Newbie trying to figure out the deals

Multi-Family and Apartment Investing
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Newbie trying to figure out the deals

Nate Boyce
Member since 2019 · 3 posts · 0 votes

Hello Bigger pockets community. I am just beginning my endeavor in real estate investing, and I have been trying to soak up as much information and knowledge as I can find. I am located in the Midwest about an hour south of Chicago. I am interested in finding multi family properties because I like the idea of the security blanket that multiple tenants offers me. 

As I look around my market I have found a couple of 4 unit buildings that really spark my interest. The problem is that when I plug the numbers into a cash flow calculator they honestly seem almost too good to be true. I’m coming up with a cash on cash return of almost 21%. Is this really a feasible number? Or am I missing something in the calculation? I plan on managing the building myself at least to start off so I’m not figuring management costs, but the numbers I’m getting are showing a cash flow of around $12,000 per year. 

I really want to pull the trigger on this, but capital is also an issue for me to get conventional lending. Anyone out there have any advise for my situation? Thanks 

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Matt Popilek
Kansas City, MO · Member since 2017 · 144 posts · 148 votes
7y

Glad you are plugging in @Nate Boyce! If you can reply with the numbers you are using in your calculation it would be helpful to better understand if you are calculating the return correctly. Also side note I always include a management fee whether I am managing it or not...you should charge yourself the fee so that you are paid for the effort...also it is a expense on the books for the property. Also when you are negotiating you can use the 10% cost in your advantage in negotiating a better deal. The Seller doesn't know who is managing the property and the 10% cost is legit cost in most cases. I am hitting way higher than 21% CoC on my deals...so simple answer is Yes 21% is possible all day every day!

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  • Nick Elg
    Rental Property Investor · Kansas City, MO · Member since 2017 · 104 posts · 33 votes
    7y

    @Nate Boyce

    Welcome to the site and getting started! The midwest is a great place to invest for cash flow so you might be right on with your numbers. If you want feedback on a deal or on your numbers you can do a post with your numbers and ask for feedback that way. 

    I would be happy to help or chat anytime. Send me a message if you'd like. 

    Nick 

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  • Matt Popilek
    Kansas City, MO · Member since 2017 · 144 posts · 148 votes
    7y

    Glad you are plugging in @Nate Boyce! If you can reply with the numbers you are using in your calculation it would be helpful to better understand if you are calculating the return correctly. Also side note I always include a management fee whether I am managing it or not...you should charge yourself the fee so that you are paid for the effort...also it is a expense on the books for the property. Also when you are negotiating you can use the 10% cost in your advantage in negotiating a better deal. The Seller doesn't know who is managing the property and the 10% cost is legit cost in most cases. I am hitting way higher than 21% CoC on my deals...so simple answer is Yes 21% is possible all day every day!

    1Reply
  • Brandon SturgillBusiness Member
    Real Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
    7y

    @Nate Boyce Cash-on-Cash is only good for year one...and it only lets us compare apples to apples to discover a best use scenario for our limited capital...but it is an essential metric...glad to see you are using it. The one fatal flaw with cash-on-cash is that very few people calculate the actual out-of-pocket costs associated with the acquisition...easy to inflate the numbers.

    Usually when you reach the 15% things get sketchy...20% cash-on-cash usually means you are in Detroit or should think about a bullet proof vest to collect rent....there are not a lot of exceptions to this...maybe in rural locations...

    And even if you self-manage, deposit that fee into your account...it's a payment you should get used to for when you scale to the point you can no longer self manage ;) 

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  • Nate Boyce
    OP
    Member since 2019 · 3 posts · 0 votes
    7y

    Thank you for all of your replies. Here are the numbers that I am using for the property.

    Asking price is $185,000 and I’m using conventional lending numbers. Taxes are $6500 annually. I’m using a rent roll of $3000/mo. There is also coin operated laundry in the building but I have not figured that in to the income.

    I made a couple of changes from my original post, but it seems too good to be true haha, idk.

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  • Oleg Shalumov
    Rental Property Investor · Teaneck, NJ · Member since 2016 · 567 posts · 291 votes
    7y

    @Nate Boyce could you please also add CapEx and Managment (even if you are managing yourself always add PM fee)?

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  • Edward Liu
    Palo Alto, CA · Member since 2017 · 230 posts · 200 votes
    7y

    - Does owner pay utilities, especially water?  

    - Maintenance cost is likely low.  

    - How is the location?  If not so good, likely need to assume higher vacancy.  Might even need to add in economical vacancy.  

    - Look at crime rate for the location - if at center of some really dark red area, then walk away from it.

    - How long has it been listed on the market?  If more than 60 days and at this type of return, usually it means there is more to the numbers.  

    - Your current number shows it is selling at 12 CAP. This type of deal is not uncommon in not so good locations. For warzone areas, you should be able to find 30+ CAP deals.

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  • Nate Boyce
    OP
    Member since 2019 · 3 posts · 0 votes
    7y

    Edward thank you for the reply. The location is in what I would say is a mid to low C area. Not a lot of crime on that side of town. The trend doesn’t show a lot of appreciation in this market though. I do believe the current owner pays water, sewer, and garbage, so I do need to add that to the expenses.

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  • George Blower
    Retirement Accounts Attorney · Southfield, MI · Member since 2017 · 3k+ posts · 1k+ votes
    7y

    @Nate Boyce

    Welcome to BP.

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  • Chase Louderback
    Real Estate Agent · Luray, VA · Member since 2016 · 460 posts · 293 votes
    7y

    Hi @Nate Boyce

    Does the owner have any landscaping or snow removal responsibilities for this property? Also, like Oleg said, you need to factor in the PM cost and a CapEx cost. PM is just so as you scale you can hire someone else and still cash flow profitably and CapEx will be for the larger expenses that you will occur over time (new roof, appliances, parking lot work, HVAC, etc.)

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