4plex Rental Analysis/CAP Rates

Rehabbing, Fix and Flip, Rental Properties
1

Hey group,

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.

2

Let’s look at your hypothetical deal:

Gross Rents: $29,000 per year or $2,400 per month (round numbers)
Operating Expenses: $1,200 per month
NOI: $1,200 per month

Mortgage ($235K, 30 yr, 7%): $1,560

Monthly Loss: $360 OUCH!

So, forgetting the cap rate or any other extraneous info, how exadtly is losing $360 per month a good deal?

To answer your question directly, I would not pay more than an amount that would allow me to have a positive cash flow of $100 per unit per month!

Good Luck,

Mike

3

Mike,

Appreciate the straight shot answer. Obviously not a good deal… :banghead

So to pass your “good deal” standards, you’d put the purchase price around $120k? (30yr, 7%= $800/mo)

Cracks me up how the realtors soliciting these short sales claim these things as the “deal of the year”… :rolleyes

Thanks again Mike. :beer

4
So to pass your "good deal" standards, you'd put the purchase price around $120k?

Yeah, that sounds about right. It looks to me like that property is about twice the “good deal” price.

Mike

5

It’s my understanding that prices in Fresno have dropped substantially. The appraisal from 2 years ago is worthless. What are the duplexes worth in today’s market?

If the sales price is substantially below fair market value, this might be a fix and flip.

The spread between fair market value and the sales price might not be as big as you are thinking it is.

6

Any appraisal over 6 months old is generally disregarded as valid in the RE world…especially in today’s market.

Keith

7

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.

8

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.

9
If you're using 50% as your expense number that is a 12 cap just so you know.

I don’t think so! Cap rate is determined by dividing NOI by the Purchase Price. Therefore, in this case, that would be $14,500/ $235,000 = .06, which is a 6 cap.

Mike

10

I didn’t mean this specific deal is a 12 cap. I’m saying if you’re doing your screening and you’re using 50% as your expense number then that is the same as using a 12 cap or the 2% rule.

So…14,500 / .12 (cap) = 120,833
or…2,416 mth rents / .02 (2% rule) = 120,833
therefore…14,500 / 120,833 = 12 (cap)

11

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.