Hey guys.
I noticed a few aprtment buildings with 9+ units for sale in my area. I don’t have any real info on them. I have been studying RE investing fo r about a year. I have no experience in REI. Is it possible for me to purchase something like that? They’re asking like $300k to 400k. I don’t have much money for a down payment and I feel that getting financing will be tough. I would have a property management company handling the property. Any thoughts?
NO.
The unfortunate truth is that noone is going to lend you around 300K w/o any sort of experience, no matter how good the deal is. :banghead
Hi:
1st MORTGAGE: Most commercial lenders will loan 70-75% LTV. Some go as high as 90%.
2nd MORTGAGE: The remaining balance hasto come from either the YOUR wallet(or equity in another property) or Seller maybe gives you balance as a 2nd mortgage.
You will need a DSCR of 1.2 or greater to get the 1st MORTGAGE.
(The DSCR is Debt Service Coverage Ration, is is the NOI/TotalLoanAmount).
DCR (Debt Coverage Ratio) = NOI/Total Yearly Payment
Forget the DSCR! If you find a property that will cash flow with real world numbers, the DSCR, cap rate, and all that other hocus pocus will take care of itself.
Mike
Well I figured it could be a long shot at best. I may find some some lenders to get in on this deal. I have to at least prove I can manage smaller rental properties first. Who knows. if I can find a reputable property management company to run thngs, it may be possible. After all, I’m sure there are many invstors that own apartment buildings that don’t deal with the day to day issues. When/if that time comes, is it better to find local commercial lending or look to private lending?
With all do respect Mike stick to residential… You haven’t a clue…
Sean,
That’s what we’re talking about here - RESIDENTIAL (apartment buildings)! Do you actually own any residential rentals or just throw out mumbo jumbo? We’re not talkiing about a 40 story office building here. We’re talking about a 9 unit apartment building.
Mike
Mike didn’t say anything out of the ordinary… What he said is basically a true statement. If you are cashflowing($100/unit in his strategy) everything else will fall into place. Obviously, if you are cashflowing $100/unit your DSCR has already been met.
Are we about to dig up old arguements here :banghead
Mike,
Eventhough apartments have a residential nature no matter what size they are, anything 4 units and above is considered commercial, as I’m sure you know. Would you say that a building that has 100 units is a residential building, I doubt it. No bank is going to finance a 9 unit apt. building on the residential side, you have to talk to commercial lending about something that size. I know your feelings about cap rates but when you do talk to the commercial guys about a deal you better know all about DSCR! This is the benchmark that bankers use to determine if a commercial deal is doable or not.
I’ve been meaning to ask you where you got your 2% rule. Is that a conclusion that you have drawn from your own experiences and numbers or is there a book or something that references that, if so I’d like to read it.
Is there a cap on the number of units that you would use the 2% rule for? Say you’re buying an apartment building with 50 units, do you still use 2%?
Well I started this thread about commercial properties. I’m not sure how it turned to residential. In my area, anything above 4 units is considered commercial. :smile
Mike just thinks that cap rates, dscr, and any other evaluation technique is a waste of time and that is simply untrue. You have to understand cap rates to know what kind of value you are buying and to be able to compare different properties and their performance or lack thereof. DSCR you have to understand so that you can look at a deal from the perspective of a banker. Typically banks want to see a 1.2 dscr, you’re wasting your time if you’re running around evaluating deals that don’t meet this benchmark. That’s why you need to understand the dscr. You can do your cash flow projections all you want, and you can get your $100/unit all you want, but if the dscr isn’t 1.2 or real close to that the bank isn’t going to do the deal. Also, if you want to get to the big time, which I assume most if not all of us do you are going to be dealing with sophisticated investors/bankers. These guys make their decisions based on percentages, rates of return, debt coverage, etc. not “Is this property making $100/unit” and to be able to speak their language and communicate in their terms, which you definately want to do, you need to understand cap rates and dscr.
Would you say that a building that has 100 units is a residential building, I doubt it.
Yes, of course you would. A residential building is one in which people reside as opposed to a retail outlet, office space, etc.
Mike just thinks that cap rates, dscr, and any other evaluation technique is a waste of time and that is simply untrue. You have to understand cap rates to know what kind of value you are buying and to be able to compare different properties and their performance or lack thereof.
Correct, I think cap rate, dscr, and many of the other evaluation techniques are a waste of time. Jbaldwin, let me try yet again. WHERE ARE YOU GETTING THE EXPENSE DATA FOR THE NOI AND WHERE ARE YOU GETTING THE MARKET CAP? As of a couple of weeks ago, you were only counting $2.33 per unit per month as maintainence expense and you admitted that you considered many other expenses not worth considering. If that doesn’t prove my point, nothing ever could!!! So, since you aren’t including all the expenses, any NOI that YOU calculate is worthless. We could dig up that old thread if you like.
Also, if you want to get to the big time, which I assume most if not all of us do you are going to be dealing with sophisticated investors/bankers. These guys make their decisions based on percentages, rates of return, debt coverage, etc. not "Is this property making $100/unit" and to be able to speak their language and communicate in their terms, which you definately want to do, you need to understand cap rates and dscr.
Ridiculous. I have dozens of rentals, almost all of which have bank financing from two small local banks. Every single loan I have is a commercial loan and I own several commercial buildings. DSCR, IRR, Cap Rate has NEVER been mentioned and I’ve borrowed several million dollars. That may not be the big time - it’s certainly not trump tower, but it’s big enough for me. I think you’re confusing trying to sound big with actually knowing how to make money.
People get so caught up with all the hocus pocus nonsense, that they forget what they’re trying to accomplish. What I’m trying to do is MAKE MONEY - real money (cash), not theoretical money; not money sometime in the future based on projections or wishing; not cap rate; not IRR; not DSCR; and not money from speculation! I do this for a living. I need CASH this month, next month, and every other month.
I deal with and talk to successful investors all the time. They are millionaires and they know how to make money. I don’t hear them talking about DSCR or cap rate. What I do hear them talking about is cash flow and equity.
The people that I do hear throw around Cap Rate and other silliness are Doctors, Lawyers, and others (amateurs) who have made their money elsewhere and almost without exception buy rental complexes for the tax benefits. They almost always are losing money on their “investment” but don’t care because they are getting the tax benefits (a very poor plan if you ask me).
I've been meaning to ask you where you got your 2% rule. Is that a conclusion that you have drawn from your own experiences and numbers or is there a book or something that references that, if so I'd like to read it.
Both of my rules (the 2% rule and the 50% expense rule) are simply based on factual expense data (from the large apartment/landlord associations) and simple math. My own experience does back up the numbers. No brain surgery here. I like the KISS principle.
Mike
Yes, of course you would. A residential building is one in which people reside as opposed to a retail outlet, office space, etc.
Correct, but residential only goes up to 3 units. After three units it goes to the commercial side and it’s called multifamily then. Multifamily properties are commercial buildings, why do you think your bank finances these on the COMMERCIAL side and not the RESIDENTIAL side. Simple, they’re not residential properties.
Correct, I think cap rate, dscr, and many of the other evaluation techniques are a waste of time. Jbaldwin, let me try yet again. WHERE ARE YOU GETTING THE EXPENSE DATA FOR THE NOI AND WHERE ARE YOU GETTING THE MARKET CAP? As of a couple of weeks ago, you were only counting $2.33 per unit per month as maintainence expense and you admitted that you considered many other expenses not worth considering. If that doesn't prove my point, nothing ever could!!! So, since you aren't including all the expenses, any NOI that YOU calculate is worthless. We could dig up that old thread if you like.
I was simply saying that for the first month of ownership for that building those were my expense numbers. I’m not naive as to think that my expenses are going to be $2.33/mth, come on. Here’s how I get expense data. I know for a fact what insurance and taxes are. I use 5% vacancy. Manage my own properties so $0. All utilities are split so $0. Maintenance 8-10% (experience and same # bank uses). Advertising is 2-4%. I know you’re going to argue to include legal fees, evictions, lawsuits, etc. but it is my belief that those numbers are so hit or miss that there is no way to assign a value/percentage to calculate into cash flow analysis.
Ridiculous. I have dozens of rentals, almost all of which have bank financing from two small local banks. Every single loan I have is a commercial loan and I own several commercial buildings. DSCR, IRR, Cap Rate has NEVER been mentioned and I've borrowed several million dollars. That may not be the big time - it's certainly not trump tower, but it's big enough for me. I think you're confusing trying to sound big with actually knowing how to make money.
IRR and cap rate are tools utilitzed by the investor so if you don’t believe in them of course it’s not going to be brought up. DSCR however is a bank tool. Ask your banker(s) if they calculate DSCR when underwriting your loans. Many investors aren’t familiar with the process because it’s a bank tool, not an investor tool. If your bank doesn’t do this, they’re either setting themselves up for problems down the road or they’re not sophisticated bankers. Maybe this is one advantage of using really small banks. But I think you’re misleading people on this forum by stating that DSCR is never used or mentioned.
Both of my rules (the 2% rule and the 50% expense rule) are simply based on factual expense data (from the large apartment/landlord associations) and simple math. My own experience does back up the numbers. No brain surgery here. I like the KISS principle.
I could be wrong but didn’t you state previously that the 2% rule is the same as buying at a 50 grm. I’m not so sure about that either. For most properties to cash flow properly the GRM needs to be between 8-12. Help me out here. Show me how the 2% rule is equal to a 50grm.
Correct, but residential only goes up to 3 units.
Wrong again. For lending purposes, residential is 1 to 4 units. Above 4 is considered commercial.
I know you're going to argue to include legal fees, evictions, lawsuits, etc. but it is my belief that those numbers are so hit or miss that there is no way to assign a value/percentage to calculate into cash flow analysis.
That’s right. You’re only including part of the expenses. Any NOI you derive from that is meaningless. You see, even you don’t know what to include. Should other investors include management in the expenses? You didn’t. Garbage in - garbage out.
I could be wrong but didn't you state previously that the 2% rule is the same as buying at a 50 grm. I'm not so sure about that either. For most properties to cash flow properly the GRM needs to be between 8-12. Help me out here. Show me how the 2% rule is equal to a 50grm.
Dividing the gross MONTHLY rent by .02 is the same as multiplying the gross MONTHLY rent by 50.
Mike
That's right. You're only including part of the expenses. Any NOI you derive from that is meaningless. You see, even you don't know what to include. Should other investors include management in the expenses? You didn't. Garbage in - garbage out.Why would I include a management expense if I manage all my own properties?
Dividing the gross MONTHLY rent by .02 is the same as multiplying the gross MONTHLY rent by 50.Ok so the math is right and it makes sense, but that number 50 is not the GRM.
Rental property brings in $1,665/mth. Using your 2% the most you would pay would be $83,250, right? So…
GRM = purchase price / annual rents so…assume these numbers using your 2% rule
GRM = $83,250/ $1,665 x 12 ($19,980)
GRM = 4.17
A $1,000,000 purchase price would give you a 50 GRM. $1,000,000 / $19,980 = 50.05 GRM. Am I missing something here? Just trying to get a better understanding of your methods.
I include management because I don’t work for free. You should be seeing that you are the perfect example why all of this cap rate talk for small residential rentals is bogus. If someone used YOUR NOI as part of a market cap number, their market cap calculation would be bogus because it wouldn’t include management or any of the other expenses that you consider to be too sporadic to include.
Ok so the math is right and it makes sense, but that number 50 is not the GRM.
You’re right in that the 50 is not an annual gross rent multiplier. My formula is to divide the gross monthly rents by .02. Some of the people on the forum made the observation that dividing by the MONTHLY gross rent by .02 is the same as multiplying the MONTHLY gross rent by 50. That’s it. No-one is talking about an annual gross rent multiplier of 50. They are talking about using a MONTHLY gross rent multiplier of 50. GRMs can either by monthly or yearly. I googled Gross Rent Multiplier and this is one of the first sites to come up: http://www.invest-2win.com/grm.html
Mike
ok gotcha, thanks for clearing that up. i was assuming that the comment about a grm of 50 was an annual number, which as we can all see is just ridiculous. are you a supporter of the grm method? as much as you talk about accurate expenses i would think that you would detest this method because it doesn’t even take into account a single expense. thoughts?
Wrong multiplier… I was thinking of
Jbaldwin,
I use the 2% rule as a screening tool, meaning that you need gross rents of about 2% of the acquisition cost (purchase price + rehab) if you are to receive an acceptable positive cash flow. In other words, the 2% rule is telling you the maximum you can pay for the property (and repairs). It is not telling you anything about the retail value, which in almost every case will be much higher than the price you can pay if you want positive cash flow.
The Gross Rent Multiplier is intended to determine the value (market value) of a property based on the gross rents. That is VERY DIFFERENT from what I’m talking about. As you correctly said, the GRM does not include expenses and I don’t use it to attempt to determine market value. I’m a big proponent of actually KNOWING your local market instead of using comps, appraisals, cap rates, or GRMs to determine market value. After all, this is MY business - it’s my job to be an EXPERT in my local market.
Mike