need a formula for buying residential multi-family rental properties

[Alex R.]

Hello Everyone

For buying 4 units and under (quads – triplex and duplex), I need a formula to show me whether a deal is a good deal or not

[Jon Holdman]

How about these:

If you're going to pay a PM:

cash flow = (rent * 0.5) - P&I payment

If you're going to self manage and you're willing to work for free:

cash flow = (rent * 0.64) - P&I payment

And then

Cash on cash return = annual cash flow / total cash invested

Note that those cash flow numbers assume you're doing a good job of running the property. A run down junker or a bunch of dead beat tenants can result in much lower, or even negative, cash flow.

That's just a quick and dirty analysis to determine if its worth digging deeper. If you like those results, dig deeper.

Two other criterian that I think matter too.

Are you getting a good deal? I'd rather not pay retail price because if you have to sell quickly, you'll lose, at best, all your transaction costs

Is there demand? Theoretical cash flow won't turn into real cash flow if you have units vacant half the time. Really, though, that means the rents are lower than you might other wise think. But some places really do have very high vacancy rates and you can't get tenants are any price. You don't want that.