Multi-Family Cash Flow Seeking Advice

17 Replies

I am currently looking at a 4 unit MultiFamily that will be upwards of 900K. How much cash flow should i reasonably want (after accounting for vacancy, repairs, capex) that makes a deal like this worth it? I see Brandon in the BP vids looking for 100/unit and think that is good for his area but would be fairly low for a mortgage this high. I am using a VA loan so I will have no money down into the property so my cash on cash ROI is odd to conceptualize for me in a way that makes sense. Any advice from some of you more seasoned investors would be greatly appreciated! Thanks!

Following for advice. I'm in a similar situation, the market in San Diego is crazy and the 4-plexes I've seen are in the 1.2-1.5 million range. From the simple screening I've done, the rents don't seem to support the property for that number and there would be negative cash flow.

Calculate your COC and other returns as if you made a 25% down payment. That will provide you with normalized return calculations.

At $225/unit, you may be expecting appreciation and, if so, you may want to use a metric such as IRR to include predictable appreciation in your return calculations. Cash flow is only one of three profit centers in real estate.

Here is how I would quickly analyze it:

I would check rentometer.com and get an idea of the expected rent. Using easy numbers, let’s say the rent is $500 per unit or $2,000 monthly, $24,000 annually. Using the 50% rule, after expenses you can expect to have 12,000 of net operating income.

Ask a realtor about local cap rates and divide that from your NOI. So, if cap rates in your area are 10%, 12,000/.1 is 120,000. I would pay no more than 120,000 for the property.

That’s my shorthand way to analyze, hope that helps. If not, thanks for letting me talk!

@Ryan Ingram ...When we look at Multi, we basically consider three major metrics.  One, as you mentioned, what is the value based on the income approach.  (Income-expenses)/(cap rate), the condition of the property, and the potential to stabilize (increase value) in the asset.  

I think 50% expenses is way too much in Multi...I generally consider the condition of each property individually.  A renovated or new property will have very little expenses in the first 10 years.

When you value a multi, its great to be able to find comps and use both the income approach and the comparable approach, however generally it can be difficult to find enough recent comps that are statistically viable.  

@Matthew Haase ...For residential multi, there is one additional factor many people don't consider and that is the cost of acquiring a loan.  In residential multi, you are able to get a very cheap loan on a property if you live in the property...and once you consider leverage, your cap rate increases.  In this scenario, you should analyze the stability of the rental market.  Nothing is without risk, however buying a residential multi and living in one of the units, in my opinion, is one of the best ways to start investing in real estate.

I assume you're just starting in REI, given the VA loan and question. My advice? Listen to @Mike Dymski .

When the total amount of invested capital gets low, the CoC number becomes less and less meaningful - while it looks great on paper, earning a 47% CoC on $5000 invested gets dominated by other risks and time costs for you. My suggestion is to either...

(A) As Mike suggested, calculate the CoC number assuming 25% down.

(B) Assuming you are self-managing, include a management fee to pay yourself for your time.  Make sure the deal still has attractive current returns with your 100% financing.

Go get specific on a $900k quad with 75% LTV financing in my market, I'd be expecting to pay myself a mgmt fee of ~$3k per year and show a CoC current return of 6% after accounting for accurate expenses and $180/door/m CapEx reserved. In this scenario, amortization is going to bump your total current return to double digits ... and any rent inflation or market appreciation is gravy.

The math works differently in these higher priced markets in ways that are unexpected if one's reference is a more typical market.

Thanks for all the responses I will dig in to all the suggestions and try to find a number I am comfortable with and report back after its all said and done. I should say that the place is getting renovated does that change any of your calculations as far as capEx is concerned for the first few years or do you figure that into your cash flow analysis no matter what? I want to lean towards no matter what because I tend to want to play it safer but curious to hear your thoughts. 

Also to answer a question above yes this will be my first REI. Thanks again!

@Matthew Haase

Will you be out exactly zero cost? No money down does not always mean zero cost. Any closing costs? Renovations? Repairs? Updates?

If your cost is truly zero then any positive cash flow is essentially getting something out of nothing and that's always a good performing investment in my book... lol. The question is will you have consistent cashflow (i.e. no deferred capex, etc). Also, with VA loans are you not required to live in one of the units which reduces cashflow.

As @Mike Dymski pointed out, use IRR. It's a better measure of performance and can be used to compare dissimilar investment opportunities (i.e. mutual funds, bonds, etc). The question of how much cashflow one should expect from a property is a popular one but can only be answered by knowing the investor's situation (i.e. what other investment opportunities are available to him and his level of risk tolerance). IRR is a great tool for this.

@Ryan Ingram

The OP is dealing with a 4-unit property. Aren't the sales comparables of this property more relevant than NOI or cap rates when it comes to valuation?

@Dan Bernstein

"...and once you consider leverage, your cap rate increases"

Does leverage affect cap rate?

Cheers... Immanuel

@Immanuel Sibero

I should be out exactly zero cost as far as i know at this point in looking at the property the only thing i am unsure of is if there are minimum appliances in each unit (oven, fridge, microwave, W/D) or if I will need to supply them. I know a couple of the units are fully furnished in those just waiting to hear back about the rest of the units condition. So I am thinking at most to be out ~$5,000 if i need to furnish two units worth. 

@Everyone

Yes I will be living in one of the units but if it works out the way I expect I should be covering the mortgage and getting a few hundred dollars in positive cash flow after figuring for expenses like (vacancy, repairs, and capEx) if I add in paying myself the ~3K mgmt fees then that will cut my cash flow  but since I would be paying myself is that all that bad? Or should I still be wanting positive cash flow beyond that? I feel like if I am looking for a deal that covers the mortgage, pays myself 3K mgmt fees, and still has several hundred in cash flow is too good to be true. Then again I am new to this and there may be deals that make that possible i just want to make sure I am maintaining realistic expectations about returns.

@Mike Dymski I will check the IRR for sure I hadn't done that yet bad on me!

Howdy @Matthew Haase

What are the current rent rates for the property?

COC and IRR are important. But I would still want the property to provide positive cash flow after you move out. Having negative Cash Flow while you live there acceptable. And I would use the 50% for expenses until you can verify more accurate numbers for the property. Your CapEx and Maintenance reserves will be based on the condition of the property and the results of an inspection. If everything is close to new condition obviously your reserves requirement will be lower. It is always good to include Property Management in your analysis. Even if you do not pay yourself you may need a PM service in the future. You want the property to continue to have positive Cash Flow in that situation.

There are a lot of 4 plex's in San Antonio. Are there many near this property? If so find comps to determine an ARV.

It is not realistic to achieve the same Cash Flow (as Brandon’s 100/unit) using a low/no down payment mortgage unless you purchase at a discount.

Hello Matthew. If it were me, I would analyze the property as if I was not going to live in it. You should be able to get your expenses very close. Vacancy rates in SA are around 3-4%, taxes are available from the county, repairs and capex are numbers you can gather from local property managers and investors, and you know the mortgage amount. Do the calculations, and if you are happy with the returns after you move out and can live for free, or close to it, I would do it. I would say this, from all of my research, any time you get above $2,000/mo rent here, the supply of tenants looking for a long term place to live shrinks. Another option, depending upon location, could be to use the other the units as short term rentals, a la Air Bnb, but that is out of my scope of knowledge.

Good luck and let us know how it turns out.

@Immanuel Sibero Leverage effects cap rate. The cap rate is NOI (net operating income)/ Price of the property.

With Leverage (calculated over 1 year): (NOI-(Cost of the loan))/($ down) = Leverage Adjusted Cap Rate or COC (cash on cash return)

Depending on the interest rate of the loan, you can have a decrease in leveraged cap rate or an increase.  Since interest rates are so low, in many cases, as long as rents are high and stable, you can increase your cap rate with leverage.  The loan cost is usually the determining factor on whether an investment makes sense, not the hard Cap Rate, since most investors use leverage.

@Matthew Haase you mentioned using a VA loan. Will you be living in one of these units? Somebody correct me if I am wrong, but as I understand it, VA loans are only for primary residences. There is an attestation form at closing you sign for this and, if you close with no intention of moving in, you may be committing fraud.

Where is this million $ four plex in San Antonio?? There are probably better cash flowing properties out there for half the price. 

I am not buying in San Antonio sorry for the confusion I know my profile says I'm from there will be moving soon.

@Larry Hawkins I am living in one of the units yes.

@Dan Bernstein

Thanks for clarifying Leverage Adjusted Cap Rate. I’m a relative newbie, cap rate has been one metric that I have spent a bit of time learning, partly because of the various definitions of it and the occasional misconceptions surrounding it.

The formula I see all the time is Cap Rate = NOI/(Purchase or Value) which does not include leverage. So by definition leverage never affects cap rate simply because leverage is nowhere in the formula. As a matter of fact Cap Rate is a metric which deliberately excludes items such as leverage because it aims to measure strictly the worthiness of the property (i.e. how much value can be created by "operating" the property). You can technically operate a property without leverage (i.e. by not borrowing) and without CapEx (i.e. by deferring it), but you can't operate a property without collecting revenues and paying for operating expenses. This is the reason why NOI, as it is used in the definition of Cap Rate, should only include operating items but should exclude debt payments and capex.

I see that you may have used the term "Leverage Adjusted Cap Rate" as a substitute for COC which is a metric that does take leverage into account. I have just never heard of "Leverage Adjusted Cap Rate" so this may just be my lack of understanding your terminology. Also this is way off topic, probably should be a different post on a different day… 😊

Cheers... Immanuel

@Matthew Haase if you're going to be living there run the numbers for when you move out and have all 4 rented. If it makes sense, then run them to see what it'll be while you're living there. With house hacking any positive net income while living there is great because you'll move out eventually and then your net income increases significantly. I agree not to worry about cash on cash with a VA loan, 0 money down and no PMI is great. good luck, wish my wife would've let me house hack when we bought our first place.

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