What am I doing wrong in my analyses?
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!
