I am actively searching for my first small multifamily property in South Jersey, primarily duplexes. I am going to self-manage the property. I am admittedly in that "analysis paralysis" stage. When I am analyzing the deals, I am including the cost of local property management to account for my time and to make sure the deal still makes sense if I choose to hire PM later down the road. For those who self-manage, do you make your offers depending on how cash flow, CoCROI, and ROI look WITHOUT accounting for PM but still analyze the deal with PM to make sure it makes sense if you hired PM in the future? Or, do you base all of your offers with PM budgeted for no matter what?
I am considering placing an offer on a duplex, which I will posting about on this forum. With PM as an expense, the monthly cash flow is $417/month, CoCROI is 7%, and total ROI is 10.18%. Without PM accounted for, the monthly cash flow is $664/month, CoCROI is 11.2%, and total ROI is 14.4%.
Am I allowing the non-PM numbers persuade me that this is a better deal than it actually is? Is it ok to use the non-PM numbers if you are self-managing as long as the deal still makes sense for you if you decide to hire PM later?
@Ian Livaich definitely a case of analysis paralysis! That is ok though! We have all gone through it.
While running the numbers is crucial, perhaps the most crucial piece to buying a rental property, you cannot ignore variables of this kind. For instance, yes run the numbers including the price of a PM because you want to be safe. However, if you're current situation allows for you to not have this PM cost as you will be self managing - review both calculations (with PM vs. without PM). At some point, you will want to break away from self managing and it's vital to know where those numbers are. On the other hand, you also need to be prepared for the exact situation you could come into - which would be without paying a PM.
This holds true for other items as well (tax & insurance increases, repairs evaluations, etc.). Prepare for the worst (i.e. highest payments) and once you're prepared see where you have room to adjust anything. If its a good deal including a PM payment, it will be a better deal without it.
This is a big step to get over and I can tell you first hand that you won't until you actually buy a property. BUT since you've done your research, talked with fellow investors, & run the numbers (countless times I'm sure) - you'll notice it's actually not THAT big of an investment because you are prepared for the managing of it, financially, professionally, & personally.
Good luck! You'll get a good one.
Been there @Ian Livaich . I always calculated and made offers with the idea I would eventually hire a PM and I'm glad I did. It wasn't long after I found and moved in my first tenant that I was ready to move them to a PM. Not that the tenant was bad, she was actually what I consider the ideal tenant, great. I just quickly discovered that PM is not the business that I want to be in. Anytime spent being a PM is less time I'm spending on finding/funding my next deal. And even if you're toying with the idea of hiring a PM, start interviewing potential candidates/firms now. I went through 2 before I found the best fit.
Howdy @Ian Livaich
My first question is what are YOUR investment criteria?
Minimum Cash Flow? $100? $200? per unit.
COC? 8%? 10%? 12%?
Are there any other criteria that you are using? 1%/2% Rule? 50% Rule?
To help keep you focused and stay away from "analysis paralysis" you need to establish criteria and stick to them.
Always be conservative in your analysis. That means including PM as an expense. Do not adjust expenses to make a deal look better. If you self manage you have the option to pay yourself or save that amount for future investments. If you choose to hire a PM later it is already included in your CF analysis. It's similar with Vacancy, Maintenance, and CapEx. You project a specific percentage/dollar amount for reserves. If they occur hopefully you planned correctly or you are at least close. If they do not occur, then, you have additional cash saved for future investments.
Really appreciate the insight guys. My plan is to self-manage for the first few years to learn the in's and out's of the business so when I scale up to larger multifamily properties, I'll know what to look for in a PM or be able to train one myself.
The best approach for me is make sure that the deal fits my investment criteria as @John Leavelle pointed out. John, how do you feel about adjusting expenses if you plan on putting a substantial amount of money into a rehab? For instance, I typically use 7-8% each for capex and repairs. But, on a property I am considering putting an offer on, I would significantly rehab it (to take advantage of a higher ARV and to BRRRR it once the rehab is complete), so I lowered my expenses to reflect that I should have lesser capex/maintenance with the property. Even after lowering those figures, I would still be saving $200/unit for both capex and repairs.
For a small multi, I'd like to cash flow at least $150/unit and get a CoCROI around 7-8%.
You have the right idea. As long as you have a good idea how long any item should last (that you did not replace during Rehab) and budget for the eventual replacement/repair. I use the BRRRR strategy and repair/replace anything that will not last 5 years. I re-evaluate the property condition each year and make the appropriate adjustments for CapEx reserves. Prior to purchasing a property I use 10% CapEx and 10% Maintenance for my analysis. I use 55% overall for expenses because I want a very conservative Cash Flow analysis. Once I have a property under contract I have the property inspected to develop a more accurate Rehab and CapEx requirement. Obvious Immediate repairs and those needed within the next 5 years are included in the Rehab budget. Items projected past 5 years go to CapEx reserves. i do not plan on holding any of my current properties more than 5 years. I plan on 1031 exchanging for larger Multi's. I still want the CapEx funds held back just in case. If I do not need to use them they will become part of my Cash Reserve's for Larger units.
My Maintenance amount depends on the quality of the neighborhood and tenants. I will not go lower than 5% or $ 50 per unit. I have not been investing long enough to have this number nailed down good.
Regarding you Cash Flow and CCR numbers. If you pursue using the BRRRR strategy you will find 2 thing happen. Cash Flow will be lower in many cases if you achieve 100% cash out. This is due to the increased mortgage payment resulting from the new ARV and associated refinance loan. You may decide not to take out 100% of your cash to meet an acceptable Cash Flow number. On the other hand. If done correctly and you manage to pull 100% of your cash out you can achieve COCROI infinity. Way better than 7-8%.
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