What kind of cash flow are u looking for

Multi-Family and Apartment Investing
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What kind of cash flow are u looking for

Chip Chronister
Investor / Rehabber · Fort smith, AR · Member since 2014 · 178 posts · 30 votes

I am looking at a 59 unit complex it was built in the 70's and it is in good shape

it is a class c complex I am talking to the bank (conventional comm. loan) he will

give is a 15year amortized loan with a 3 to 5 year call. we will cash flow about 3k a month what do you guys think.

Thanks

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Ben Leybovich
Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
11y

$3,000/month on 59 doors - not even close.  Don't do it!

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  • Brent Fleeman
    Investor · Ringgold, GA · Member since 2014 · 86 posts · 13 votes
    11y

    @Chip Chronister do you have any of the specific numbers on the property? Purchase price, number of vacancies monthly, cost of rent per door, show the math, the people on the site can help but they need to know specifics.

    0Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    11y

    $3,000/month on 59 doors - not even close.  Don't do it!

    2Reply
  • Rich Urban
    Wholesaler · Miami Beach, FL · Member since 2011 · 22 posts · 8 votes
    11y

    I'm with Ben ... I net about $3k a month on one of my duplexes.  No way in hell would I spend the time to manage 59 tenants for only $3k.  

    1Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    11y

    "15year amortized loan with a 3 to 5 year call"

    That's an awful loan for you. Great for the bank. I am sure this is full recourse from them. You didn't mention what the bank requires down and the interest rate.

    Based on the limited info you have provided it's a pass.

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    1Reply
  • Jon Klaus
    Developer · Garland, TX · Member since 2008 · 8k+ posts · 4k+ votes
    11y

    How good is the location?  What year was the complex built?  What's the occupancy rate?  Any deferred maintenance?  Are the rents at market?  How much down payment?  How much would the cash flow be on a 30 year amortization?

    1Reply
  • Chip Chronister
    OP
    Investor / Rehabber · Fort smith, AR · Member since 2014 · 178 posts · 30 votes
    11y

    The complex is in a decent area and the complex is 40 years old, it is 95 percent full 

    59 units

    it does need a new roof but the owner is going to replace it, the complex is in great shape for its age. The rents are 350 for one bedrooms and 425 for 2 beds and it is 60 percent 1 bed and 40 percent 2 bedroom

    The rents are right there with the market a

    The price is 1.4 mil with 25 percent down

    The banker can get me a 4 percent loan but on 15 years due do the age of the property. What kid of loans are you guys getting 

    With a 5 percent interest and 15 year it will cash flow 3 k a month

    What kind of cash flow per door are u guy getting for a class c apartment.

    Thanks

    0Reply
  • Thorney Gibson
    Engineer · Bel Air, MD · Member since 2009 · 136 posts · 24 votes
    11y

    posting so keep up on updates.

    0Reply
  • Michael J.
    Rental Property Investor · Louisville, KY · Member since 2008 · 342 posts · 123 votes
    11y
    Is there any opportunity to increase rent, reduce expenses and utilities to bring in more income? I'm curious also what cashflow per door people that buy large complexes are looking for and what kind of financing to get those numbers.
    0Reply
  • Account Closed
    Investor · Baltimore, MD · Member since 2014 · 1k+ posts · 688 votes
    11y

    wow, 50 a door per month = horrible. The loan is horrid.

    2Reply
  • Colin Armstrong
    Rental Property Investor · Chicago, IL · Member since 2014 · 12 posts · 5 votes
    11y

    Where is this deal located?

    0Reply
  • Mike F.
    Investor · Denver, CO · Member since 2015 · 570 posts · 521 votes
    11y

    Netting $36,000 a year on a 1.4 million dollar investment isn't that a 2.5% cap rate?

    0Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y
    Originally posted by @Mike F.:

    Netting $36,000 a year on a 1.4 million dollar investment isn't that a 2.5% cap rate?

     Nope!  His cash flow is after P&i.  And whaat difference would it make if it were a 2.5% cap rate?

    0Reply
  • Mike F.
    Investor · Denver, CO · Member since 2015 · 570 posts · 521 votes
    11y

    Shouldn't have said cap rate, what I meant is that is a 2.5% return on investment. Not to mention it sounds like a potential loss factoring in deferred maintenance. How much out of pocket was the seller for the new roof? What's next to be require money thrown at it?

    0Reply
  • Ben Leybovich
    Rental Property Investor · Phoenix/Lima, Arizona/OH · Member since 2012 · 4k+ posts · 4k+ votes
    11y

    @Mike F. - let me translate what @Account Closed said :)

    Cap Rate is not a good metric of return, but if you use it as such, it uses the NOI (Net Operating Income) as the basis:

    NOI = Gross Potential Income - Operating Costs (operating costs do not include the debt service).

    So - the $36,000/annum of presumed CF is the wrong figure to use in a valuation formula since this includes the debt service:

    Cap Rate = NOI / Value = ($36,000 + Annual Debt Service) / Purchase Price

    Now - to Bob's second comment as to why does it matter if Cap Rate really is 2.5%

    What Bob is likely talking about is that if you buy a building at 10 Cap, force the NOI up by 20%, and turn around and sell at 10 Cap, you will make money in the delta. Similarly, if you buy a building at 2.5 Cap, force the NOI by 20%, and then turn around and sell still at 2.5 Cap - I am sure you can see how you'd make the same delta. This is precisely why Cap rate as an indicator of the worth of an investment opportunity can be very misleading indeed!

    Furthermore, low caps typically indicate better markets, which means more appreciation, which will outpace cash flow in terms of IRR any day of the week.

    Hope this helps.

    1Reply
  • Eva Salas
    Real Estate Investor · Silicon Valley, CA · Member since 2012 · 169 posts · 52 votes
    11y

    I'm sorry but I had to give all those folks who gave this deal a resounding NO my vote!  

    Yikers! Each unit CF's a whopping $50.84 a month! 

    1Reply
  • Account Closed
    Investor · Honolulu, HI · Member since 2013 · 3k+ posts · 1k+ votes
    11y
    Originally posted by @Ben Leybovich:

    @Mike F. - let me translate what @Account Closed said :)

    Cap Rate is not a good metric of return, but if you use it as such, it uses the NOI (Net Operating Income) as the basis:

    NOI = Gross Potential Income - Operating Costs (operating costs do not include the debt service).

    So - the $36,000/annum of presumed CF is the wrong figure to use in a valuation formula since this includes the debt service:

    Cap Rate = NOI / Value = ($36,000 + Annual Debt Service) / Purchase Price

    Now - to Bob's second comment as to why does it matter if Cap Rate really is 2.5%

    What Bob is likely talking about is that if you buy a building at 10 Cap, force the NOI up by 20%, and turn around and sell at 10 Cap, you will make money in the delta. Similarly, if you buy a building at 2.5 Cap, force the NOI by 20%, and then turn around and sell still at 2.5 Cap - I am sure you can see how you'd make the same delta. This is precisely why Cap rate as an indicator of the worth of an investment opportunity can be very misleading indeed!

    Furthermore, low caps typically indicate better markets, which means more appreciation, which will outpace cash flow in terms of IRR any day of the week.

    Hope this helps.

     Thanks for dumbing it down for me.  I did not want to seem presumptuous.  

    0Reply
  • Steve Olafson
    Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y

    How did you calculate the expenses?

    0Reply
  • Reynaldo Aranda
    San Antonio, TX · Member since 2015 · 6 posts · 2 votes
    11y
    Not sure if I'm missing something, but I think that would be to much work/time to manage 59 units for 3k. I have a 6 unit on a 15yr note with 4 yrs left, I receive $2500 in rents per month.
    2Reply
  • Eva Salas
    Real Estate Investor · Silicon Valley, CA · Member since 2012 · 169 posts · 52 votes
    11y

    @Reynaldo Aranda brought up an excellent point!  59 units is SO much work for 3k a month!  I had a 33-unit bldg. that cash flowed between 7-8k per month and that kept us plenty busy!  

    0Reply
  • Steve Olafson
    Scottsdale, AZ · Member since 2014 · 659 posts · 536 votes
    11y

    This property does not seem to be a deal from what was presented.  But, the idea that a property is not a deal if it does not have good cashflow initially does not make sense. 

    I would be willing to bet that if I posted the details of my last 5 deals on here, most responses would have been negative.  Only one of them had positive cashflow at all.  I still have that one but the rest have been sold.  Those 0-4 cap deals on purchase with no cashflow made me a lot more than the income from operations would have made.

    If the idea is to make money in real estate then all aspects should be looked at and accounted for.

    @Jon Klaus  was trying to prompt for more information to be able to help determine this. @Ben Leybovich explained this as well.

    Initial cashflow does not mean much.  Potential cashflow and the cost of getting there means a lot.

    It is not easy to determine potential cashflow as a novice investor though.  Most beginners look at the cashflow and think that it is easy to reduce expenses and raise income. It is easy if you know what you are doing and understand the drivers behind the process.  This is a learned skill that comes with understanding your market and property dynamics.

    1Reply
  • Johnie Bridges
    Gretna, LA · Member since 2015 · 1 post · 0 votes
    10y

    1.4 MILLION come to Louisiana we can take that money and by 20 single family homes gross rent 20,000.00 per month 

    0Reply
  • Leonid Sapronov
    Investor · Laurel, MD · Member since 2012 · 149 posts · 33 votes
    10y

    I feel like everyone is talking about different things here, comparing gross rents, NOI, cashflow before and after P&I, etc. It's like the tower of Babel. It sounds like the seller is talking about net cashflow after P&I and all expenses. So, estimating his debt service to be at ~$8.3k based on the info provided, we can guess that, if he was realistic in his analysis, the gross rents to be around ~$23-25k. His downpayment would be $350k. Consequently, his ROI is more like 10% and the CAP is also close to 10% (whether it matters or not is a separate question). Yes, cashflow/door is small, but debt service eats up a large chunk of it. Once it's paid off, he'll cashflow ~$12k/month or more. Is this really such a bad deal?

    What he didn't mention is whether there's any built in equity at this price, which is also kinda important. There very well may be.

    0Reply
  • Ryan Rogers
    Investor · Boston, MA · Member since 2015 · 95 posts · 32 votes
    10y
    Originally posted by @Ben Leybovich:

    $3,000/month on 59 doors - not even close.  Don't do it!

     Love your info in your Podcasts Ben, thanks for sharing!

    1Reply
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