Noob Real Estate Investor - next steps after initial analysis?

Question

Hello My Fellow Investors:

I have been analyzing deals and crunching numbers on MF properties. However most of the times, properties aren't cash flowing at all after this initial analysis. In some cases either property has too high expenses which eats up most of the Gross Rent Income and NOI number is where might have to put money out of pocket resulting in negative cashflow. Unless, down payment is more than 20% like between 30-50%, then property might cashflow. But I still see these properties being scooped up in a day or two by people.

Is there anyone out here who can assist or mentor on follow up steps or information that I missing to make the numbers work ?

- What to do if the property is negative cash flow after initial analysis ?

- If property cash flows $100/ door, then make an offer ?

- Even if I do end making an offer at the list price, someone else ends up buying that property over asking price. How does people make that property cash flow ? Am I missing some pieces of puzzle ?

Open to feedback / responses from all you out there.

Chris Baxter · Answer

@Mannny Lubana NOI = Income - Expenses (not including debt servicing). If NOI is negative, you have to make up the difference AND cover mortgage payments. This is not a recipe for financial success. Historically, investors in Canada have looked to have a DCR (debt coverage ratio) of 1.1 or greater. DCR = NOI/debt service. Properties that meet this criteria are more challenging to find in most markets, especially (as you pointed out) when you are competing with potential home owners (and investors) that are paying over asking.

In Canada, you are going to have to look for value add opportunities in provinces that don't have rent control.  Find a property that has some deferred maintenance and consequently has below market rents.  Do the rehab, raise rents, and put yourself into a good cash-flow position.

Matthew Crivelli · Answer

Outside of super inflated markets you should be able to cashflow. I closed on a deal in Hammond Indiana recently, 100k valuation with a market rent of $1500 per month. Plenty of room to pay the note, expenses, and still cashflow. Lots of places like this all over the U.S.. A few hundred per door is typical though I mean usually you need quite a few doors to cashflow to the point of quitting your day job.

You do not want negative cash flow. This doesn't make any sense at all.

Account Closed · Answer

@Mannny Lubana

Buy Don Campbell’s book. You’re about to jump without a parachute here.

Cory D Sperle · Answer

This is a very common question I see when investors attempt to purchase their first multifamily building.  Your job is to determine what price makes sense to you, and make a fair offer based on that price and terms.

Do your own initial analysis, and then have a quality multifamily mortgage broker offer their opinion on what financing terms they can offer to you, and then make your offer based on that valuation.

If this is a value add project you need to determine what the units will rent in the market you are in once they are upgraded.  Then add in the cost that the interim/bridge financing will cost you.  Take these costs and multiply by two, and deduct that from your purchase price to compensate you for your efforts.

Feel free to reach out to me directly, I have bought several buildings over the past 20 years.

Joel W. · Answer

There's a really good Warren Buffett quote that fits this occasion. "The difference between successful people and really successful people is that really successful people say no to almost everything."

Laura Marks · Answer

Finding agents that are investor "knowledgeable" not "friendly" is key. I can calculate cash flow in my head, when looking at a property. It's important they KNOW what rents and where. Zillow comps are horrible and shouldn't be used. I'm fiercely protective of my clients and will be the first to say no this isn't a good deal for you. As the market has changed the last year, I've still managed to find great deals and I know how to win offers. The last two properties I helped investors purchase were at and below asking, with $400+ in monthly cash flow. Your agent is so important!!

Shivan Perera · Answer

What kind of cap rates and yr1 ROI (based on  20% down payment) are you ascertaining from your analysis? Are you considering YOY rental growth in your projections?

Some markets are appreciation markets and deals won't necessarily cash flow in year one. Low caps or or near break even cash flow is common in hot real estate markets/big  cities especially if you are looking for something turnkey. You have to decide for yourself if that is the right market to be in or the right strategy for you. As some one else on this post alluded to, you can always try looking in the outskirts or secondary locations near (or away from) hot markets if the demand drivers are there. Thats where you can get long term upside but may not have to pay a premium to acquire the property.

There are a lot of good "rules thumb" to reference when doing your analysis and deciding whether to make an offer. If you think your analysis is off try run it through the Bigger Pockets rental calculator and compare it to your model. You get a few free test runs if you aren't a pro member. Also read The Multifamily Millionaire by Brandon Turner. It's a great starting guide to evaluating and choosing small multifamily properties. Chapter 8 is dedicated the financial analysis. Lastly try connect with local real estate groups and ask local investors what they are seeing in your target market and see if that aligns with your analysis.

Happy Hunting!

Mannny Lubana · Answer

@Chris Baxter - I appreciated your input and suggestion. Still trying to look for value add opportunities.@Huong Luu - Thank you very much for your detailed information. I agree and I do need a second set of eyes for the analysis to look at the properties against which I am running the numbers to see what I might be missing. Would you recommend any educational stuff which might give me a fresh perspective on how I should be looking at the properties ?

Huong Luu · Answer

@Mannny Lubana

1. If the property is negative CF, see what potential there is (ie: can you charge for parking, laundry, storage, is the rent too low, can you reno and increase rents, etc). Keep in mind, you want to buy at the value it is at now, not what the potential is. Just because other people buy doesn't mean it is a good deal. If you are looking at MF, you will need 20%+ d/p. Depending on the appraisal, the lender may require higher.

2. It is not just about CF/door. You have to look at the mortgage paydown, expense ratio, debt servicing, market, your client profile, reserve, etc. If the building is going to require some major repairs in 5 years, then your $100/d will be eaten up very fast.

3. Some people don't buy for CF. Sometimes, they put in offers to get it under contract and then negotiate the price down after their due diligence. They may have another use for the property that you are not seeing. ie, I recently got into a 3 unit property where we knew we could convert it into 6 units. Some people buy at 'potential' value.

I am assuming you are having a 2nd set of eyes on your analysis. Also not putting in too much buffer in your analysis. Good luck.

Noob Real Estate Investor - next steps after initial analysis?

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