What am I doing wrong in my analyses?

29 Replies

Hi guys,

I’m relatively new to the world of multifamily real estate investment and I’m struggling to find any deals that come even close to making sense. In order for need to find cash flow in a given property, I often have to bring the purchase price down several hundred thousand dollars lower than what it’s at (e.g. from $600k down to $100k).

This is obviously unrealistic and therefore I feel like I must be drastically over-conservative on some of my calculations.

I have compared my custom-designed calculator to the bigger pockets calculator and it calculates similar values, so I know it’s not a coding error. I’ve confirmed all the mortgage information with my mortgage partner and it seems to pencil out correctly. Rents are based on rental comps in the area and discussions with local property management companies. Likewise, PM fees are based on those convos as well.

That really leaves me with operating expenses and capital expenditures as the two primary areas that are up to interpretation. If I had to guess, I would imagine I’m either over estimating repairs and maintenance or capex, since vacancy is based on similar numbers I see thrown around here.

Assumptions in my calculations:

  • - capex: $250/unit/mo
  • - insurance: $3.50 per $1,000 property value
  • - repairs/maintenance: $1/sqft of the property

As you can see in the example attached, the property meets the:

  • - 1% rule
  • - 50% rule
  • - 70% rule (example property is priced at $660k on MLS currently)

Even with all that, the property pro forma shows a COC return of -3.36%, and an annual loss of almost $4,600. This would be WITH me negotiating a 30% discount on the purchase price of the property, as well as raising rents in the top and garden units by $150/mo each, and some other value-adds like putting the majority of the utility expenses onto the tenants. If I purchased at the asking price and kept rents/utilities as-is, I would be losing over $10k per year!

Based on projections, the property would continue losing money for the entire 30-year term of the mortgage, amounting to around $80k of loss over that time, meaning it would take at least 4-5 years after paying off the property in full to break even on the property. That’s obviously not a feasible strategy for acquiring many properties over time.

To break even on this property with a mortgage at the existing rents/opex, I would need to get the property for around $375k, which is almost $300k less than the asking price.

Can you please take a look at the example attached and let me know if my math seems sound? Specifically notice the cash flow per door and cash on cash return.

Since I am specifically looking at three and four unit properties only in an effort to increase the chances of cash flow, I’m very perplexed why I am still completely unable to find any scenarios that cash flow for every property I have looked at so far. I have looked at about 200 properties across multiple states and haven’t found a single one that isn’t a D- property that would require a lot of speculative luck to come out ahead on.

I know I’m not doing this correctly because plenty of you guys find deals all the time and have built significant portfolios, so please help me understand where I am going wrong so that I can move forward. Thank you so much!

Go where others won’t
do what others will not

Work harder The easy path is filled with new people who love the idea of sitting back and getting easy re tall income by using a PM

If you follow what the gurus advise and other ‘experts’ in this market you probably won’t find good deals

Look at mold problem houses. Look at fire damaged houses. Look at mobile homes   Look in the country where people where retirees people live so they don’t need to be near a big city for work 

I can’t find enough cash for all the deals I want to do.   To me 1% is not high enough. 

I see people here advocating .6 that is crazy in my world.   My worst is almost 2%   And not a single one is in a bad neighborhood    You can easily walk down the street at midnight and be safe 

It is a cop out to say you can only find good cash flow in war Torn neighborhoods 



@Kasia Harmata

At first glance, it looks like you've got $1,000 per month budgeted for Capex, which seems high to me. Let me do some more digging and see what I can find. I'm new to investing, to take anything I say with a grain of salt.

@Michael Plante

I am very confused by your aggressive response; it seems like you're implying I am lazy and looking to sit back, when all I did was ask people to analyze my calculations and help me understand why I can't find properties that cash flow. I have a full time job; I am looking for a retirement strategy, not another job. How would I manage my own properties if I am investing in other states?

@Kasia Harmata The CA market is out of control and is very difficult to find cash flow properties although I'm sure there are a few out there. My wife and I have property on southern CA but recently decided to start looking out of state. We are planning to hire property management to watch over everything. My main concern is building relationships of people we can trust. My W2 job turned work from home so I am planning on renting an Air BnB during the buy and fix up process to be nearby to build those relationships.

I think you need to look in a different market(s) that would more closely support your investment goals. Your numbers might be correct but you may be priced out of the market you're researching. This is especially true in hot or high value markets. 

I hope this helps. Good luck

Brendan: $1,000 is based on $250/unit (this is a 4-unit) which I've seen as a reasonable estimate and hard money lenders that I've spoken to use a number similar to this when analyzing deals to fund. But maybe it's too high, interested to see what some experienced multifamily owning investors think.

Derek:
 thank you and I agree about CA, but I'm actually not looking for properties in California. I've been looking all over the midwest (I am originally from Chicago). Having the same problem all over it seems.

First things first.  Throw out the 1%, 3%, 50% 70%, and any other ridiculously arbitrary rule (LOL) someone comes up with for analysis.  You're own personal analysis, basing the deal on how your CoCReturn and cash flow is losing you money, is the correct way to do analysis.

Next, stop thinking you are making a mistake somehow.  You're not.  Sometimes the best deals you make, are the ones you don't.

I appreciate all the responses, but to clarify, my question is strictly about my analysis, not where I'm choosing to look for properties. I am asking if my analyses are overly-conservative and if so, which elements.  As per my example, the property in question meets several basic criteria for finding a potentially cash-flowing property, yet the property is nowhere near cash-flowing.

I've analyzed properties all over the US, not hot markets. I live in CA but am not looking for properties in CA. Chicagoland outskirts, Indianapolis outskirts, etc. Regardless, I am not asking about where to look for properties; I just want someone experienced with investment to check my analysis and let me know if I am analyzing accurately or if I am overestimating costs somewhere.

Per my experience, anything that isn't D- doesn't cash flow. I have to look in very bad neighborhoods to find anything that seems to work. Even properties requiring tons of rehab, which is fine, don't pencil out unless they're in bad neighborhoods. 

I am absolutely willing and able to contact owners directly to find off market listings, but if they look at property values for market properties they're likely going to balk at me offering them <50% of what similar properties are selling for.

Thanks Joe, I am definitely looking at my own numbers more which is why I added several return metrics such as COC, cap rate, adjusted cap, etc. I definitely didn't expect most MLS properties to be good deals as-advertised... however what makes me think I am making a mistake is that the numbers required to cash-flow aren't even close to the asking price... they're often 50% or less than asking. For example, a property asking $450k that would only cash flow at $185k, etc. This hasn't been an exception, it's been the norm. I guess I assumed properties would be listed a bit more than required to cash flow (say, 15-20% on average), but to be listed 2-3x an acceptable price as the norm seems crazy.

I dunno small multifamilies have their own logic and it's not based on a spread sheet. If you wanna do spread sheet deals find some partners and go after bigger deals 10 plus units where you have professional commercial brokers that know how to price an investment grade property. Look out of state and focus on having all your ducks in a row like an attorney, accountant and get prequalified in the states you want to buy. Most buyers in that market live in one apartment and are hands on managers. Espically with the housing market so overheated. No doubt homebuyers are stepping into the duplex and fourplex market because they can and they are driving up prices.

If you buy in Califorina in the 4 plex category it should be like buying a house. 

Look at the comps as you would a house and look at market rents. Like others have suggested look at multi-family fixers or better yet check out underdeveloped multifamily you can improve later.... There will always be good deals but it takes time and luck.

feel free to contact me

@Kasia Harmata

So your making about $535/mo?  So that's about a 4.72% CoCr.

Just looking at the form looks like you have a lot of information.  I honestly did the same thing when I first looked at it just because you have monthly and yearly next to each other and you don't distinguish the two.  I like the form running about 51% expenses including the CAPEx.  Little high but it is better to go in conservative and have a good surprise then go in liberal and have a bad surprise..  I usually do everything on a yearly basis and do not break it down monthly.  

Good Luck!!


Originally posted by @Nick Robinson :

@Kasia Harmata

So your making about $535/mo?  So that's about a 4.72% CoCr.

Just looking at the form looks like you have a lot of information.  I honestly did the same thing when I first looked at it just because you have monthly and yearly next to each other and you don't distinguish the two.  I like the form running about 51% expenses including the CAPEx.  Little high but it is better to go in conservative and have a good surprise then go in liberal and have a bad surprise..  I usually do everything on a yearly basis and do not break it down monthly.  

Good Luck!!

 Why do you do everything yearly instead of monthly?

@Joe Villeneuve

Well on my form I do have everything broken down monthly in one section but I look at what's going on yearly.  So I do not have mistakes like what happened to Kasia where I forgot to do something monthly or annually.  When I look at things I like to look at things on a yearly basis since I project out 5 years and these are long term investment. Just personal preference I guess is my answer haha.

@Kasia Harmata at first glance, I think your Capex is high. I see you don't have any upfront repairs which leads me to believe it's in relatively good shape and you will probably have an inspection done to confirm or disconfirm that.
my opinion on capex is that it’s property specific. Some may use a percentage, but it’s not one seize fits all. $12,000 per year on a $600k property seems high. Maybe I’m wrong, but that would be 120k over the course of a decade. In 10 years, you might have to replace 6-8 HVAC units, a roof, your hot water heaters, and some other miscellaneous stuff at worst, but on day one, you should reasonably be able to identify what will be needed coming soon. I would estimate capex should be closer to half of what you are estimating. Also, those high taxes make me think you are looking in a state without income tax that has prop taxes only because they seem somewhat high otherwise. Is that the case? I only ask that because I’m from Texas and those look like Texas taxes. 

@Boone Tyson

Earlier in the forum we talked about the CapEx was meant to be $1000/yr not /mo. Usually for CapEx you want to estimate $250-300/unit/year.

A lot of those rules are for C class sub 100k properties. If you are buying in higher priced A and B class markets even several years ago you would never of found a property to match those rules. You need to run numbers individual for each property to see what cashflows/has a value add. Prices are higher now so it's even harder to find deals that work, I wouldn't bet on them falling anytime soon though. I personally am just OK doing less deals and only buying good deals. 

Your interest rate on a non owner occupied 3/4 unit currently should be 3.4-3.6% I see you have 4.5% that is too high. Just had a buyer close a 3.6% last friday on 400k 4 flat 25 down non occupant and they locked it in before rates ticked down a little last week. 

Originally posted by @Kasia Harmata :

@Michael Plante

I am very confused by your aggressive response; it seems like you're implying I am lazy and looking to sit back, when all I did was ask people to analyze my calculations and help me understand why I can't find properties that cash flow. I have a full time job; I am looking for a retirement strategy, not another job. How would I manage my own properties if I am investing in other states?