Milwaukee MF Analysis. Always Negative Cash Flow...

[William S.]

I'm not seeking to buy at the moment so I am using this time to practice. There is a neighborhood of interest that is up and coming and has some nice 4-plexes. I have considered contacting the sellers (off market) to see if they would sell. I've been searching the property history to see what the purchase price was. Then, using my numbers calculate the cash flow to reach an acceptable price. After looking at the history, it seems that these are terrible deals. I've noticed in my market many investors do not factor in all of the expenses, self manage, do landscaping, etc. This has resulted in an inflated market. Uneducated investors, not running their numbers correctly and being a jack of all trades rather than hiring professionals. See deal below based of 2005 purchase price.

Sale Price 2005 = $295,000

Rent = $3,200/m ($800 per unit)

Mortgage = $1,046/m (30% Down 4.5% Interest 30-year Fixed)

Taxes = $625/m

Insurance = $150/m

Vacancy (1-month) = $266

Property Management 10% = $320/m

Lease Fee = $166/m ($500 per unit, once a year)

Maintenance = $200/m ($50/m per unit)

CapEx = $800/m ($200/m per unit)

Lanscaping = $100/m (estimate, not for sure)

Total Expenses = $3,673/m

Net Cash Flow = -$473/m

I know some people on here may think my numbers are off. In order to properly upkeep the property $200/m per unit for CapEx seems appropriate. Also, since it is a apartment building 1 year turn over isn't unheard of. I'd be interested in getting some feedback on the numbers I have put together. Am I missing something here???

[Michael Henry]

@William S. thank you for requesting my input. I ran the numbers in my spreadsheet and it is coming up with a cash flow of $600 annually. Nevertheless, the numbers don't work. I think you are triple dipping with the CapEx, landscaping, and maintenance. The CapEx number suppose to be for major items like the roof and furnace. Once that money is set aside you do not need to budget for it anymore. The point of setasides to make sure you have the cash when something goes wrong. I have a few clients with high-income jobs and they don't budget for repairs because if something breaks they have the money to fix it.

Secondly, at that price point, many of the capital expenditures items should be at the beginning of its life otherwise you are paying to much for the building; which in your example is the case. The reason Sellers sale is because of future capital expenditures that are due soon.  

Lastly, many investors who purchase in this price range and higher are doing 1031 exchange and/or is paying cash. These buildings are very desirable because they are stable which means that your vacancy rate will be lower and not I lot of tenant turnover.  When running your numbers you need to take into account the sub-market averages and not use cookie-cutter figures.  

The 4-family BRRRR I did we paid $103K for it, and put $50K in it. When I ran my pro forma I had a maintenance expense even though I know I was going to fix everything. We have not gotten a single call because of the amount of many we put in it up front. Should we still keep a maintenance setaside?
 

 At this moment in time, I don't pay retail for anything because I need cash flow. Investing in real estate is very subjective this why I can work with many different clients in the same market. Do what works for you and don't worry about anything else.