Rental Income vs. Operating Expenses: Long-Term Projections

[John Franczyk]

I'm running different scenarios with the BP rental calculator for a 4-flat that I'm considering purchasing in southeastern Wisconsin. The building is in good shape and is fully-rented, but it is older (80+ years) and is in a lower-middle class neighborhood. Because of these factors, I'm estimating that operating expenses will grow slightly faster than rental income over the life of the building. The scenarios inevitably show that at some point around 10 years into the project, expenses will exceed income. Obviously, there are ways to manage the building that will increase the likelihood of better rental income and to reduce expenses, but for a purchase and investment analysis I am leaving my income and expense estimates as they are.

All of my scenarios show that the building will cash flow at least  $300 and $400 per month total (i.e. not per door) for at least 10 years before expenses start to overtake income. They also show that I can make a reasonable profit if I sell the building between 3 and 10 years into the project. 

In a previous career doing business analysis, I told clients that any projections beyond two years were ridiculously speculative, and that even two years of projections could change with the drop of a hat. I routinely laughed at five-year projections.

My question is this: when you use the BP rental calculator, how much stock do you put into the longer-term numbers that the calculator generates? Are those numbers ever enough of a red flag to keep you away from a project? 

My gut tells me that this project has good potential in spite of the long-term numbers. The current owner has done very well with the building, but he manages it himself and he's getting landlord fatigue and wants out of it. He's been trying to sell it on his own for several months, but he hasn't listed it on MLS. The only offers he's had are from people who want him to do seller financing.

Thanks for any thoughts here.