Am I being too conservative when analyzing deals? (Philadelphia suburbs multifamily, PA, Pennsylvania)

8 Replies

When analyzing deals (multifamily rentals, usually 4-20 units) I have found that it is rare that a deal meets my criteria (even when it meets the 1% rule). I am typically looking for at least $100 cash flow per unit and at least a 10% cash on cash return.

I like to be conservative when underwriting annual expenses, and my typical underwriting guidelines are:

Insurance - $500/unit
Trash Removal - $1000 for under 10 units, $2000 for over 10 units
Advertising & Marketing - $250/unit
Liscenses & Fees - $50 to $100/unit depending on county
Repairs and Maintenance - 5% of gross rental income
Snow Removal & Landscaping - $1000
Management Fees - 5% of gross rental income
Real Estate Taxes - from public record
Utilities - use figures from listing or $150 per month per unit

Could it be that most listings are grossly overpriced or am I being too conservative? Any input on my expense figures would be greatly appreciated.

I think most of the multi family's in the Philly suburbs are greatly overpriced. Most of the listings I see are trying to sell at 3-5% cap rate. I'm looking for at least 8%. I think your numbers look good but I am just a rookie in the real estate game. Good luck!

@Steve Francis

Thanks for the input.

I love when a listing agent claims the listing is an 8 cap and shows that the NOI is the gross rental income minus only the tax expense.

It seems like most "8-10" caps (according to listing agents) are actually 4-5 caps when you apply realistic expense figures. Its kind of a joke.

most listing are GROSSLY overpriced. and Most SELLER are not motivated and is just FISHING

I am just like you, that is why I find 1 deal every 1.5 yr.  My "victim" eventually GIVE into MARKET.

5 mixed used bldg:

asked $550K, 

dropped to $350K, 

and picked it up at $200K,

it now cash flow 15% cash on cash, 2 yrs later fully occupy

I think your utility allowance of $150 per unit is too high. Of course, it could be a building with one central oil heater and then that number might be more reasonable. But if tenants are paying heat, then you will just have water and sewer plus any common area electric, and those should be much less than $150 per unit. And of course the number of BRs per unit will affect this. 

5% for PM might be low; it could be high if you self-manage, but lenders will want that as part of expenses either way. 

In the City of Phila, your trash figure might be low :) (unless you use a private hauler).

I am in the process of looking for my first investment property.  My plan is to house hack a multifamily home but everything in the decent areas in Montgomery and Bucks county are priced 100k plus over meeting the 1% rule.  They definitely aren't being priced as a business.  Anyone have any tips or feedback?

@Edward Karcher

What areas are you looking in? Most small multifamily properties 2-4 units will be priced based only on comps, and not on income and cap rates. I have found that you need to look at 5 units or more to get income approach values, and unfortunately a lot of these are priced by residential agents who have no idea what they are doing. Then the owner gets the outrageous value in mind and thinks they can get it, and then the property sits for a year.

Matt,

I am looking at areas along 276 from Hatboro/Horsham and to Berwyn in close proximity to train stations and I work in Bristol and my girlfriend takes the train to center city. I want to stay out of Norristown. I like Conshy but again the homes are overpriced. I will be using a VA loan to purchase so I am limited to singles up to a fourplex.

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