Is analyzing cash flow for multi-unit rentals the same as analyzing for SFH, using the 45-50% rule, and 100 dollars cash flow per unit?
Is there anything else I need to look for in multiunits (besides checking to make sure it is zoned for proper # of units).
I want to start analyzing multi units in my area to get an idea of what the market is like.
Also-
most of the units i have looked at are rented. What sorts of things do I need to look for and be careful about when purchasing a rented multi-unit?
Thanks
-Terry
Phatman,
Yes, operating expenses are still 45% to 50% of gross rents and you still analyze them the same way. With multi-units, you want to determine if the utilities are split and metered separately and you want to consider any common area maintenance, mowing, and snow/ice removal. You should still check the leases of all tenants and screen them to see who is in the building. You are inheriting the leases, so you are stuck with the terms. Many sellers of multi-units will fill the buildings with just anyone to make the building look better.
Good Luck,
Mike
For me, there are a lot of advantages over Multi-Unit properties for rentals than any other. Other than the simple fact that you can leverage your costs over multiple income streams, you also decrease your downside risk of vacancies (as in the case of a 4 plex, if one is vacant you still have 75% of the income stream coming in). That’s not the case with a SFH.
Also its likely that Multi-Units are not in HOA areas, meaning that you won’t have to absorb the HOA fees. But you then become your own HOA. You inherit all the maintenance, all the time.
Your other advantage is being able to sell or resell utility services to the tenants. I’m not just talking about power, etc. (which we currently don’t resell, but are considering installing solar systems and using it to harvest power and sell back to the power company on all of our properties), but to sell laundry facilities (coin-op), etc. back to the tenants. With all that in mind, the upside rent cashflow potential of multi-units far outweighs SFHs for us.
However the downside is that they don’t increase in equity as much. With the state of the market right now, this isn’t as much of a concern for the short term, however as we all know we are not in this for the short term.
I guess I live by the law of cashflow rather than lump sum cash. I don’t like to ‘kill the goose that lays golden eggs’.
V
I care about cash flow. That is the #1 factor. BUT if you want to compare SFH Vs. Multi, then SFH are great investments and Mulifamily property are headaches. I know an investor who only buys SFH. His life is A LOT simplier and better then mine. If I started over I would only buy SFH and maybe a large apartment or two with a property mangement company running the apartment.
I run my investments as a business, and don’t share your experiences with MFH. I don’t expect property managing to be headache free. But SFHs in our area are fraught with expensive HOAs, high downpayment requirements to get in through lenders, and rents that are way under property prices. Its hard to cashflow these at the moment. Although I have many other SFHs that cashflow now, but its only because I bought them 7 yrs ago. These days, I’ll only buy MFH because of the cashflow and minimum risk of vacancies.
V
.
Nothing I wrote is debatable. If you haven’t shared my experiences then you probably will with time. I buy what cash flows, and if only multifamily properties cash flow in your area then great. You can definitely only buy what cash flows. But there is only one advantage to mulifamilies and that is cash flow. In every other way SFH’s are better.
I evict around 1/3 of the tenants I inherit from mulitfamilies. One of the main reason’s landlord sell is because they have had it with their tenants. I prefer to buy vacant properties, but have no problem evicting. With multifamily properties you will evict more often, and have far more people move out. So just plan on the headaches to be more frequent then with your SFH tenants.
What area of the country are your investments?
V
In my area, even through wholesalers finding SFH’s that cashflow are near impossible. I am sure you can purchase them via foreclosures or sub2 (however I am still trying to learn about this area also).
What should I be looking for/beware of when taking existing leases?
Can I make them change over to my leases?
if anyone wants to forward me a copy of the lease they use I would appreciate it.
45-50% rule of thumb, does that include reserves for repairs?
I also asked this question before, but did not get any answers with substance.
I wanted to know what percent of gross rent (within the 50%)is used for
- advertising %
-maintenace %
-Vacancy (common agreement seems to 5-10%)?
and taxes insurance are fairly fixed from property to property.
phatman,
Yes, the 45% to 50% includes repairs. It includes ALL the operating expenses. However, not looking at the 45% to 50% expense range properly. The 45% to 50% expense range is the average throughout the United States and represents data from hundreds of thousands of rental units. It is not an itemized breakdown of any one property in any one location at any one time. You ask what percentage of gross rents is used for maintenance. With dozens of rentals, I had many rentals in 2006 that I literally didn’t touch for the entire year. Should I conclude from those properties that the maintenance expense for my properties is zero? On the other hand, I spend about $2,000 rehabbing one room in a house this past week. The room was an add-on to the original house (probably started as a porch in the late 1800’s and the floor (including the joists) had just about rotted away. Should I conclude that my maintenance is $2,000 per year per unit based on this incident? What about evictions? How many evictions will you have in any given property in any given year? What about legal fees? Will a tenant sue you as the result of a slip and fall accident in any particular unit this year?
That’s the beauty of the 45% to 50% rule (I use 50%). It doesn’t try to itemize expenses that can’t be itemized. It gives you the average of all expenses over time which is the important thing you need to know if you want to make a profit.
Mike
I totally agree. That is the beauty of the rule. Being able to cash flow a property is critical and should always be basic. Too many investors invent complicated systems.