I’m not much into the rental game, but have come across a fair amount of distressed multi-families lately that I’ve considered picking up.
I know there are many subjective factors that go into rentals such as neighborhood, condition, etc, but lets put those aside and look at numbers. I’ve got a line on a lot (5-6) of short saled 4plexes in Fresno, CA. Numbers are as follows,
$235k short sale price (sold for $410k+ 2 yrs ago)
$29,000 gross annual rents
12.6% gross CAP (gross rent/price). Rule of thumb on this board seems to be 50% expense ratio, so estimated 6.3% CAP rate. Nothing stellar there.
My question really boils down to, if you are using a 50% expense ratio, what sort of minimum CAP rates do you guys shoot for? Equal to your mortgage interest rate? 1 point higher? 2 points? 10 points?
Any feedback on the “numbers analysis” would be appreciated.
100% agree with you guys. That previous sales price has nothing to do with my analysis. Just more of a tidbit of info to show how crazy people were a few years back. :shocked
Prices in the entire San Jauquin Valley have tanked (Sacramento, Modesto, Stocken, Fresno). Strong rental market though, so it would be a good time to pick up some multi-families from the “flippers” who are getting eaten alive by negative cash flow.
These multi families units are an interesting bunch. From an income valuation (like Mike’s), this deal looks bad, but from a comp valuation, it looks cheap. As stated, i’m pretty new to this segment of REI, but my instincts tell me I should stick with an income valuation.
Turns out the short sale is still pending, so I’ll most likely submit a few low ball offers with an estimated income statement.
If you’re using 50% as your expense number that is a 12 cap just so you know. So if you start looking at different cap rates when comparing properties and you’re getting 6 and 7 those aren’t even numbers I would consider to begin negotiations. Needs to be at at lease a 9 or 10 before I look at it. Good luck.
Spencer, I will buy property that has negative cash flow and I’ve done just fine with real estate.
However, if you are going to buy negative, you must have a realistic expectation of what the expenses are really going to be, and you have to know where the money is coming from to make the payments, because the new building isn’t going to make it’s own payments.
The information that the seller and the agents give you concerning expenses is totally worthless. You must track down every expense and verify it for yourself.