Am I evaluating a properties cash flow correctly here?

Question

I'm located in the Salt Lake Utah area. I'm trying to build a spreadsheet for evaluating properties. Here is an example of a property for a newer 4 plex currently available. I came out with a negative cash flow of $203. Am I missing any other obvious expenses? Are any of these expenses over or under expectations? This building was built in 2015 and is outside of a growing tech area.

• Purchase price: $940,000
• Loan amount: $705,000 (25% down)
• Closing costs: $19,000
• Loan terms: 5% interest, 25 amort, 10 year call, 5 year rate adjustment (Estimating here based on bank websites)
• Monthly rent: $6100
• Monthly HOA: $648
• Monthly property management: $427
• Monthly cap ex/vacancy savings: $6100
• Monthly mortgage payment: $4121
• Monthly property tax: $181
• Monthly insurance: $180
• Cash flow: -$203

With no property management the cash flow becomes $224 and no cap ex/vacancy it becomes $733. Thank you.

Race Ostler · Answer

Hi Randall,

In the lending world, a single-family residence up to a fourplex is financed by a residential loan. Rental properties with 5-units and up are financed by commercial loans.

I would recommend looking into Mountain America. They offer mortgages in Utah, Arizona, New Mexico, Idaho, and Nevada. They offer 2 investment property loans (up to a fourplex each one) for only 10% down. That is very uncommon and can enable you to get twice the amount of doors for your money but depends on your risk appetite. Once you max out of those two they will let you get more you just have to put 15% down

Jaiden Olsen · Answer

@Randall Marshall, As a rule of thumb, I estimate 10% for property management (rather than 7% which is what you are showing), 10% for repairs (which you don't have listed, and may not be that high for a building that new), 5% for Vacancy, and 5% for capital expenditures. It also doesn't look like you are showing anything for utilities (if they are paid by the tenants (other than the HOA), that is fine, just want to make sure).Also, your closing costs seem to be extremely high. If I use my spreadsheet (download it here if you want), I show a negative cash flow of $860/month.

There is a lot that goes into analyzing a property, and cashflow is just the tip of the iceberg, but if I were basing an offer strictly off of cashflow, I wouldn't offer more than about $450k for this property using conventional financing methods. If I could buy the property on terms (Seller Financing) that is a different story, and I could probably get the seller a full price offer.

Chris Coleman · Answer

@Randall Marshall

It looks like you have your Monthly Cap Ex/Vacancy the same as your Monthly Rent.  I’m sure that’s an error.  Monthly Cap Ex/Vacancy is generally estimated at 10%.

Randall Marshall · Answer

Thank you everyone for the very helpful replies. I am very eager to learn and begin. I agree that the numbers for this property are not very good. I'm currently heavily invested in another business that I've slowed expansion to diversify cash towards another industry, in this case, real estate.

@Race Ostler

I had not heard about Mountain America's mortgages. Those down payments are impressively low. I will make sure to check with them. Financing a 4-plex or less with a residential loan would be a great way to start out.

@Jaiden Olsen

That is a really solid spreadsheet, far more sophisticated than mine. Thank you, it is more helpful than I can say. I estimated the closing costs at 2% of the loan without really knowing what they would be. Some reason I lumped repairs with capex in my head. Thank you for correcting me.

@Don Spafford

The Salt Lake market is expensive and I am envious of markets with better cash flows. Utah has an easy website that lists most MLS listings. You're right that I stuck with the area to be closer but perhaps local options are not the right route to go. I need to learn the same for other markets. Discovering opportunities is a difficult skill to master and I look forward to the day I find myself with a few available.

I spent 6 years in Eastern Idaho and have family in the area. I am new, want to learn, and want to build a portfolio. I am not necessarily looking to only loan out money but that is something I can bring to the table if it means learning and working together on a deal. Let me know if you want to talk more or perhaps keep me in mind.

Don Spafford · Answer

@Randall Marshall You can make your money go a lot further. As mentioned Mountain America can get you a much lower down payment. But even then, from your analysis what you are putting as a down payment on that 4 plex can just about purchase one in cash in other areas, such as Eastern Idaho and still get a better ROI. Or refi and pull cash back out or just spread it out over multiple purchases with low down payments.

Personally I would look for a much higher ROI. I understand wanting to invest in your area near you, but when you can get much better returns for much less cash, why wouldn't you. I have many opportunities on my table at the moment in different locations. I am always in need of a money partner. For example a 14 unit (7 duplexes) can purchase for $600k, using 15% down on a commercial 20 yr amort loan at 6.25%, cash flows $2500/mo after all expenses. I actually offered on it less than a yr ago. It has since been updated and now relisted but still cash flows. I just don't currently have the full $90k down to do it on my own otherwise I would. And a 31 unit in NY for around $800k 16% cap rate. When you invest with just your own money you eventually run out. When you partner, there are unlimited opportunities.

Don Spafford · Answer

@Randall Marshall It would be worth the investment to upgrade to a pro BP membership to have access to unlimited use of the calculators. They can help you analyze your deals more easily. The calculators are the main reason I opted for the Pro membership. If you haven't tried them out yet, give it a spin. I think you get 5 times with the free membership. Watch one of the live webinars, they usually will have a discount code for a pro membership at the end.

Randall Marshall · Answer

You are right. The $6100 should have been the yearly cap ex/vacancy. The monthly amount in my formula is set at $508 which is around 8.33%. So I'm a little low. Thank you.

Julie Fullmer · Answer

@Randall Marshall I am pretty new and looking to learn but I was wondering why cap/ex was so high? Is that normal? Seems really high to me... 🤔

Randall Marshall · Answer

I was under the impression I must use a commercial loan. Further reading makes it appear a four plex also qualifies for a traditional residential mortgage. Around here a 30 year fixed in 3.625% which would up the cash flow to $700. (Still 25% down) Is that right?

Am I evaluating a properties cash flow correctly here?

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