I just completed a "Four square rental property analysis" for a fourplex in my area, and according to my calculations it has a negative cash flow. Am I missing something, or is this property just that "bad" of a deal? I have outlined my analysis below, and would appreciate any insight. Thanks! Property: Fourplex in Southern California, Inland Empire area; each unit is a 2 bed/1bath, shared laundry, in a B class neighborhood; current rents are 1050-1200; market rent could be closer to 1300/1400. Background: I used the information and numbers given on Redfin, to make these estimates; plus, I predict a sale price of $700,000 instead of the asking, $899,900. Based on the information they give about "net operating income," this property should cash flow around $2000/mo. (if you add in vacancy, repair, and CapEx, which they do not), but that is not what I'm seeing. Analysis: (based on current rents) Total Monthly income = 4700 Rental income = 4400 Laundry = 300 Total Monthly expenses = 6530 Taxes = 660 Insurance = 100 Water/Sewer = 150 Trash = 70 Electric = 45 Gardner = 70 Vacancy = 215 Repairs = 400 CapEx = 400 Mortgage = 4420 Cash Flow = -1830 Cash on Cash ROI = -63% (-21960/35000) Total Investment = 35000 Down Payment (3.5% Owner Occupied) = 25000 Closing Costs = 5000 Rehab = 0 Misc. other = 5000 https://www.redfin.com/CA/Upland/880-N-Redding-Way...

Da nada, although it has a stellar reputation for total profits with professional investors worldwide. The slack on BP stems mostly from bpers trying to sell Californians on some far way areas and almost always for a commission. They really are not doing locals a good service with what amounts to flawed analytics. The fact is the top 3 cities in the US with highest total profits ( cash flow + equity) since 2000 are LA, SF and San Diego. Understand more folks ( renters) live in SoCal (23 million) than in every state except Texas. That equals a lot of REI opp packed into one geographic location with nearly every type of RE investing method mixed in that massive population space. There was one pro investor who once said " if you can not make money in California real estate, you really should not be investing in real estate" Good luck investing!

I have also done well ~45 minutes drive from you in East Lancaster and East Palmdale ... East of say 15th St East ... stay away from Central (Division St.) unless you really know what you are doing, and west side (west of 14 frwy) is nicer but more expensive. That area has a booming Aerospace and Defense industry right now ... and with global Geo-politics being what they are today, I don't see that declining anytime soon. And in spite of what some with absolutely zero experience investing and landlording here in SoCal may say, you absolutely can find stuff there that cash flows. One word of warning to caveat that, though, is that these far inland markets (including the IE, as you may already know) tend to be MORE volatile and have lower long term appreciation than the more coastal stuff that cash flows less initially. Those markets tend to crash much harder in a downturn, but then appreciate much faster when the market turns to close the price gap a bit more, but the average appreciation (over several cycles) tends to be lower ... so, the best time to buy in these type markets is actually after a crash, but that is not to say that it can't work today so long as you put in the time and effort to find a great deal before pulling the trigger, which to me is the cardinal rule to follow in any market at any time in the RE cycle. As you become more skilled at acquisitions (and value add rehab), especially off market acquisitions, you can find better and better deals and thus cash flow further and further west, or cash flow even more in the inland markets. I still have a LONG way to go with my acquisition skills, but I like to buy everything like a flipper would (and still run the cash flow analysis too), then I just flip it to the rental market instead of the sales market :)

@Matt R. Touché my friend touché. I sure wish my dad had bought those beach front homes 50 yrs ago, no doubt about that!

@Matt R. Isn't it interesting that the LA metro area has the fourth-highest share of renters in the nation. Using 2015 Census data, the study found that just under 54 percent of LA homes, condos, and apartments are renter, rather than owner, occupied. However, in another study about the 5 Best and Worst Cities for Affordable Rents, Los Angeles was #4 as the WORST U.S. city for affordable rent (Average Rent: $1,940 and rent as a share of income was 37%). Being a born and raised Southern California guy, it's always amazed me that people are willing to over extend themselves to live in California where we have the highest state income tax of any other state, home prices are some of the highest in the country and obviously it's not cheap to rent here either, but peeps want the sunshine, etc. lol Based on an article in Forbes surrounding the 5 Best and Worst Cities for Affordable Rents, here were the findings: (Not sure if this information matters much OR will help other RE investors make informed decisions on where they choose to invest for BUY/HOLD properties, but I'm a believer that we all need to be educated and informed, and share with one another, so here you go) The 5 worst U.S. cities for affordable rent #5 Orange County, California (Average Rent: $1,900; Rent as a share of income: 28%) #4 Los Angeles, California (Average Rent: $1,940; Rent as a share of income: 37%) #3 Manhattan, New York (Average Rent: $3,500; Rent as a share of income: 54%) #2 San Diego, California (Average Rent: $1,750; Rent as a share of income: 30%) #1 Miami, Florida (Average Rent: $1,390; Rent as a share of income: 36%) The 5 best U.S. cities for affordable rent #5 Columbus, OH (Average Rent: $850; Rent as a share of income: 17%) #4 San Antonio, TX (Average Rent: $910; Rent as a share of income: 20%) #3 Kansas City, MO (Average Rent: $870; Rent as a share of income 16%) #2 St. Louis, MO (Average Rent: $830; Rent as a share of income 17%) #1 Indianapolis, IN (Average Rent: $800; Rent as a share of income 17%) Original Article If Interested

Right on. Timing plays a role and perhaps longer term might matter less. Eventually some market fundamentals play the bigger role. Here is the thing for some SoCal locations and maybe the majority, I do not know of one single buyer who lost money long run. I am sure there are thousands who have lost in some SoCal locations but certainly it would not be normal to lose long haul in OC etc... I know of folks who purchased out of state including myself and most if not all would have been better off ( more profitable) staying local including myself. There are market forces here that are not as common OOS. When I look for the most successful investors I know of that buy and hold OOS, the state they buy in is Calif. I am not opposed to OOS, just make sure it is as close in the fundamentals as all the locations you are passing over perhaps. And try not to fall for the future cash flow on paper, rather understand those local market influencers that would make the locations future cash flow growth worthwhile. Investing can be a hassle, just make sure it is worth the hassle. Finally, when your future kids ask where daddy invested back in 2017/18...what location do you think they hoped daddy had the smarts to pick? Good luck!

@Laura Campbell Doesn't seem like a deal.....Unless you are betting on appreciation and looking to come to the table every month with money to maintain it then I'd say walk. If there is some value add potential maybe consider it but those are the only two circumstances that would get me to even consider something with these type of numbers. At minimum you should be able to realize 1% rents. Best of luck to you.

Rental Property Analysis--Is this right?

Sam M.

Investor · Diamond Bar, CA · Member since 2012 · 79 posts · 24 votes

9y

If you pay $175K per unit and get $1175 rent per unit, I am not surprised that it does not cash flow after considering financing, insurance, taxes, repairs, vacancies, etc. You can use the 1% rule as a rough guideline (monthly rent must be around 1% of purchase price). Of the units that I own in SoCal, I have a 3-plex that takes in 1.5% of the purchase price and it's profitable. I have other units just under 1% and they are pretty much break-even. The 1% rule is just a rule of thumb. You are doing the right thing by calculating your net income and considering all costs. All I'm saying without going through your numbers in detail is that since the rent is at 0.67% of purchase price, it's not surprising that it doesn't cash flow. What is the cap rate and how does it compare to the going cap-rate in the area?

4 Reply

Cameron PendergraftPro Member

Rental Property Investor · Prairie Village, KS · Member since 2017 · 62 posts · 36 votes

9y

@Laura C.

At first glance, it appears your total monthly expenses includes the principal portion of your mortgage. The principal payback isn't a hard expense on a pro forma however it is a negative cashflow. If you remove the principal portion, you'll get a net income figure closer to what the listed pro forma states. Also, the 4,420 mortgage figure appears to have property tax, insurance, and mortgage insurance included but taxes/insurance is also listed separately on your breakdown outside of the mortgage. The strictly principal/interest portion of the payment on a 675k note (700k minus the 25k down payment) at 5% is roughly 3,623.54. Next, the listing says there are 4 separate electric meter. Depending on what is common in your market, this may be an expense you put back on the tenants? Making these changes would help your cashflow figure a little but it still doesn't look like a good deal. One last item is that if you went the owner occupied route, you would be in one of the units therefore your gross rents would be 3,300 instead of the 4,400 you used in your first projections.

1 Reply

Andrew Johnson

Real Estate Investor · Encinitas, CA · Member since 2016 · 3k+ posts · 3k+ votes

9y

@Laura C. I think just out-of-the-gate it's easy to see that this property won't pencil. You have $4,400 in projected gross rents and your mortgage with 3.5% down exceeds that. Tinker around with all of the assumptions that you want, it's still never going to break even for you. And, if anything, I'm guessing that your insurance and water numbers are low. Even if the individual units are metered for water you'll still be footing the bill for the common area yourself. Upland is dang HOT and most municipalities aren't really lowering their rates. If the units are not individually metered it's going to be even higher. Anyway, just glossing over the numbers it's no wonder that it's been on the market for 160+ days in one of the hottest real estate times in history.

2 Reply

Laura C.

OP

Fontana, CA · Member since 2017 · 88 posts · 36 votes

9y

@Sam M. Thank you for your input! The cap rate based on the numbers from Redfin would 5.8%. Of course, I'd be hoping to buy at less than the asking price, but that's the cap rate on that particular property. And based on a quick search in that area the typical cap rate is between 6 and 9%.

0 Reply

Laura C.

OP

Fontana, CA · Member since 2017 · 88 posts · 36 votes

9y

@Cameron Pendergraft Thank you for your input! It completely slipped my mind that the mortgage calculator included the insurance and taxes, so that putting them into the calculation again was increasing my overall expenses. I will watch out for that next time! Yes, there are 4 electric meters so I would have tenants pay their own electric bill, I'm guessing the electric that is recorded on Redfin is for property lights and laundry room equipment.

0 Reply

Laura C.

OP

Fontana, CA · Member since 2017 · 88 posts · 36 votes

9y

@Andrew Johnson Thank you for taking a look! I also noticed it was on the market for quite a while! I had a feeling after going over it more than once that it wasn't a good deal, but I kept thinking I was missing some information. I tried to overestimate on some of the numbers, but as you pointed out, I may have underestimated on others. I will keep these things in mind as I analyze more deals!

0 Reply

Kevin FoxPro Member

Real Estate Agent · San Diego, CA · Member since 2014 · 1k+ posts · 635 votes

9y

Originally posted by @Sam M.:

If you pay $175K per unit and get $1175 rent per unit, I am not surprised that it does not cash flow after considering financing, insurance, taxes, repairs, vacancies, etc. You can use the 1% rule as a rough guideline (monthly rent must be around 1% of purchase price). Of the units that I own in SoCal, I have a 3-plex that takes in 1.5% of the purchase price and it's profitable. I have other units just under 1% and they are pretty much break-even. The 1% rule is just a rule of thumb. You are doing the right thing by calculating your net income and considering all costs. All I'm saying without going through your numbers in detail is that since the rent is at 0.67% of purchase price, it's not surprising that it doesn't cash flow. What is the cap rate and how does it compare to the going cap-rate in the area?

Hey Sam.

While most of what you said is true for a significant portion of the nation's markets, it is not applicable everywhere.

Funny enough, the ".67% rule" is actually the San Diego variation of the "1% rule" that I've reverse engineered to better reflect the unique variables in our market.

Now, having said that - I doubt that rule would be applicable in the inland Empire, but I don't know enough about that particular market to say definitively.

3 Reply

David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

9y

Originally posted by @Laura C.:

@Sam M. Thank you for your input! The cap rate based on the numbers from Redfin would 5.8%. Of course, I'd be hoping to buy at less than the asking price, but that's the cap rate on that particular property. And based on a quick search in that area the typical cap rate is between 6 and 9%.

Forget about CAP rates ... 4-plexes are residential property, and residential property is valued off of sold comps sale price, not CAP rate comps ... CAP rates only apply to valuation of commercial property, which are 5 units and up.

2 Reply

David Roberts

Columbus, OH · Member since 2017 · 30 posts · 41 votes

9y

I'm curious of what the projected depreciation opportunities with this property might be and whether that is something the more seasoned investors in these tight markets consider in their analysis?

0 Reply

Ali Boone

Real Estate Coach · Venice Beach, CA · Member since 2012 · 6k+ posts · 3k+ votes

9y

It's very likely that the numbers will yield a negative cash-on-cash return. It's next to impossible to be in the positive for cash flow in SoCal.

@David Roberts The depreciation isn't likely going to get it in the positive either. It's just SoCal and their prices right now, unfortunately. I'm a seasoned investor, I live in SoCal, and I purposefully invest out-of-state because of the lack-of-penciling here. That's what most investors I know do. But, it depends on each individual's goals, etc.

Laura- I would compare that "income" (negative) to what you are paying in rent currently, or whatever you are currently paying to live. I understand why people want to go for the house-hacking idea, but if the numbers--including the tax write-offs--don't outdo what you are currently paying, it just doesn't seem worth it.

I live out in Venice, which is a higher price point so may be slightly more dramatic, but just the property taxes alone that I would have to pay annually are more expensive than what I currently pay in rent. Then there's mortgage interest and repair expenses and all that jazz in addition to the property taxes. So it's by far cheaper for me to just rent my apartment and have no hassle.

Just things to consider. There are people on here who are adamant that SoCal can cash flow, but I've yet to have seen any properties that do (they say they exist, but don't show them to us). So maybe they can chime in with different info. But definitely believe the numbers.

0 Reply

Trevor Lohman

Investor · Redlands, CA · Member since 2013 · 177 posts · 76 votes

9y

Looks like a pretty nice property!

I just bought a SFR out of state because I have just about ruled out local investing (I'm in the inland Empire as well) due to the rent to value ratios, but I'm super curious if you can find something that works at some point in the future.

Multifamily is becoming more and more interesting to me. 175k a unit just seems like a lot though for 1100 monthly rent. By the way, Is it normal to pay electricity? I don't see that too often but I'm sure it varies.

Good luck!

0 Reply

Laura C.

OP

Fontana, CA · Member since 2017 · 88 posts · 36 votes

9y

@Kevin Fox it is good to know that the rule of thumb is different in different places. I appreciate your input! Thanks.

1 Reply

Laura C.

OP

Fontana, CA · Member since 2017 · 88 posts · 36 votes

9y

@David Faulkner Thank you for point that out! I "knew" that but didn't remember once I started analyzing.

0 Reply

Laura C.

OP

Fontana, CA · Member since 2017 · 88 posts · 36 votes

9y

@David Roberts I'm not familiar enough with real estate or this market to know that information yet (I'm new and just getting started), but I will consider that as I look at future deals!

0 Reply

Laura C.

OP

Fontana, CA · Member since 2017 · 88 posts · 36 votes

9y

@Ali Boone Thank you for your input. This information and these items for consideration are very helpful! May I ask where you typically invest out-of-state? I have considered that as well, but am unsure of pursuing that as my first deal.

Your point about rent vs. buying makes a lot of sense also! That is one of the reason why we still rent currently. It's not cheaper for us to buy a primary residence at this point. Although, with the right deal I think house-hacking (even if it's not a full hack) would be very beneficial.

0 Reply

Laura C.

OP

Fontana, CA · Member since 2017 · 88 posts · 36 votes

9y

@Trevor Lohman That is something I am considering also! It does seem like a very tight market here for creating cash flow; however, buy and hold may work if the cash flow doesn't add up immediately. What do you think?

0 Reply

Trevor Lohman

Investor · Redlands, CA · Member since 2013 · 177 posts · 76 votes

9y

I'm sure it can!

I just think you bring some stress into your life when losing money each month from your investments. It turns into a bill and I think that's tough long term.

Although I'm sure out of state investing can be as or more stressful too. Pros and cons

I'll pm you the pro forma on the out of state house I bought for a comparison. I'm not steering you either way, I hope you find a strategy for local investing so I can copy it! Lol

0 Reply

Jennifer Slaughter

Real Estate Agent · Fort Collins, CO · Member since 2016 · 246 posts · 142 votes

9y

@Laura C., from what I can see it looks like there is only a $300 spread between potential gross income and your mortgage payment so it makes sense that it's not cash flowing. I know investors can find exceptions but CA isn't typically a cash flow market but might be more attractive if you are hoping for appreciation. On the other hand, it looks like you are going to owner occupy so if your goal isn't cash flow but to lower your expenses by house hacking you might consider if this specific property would help you with that.

1 Reply

Laura C.

OP

Fontana, CA · Member since 2017 · 88 posts · 36 votes

9y

@Jennifer Slaughter Thank you for your input! I have been hearing that about SoCal and cash flow, so I may have to reconsider my area. Thank you!

1 Reply

Matt R.

Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes

9y

There are Socal areas outside of LA that will have better initial positive cash flow today like Bakersfield areas and or check Sam M. above with his 1.5%er. Some challenges might be they may not currently be the best location and overtime may not be more profitable than locations with less initial cash flow. Which leads into logically rent to price is not always the best indicator for total profits. If it was Detroit or Baltimore wins that prize. Perhaps take a step back and understand the locations fundamentals and how those impact the investments future profits.

As far as rent vs buy, if you can fha into a quadplex, your mortage minus rents, tax savings etc..should be worth more than just renting personally. So if your rent is $2500 and owning and living in the quad runs $1250...you get the idea.

Good luck!

1 Reply

David Faulkner

Investor · Orange County, CA · Member since 2015 · 2k+ posts · 3k+ votes

9y

Not saying that this is a good investment or not specifically, but that generally investors in CA (and everywhere IMO) need to consider ALL of the profit centers of RE, and consider them over the full life span of the investment. All too often on BP all that folks look at is the cash flow on day 1, and then ignore everything else, which is really dangerous IMO. Cash flow is an important thing, but it is not the only thing. The 4 profit centers of REI are:

1)Cash flow (which changes over time with rent increases and other expenses which may or may not grow at the same rates)

2)Appreciation (both forced and market)

3)Mortgage pay down (through loan amortization)

4)Tax savings

The best way to combine all of these things into a single analytical framework IMO is to project out the financials (including all of these items using estimates based on current actuals and long term historical trends) from the day of purchase on out to the exit (via sale or cash out refinance of your initial investment) and then compute IRR. There will be some uncertainties in your projections, so best to make sure you have sufficient profit margin (aka margin of safety) and cash reserves to cover these unknowns and maintain multiple profitable exit strategies in case they are off.

Please note that this sort of analysis is much more in depth and fundamentally different from the analysis presented by the OP ... however, she asked if her analysis was right, and IMO this is what an analysis that is "right" would look like.

1 Reply

Jeff Petsche

Real Estate Broker · Yorba Linda, CA · Member since 2017 · 154 posts · 114 votes

9y

@Laura C. This is just my honest opinion and as a real estate Broker in SOCAL, I can tell you that the majority of properties you come across right now in our area will NOT pencil for CASH FLOW, IF analyzed correctly. However, if you are one of those investors who wants to bank or speculate on appreciation over the next 10-20 years, historically you'll probably make money.

If you choose to buy in CA NOW, just know you are buying in a seller's market and specifically a Seller Cycle II market (top of market and reaching peak). Since 1980, market gains in CA to new peak values have typically lasted 5 to 7 years (we are currently entering year 6 of an up cycle). Except for the Dot.com bubble/9-11 adjustment, market declines/recessions have typically lasted 3-4 years. (Disclaimer: This does not mean that present and future cycles will be the same. Historically, BOOMS can last longer than expected and adjustments-declines can come suddenly and unexpectedly.

I've been tracking CA market cycles going back to 1984 to present and the cycles have looked like this:

1984-1990 (+100%)

1991-1994 (-11%)

1995-2001 (+100%)

2001 (-10%)

2002-2007 (+59%)

2008-2011 (-27%)

2012-2017 (+72%)

For me, the entry price to play in SOCAL is not in my wheel house at the moment, so much like what @Ali Boone said in her post, I'm investing out of state at this time. Yes appreciation won't have the BIG swings you have here in CA, but I'm going for CASH FLOW and if a property appreciates, then it's "icing on the cake". I estimate a 3-5% appreciation per year in Southwest markets, but because the entry price point is more reasonable, cash flow is almost a sure thing.

BOTTOME LINE: I WILL NOT buy a property if it does not CASH FLOW...PERIOD!

Just my 2 cents!!

0 Reply

Jeff Schulman

Wholesaler · Highland, IN · Member since 2017 · 18 posts · 2 votes

9y

I have a property that is only $57,900. It is refurbished and updated. It has 3 bedrooms and 1 Bath. Almost 1200 sq. ft. The home is in a good part of a suspect town. Well kept homes in area and a Police officer lives next door. The home will rent for $850.00 -$900.00 easy. The previous renter paid $850.00 when it was in rough shape. MLS is not effective. My realtor has not brought anyone to the home. My Bandit signs have been attracting some attention. One of my questions is; Why would investors spend so much more money to rent a home for only a few hundred dollars more. Any suggestions on how the market the home in a more effective way?

0 Reply

Matt R.

Sherman Oaks, CA · Member since 2013 · 3k+ posts · 2k+ votes

9y

Originally posted by @Jeff Petsche:

@Laura C. This is just my honest opinion and as a real estate Broker in SOCAL, I can tell you that the majority of properties you come across right now in our area will NOT pencil for CASH FLOW, IF analyzed correctly. However, if you are one of those investors who wants to bank or speculate on appreciation over the next 10-20 years, historically you'll probably make money.

If you choose to buy in CA NOW, just know you are buying in a seller's market and specifically a Seller Cycle II market (top of market and reaching peak). Since 1980, market gains in CA to new peak values have typically lasted 5 to 7 years (we are currently entering year 6 of an up cycle). Except for the Dot.com bubble/9-11 adjustment, market declines/recessions have typically lasted 3-4 years. (Disclaimer: This does not mean that present and future cycles will be the same. Historically, BOOMS can last longer than expected and adjustments-declines can come suddenly and unexpectedly.

I've been tracking CA market cycles going back to 1984 to present and the cycles have looked like this:

1984-1990 (+100%)

1991-1994 (-11%)

1995-2001 (+100%)

2001 (-10%)

2002-2007 (+59%)

2008-2011 (-27%)

2012-2017 (+72%)

For me, the entry price to play in SOCAL is not in my wheel house at the moment, so much like what @Ali Boone said in her post, I'm investing out of state at this time. Yes appreciation won't have the BIG swings you have here in CA, but I'm going for CASH FLOW and if a property appreciates, then it's "icing on the cake". I estimate a 3-5% appreciation per year in Southwest markets, but because the entry price point is more reasonable, cash flow is almost a sure thing.

BOTTOME LINE: I WILL NOT buy a property if it does not CASH FLOW...PERIOD!

Just my 2 cents!!

That is understandable. At minimum a property should cash flow most would agree. It may be the future source of that cash flow and direction of the cash flow some investors also consider. CA is a large market, I am not sure the numbers above apply to the entire state or that would surprising for some less popular areas to have that much appreciation since 1984. Generally I do agree with your 2 cents still.

Here is what one financial writer/investor recently wrote after several years of analysis of their own OOS TK holdings.

Day 1 cash flow is the most deceiving (misleading) metric newbies focus on when it comes to real estate investing.

Property value appreciation potential is far more important than Day 1 cash flow for long-term success (if a property has massive appreciation potential you will as a byproduct experience massive rent appreciation, which will inevitably churn out that massive cash flow you so desperately seek).

Anyone who thinks property value appreciation is overrated has never thought long and hard about exit strategy.

Good luck OOS!

1 Reply

Laura C.

OP

Fontana, CA · Member since 2017 · 88 posts · 36 votes

9y

@Jeff Petsche Thank you so much for taking the time to look at my number and give you 2 cents! This information is very helpful and I have had this thought since looking at REI, which is that the SoCal market is possibly reaching another "peak," so your comments confirm that. I also value your research, that helps me to make informed decisions, which is very important to me. Thank you again!

1 Reply

Rental Property Analysis--Is this right?

Rental Property Analysis--Is this right?

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