I'm thinking about branching out into a multifamily purchase. I found a good candidate property - $2360 monthly rent received. It's for sale for 310k, so when I put all the factors into a calculator I'm getting a negative monly cash flow of $100. So the deal is no bueno.
Tweaking the calculator I find a monthly positive cash flow of $128 and cap rate of 5.8% if I can get the property for 250k. This is a fairly steep discount from the asking price. I'm using conservative estimates for expenses and vacancy. It's a C class property. I'm planning on putting $20k in to raise the rents.
What am I missing in analyzing the property? Is 5.8% cap rate sufficient (this is in NM)?
Thanks for any advice or other considerations.
Personally I like to see at least $100 per door.
What’s your cash on cash return for this?
I suggest going for 236K that way your rents equal 1% of purchase price. You need to look at similar properties that SOLD in the area. is their cap rate 2% or 10% that will tell you how your cap of 5.8 stands in comparison. You compare to SOLD properties. Someone can ask any price - you buy based on the numbers.
If you really want help analyzing this deal, give us the numbers and people on here can answer specific questions.
Vacancy rates for area? Vacancy rate you'd like (If you want to be more conservative)
Utilities cost/month that you're responsible for?
Are you financing, if so what amount $$ finance and @ what % interest over how many years
Tax costs/year or month
Repair % and Capex % you'd like to hold back (this varies greatly on building age/condition and updates etc...
But as a rough estimation I like to get ~100/mon per door when analyzing properties, and I like ~10%+ CoC ROI. Cap rate doesn't matter as much since this doesn't sound like a commercial property so you need to use CMA not Income Approach to determine property value.
Thanks for the responses so far. When calculating the CoC return, should I use the current rents, or what I would expect to increase them to following the renovations?
Vacancy rates for ABQ are approx. 7%, I'm estimating 10%
I would be responsible for water/sewage, estimating 80/mo
Estimating insurance at $1000/yr
Expecting to put 20% down and finance 80% at 5% interest and 10K closing costs (would finance this).
Annual taxes of $3600
Expecting $1000 annual Capex and $1700 for annual maintenance
run the numbers based on current rent NOT what you think you can get for the place. What you can raise them to is your gravy not the sellers.
It does not sound like a good deal to me. Just not enough cash flow.
I also think $1000 a year is generally not enough for capex. That is just 3.5%. Unless everything is new I think that will not be enough, which will be a problem with the limited cash flow.
Your maintenance budget is also only 6%, $140 a month is gone if you need a Trades professional just to check out 1 thing, not even talking about monthly returning maintenance cost as lawn care.
How much is your budget for property management?
You going to have to seriously negotiate to get a purchase price that will allow you to break even. Let alone make a healthy monthly cash flow. I would pass for now, keep an eye on the property and wait for it to sit on the market for a long time. Then contact the seller and offer a price that makes more sense to you as an investor.
Just bought a 4 plex. What made it worth it was the prospect for improvements that could increase revenue (in my case, fixits to turn it from a 3 to a 4 unit).
Do you see opportunity for added value?
If you can’t get the revenue up from 2.3k, it’s not as much of a B-Rehab-RRR.
In Albuquerque, the owner generally pays water/sewer/trash on older multis. It generally runs $50 per door, but can be much higher (remember we are in the desert). I didn't see anything for management either.
Depending on what part of town this is in, it could be a decent deal or a terrible deal. Rougher areas have higher expenses while better areas have lower expenses (generally).
What kind of returns have you been getting on your other RE previously? If they are better than this, why change?
Howdy @Scott Ruppel
I don't see how you think this is a good candidate. You state you get a negative $100 monthly cash flow. Even when your tweaked the numbers you get $32 per unit cash flow. Without seeing all your actual numbers there is noway to know what else you left out. It does not appear you are really using conservative estimates for expenses since you left some key expenses off your posts. Using the 50% rule for expenses would be conservation.
I would need to see recently sold Comps to determine the FMV. This is not a commercial property so Cap Rate is only useful to compare properties with cash purchase only (no financing). Not to determine price.
What condition is the property in? Does it need sufficient repairs to justify the discounted offer? Have you completed a rental market analysis to determine if this property rent rates are below market or not? Property condition and rents under market rates can improved to potential of a deal.
Cash on Cash Return is based on the current rental income/Net Operating Income divided by your initial cash investment. Based on your numbers the COC for current rent is a Negative 2%. For your tweaked cash flow it is approximately 2.6% COC. Neither are acceptable for most investors.
Bottom line this is not a deal I would even look at. Pass. There are many more better opportunities out there.
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