How much cash flow should I have for a 4-plex

Question

Hey guys so I've been looking to purchase a BUY and HOLD property. I want to buy a house that can be profitable enough to where the rental income can pay the mortgage as well as give me some cash flow. I am thinking of putting in an offer on a four unit property but am unsure of what I should be shooting for as far as cash flow is concerned. From the research I've been doing it seems that you want to shoot for around a 20% cash on cash return, but what this general rule of thumb doesn't go over is how much you should make per unit. I feel as though a four unit should cash flow more than a duplex or single because a four unit is more work (more tenants to manage, more sinks to unclog, etc.) Any advice on this subject would be most appreciated. Thanks.

Drew MacDermott · Answer

Welcome to the site, @Nate Boda !

If you haven't already, read the Ultimate Beginner's Guide to Real Estate Investing (http://beta.biggerpockets.com/real-estate-investin...).  This guide is amazing.  You may want to initially gauge a property using the 50% rule (http://www.biggerpockets.com/renewsblog/2013/06/14...) .  If I can paraphrase Brandon Turner, the rule says over time 50% of your income will be spent on expenses, not including the mortgage.  Find the total monthly rent and multiply it by 0.50 to find average expenses per month.  The difference will be your NOI which only then do you subtract debt service (i.e. mortgage).  After debt service is factored in, shoot for at least $100 cash-flow per unit per month, or $400/month in your case.  If this rule passes, you can take a closer look at the actual expenses and continue due diligence.  $100 may be too low for your strategy.

The cash-on-cash return will be a metric you decide on for your personal strategy.  20% sounds like a great number to shoot for starting out though.  My suggestion is to define your goals, exit strategies, and your WHY.  Why do you want to start investing? Retire early? Travel? To provide for your kids and family? Thrill of the chase?  Whatever it is, write it down and think about it everyday.

Start connecting with people on this site, too!  Keep asking questions and learn everything you can.  Once you've done that, the biggest step is actually jumping in and purchasing the first property.

Good luck!

Engelo Rumora · Answer

Hi Nate,

Welcome to BP.

I don't see you having any trouble getting a 20% net cap on a 4plex in the Midwest.

We are based in Toledo and its a bit harder finding a 4plex with decent numbers in a solid B class area. Mostly SFH and duplexes.

The numbers might look great on paper but anything lower than B class for a 4plex would be difficult to manage.

Just my opinion.

Thanks and have a great day.

Ryan Ball · Answer

I think you have to look at what cash on cash rates look like in your market.  When we first started in our market (Cincinnati) I wanted to look at all of the properties that had the highest projected cash on cash returns.  I quickly realized that virtually every property that projected over 20% was either in a bad location, was in very bad condition, or both.  Really low priced properties will end up looking great from a projected cash on cash return perspective but they are likely in an area where you will not have great tenants.  If you have vacancies, high tenant turnover and high maintenance costs the income part of the equation will never materialize.  We set our minimum cash on cash return to 10% based on our experience.

Eddie Werner · Answer

Personally I would not buy in a flood zone.  That is just a personal risk I would not want to deal with.  RE investing is a profession of calculated risk.  you need to determine your threshold.

Nate Boda · Answer

thanks so much to everyone that responded to my question! this was my first post ever on the site and it was met with a plethura of very useful advice. THANK YOU! Just to let you know what ended up happening; I worked the numbers and put in a bid in which I felt comfortable. They turned down the offer but even so it was great because I learned a TON; this was the second offer i've ever put on a house so i'm learning something new every time.

Another question for people: Would you ever buy a property that needs flood insurance? The 4-plex I was looking into was in a flood zone near a creek and I decided to go for it anyway because it has only ever flooded into the unfinished basement. I've heard alot of investors say they would never own a property that could flood however I know that some people are willing to take the gamble.

Sam L. · Answer

I would suggest looking at your target market and running the rough numbers (50% rule, etc) on a number of properties. You'll get an idea of the cap rates in your area and what is a realistic goal. Remember, better deals take patience, marketing and/or fast action to find and get under contract. How quickly and how much effort do you want to expend to get a deal that meets your 20% COC goal?

Also, I second the idea that you must see what type of properties fall within your search criteria. Aiming for a 20% COC and using the 50% rule will typically turn up properties where the maintenance will be higher. You might need to use 60% for older, more poorly maintained properties.

Finally, how do you plan on financing the property? The conditions of the loan will greatly affect your COC and cashflow which are INVERSELY proportional as you adjust the down payment.

Things to consider. I wish you the best of luck. I'm in a similar boat now.

James Wise · Answer

@Nate Boda welcome to the site.

How much cash flow should I have for a 4-plex

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