I have been researching many deals in the MF space but every time I run the numbers, I get Cash-on-Cash returns numbers that just doesn't make any sense. Here's one deal that I would like to get some perspective from BP community. • 10 Unit (mix of 2 & 1 ) in Northern CA • Asking Price - $745K • Current Avg. Rent: $625 / month / unit • Owner Paid Utilities: $905 / month • Assuming Property mgt - 8% • RE Taxes - 1.14% • Insurance - $2000 / Yr • Repairs & Maintenance - 4800 / year (potential, could be more or less) • CapEx: 3500 / year (Potential, could be more or less) • Assuming - 30% down with conventional financing at 4.5%, I get a COC of just over 1%. Aside from any upside potential in rents with some rehab, Why would anyone want to buy into this deal from cash flow perspective, or am I missing something crucial in running my numbers? I have been running into the same dilemma with every other deal I am looking at. Is there anything I could do to make this deal work other than offering lower price? Thanks!

It's a tight market. I've run numbers on buildings in Chicago that I need to pay $2MM or less for to make sense and they are selling for $2.5MM. Combination of reasons IMO: -some people not knowing what they're doing and wanting to buy something -some people knowing more than I do and seeing upside potential that I don't -some people's investment strategy is based on future cash flow and appreciation, they are ok with the building not cash flowing for the immediate future Be patient and buy right. Don't lower your standards just because it seems like everybody else is.

Figure out when you want to jump on this train pictured below if ever. If you ask Jay or Marcy, they might say as soon as you can afford it or make the numbers work. California is mostly for bigger picture investors, always has been and always will be. Whether that investor is considered lucky, speculator, or smart...the history and overall results ( total profits, flow+ equity gains) are likely mostly the same. Good luck!

@Rich Lopes the numbers you give tell me this property is not in the Bay Area. $745K hardly gets you a 1 bedroom condo here. California real estate is not like other places. The fact that you can get 1% with 30% down is a great deal for California. In the Bay area you need at least 40% down just to break even. The major reason for investing in California is for stability and appreciation. If I were looking at that property I would be happy with the 1%. What I would look at is the future rental stability and the chances of appreciation. Is the property somewhere like Chico, where you would always have a steady stream of student renters? Is it near Sacramento where there is tech company expansion coming and government workers? Or is it in a rural central valley ag town where there is not a lot of room for business growth or a steady unending group of renters. I personally think those are the more important questions, not wether you can get 2 or 3% over expenses. If cash flow is your top criteria rather than appreciation you should probably go to another state. My feeling has always been cash flow can come when I am older and need the money. Buy for appreciation, pay off the mortgages, and breathe easy in your 60's. I am now there and I my 200K down payment has grown exponentially, the mortgages are paid off, and I have cash flow and million more in equity than I could have gotten out of state.

@Rich Lopes that could happen, but with good inspections you should be able to predict it pretty well. You would also ask for a price reduction or credit after you are in escrow if it is something in need of repair soon. i.e. I had a client who purchased 15 units. After we did our visual we knew the roof would need some serious help very soon. We got three bids from local and reputable companies and went back to the seller with the lowest bid and asked for a credit at title to repair it. He agreed and it made the deal worth it. If the roof would've needed help in the next 5 years we may have asked for partial credit or my buyer would've left the deal or made some other improvements and sold the property in 3 or 4 years. It's all part of the art of the deal, as it gets put together you can find ways to make it work, but if you can't you just walk away and move on to the next one. Don't be afraid to change your strategy if necessary and make sure to look for the opportunities during the process. I've found the best investors are the ones that can see opportunities in properties that others can't. Feel free to message me if you want to talk more.

I hear ya. That historical chart could apply to the top 3 to 4 cities in Cali perhaps. If you believe CoreLogic, the top 3 cities in the nation for total profits ( cash flow + equity gains) since 2000 are LA, SF and San Diego too if that helps. I have not seen any reasons that this would change in any significant way longer term. Good luck!

CA is not a place to invest for cash flow. Historically, it is an appreciation play, which is speculation, not investing. Also, CAP EX is not an expense. Planning a certain amount of loss for monthly repairs like a plumbing visit or HVAC repair is wise, but if there are no repairs, you get to keep the money. A roof that may need replacing in 10 years is not an expense today and hopefully over the next 10 years you will own more property and be making a lot more money.

Your analysis is directionally correct. It could be argued that your expenses are light as well. Now what differentiates a successful investor from others is what you do with this information. Me, I would run away and bark up another tree...

I recommend looking in markets with above average cap rates in landlord & business friendly environments with above average job and population growth. You didn't specify the exact city in Northern CA but cap rates there are likely to be 4-5% and with financing at 4.5% the cash flow is going to be low to non-existent. In my experience, people buying in these markets are buying and hoping for appreciation which is very speculative.

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Updated almost 7 years ago on 02/26/2018. Most recent reply

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Posts: 54
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Rich LopesPoster

Rental Property Investor
San Jose, CA

Multi-Family and Apartment Investing

Help Analyzing the deal - am I doing something wrong?

Rich LopesPoster

Rental Property Investor
San Jose, CA

Posted February 23, 2018 15:10

I have been researching many deals in the MF space but every time I run the numbers, I get Cash-on-Cash returns numbers that just doesn't make any sense.

Here's one deal that I would like to get some perspective from BP community.

10 Unit (mix of 2 & 1 ) in Northern CA
Asking Price - $745K
Current Avg. Rent: $625 / month / unit
Owner Paid Utilities: $905 / month
Assuming Property mgt - 8%
RE Taxes - 1.14%
Insurance - $2000 / Yr
Repairs & Maintenance - 4800 / year (potential, could be more or less)
CapEx: 3500 / year (Potential, could be more or less)
Assuming - 30% down with conventional financing at 4.5%, I get a COC of just over 1%.

Aside from any upside potential in rents with some rehab, Why would anyone want to buy into this deal from cash flow perspective, or am I missing something crucial in running my numbers? I have been running into the same dilemma with every other deal I am looking at.

Is there anything I could do to make this deal work other than offering lower price?

Thanks!

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