Milwaukee MF Analysis. Always Negative Cash Flow...

Multi-Family and Apartment Investing
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Milwaukee MF Analysis. Always Negative Cash Flow...

William S.
Rental Property Investor · Overland Park, KS · Member since 2015 · 492 posts · 234 votes

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???

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Michael Henry
Real Estate Consultant · Brookfield, WI · Member since 2014 · 873 posts · 350 votes
8y

@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. 

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  • Greg Moss
    Long Island , NY · Member since 2017 · 30 posts · 31 votes
    8y

    @William S.

    Your Cap Ex is way to high. And if you truly believe that for this property is going to have a cap ex of 25% of rent on a monthly basis simply stop looking at this property and move on to the next one.

    If you are buying a property for 300k that is in good shape there is no reason for Cap ex to be this high. to have 10,000 in major repairs a year for a in shape property shouldn't be happening. 

    Look for something that you can have the maintenance and cap rate at a 15-20% rate max and you should see some positive numbers. Because if you assume the high numbers like you are any cash flow margin is going to be squeezed out of a deal. 

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  • Nick L.
    Buy & Hold Investor · Milwaukee, WI · Member since 2012 · 378 posts · 179 votes
    8y

    @William S. Thanks for the tag. Sorry it's taken me a while to reply.

    As you know, ROI falls into two major buckets - cash flow and capital appreciation. (There are also the minor buckets of equity paydown and tax depreciation.) The 53222 zip code is not a majorly appreciating area, nor is it likely to be in the near future. So you need to either buy properties significantly under market value or at market value with great cash flow.

    Without getting into the argument about capex numbers, your opportunity here is in the 1% region. That's pretty much breakeven in a Class B/C Milwaukee neighborhood, perhaps negative cashflow if you are in a sub-area of 53222 with crappy tenants. That's not worth it to me. 

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  • Marcus Auerbach
    Investor · Milwaukee - Mequon, WI · Member since 2010 · 5k+ posts · 7k+ votes
    8y

    Following @Nick L.'s comments: for me risk mitigation comes first, second is cash flow, then principal pay down and then appreciation last. 

    However, appreciation is the real wealth builder. Cash flow pays the bills and without you go broke, so it's a non negotiable. But at the end CF is peanuts!

    At a rate of $500 a month it takes 166 years to reach one million dollars. Most of use want to retire sooner. And a million will probably not even cut it.

    Growing wealth is much faster than 166 years using a different approach. For example buy 10% below FMV, force appreciation by 10% through remodelling and wait for 10% appreciation (or call it just inflation) - for a 30% increase in value of any given portfolio. So, how big is your portfolio and how much time do you have?

    Now, once you got that concept,  the next question is: how can you grow your portfolio the fastest way possible that has low risk, good cash flow and is in good areas (school districts) to have some decent potential for appreciation? 

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