When you analyze a deal, what is your target cash flow?

Question

So I wonder what most of the other investors with multifamily rentals in the CLE market strive for number wise?  I am not sure if I am expecting to little or too much?   I am using the 50% for expense rule, after that and paying the mortgage from the remaining 50% I want at least $250 to manage a door/unit.  Outside of that I will try to control my expenses which could put me closer to $350-$400 a door/unit.  I plan to hold the expense cash until each property has a reserve of $20,000 then I will roll over the additional expense holding to my intake each month.  If I have to spend some of the 20K then I will redirect back to that account unit it reaches the 20k again.   What do you think of my plan?   Good, bad or the reality.  I would appreciate to hear from those whom have more years on me.

Bob Collett · Answer

You have it backwards... start with your required return on investment... assuming an all cash purchase.

Forget the 50% rule. Learn to figure actual costs. When all is said and done if you get 12% or 13% ROI, after all expenses including a maintenance allowance, insurance, taxes, property management fees, vacancy alliwance, professional services, etc; then you are doing better than most.

Bad neighborhoods will have higher initial ROI, but will be offset by higher vacancy allowance, greater legal expense, more theft, higher insurance, etc.

Then factor in your cost of money.

Brad Fausett · Answer

@Natalie Vane - these are all great questions and reminders too.

While I would say both properties are rent ready, I did plan to do some painting in them prior to putting them on the market.  The cheaper home will also have the vinyl flooring replaced in the kitchen and bathroom.  I have updated my spreadsheet to show these cost.

I plan to  manage all my properties full time currently but I like your thought process as to wether or not they still work when I add PM to my portfolio.  Long term I plan to add these once I am ready for "retirement".  I have added this and will continue to do so for budgeting.

The more expense unit has one tenant staying and the other unit I feel confident I can rent quickly via listings on Hotpads, Realtor and Gosec8.  However, I did not orginally account for listing fees so this has also been added to the "repairs" column for upfront cost.

Your 4 column questions whether I can perform at the same level of a realtor/ brokerage company in realtion to acquiring, screening and placing tenants.  I would certainly hope, that with my sole dedication to only my properties I can far outperform them.   I will personally kick my own rear if I can not fill each of the 3 aviailable units in a 12 month lease in sub 30 days.  Cleveland is a city of renters, with 15,000 section 8 issued vouchers and only 14,000 currently filled in rental homes (data from CMHA) I personally have focused my portfolio on homes that can cash flow with Sec 8 tenants.

Each of my deals I have accounted for tenant mowed lawns, I will handle snow removal.  I have also budgeted for $125 water/sewage per tenant.

I look to the more experienced investors to show me what I am missing.  And i would like to personally thank you for taking the time to write out such a lenghty yet detailed explanation of items I was overlooking.

Quick question in relation to locks?  Who pays a $100 per lock each time a tenant turns over?????  As a owner of a small tech audio visual company, and former residential tech guy if this is really your current plan we should talk.  For around $200 per lock you can put in digital locks, issue digital keys and never replace a physical lock again.

Michael Seeker · Answer

@Brad Fausett - $250+/mo/unit is a little high in my neck of the woods but I can speak for your area.  Generally speaking, the higher you want your numbers to pencil out, the closer you get to warzones (assuming you keep the 50% expenses static).  I buy in high-demand, high-rent areas and keep expenses around 30% which nets me about $200/unit/mo.  It all depends on where you're comfortable investing.

Regarding your reserves, $20K per property seems insanely high to me.  I had a rule starting out of a minimum of $1K per property but no less than $5K (so $5K starting out, then upping it as I accumulated more properties).  I haven't come across any great guidelines around this, but $20K per property is just way too high unless you're in a very high cost area (HI, CA, NY, etc)

Brad Fausett · Answer

@Federico Gutierrez @Bob Collett  Thoughts on the above?

Brad Fausett · Answer

I am curious to where you guys think I am going wrong.  Here are the 2 deals i am in contract currently on.  I have verified rents and on both units, I am realistically about $50 per unit low.   I verfied the rents based on Realtor, Hotpads, Rentometer, Gosection8.    One of the homes is on West Blvd near 90 and the other is right between old brooklyn and clark fulton area at 71.

As for the idea of 6 months rent for reserves?  I like that, but I want to make sure I have enough set aside for furture needs.   Both house have newer roofs and mechicals.  West Blvd needs windows and will be getting them shortly after closing but otherwise both units are in top shape and need nothing.

Federico Gutierrez · Answer

unless your advertising, networking and spending some actual money on marketing on getting your own deals $200/door not gonna happen.

You need to be a realtor or actively working on getting your deal. Market rate is 10-13% CoC not a set $ figure

Thomas S. · Answer

I base my rough calculations with 50% expenses and having 100% financing. If you can not cash flow with 100% financing it will be worse if you place any value on equity.

$200 a door is a good target but less is fine if you see potential for increasing rents or reducing expenses within a year. As for reserves the equilivant of 6 months rent is common, I would be happy having 10K but as you increase the number of properties you do not need as much in total for each property.

I personally do not hold cash reserves I manage my investment with a 200K HELOC. Income in, expenses out.

When you analyze a deal, what is your target cash flow?

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