Rental property deffered cash flow?

[John Armando]

Hello BP team, 

I've been looking at multi-family units in my area for quite a while, and feel I am on the cusp of making a deal, but am having trouble finding the right house. Which is fine, no reason to jump into a bad deal just to get started. But I was hoping for some guidance on my evaluations. 

I am looking at low down payment owner-occupied options through a portfolio lender at 5% with PMI, that will go away once reaching 80% LTV (so will get some extra cashflow after approximately year 7).

In my analysis I account for Expenses including (common utilities, taxes, property management (10%), Long term maintenance (10%), short term maintance/repairs 95), legal, misc, vacancy (7%) etc, etc.) This amounts to roughly 55% for most of the properties I analyze, so I am comfortable with those assumptions. 

Breaking out my cashflow by year, I assume a 3% rental increase per annum, a 3% expenses increase per annum, and appreciation of 1.5% (the area I am looking to invest is a slow up-and comer but still has some very rough areas, but I know the area well). 

For most properties I don't see positive cash flow until approximately year 3, some COCR better than other properties at this point. Is this acceptable in your viewpoints for a long term buy and hold, where at years 7 and 8 a >20% COCR is achieved?

And I know it is not good practice to not account for property management in the expenses, but at the outset (early years of ownership for our first few properties) should I discount expenses based upon performing our own property management to add the 10% property management to our cashflow?

Any guidance or rules of thumb would be greatly appreciated

@Molly Armando

[Anthony Angotti]

Hello,

There is a lot here so let me try my best with everything. First a higher expense estimate is best so good job there. Second including property management in expenses is a good thing because even if you are doing your own it puts you in a place where you can turn it over if you have to. So personally I would keep the 10% there.

Are you keeping this for cash flow? If so I wouldn't focus too much on the appreciation growth, but 3% rent increase is a pretty good assumption (many salaries increase 3% each year so people can afford that increase).

Lastly if the numbers don't work don't rely on increases to cash flow. Buying a property with negative cash flow is generally not a good idea if you are buying and holding for cash flow and a long time. If you can't find one with positive I would question how you are looking for deals. Are you looking at only MLS deals? Are you looking at places that don't need much work? I think if you spend some extra time networking and hunting down that good deal your time will be much better spent than waiting a long time to get positive cash flow. Maybe partner with someone experienced with distressed properties at first, but definitely don't buy something at a price where the cents don't make sense.