CapEx killing cash flow analysis

Multi-Family and Apartment Investing
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CapEx killing cash flow analysis

Michael Kissel
Buffalo, NY · Member since 2016 · 16 posts · 0 votes

I've been looking for my first rental property in Buffalo, NY area and using the rental property analysis tool from this site to do evaluations.  I use estimates of 5% vacancy, 5% repair & maintenance and 10% capex, which from my research are typical values to use.  Using these estimates, I have not had any luck finding a property that returns an acceptable monthly cash flow, even when putting in sell prices considerably less than asking.  I'm looking at duplex, triplex and quadplex's and shooting for around $200 per unit per month in positive cash flow, which again seems to be what is recommended.

Are my estimates for vacancy, capex, etc too high?

Is approx. $200/unit/month expecting too much?

Or are seller's just that out of line with their asking prices?

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Vanessa Vandervalk
Investor · Madison, WI · Member since 2015 · 44 posts · 31 votes
10y

I've always thought that CapEx as a percent seems off. Doesn't it depend a lot on what the rent is? A 1500 sq ft house that rents for $800 vs a 1500 sq ft house that rents for $3000 could have about the same CapEx in real amounts. It seems more prudent (and time consuming) to estimate actual costs based on the ages and condition of everything. Does anyone do this, maybe with a spreadsheet set up for this purpose?

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    10y

    Some markets are at there peak currently and overheated. In those areas you can either build new, rehab something you buy at a lower basis, or pay a premium for existing and stabilized and hope to ride appreciation for the long game.

    If you want or need cash flow today then you might have to switch areas.

    Some areas are simply buy and hold and people with lot's of money hold for the equity growth long term and eeking out some cash flow when rental increases happen.

    Some sellers are also pushing the market to see what happens. When I check for clients on commercial for multi million properties I ask why the seller is selling? The answer let's me know their level of motivation. If their reason is a low motivation or they want rounds of market bidding to extract every cent then I pass on that property.

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  • Matt Motil
    Rental Property Investor · Cleveland, OH · Member since 2015 · 1k+ posts · 880 votes
    10y

    You need to use those numbers as a starting point, but each property will be different. It's not right to assume 10% for cap-ex on a property with a new roof, new windows, new HVAC, new H2O tank, etc. Some of those items get replaced once per life-cycle, so if they are new, you typically don't have to worry about them again. You also need to factor in what you're actually going to spend on those items and when to determine what the right amount to hold back for those expenses. Does that make sense? 

    Also, $200/unit cashflow after all your reserves are accounted for seems a little high if your numbers are  correct. 

    1Reply
  • Vanessa Vandervalk
    Investor · Madison, WI · Member since 2015 · 44 posts · 31 votes
    10y

    I've always thought that CapEx as a percent seems off. Doesn't it depend a lot on what the rent is? A 1500 sq ft house that rents for $800 vs a 1500 sq ft house that rents for $3000 could have about the same CapEx in real amounts. It seems more prudent (and time consuming) to estimate actual costs based on the ages and condition of everything. Does anyone do this, maybe with a spreadsheet set up for this purpose?

    4Reply
  • Brenda Snyder
    Buffalo, NY · Member since 2016 · 16 posts · 5 votes
    10y

    We are just starting in the Buffalo market, so this is peaking my interest. I will be following to see what the experts recommend.

    1Reply
  • Edward B.
    Investor · Midlothian, VA · Member since 2015 · 980 posts · 822 votes
    10y

    @Vanessa Vandervalk,

    We were just talking about this very thing in another post. I use percentages for rough numbers but you are absolutely correct, there is not as strong a correlation between rental rates and capex as there is between the type, condition, and size of property and capex. The previous conversation led me into the FilePlace and Sam Tato has a spreadsheet in there that does what you are talking about. I have one that I got from somewhere but it is a little more basic than Sam's.

    1Reply
  • Vanessa Vandervalk
    Investor · Madison, WI · Member since 2015 · 44 posts · 31 votes
    10y

    @Edward B., I found the CapEx sheet and it's just what I need right now! Thank you so much! Anyone who uses this sheet will be able to get a more realistic picture of their actual capex costs over the long haul.

    1Reply
  • Michael Kissel
    OP
    Buffalo, NY · Member since 2016 · 16 posts · 0 votes
    10y

    Great info! It definitely seems to make more sense to more accurately estimate capex instead of using a straight 10%.  I found the spreadsheet too.  Didn't know yet about the FilePlace, so thanks again.  It might be time to revisit some props.

    0Reply
  • Thomas S.
    Member since 2016 · 13k+ posts · 12k+ votes
    10y

    If it is necessary to deviate from the normal percentages as a starting point to analyse a property then the margins on the property are far to thin to begin with. If numbers don't work then they don't work. Trying to find ways around the proven methods are only going to get novice investors in way over their heads.

    You might as well go back to the old days when a novice investor looked at the first months ownership and declared they have zero expenses and massive positive cash flow.

    0Reply
  • Ali Boone
    Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes
    10y

    I'd say none of the above. I'd say it's your market. I've never heard of Buffalo producing positive cash flow. I'm in Los Angeles and it's the same thing here. I've always just bought out-of-state because of it.

    0Reply
  • Sam Tato
    Wholesaler · Buffalo, NY · Member since 2014 · 17 posts · 7 votes
    10y

    @Thomas S. Who is to say what normal percentages are? I would argue that percentages vary by area and property type.  I definitely think it's better to go in depth with the numbers and be as accurate as possible regardless of your investing experience. 

    1Reply
  • Vanessa Vandervalk
    Investor · Madison, WI · Member since 2015 · 44 posts · 31 votes
    10y

    @Ali Boone may very well be right about Buffalo. For anyone interested in the capex question in general: I guess there are actually two questions: "Should I consider it?" and "Should I buy it?" which could very well use different levels of analysis. In other words, maybe find an approximate capex % to use for your area and the age of the property, just to throw into the BP analyzer tool and see if it's worth considering. Then, find out the details of what expenditures you will have over your holding period and use the spreadsheet method for your due diligence before buying.

    0Reply
  • Matt R.
    Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes
    10y

    @Michael Kissel @Vanessa Vandervalk

    @Ali Boone

    Buffalo is a major cash flow city just like most eastern cities. There are a couple bpers doing it perhaps check search. You might check another area of the city. 

    http://www.buffaloturnkeyproperties.com/properties...

    1Reply
  • Derrick H.
    Real Estate Investor · Buffalo, NY · Member since 2009 · 151 posts · 49 votes
    10y

    Some better questions I want to ask are this:

    Do you have a reserve if sudden and unforeseen repairs occur?

    Have you inspected the age of the roof?

    Have you checked the User Fees/City Tax/County Tax and Water bill avg for the property?(Erie County)

    What are the crime statistics for the area?

    What are the appreciation statistics for the area?

    Are you forming an LLC or S/C - Corp?

    What type of insurance would you consider?

    Who's going to handle the maintenance?

    Are their building/housing code enforcement agencies in the areas you're buying?

    Have you registered with Section 8(RAC) or Belmont Housing?

    Have you completed the Landlord Lead assessment course?

    These are going to come up and this is just several examples on what's it's like to own Rental units in WNY(Buffalo). Just wanted to throw this out there. There's more to it than calculation of CAP and ROI.

    4Reply
  • Michael Kissel
    OP
    Buffalo, NY · Member since 2016 · 16 posts · 0 votes
    10y

    Being a newbie, I understand that there is alot I don't know.  That's one of the reasons I'm on this site - to learn from others who have done it.  The feedback is great but a little overwhelming at the moment.  Most of the stuff mentioned by @Derrick H., I have considered but not all of it.  So thank you.

    I asked this question as it seems every property I have analyzed is at least $20-$30K overpriced based on the calculator and I thought maybe I was doing something wrong.  Have others found it normal that properties are this far overpriced?

    0Reply
  • Derrick H.
    Real Estate Investor · Buffalo, NY · Member since 2009 · 151 posts · 49 votes
    10y

    In the Buffalo Market Game you have to buy them LOW.....very LOW. Alot of the properties you may be looking at have already been flipped and selling with Tenants in place. A few investors I know buy properties for less than $20k place about $15k into and sell between $50k -$60k with the middle ground profit. You best option is try not to overspend too much on a High Cap turnkey with low appreciation.  

    1Reply
  • Jordas Reyes
    Real Estate Agent · Naples, FL · Member since 2015 · 86 posts · 27 votes
    10y
    I'm still in search of my first non live in deal and like many I live by the numbers! Don't let the emotions make you tweak the numbers to make them work for you. I'm sure that's nothing no one here has not heard but unfortunately many of us still do it. Especially in the early stages. Last thing I'll add is my opinion on vacancy %. I base my numbers on an entire month out of the year being covered. So 1,800 Monthly rent means I save 8.3% or $150 per month towards vacancy. That % changes by property for me. Best of luck!
    0Reply
  • Lawrence L.Pro Member
    Rental Property Investor · Bronx, NY · Member since 2008 · 144 posts · 64 votes
    10y

    @Jordas Reyes Your opinion on vacancy....the percentage you use is that the vacancy rate for your area, and what do you mean % changes with each property. 

    0Reply
  • Jordas Reyes
    Real Estate Agent · Naples, FL · Member since 2015 · 86 posts · 27 votes
    10y

    @Lawrence L.

    I may not have explained it well. It's just the way I personally like to run the numbers. If my monthly rent is 1,800 a month I like to divide that by 12 months and that's where I get $150 a month or in this case 8.3%. If my monthly rent is 1,000 that makes my vacancy $84 or 8.3%. So that's my sweet spot to give me a months worth of rent at 12 months. Sorry if I made that more complicated then it needed to be. The percentage does not change but I based that % on wanting a full month rent at end of year. 

    0Reply
  • Lawrence L.Pro Member
    Rental Property Investor · Bronx, NY · Member since 2008 · 144 posts · 64 votes
    10y

    @Jordas Reyes... Thank you for the clarification 

    0Reply
  • Pete Bhairgond
    Investor · Cary, NC · Member since 2016 · 14 posts · 4 votes
    10y
    Originally posted by @Vanessa Vandervalk:

    @Edward B., I found the CapEx sheet and it's just what I need right now! Thank you so much! Anyone who uses this sheet will be able to get a more realistic picture of their actual capex costs over the long haul.

    Is it possible to get a copy of the CapEx sheet? I am looking for one to assess couple of prospective deals in a different state.

    0Reply
  • Edward B.
    Investor · Midlothian, VA · Member since 2015 · 980 posts · 822 votes
    10y

    @Pete Bhairgond, Go to the search box at the top right of the desktop page. Type in "Cap Ex" with the space. On the left of the results page choose the "Files" filter. It should be the only one in there.

    0Reply
  • Gino BarbaroPro Member
    Rental Property Investor · St Augustine, FL · Member since 2014 · 2k+ posts · 1k+ votes
    10y

    @Michael Kissel

    Hi Michael

    I used to own property in Rochester, NY and the problem was the cap ex.  The properties cash flowed great but  the homes were old and in need of some type of repair.  Be careful when purchasing "cheaper" homes, especially if they have some type of age.

    In apartments, we generally allocate 250 per unit per year, especially if the property does not need much repairs.  I think 200 per month per unit may be a bit excessive.  Look at the condition of the asset, and estimate the roof expense, blacktop, appliances, a/c, etc.  Come up with a figure and back into the number that way

    Gino

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  • Pete Bhairgond
    Investor · Cary, NC · Member since 2016 · 14 posts · 4 votes
    10y

    @Edward B. Thank you very much for the tip. Still a fairly new user on BP (2 days so far) so not yet familiar with the site. I will definitely use the search feature. 

    0Reply
  • Michael Kissel
    OP
    Buffalo, NY · Member since 2016 · 16 posts · 0 votes
    10y

    A few people mentioned that $200 per unit per month after all expenses was somewhat high but that is the number I got off a webinar on this site.

    What is a realistic number then I should be shooting for?

    Anyone in the Buffalo, NY area that cares to share what their approx. cash flow is per unit per month for duplex, triplex or quadplex?

    0Reply
  • Chris D.
    Investor · East Amherst, NY · Member since 2016 · 47 posts · 20 votes
    10y

    It all depends on the area and what rents are. For example, i used to own a bunch of doubles in the black rock/riverside area, I was purchasing them for 40 to 45k, renting the units for 500 to 650, so all and all i was making 500 to 700 profit every month on a double.  Now in another area i own, i purchased a double for 120k, with rents around 800 each im only making 350 a month profit, but better appreciation,better area, better tenants, etc....

    1Reply
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