Here’s a property I am monitoring and made an offer a week back.
(8 units)
Total Rent roll - $53880
50% rule - 26,940
NOI - 26940 per annum
Asking price - $400,000
Offer price $210,000
Offer rejected because the appraised value - $310,000 → at this price the net cash flow will be roughly 115$.Not worth the hassle.
Now to my question, the seller knows that this property will not cash flow unless its total rent is at least 2% of the sale price thus even at appraised value 2% x 31000= $6200.
Even this amount will not ensure cash flow.
Im sort of confused how these sellers sell, I’m not in it for the dirt, just for the return. Im sure all who venture into MF properties also want immediate cash flow so can these sellers expect to sell unless it makes money?
Whats the catch?
Can anyone suggest a tactic to use ?
Advance thanks
You state this like it is a fact, but unfortunately it is not. The often quoted 2% rule is more like a “rule of thumb”. Might be true and it might not be. Some property are more expensive to operate than others. On an 8 unit, the seller should be willing to provide at least 2 yr worth of operating financials. It is likely you will need those to get your loan as the lender will want to see the gross rent provides enough debt coverage.
Different terms/ lower leverage can also bring a higher annual ROI, or cash flow. It’s not all about buying as low as possible. Your interest rate will play a significant role as well. The 2% rule is more of an aide to help you decide whether a property is grossly overpriced so that you won’t have to waste your time investigating something that just won’t work no matter what you try and do.
You are absolutely right. This is a terrible deal. The truth is that the vast majority of rental properties in the United States are owned by individuals. It is also true that the vast majority of newbies fail. If you look in your local MLS, properties that could never cash flow are often listed as “excellent cash flow”. Most new landlords and most realtors don’t know anything about the business. In fact, many so called “gurus” don’t know anything either. How many times have you heard someone say that the rent less the mortgage payment is the cash flow? A lot of realtors even say that. There have even been people on this forum trying to sell mentoring who believed this nonsense!
In almost every market, the majority of rental properties are sold at retail (like the deal you listed). There is an endless supply of newbies that will pay too much and then be forced out of business in a short period of time. Fortunately, you are smarter than they are. Keep looking - you’ll find a good deal!
The seller doesn’t give a toot whether you make money or not. He is going to get the most for his property.
If he can sell for $400,000 that’s what he is going to do, and it’s no problem of his how the buyer is going to make the payments.
I certainly hope that when you want to sell one of yours and the appraisal comes back at $400,000, that you don’t list it for $170,000 so that the buyer can have nice cash flow.
The rent roll is just a list of each apartment and the monthly rent it generates. NOI is “net operating income” and is the gross rent minus the operating expenses.
guys i suggest you read “What Every Real Estate Investor Needs to Know about Cash Flow” - Frank Gallinelli
ISBN 0071422579
it is one of the better real estate books that i have read. you will learn how to analyze deals throughly and with confidence. I read this book before i attempted to start buying mulit-family properties in the Cincinnati market. After using this book to screen deals i decided to move from multi-families to SFHs after searching for about 4 months to find a reasonably priced multi-family because as propertymanager said most properties are terribly overpriced.
Just from running the numbers i found that the only way that i could have made many of the multi-family deals work were if i bought foreclosed properties, because many of the non-foreclosed properties that i were interested in the owner paid WAY to much and he/she tried to pass the buck to me.
so please do yourself a favor and read this book or any real estate finance book.
One way to calculate how good a deal a Multi-family building may be (or not be) is to break it down to price per unit and then compare the unit price to what you could buy a single family house for…
Most multi’s I see have a per unit price that is not much less than a SFH, which would be one thing if the building, location, and ameities of the units where all far superior to the individual SFH’s…But it gets strange when some pieced together rattletrap with units stuck all which way has a per unit price equal to or not far under surrounding SFH’s…
I’m in the same Ohio market that Mike(Property Manager) is in. Been in the business ten years. My grandfather and father both have had real estate holdings throughout their adult lives. Even with that background I still have learned so much by doing this myself. I’ve taken it much further than they ever did. In the beginning I bought retail for a few properties and as a result they have not really ever provided substantial cash flow. But I have managed them close to the belt and they have always sustained themselves without putting a dime of my own money in. I am doing great now because the debt has been paid down and I have much more leverage with those early purchases. Eventually(retirement) those properties will be paid off and provide nice monthly supplemental income. However I would never pay anything close to retail today. If the deal doesn’t work I walk away. I’m not in this business to bail someone else out. My latest purchse is a 6 unit mixed usage building for 22K. Yes you read correctly, $22,000. Last Schedule E I saw netted an average of $2500 per month and that was under poor management. Was watching it for some time. It was listed for 242K, then 195K and finally 150K. Eventaully the owner through in the towel and it fell into foreclosure. I take possession next month. Mechnicals need updated but the building is sound. Tight walls, tight ceilings, foundation is good, roof replaced in 2005. Should provide unbelievable cash return even with a ridiculously high vacancy rate figured in. The deals are out there, especially now. If you haven’t found something that cash flows, you aren’t looking hard enough or in the right places. Listen to Property Manager’s advice… always. He is right nearly all the time… Or maybe I just agree with the same philosophies he uses for REI. You may not always like what he says but he always gives sound advice, and you can tell he is very successful. This is a terrible deal. My very first deal was better than this one and it’s nothing I brag about.
Did you purchase that property by short sale with the owner/lender, at a forclosure auction, or through the lender or their agent after it was foreclosed and taken back by lender…?
Negotitated a contract price with the lender to purchase it before foreclosure auction. They then purchased it at foreclosure auction and are reselling to me. That way the title gets cleansed.