WON'T CASH FLOW, is it the taxes?

Question

Greetings BP,

I have been trying to break out into the world of multifamily REI. However, there is not a single property in my area or the surrounding areas that will cash flow even close to $100/door. I am under contract for a duplex currently but the only way I could get it to cash flow at $100/door was to do a cash purchase.

This property was the closest by far to getting $100/door then the other 60 or more properties I have analysed. Below is the break down on the numbers.

Purchase price: $46k

Scheduled Rents: $1300/month ($650 each unit)

Expenses are

Garbage: $60/mo (approx)

Lawn/Snow Removal: $60/mo (approx)

Water/Sewer: $60/mo (approx)

Insurance: $58/mo

Property Taxes: $283.33/mo (ouch, I think this is the reason for not making cash flow)

Vacancy: $130/mo (10%)

Capex: $130/mo (10%)

Management: $130/mo (10%)

Repairs: $65/mo (10%)

Cash Flow w/ Mortgage (25% down, 20yrs at 6%) = $76.50/mo ($38.25/Door)

Cash Flow w/o Mortgage = $323.67 ($161.84/Door)

What am I doing wrong? Or is it all due to the property taxes?

Any and all insight is very much appreciated

Thank you,

Jason

Michael Wagner · Answer

Account Closed

If you have the time, it is advisable to self manage your first property....otherwise it is hard to really know "what to pay a property management company to do".  Im a big proponent of hiring it out but only after you have mastered the day to day yourself so that you intimately know what is going into the management.

Where is Upstate NY are you?

Michael Wagner · Answer

Start with the BP podcasts and then your local REIA (Real Estate INvestment Association) as that will likely be your best networking venue

Gary Kline · Answer

Oxford, being a rather rural area, will bring lower rents.  Just don't have the jobs that pay a good amount.  Property values are lower there as well.  You may want to look at the Binghamton area where rents should be higher and prices very competitive.

Just my thoughts.

Gary

Bernadette Martin · Answer

As a brand new investor, does anyone have advice for me on what books, articles, etc to look into on how to manage my first property properly? Also, for later properties where I'll need help, what is the best way to find the best local property management company? Thanks!

Len Roche · Answer

Hi Account Closed,

Unfortunately I don't know if many banks will be willing to loan you money for under $75K. Have you been preaproved for a loan? You may have to pay all cash for this property anyway. If you do find some one, Going to 30 years will improve cash flow. Also 6% interest is really high. I just got one for 4.04% at 25% down.

To save some money:

Try making the utilities your tenants responsibility. That will save you $180/month.

10% Vacancy seems really high. If your area has good rental history I'm sure you can lower this value save more money. Maybe $26 to $65 depending on your re-evaluation. If you are managing this as your sole property than some extra effort and preplanning will keep your vacancy low if the property is in a decent location.

Speaking of management, keep this budgeted even if you don't hire it out. You may need them further down the road. If not you get a get good cash bonus.

Good luck!

Account Closed · Answer

Jeff,

Thank you for the comps on the expenses. Always great to hear some real life figures. I hope mine are close to what yours runs.

Jason

Account Closed · Answer

David,

Thank you very much for your break down on the numbers and how you would look at things. I understand your point of view and will try to figure a plan to get some of my numbers down.  I do not expect a full month vacancy in both units (I certainly hope not anyway). I have not calculated for any depreciation, I just consider that the icing on the cake.

Jason Ruff

Account Closed · Answer

Gary,

Thank you for your insights. You are correct about the property values. I have been looking in the Binghamton area a little bit. I do notice that quite a few of the list prices are better there. I am trying to learn the good areas and bad areas (though I have told there are also areas with good streets and not so good streets?

Jason

Account Closed · Answer

Michael,

You make a lot of sense in that a person should have intimate knowledge of what a management company does. I am located in Oxford, NY, about an hour east of Binghamton, NY.

Account Closed · Answer

Len,

Thank you for your advice/ideas. I have been to a couple lenders and they would only go 20yrs and the rate was an average of 6%. I need to try the smaller banks and credit unions. The 10% vacancy was estimate was also from the banks criterion. I will look into passing the snow,garbage, etc on to the tenants.

Thanks again

WON'T CASH FLOW, is it the taxes?

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