Milwaukee MF Analysis. Always Negative Cash Flow...

28 Replies

I'm not seeking to buy at the moment so I am using this time to practice. There is a neighborhood of interest that is up and coming and has some nice 4-plexes. I have considered contacting the sellers (off market) to see if they would sell. I've been searching the property history to see what the purchase price was. Then, using my numbers calculate the cash flow to reach an acceptable price. After looking at the history, it seems that these are terrible deals. I've noticed in my market many investors do not factor in all of the expenses, self manage, do landscaping, etc. This has resulted in an inflated market. Uneducated investors, not running their numbers correctly and being a jack of all trades rather than hiring professionals. See deal below based of 2005 purchase price.


Sale Price 2005 = $295,000

Rent = $3,200/m ($800 per unit)

Mortgage = $1,046/m (30% Down 4.5% Interest 30-year Fixed)

Taxes = $625/m

Insurance = $150/m

Vacancy (1-month) = $266

Property Management 10% = $320/m

Lease Fee = $166/m ($500 per unit, once a year)

Maintenance = $200/m ($50/m per unit)

CapEx = $800/m ($200/m per unit)

Lanscaping = $100/m (estimate, not for sure)

Total Expenses = $3,673/m

Net Cash Flow = -$473/m


I know some people on here may think my numbers are off. In order to properly upkeep the property $200/m per unit for CapEx seems appropriate. Also, since it is a apartment building 1 year turn over isn't unheard of. I'd be interested in getting some feedback on the numbers I have put together. Am I missing something here???

@Dawn Anastasi

Correct, but if we analyze the deal based off the income it produces using today's rent I often do not see anything that will work. Is this due to low rents / high taxes & expenses? I am just not seeing anything that works.

@William S. thank you for requesting my input. I ran the numbers in my spreadsheet and it is coming up with a cash flow of $600 annually. Nevertheless, the numbers don't work. I think you are triple dipping with the CapEx, landscaping, and maintenance. The CapEx number suppose to be for major items like the roof and furnace. Once that money is set aside you do not need to budget for it anymore. The point of setasides to make sure you have the cash when something goes wrong. I have a few clients with high-income jobs and they don't budget for repairs because if something breaks they have the money to fix it.

Secondly, at that price point, many of the capital expenditures items should be at the beginning of its life otherwise you are paying to much for the building; which in your example is the case. The reason Sellers sale is because of future capital expenditures that are due soon.  

Lastly, many investors who purchase in this price range and higher are doing 1031 exchange and/or is paying cash. These buildings are very desirable because they are stable which means that your vacancy rate will be lower and not I lot of tenant turnover.  When running your numbers you need to take into account the sub-market averages and not use cookie-cutter figures.  

The 4-family BRRRR I did we paid $103K for it, and put $50K in it. When I ran my pro forma I had a maintenance expense even though I know I was going to fix everything. We have not gotten a single call because of the amount of many we put in it up front. Should we still keep a maintenance setaside?
 

 At this moment in time, I don't pay retail for anything because I need cash flow. Investing in real estate is very subjective this why I can work with many different clients in the same market. Do what works for you and don't worry about anything else. 

@Michael Henry

Thanks for responding. 

Maintenance for me means repair calls/make ready stuff, not major items.

Landscaping is meant for lawn mowing / snow removal. I haven't found a good local monthly budget for this.

CapEx I am calculating as a monthly amount to set aside for the major items, instead of having a set amount of reserves upfront. I always plan have X$ upfront in case of an unforeseen emergency. However, even if everything is new things eventually wear down and need to be replaced. This is a high cost in order to maintain the property. If you hold it's expensive or you just milk it, not fix anything and sell (not interested in that).

If I were to pursue a mult-family in this area I would need $200/m per door (leveraged). I agree with you on buying some not retail but distressed. I'd rather do the repair work upfront and buy something at a discount. Keeps the mortgage lower.

My numbers are very conservative, too conservative I think as everything comes back terrible. My vacancy seems off. How do you calculate vacancy for a multifamily? It would be rare if all 4-units went vacant at the same time.

Overall this deal to me seems such low rent for such a high level of taxes...

If possible I'd be interested in seeing the numbers you ran for the 4-plex BRRRR. Perhaps that would help me with my numbers.

Your taxes seem high for Milwaukee, but that can be found on the assessor's web page. Property management is a little high - 8-9%. Cap Ex is quite high. I would be using $400/mo. Looks like your missing water/trash, bookkeeping and some electric (basement and hallways). I'd say you would have a tough time if you can only get $800/mo

@William S. well then that is a deal I would pass up on, unless you can buy for less. Someone posted recently in the MF forum that they bought a 4 plex in Wauwatosa for $167k. That seems like it would cash flow, plus most of that city is a solid market. 

@William S. as requested  5017 N 84th Street pre/post deal analysis. I try to underestimate the rents and overestimate all other expenses. I know that if I produce a good product I can ask for more rents and I can look for a lower rate on insurance.  I use a few different spreadsheets to come up with what my expected cash flow will be. 

In the link are a few documents pre-deal analysis,  a current pro forma, and an owner statement showing all the expenses and income. 

My only thought would be about your capex and maintenance budget. If this is four units under one roof, and assuming the property is stabilized and you've done any up front repairs, what are you spending 12k a year on?

I've also been shopping for a 4 family in the Milwaukee area and have some to the same conclusion as @William S.   Purchase prices in the neighborhoods I'm interested in are in the $250-$290k range.  Rents around $750.  Even with lower numbers for capex, I'm at best cash flowing $100/mo on paper.  No thanks.

It may not be as ideal as you want, and I certainly understand when you're talking about MLS prices. I see these four families come up in Cudahy at 240+, and spit off maybe 2500 month in rents. Yeah, these don't work.

But consider whether you're just ruling out opportunités because your assumptions are too high. 12k a year under one roof sounds like a lot. At that rate in four years you could replace the roof, 4 HVAC units, 4 water heaters, and you still have a substantial cap ex budget. I don't think that number is realistic or at least way overly conservative, and if you go that route of course your numbers will look like ****.

Insurance you should pay about 100 for, so there's another 50 per month.

Also, when you're buying in these price points I think you need a slightly better more nuanced analysis beyond simple cash flow. Debt pay down means something when you have a substantial mortgage, so while you're not cash flowing where you'd like to be, you're also still making 3-350 paying down debt per month. Maybe check total return as opposed to just cash flow.

I don't typically factor appreciation into my analysis because it seems too uncertain, but debt paydown certainly.

And if you buy right or leverage creatively you should have substantial equity in the property. These deals are out there.

If you're just complaining about the MLS being tough and no good deals on there, well then you're right and maybe time to take your efforts elsewhere.

I think that some of the areas in Milwaukee are totally ripe to buy.   If you are a smaller landlord, you should do some of this yourself.  You can probably cut the leasing fees and landscaping down.

The Cap Ex could be off.   Parts of Milwaukee have older housing stock, meaning at least 90 years old.  Many of these properties have cap ex issues when you buy them.  Or more surprises down the road.

When you purchase a building, best to attack all the deferred maintenance and/or visible cap ex projects immediately.  I think $800 per months is off.

The apartment market for selling is very high right now, some would argue over inflated.  We gave a presentation in MKE regarding our self storage facility we are developing there near Miller Park, the other presenters were discussing their apartments.  I was listening to their numbers and came to the same conclusion you have, too much risk for too little reward.  From a demographics point of view, MKE is a great rental market - we have over 500,000 people within 5 miles of our site, and over 50% are renters.

Not saying this deal is good, but I think your CAPEX is way off. $800 capex reserve / $3200 gross rent = 25%.

25% for capex reserves?!?!

The house must be literally falling apart, in which case you shouldn't pay that much for the house. But even then, you'd overhaul the house, and then not have any major capex concerns for years. 

If it's not falling apart, 10% should be more than enough to set aside. 

Once again, probably still not an amazing deal, but my point is the capex.

@Taylor Chiu

If you break down the replacement cost of each major item and their lifespan I think you'll be surprised how expensive it gets. These are real costs. In the real world prices are not dictated by your income. Even if things are new, and you plan to hold long term you still need to maintain the property. Everything eventually breaks down.

@William S. True, they aren't dictated by income, but that does serve as a guiding metric.

So $800/mo is $9600 a year. $288,000 every 30 years. At that rate, couldn't you just literally tear down the house and rebuild it from scratch every 30 years?

@Taylor Chiu

I typically get $150-$180/m per unit, but then you have to take into account the overall structure too (roof, concrete, garages, etc). $700/m low end of the budget total. 

Now, you could always hold for several years and sell before those issues arise too.