Acceptable Cash Flow For 4plex?

Question

Hello Everyone,

My first post here on the forum and I'm very excited. I would like to know what is considered acceptable cash flow on a 4plex? Is there a certain amount of monthly flow that is considered bare minimum?

I ask this because I'm starting to look at properties and submit info to my real estate counselor and don't wanna waste time. I will give property info once I start finding properties that meet my criteria of fully rented out or one unit available. The home purchase program (NACA) that I'm in requires owner occupancy.

Jerry W. · Answer

@Amit M. , you are right about some folks making loads of money from appreciation, but keep in mind property can go the other way too.  When the property value dropped in CA and other places a LOT of folks went bankrupt.  @Maurice Cormier can still buy the property but he needs to understand the risk is extremely high compared to normal real estate investing.

Amit M. · Answer

Maurice- Most people on this forum just focus on cashflow, in areas that get little appreciation. In decent parts of CA (especially the Bay Area) you need nowhere near 50% of rents to cover expenses. For one, vacancies are lower here. Also, higher rents per unit drastically effect expenses. Example. Tenant leaves and say you need to invest $2000 in paint and minor updates. That could be 4 months of rent in Texas, 1 month in CA.  And in TX you would need 4x more units to equal 1 in CA, so your repair exposure is x4. So yes, there you want 50% ratio, but certainly not in the Bay Area.

And as for prices, if you think Oakland is bad, SF is worse!  People on DP want 2% of prop cost to equal 1 months rent. In SF it's more like 1/2%!  Terrible deal right?  Then why are there so many investors clawing their way to buy here?  (I'm also looking to get into another multi unit in SF.)  Cause they quietly know that future appreciation in SF is substantial. Oakland (although I don't specialize in it) is similar in potential, certainly compared to cashflow friendly areas with little appreciation.

I'll quote you: "One person told me he covered the rent in the unit he lived in as a owner occupier until he could refi out his loan and take money out to buy another property...risky! But they all do that or try to do that."

That is exactly how many do it in CA.  Your friend was able to buy another property from appreciation. That's huge!

Ultimately you have to run your own numbers. But if you can get into a decent part of Oakland for little down, secure a low rate 30 year fixed loan, and manage the cashflow mid term, you have a decent chance of setting yourself up nicely 3-5 years from now. Rents will inevitably go up in next 2 years, and $1000 in added rent (over 4 units is not a lot) will increase your property's value by (using 12-14 GRM) $120,000-140,000.  As long as your buying in a decent part of Oakland, I think you strategy is solid.

Joel Owens · Answer

Maurice do not focus everything on the "no money down" part of finance. You can purchase something that way and get a large chain and anchor around you holding you down for a very long time with bad debt.

In fact you can have no money down and buy a property that you have to FEED money to for years to keep going.

I have many clients from California and they buy elsewhere. In overheated markets you are not investing in my opinion but SPECULATING on a back end payoff.

For some people that make 200k or 300k a year and do not need the money the depreciation and payoff on the back side (if any) might be fine for them. If you are making 60k a year gross from your job and trying to use these properties cash flow as a jumping point to other properties it doesn't work. You are banking everything on the fact the appreciation will happen and with pay down you can refi out money to invest or sell off down the road. If that doesn't happen you will be treading water and never get started positively with investing.

As others have said California is pro tenant and some areas have rent controls and the state has a high income tax and yields are low for many areas for investment.

I am not trying to down California just stating reasons I wouldn't invest there myself as far as multifamily. With you living in one of the units emotional equity will come into play and the benefit of helping pay for your mortgage. You may or may not be the type of person that can handle having tenants live right next to you and constantly bugging you for stuff because you are right there.

Maurice Cormier · Answer

Thank You Guys. Got a some education from this.

Sarah Lam · Answer

@Maurice Cormier  Remember that past appreciation rates may not continue into the future. @Troy Fisher  has a point - it may very well be that the SF bay area is in another bubble. While I personally think that in the long term, Oakland will be a strong appreciation market, that is a lot of negative CF each month that you will have to take into consideration. I'm only familiar with Lake Merritt out of the areas you mentioned you were looking in, but I do think the Bay Area as a whole will continue to appreciate. You will definitely want to make sure you have enough cash reserves to float you through the short term ups and downs (any repairs, etc).

I personally am not looking to invest locally for a while, but when I do look for a place for myself using FHA, I will definitely look for a small multi, as well.

Good luck! Keep us updated!

Troy Fisher · Answer

$1500/mo in negative cashflow?  Oooof.  If you can't afford your local prices look in other markets.  But here's the secret *whisper whisper* if everyone is starting to talk about the appreciation in a market, that means you are near the peak, and you may not get much more out of it.

You would probably be buying in anticipation of appreciation.

From Wikipedia: (http://en.wikipedia.org/wiki/Real_estate_investing)

Capital appreciation is the increase in market value of the asset over time, realized as a cash flow when the property is sold. Capital appreciation can be very unpredictable unless it is part of a development and improvement strategy. Purchase of a property for which the majority of the projected cash flows are expected from capital appreciation (prices going up) rather than other sources is considered speculation rather than investment.

Maurice Cormier · Answer

@Sarah Lam

Thanks for the response and the confirmation that what I've been hearing for the last couple of years is true. Which is really why I'm so focused on getting multi-units in the future. I'm mainly looking in the upper peralta (coolidge, macarthur), lake merritt, and the oakland/berkeley city limits (telegraph). Familiar with these areas?

Sarah Lam · Answer

Welcome @Maurice Cormier  to BP! I'm a new to REI, but I live in SF and can finally contribute something helpful to a thread! Oakland is definitely an up and coming area; there's been crazy appreciation there in the last 2 years. Lots of people are trying to buy in now in expectation of continued strong appreciation. The explosion of the housing market in SF has been raising home values in East Bay, the peninsula and South Bay for a while now. Cash flow is hard to find in California, unless you're investing in really run down areas. Oakland is already gentrifying, so I wouldn't expect to see great CF in any decent parts of town. You would probably be buying in anticipation of appreciation.

Maurice Cormier · Answer

Thank You Jerry For Your Wisdom Jerry. I can see it's very risky but what's crazy is the fact that normally this is how it's done in california, based off what I hear from other property owners. One person told me he covered the rent in the unit he lived in as a owner occupier until he could refi out his loan and take money out to buy another property...risky! But they all do that or try to do that.

Jerry W. · Answer

@Maurice Cormier they say you should plan on using 50% of the total income for maintenance, repair, and other miscellaneous costs.  Your total gross monthly income is only $4570 so half would be about $2285, leaving you $2285, which is well below the $3650 you need for your monthly mortgage and taxes/insurance payment.  Plus you have over $500 per  month in utilities.  Since what you pay for rent is nearly identical to what one of the 4 plex tenants pays there is no savings by you moving in.  You also would have to deduct 10% from your gross if you have a management company manage  the complex.  If you have never managed a rental in California, I would strongly suggest you consider a management company.  It is my understanding it is extremely pro tenant and it can take 6 months or more to kick out a non paying tenant, and there are many pitfalls that could cost you if you are not aware of all the landlord laws.  California has a reputation in my area of being a night,are for landlords.  There is a huge temptation to buy a property worth well over a half a million dollars and no money down, but there is a huge danger as well.  I don't know what the rental demand there is, but $1570 seems low for vacancy, that is only slightly over 1 months rent for 1 unit out of 4 units.  Even if there are no major breakdowns, there will always be carpets that need replaced, painting done, lawns mowed, trees trimmed, bugs/termites sprayed for, etc.  You have $570 per month in utilities.  If you add that to your $3650 monthly payment, it comes to $4250, that only leaves 320$ a month for vacancy, repairs, replacing carpets, faucets, painting, etc.  I would love to see you get a good rental, but the figures I see says this is a terrible investment, but to be honest, California is a very tough market for rentals due to the huge price of real estate.  There are side benefits to rentals like tax deductions, and property appreciation, but they don't help if you lose your shirt on them.