Over the past year and a half I've delved fully into the world of lower income multi-family properties. Using various resources I was able to build out a cash flow model to help me analyze potential deals. I just wanted to get some feedback on some of the inputs I have been using (the areas I invest in are typically made up of minimum wage renters)
- I tend to be very conservative in my analysis, so I use a vacancy rate of 88%. My projected rents are on par with the area. I've heard, however, that for most properties 90% is more appropriate.
- I use an expense multiplier of 0.54, assuming 54% of all income will go to expenses such as refinishing units/addressing issues as they arise. Most research I've done indicates something around .44-.46.
I was just hoping to get some feedback on whether these numbers seemed appropriate, or too high/low. From my experience the inputs have been overly conservative, but there haven't been any major issues to deal with.
Let me know if you need more information.
@Arun Gokhale , 88% of the time vacant? You had better hope that you are being conservative! (Or did you mean 12% vacancy rate)?
Long answer short, you won't know the REAL numbers until you act on your analysis. And then, you can be the one to tell us.
But certainly, the more conservative you can be in your calculations and still show a theoretical return, the less likely you are to be proven wrong about positive returns being possible. Welcome to BP. All the best...
@Brent Coombs Ah yes I mixed up my terms there when referring to the vacancy rate. I use about a 12%, while it appears the US average has been trending downwards to around 7%
Honestly 88% occupancy seems very high on anything close to D class. You will get killed on unit turn costs. In a bad area, screening for quality tenants is near impossible so you end up taking what you can get. You get into a cycle where tenant moves in, doesn't pay within 3 months. Then you evict and the turnover is 4-5x the cost of any rent collected. This is the vicious cycle of death. I have had such properties run 70-90% expense ratios and this is with good self management. Some properties simply will have no chance to cash flow. 54% is very optimistic and this is what I run with B class property with good screened long term tenants.
Hi, I know this is a very old post.... But do you have actual data now on turnover etc and willing to share? Thanks
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