Hello all, I’m considering buying multi-family and wanted to get an idea from other landlords of what should be an acceptable percentage for a monthly profit. IE: Purchase price $70,000, 2 units renting for $925 total a month. I would expect to be paying around $700 in mortgage, insurance and Taxes. Leaving approximately $225 for maintenance and profit. Does this sound like a decent deal? Is there a common rule of thumb i should go by? Like 75% overhead and 25% profit? Just trying to get a feel for what would, by the nature of the business, constitute a good deal. Thanks everyone
GracesDad,
Throughout the entire United States, operating expenses (including capital expenses) run 45% to 50% of gross rents. Therefore, in your example, your operating expenses would run about $450 per month (just to make the math easy), leaving $475 to pay the mortgage. With a mortgage payment of $700, you would lose $225 each and every month. OUCH!
I will not buy rentals unless they will generate 2% of the purchase price in monthly gross rent. So, in your case, I wouldn’t pay more than about $45,000 for a property that would generate $925 per month. Even at $45,000, this will not generate a significant profit.
Using the above formula, I would like to get at least $100 profit per unit per month. Anything else isn’t worth the hassle in my opinion.
Good Luck,
Mike
operating expenses vary widely depending the property. the biggest issue I constantly see people who underestimate expenses. Its the smaller things that add up. For example do you ahve any of the following expenses:
trash removal,
water/sewer
septic pumping,
lawn care,
snow removal
propane tank rental
electric in common areas
school taxes on top of real estate taxes
placement fees for new tenants
yearly inspection fees by local city/county, etc
etc.
My point is I own properties that have some or all of these and other that do not.
Second is capital expenses like age of roof, hot water heaters, heat pumps, funances, siding/ext. painting, condition of kitchens. These are all high dollar items that can gobble up 1 year profit or more.
Plus I assess how likely I am to have vacancy; its key in figuring cash flow/profit.
I look for properties with low probability of major capital expenses, plus some potential upside on rent, equally or more desirable than neighboring properties and produce “reasonable” profit based on current rents when including all expenses, capital reservse and vacancy factor. “Reasonable” varies based upon amt of downpayment, size of property, type of loan, etc.
Last but not least, you need to set finanical metrics that work for you. Certainly, we all want to make money, but one has to factor in your time available to spend on the activity, your time horizon, risk tolerance, cash flow vs. appreciation, etc. What one investor might consider a terrible deal, might meet the needs for another. With that siad, some rental deals are just plain alligators (cash consumers) and never should be done.
Your return should be based on how much down payment you are putting/investing in the deal. Let’s say you are investing $10,000 in this deal. Now calculate these figures to see how fast your 10k will grow?
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Cash flow: yearly cashflow/10k * 100 = % return per year on your investment
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Principle payment income: total priciple paid per year/10k * 100 = % addition per year on your 10k
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Discount: lets say you got this property 5000 cheaper then market: 5000/10k * 100 = you just made 50% your investment upfront
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Appeciation: Figure out annula appreciation you are going to see 3-5% minimum if you are in decent location
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Tax advantages - you get to deduct many of the stuff and depreciate your property. Get a good accountant
You NEVER want to just look at cash flow …like other have stated above. Get a whole picture and remmeber you are investing only the downpaymnet not the purchase price.
Think about what you will get if you put that down payment in bank and CD…no where close to above numbers.
Good luck… the deal looks good go for it.
DFW