Lancaster city district properties are extremely high, one (of many) reasons why I don't buy in the city anymore.

Yeah, PA taxes in general, and especially Lancaster city properties, have a pretty high tax rate.  The taxes above sound appropriate for the area.  Others have mentioned it as well, but make sure to include maintenance, vacancy, and management (if you aren't self managing) in your calculations.  It is easy to leave those out, but they are real expenses and over time will affect your bottom line.  Make sure you have real numbers for your insurance and utilities as well.  You will be paying water/sewer/trash, and common electric judging by the building type. What about the heat... hopefully the heat is separated?

I like to estimate everything high, and then beat the estimates, rather than estimating low and ending up in the red.

Mark

Originally posted by @Mark Peteritas :

... but make sure to include maintenance, vacancy, and management (if you aren't self managing) in your calculations.  It is easy to leave those out, but they are real expenses and over time will affect your bottom line. 

It's worth repeating though Mark! Also account for CapEx - it's really easy to leave out, but a major repair or new roof could easily wipe out 1-2 years of cash flow.

Originally posted by @Michael L. :

Max,

Welcome, I also am from the Lancaster area. 

While you should always run the numbers yourself, my guess is that this proposed property will not get anywhere close to $1000/month in cash flow.

The "back-of-the-napkin" equation BP'ers use is the 50% rule. By that rule, you would spend half of the rent on expenses, with the other half left as NOI, or about $1400 per month. You would then spend $1100 per month on your mortgage, yielding about $300 per month.

Of course some months you will cash flow $1000, but this does not take into account your months with vacancy or a major expense.

A realistic goal in this rent range ($700/door) is to net after expenses and mortgage payments about $100 per door. Note that this also fits with the 50% rule above.

Good luck and always do plenty of due diligence!

Michael L.,

It's nice to meet an investor from my area! So tell me about your investing experience, where do you own properties? And are any of them 4-unit? Do you own any properties in Lititz or Ephrata?

Max

Originally posted by @Mark Peteritas :

Yeah, PA taxes in general, and especially Lancaster city properties, have a pretty high tax rate.  The taxes above sound appropriate for the area.  Others have mentioned it as well, but make sure to include maintenance, vacancy, and management (if you aren't self managing) in your calculations.  It is easy to leave those out, but they are real expenses and over time will affect your bottom line.  Make sure you have real numbers for your insurance and utilities as well.  You will be paying water/sewer/trash, and common electric judging by the building type. What about the heat... hopefully the heat is separated?

I like to estimate everything high, and then beat the estimates, rather than estimating low and ending up in the red.

Mark

Mark,

I met an investor today in the local area who says he charges the tenant water, sewer, trash, electrical, and gas for heating. Also he says his expenditures on maintenance usually are $1,000 per month and hardly go over that. He does the lmaintenance himself but hires a management company to deal with the tenants, so that brings down his expenses.

Originally posted by @Max Reznik :

Mark,

I met an investor today in the local area who says he charges the tenant water, sewer, trash, electrical, and gas for heating. Also he says his expenditures on maintenance usually are $1,000 per month and hardly go over that. He does the lmaintenance himself but hires a management company to deal with the tenants, so that brings down his expenses.

These are all good points and worth considering.  The way water is billed (and the rules of passing along those bills to tenants) varies by municipality.  In Lancaster city, and plenty of other towns in the area, water metering is on a per building basis, not a per unit basis.  Individual metering outside of that can be done, but it is generally not condoned by the municipalities.  Lancaster city for example does not allow those expenses to be billed to the tenant, although they tolerate it being done for single family homes.  So the general rule I tend to use is that for multi-unit properties, in central pa, the owner is responsible for water/sewer/trash, since there is not a good, legal way to split it up.

It sounds like you have a target you are looking to hit, which is great.  Just be careful not to be honest with your numbers, so that you really do hit or beat your targets.

Mark

Updated almost 6 years ago

*Just be careful TO be honest with your numbers* ... had not had my coffee yet...

Max,

Based on the information you provided, I come up with about $520/month in cash flow.

This is determined using the following estimated monthly expenses:

Mortgage: $1,100
Vacancy: $140 (5% of rent)
Insurance: $84 ($1,000/year)
Maintenance: $336 (12% of rent)
Taxes: $292 ($3,500/year)
Management: $225 (8% of rent)
Misc. expenses: $125 ($1,500/year)

TOTAL Monthly operating expenses: $2,302
TOTAL Monthly rent: $2,800

Estimated monthly cash flow: $521.

Obviously costs can vary, just make sure you are realistic about the numbers.  Don't base your calculations on speculation or what the investor down the street is doing.

Originally posted by @Max Reznik :

1. We would do a 20% downpayment which is $50k

That's really all the information you need to know to start your analysis.

You want $1000/month cashflow, which is $12,000 per year.

On a $50K cash investment, that's about 25% cash on cash return.

These days, it's pretty tough to make 25% COC on a leveraged property, but not impossible if it's an off-market deal.

So, the 10 second analysis would be that it's possible, but going to be very difficult without some signficant marketing and/or luck.

Others can give you better feedback based on the specific area.

Thanks for all your replies guys! 

The way I am trying to look at it is aiming for the stars and hitting the moon. In other words I want to aim to make a high $1,000/month using $50k capital to acquire the property, which is 24% COC. It looks to me and based on all of your replies that that's a very very optimistic calculation and it's an unlikely outcome. But if I aim for that, at worst I would get is probably $300/month during a bad month (of course it can be WAY worse than that depending on what occurs, but I'm not talking about very rare occasions where you have to upgrade the heating system to a new one). I feel like Andrew Bosworth and how detailed his calculations are, is probably pretty close in his numbers and I would still be pretty happy if it's going to be $500/month since that's still 12% COC, not bad. So I know reality is always different from theory where in reality things break down, there are vacancies, sometimes evictions, leaks, capex, etc, but I still want to aim for $1,000/month. To increase that chance I may spend another $20-30k on top of the $50k to put into the property to minimize maintenance in the long run, perhaps upgrade to a new gas heating system, new roofing, maybe some new plumbing to pex lines, refresh the apartments by painting and new flooring. I am in luck because I have a lot of residential construction experience particularly with remodeling, so a lot of the work I will do myself and save on labor. I'm very excited to learn this businesses, and as many of you would probably agree, the best way to learn is just to try it out for yourself and learn as you go.

It's hard to suss out what is possible without hard information.

You could eliminate some of the guesswork by getting some hard numbers. It looks like there are a few 2-8 units in the area available on Loopnet. You could reach out to the brokers and ask to see some P&L's or at least pro formas.

Obviously every building is different, but this would give you a better indication of what you could expect for regular expenses. 

Originally posted by @Max Reznik :
But if I aim for that, at worst I would get is probably $300/month during a bad month (of course it can be WAY worse than that depending on what occurs, but I'm not talking about very rare occasions where you have to upgrade the heating system to a new one).

I'm not sure you're thinking about this correctly...

Keep in mind that you're not going to make $1000/month (or however much) every month.  It's more likely that many months you make closer to $1500, and then you have those months where you'll have vacancies, maintenance, property tax payments, insurance payments, capex, etc., and you'll make significantly less than $1000 those month (and some months might be negative cashflow on the P&L.

If you'll require that monthly cashflow for other expenses, I would suggest learning how to do basic cash flow analysis and run some models for how a multi-family property will likely cashflow on a monthly basis over, say, ten or twenty years.

Hi Max,

I recently purchased a 4 plex In NC that has been producing a 24% COC return with 30% down at full occupancy factoring in vacancy, repairs, ect. The taxes are much lower at just under $1k, I paid $135K and total gross rents are lower at $2,300. It nets about $1k/m but if one unit is vacant for a month it would be $400/m and if 2 units are vacant it could be -$200/m (Depending on the unit) if I properly allocate for expense reserves.

One thing I forgot was to budget for lawn care and snow removal. The snow is not an issue in NC but that could be a very big one in PA if there's another winter like last year. You probably don't worry about this on your SFR but you will have to cover it on multi family.

Adam

@Max Reznik

I am exactly where you are right now.  I run numbers and think it is too good to be true.  I must be missing some expenses.  Below are some numbers:

$300k purchase price, 25% DP, $225k loan @ 5%

Income - $2800

Mortgage P&I - $1208

Taxes - $300

Insurance - $200

Management - $200 (me)

Maintenance - $200 (me)

CapEx - $200

Vacancy - $200

TOTAL EXPENSES - $2508

CASH FLOW - $292

And yes, the only way we will ever find out exactly what it costs is to finally get in and do something.  I am in St. Louis and looking at the surrounding area and there are many similar properties. I hope I have over-estimated some costs and if so that it would drive my cash flow higher.  I want to apply this to a property and then do it again and again and think to myself 10 times and that is $2,920/mo and that would be making an amount good enough for me to quit working the man and just work for myself.