Tips on evaluating multifamily deals

[Jeremy Commisso]

Hey BP community! 

I'm a business owner looking to deploy excess capital into investment properties with all signs leading me to multifamily rental properties. The biggest issue I am running into as I evaluate deals is that, based on current operations, they're almost all going to have minimal to no negative cash flow for as long as those leases are at their current rates. Below is an example of a property we have evaluated (3-plex)

Trailing 12 month rental income: $41,799
Expenses (no property management): $5,974
NOI: $35,825

If I added in our property management fee (8%) that would be another $3,343 (not to mention the portion of 1st month's rent that would also be incurred for new tenants)

Lastly, we would be able to get a commercial mortgage for 25 years with 25% down at a 6.5% interest rate. The payment comes out to be $3,076/mo ($36,912/yr)

As you can see, cash flow with just this broad information is going to be -$4,430

Now, we do know that the rents are below market value (we believe $1,600 is very attainable for each unit). If we adjusted the numbers for future state, assuming the expenses remained the same for simplicity, the new breakdown would be:

12-month rental income: $52,992 (assuming 92% occupancy)
Expenses (with property management): $9,317
NOI: $43,675

Mortgage Payment Annually: $36,912/yr

As you can see, cash flow is expected to be $6,763

What I am asking here is, when y'all purchase properties, what are your thoughts on purchasing negative cash flowing properties that you expect to cash flow within 12 months with 'better' management of the properties and bringing up rents to market value? For those that are willing to do this, do you have a 'rule of thumb' for the amount of time you're willing to wait for that property to have positive cash flow (i.e. 6 months, 9 months, etc?)

[Reed Rickenbach]

I do this specifically with multifamily, although this isn't typically a strategy that new investors start with. One thing I'd make sure of is that you're buying the property at a price that is based on CURRENT performance, not proforma performance. If you're paying a proforma price with current rents, you're essentially doing all of the work to get the property stabilized for free.