This is my very first post after lurking for quite a while.
I’m currently looking at purchasing my first rental property. It is a 28 unit building with gross monthly rent of around $11,200. It is in an area that I am familiar with, but I do not live there currently. It is currently managed by a property management company, and I would likely keep them as property managers.
I am expecting to buy and hold the property with positive cash flow. I would be putting about $75,000 down. What is a reasonable positive cash flow for that amount?
What kinds of information should I be able to get regarding the property? What kinds of things should I ask for that I might overlook?
When you say gross monthly rent, what do you mean? Gross scheduled, gross net? Gross scheduled is what you would be collecting in a perfect world. For example, if each of the units was up for rent at $100/month your Gross scheduled would be $2800. However, some of them may be vacant so your actual collected rent would be less.
Just stating that you will put down $75,000 is not enough to determine what kind of cash flow you will get. How much are you pruchasing it for? What is the gross scheduled rent? What is the vacancy factor? Number of questions that must be answered to determine your cash flow. Basically your cash flow will be your Gross Scheduled Income (Rents as you hope to collect) - Vacancy loss - Operating Expenses. Whatever is left over is your cash flow. There is a lot of details in that number, but that is basically it.
What kind of information should you be asking for? You want verification of leases. Get a copy of each lease. If all leases are expiring one month after you buy you want to know this! Get a copy of the rent rolls for the last 12-24 months. You want to know what was ACTUALLY collected. Get a copy of a Scheule E or other appropriate tax schedule for the owner, you will want to know what he claimed the expenses were to the IRS. If he says that expenses are $500/month, don’t be surprised if he told the IRS they were $1000/month. Use the figures used on the tax form when deciding on a price.
That should get your started. Use the information to confirm that the price you are paying is indeed worth it.
I would place a lot of emphasis on getting ACTUAL number (rents, expenses, etc). In my experience some listing agents/sellers have a hard time getting it thru their thick heads that you want to see those numbers (I have had ask 2-3 times). A serious seller should have that info already lined up and ready to show to potential buyers.
Projected, scheduled, pro forma (or whatever you want call them ) are nice talking points but of limited value. These might suggest what FUTURE cash flow might look like, but means YOU (or the new owner) have to do the work to get there. Thus, make your offer on current and/or historical numbers; not pie-in-the-sky pro forma numbers
Ditto what carlittle and aak are telling you – right on the money! Also, find out who pays what…are the units separately metered (heat, water, electric)? …what are the taxes?
What % down does $75K represent?
Is the seller financing any part?
A reasonable cashflow…? You should do the math and know what sort of cashflow you should expect to get…are you paying $75K down because you need to or because you have to to make it cashflow?
Thanks guys, great feedback. That’s why I thought I should post here!
It’s a 28 unit property. Actually 2 adjoining properties. Average rent is $400 per unit (lower for 1 bed, higher for 3 bed) and rates are pretty comparable with the area. Asking price is around $750k. I don’t have any detailed information on costs yet, but I’ve been using the following ballparks for cash-flow estimation:
90% occupancy rate
2% of purchase price for annual maintenance expense
20-year mortgage at 7%
1% of purchase price for annual taxes (about right for this area)
$100/mo for utilities per unit (owner pays heat, water, trash)
8% for property management
With this, I’m showing negative cash flow of $511 per month ($18 per unit) with 10% down. If I decrease the purchase price, or increase the downpayment, I can get it to positive cash flow (my goal). I would like to be returning 10% in positive cash flow (annually) against my downpayment. To do that, I’d have to get them down about $125k on their asking price. Now, all of this assumes that my assumptions above are correct.
One of the things I was asking is whether a 10% CASH-ROIC is reasonable? Of course, there is also the equity gain through the mortgage that would increase that ROIC to a much higher number (22% in this model). Am I being too conservative? Any thoughts on the assumptions above? This is NOT in a major city and is located in the midwest (population of less than 100k). I’m also assuming a modest 2% property value growth each year. All of this adds to a very long-term profitable model, but it has to be cash-flow positive as well.
Your feedback is appreciated. This will all be commercially financed through my bank, no seller financing.
If your numbers work out and you end up with a litle negative cash flow at first, just remember - you are only 1 rent raise away from positive cash flow.
Dig,
Raising rent is one way to increase cash flow (or decrease loss), but that is only possible if the market will allow it. Rents go up, but they sometimes go down. Look at the market rents and be sure that you can raise them if you are banking on higher rents to carry you.
As always do the numbers and then decide if the risk you perceive is worth the reward you anticipate.