How Do I Know If This Property Will Cash Flow?

Have you ever found a property, a little unexpectedly, and realized that it is perfect for you. You call the sellers or the sellers’ agent, get the price and learn that they just got an offer. The clock is ticking, and the clock is ticking fast. You don’t have a leisurely amount of time to research the property, you have a few hours at most to determine if you want to make an offer. So how do you know if this is something that you can make an offer on quickly.

Hopefully, it is in an area where you have been researching what the going market rents are for each size unit. Hopefully, when you were on the phone, you were able to ask for the breakdown of the number of units the property has. However, if you don’t know, then you will have to estimate based on square footage. You can get the square footage off of the county records.

If you don’t know what the rents are for that area, the easiest way to find out is to research a few of the competitors within a 3 to 5 mile radius of this property. Start by going to their websites. Are their prices listed online. If so, great, if not, call and ask about a 10 x 10, a 10 x 15 and 5 x 10. Research at least three other properties so that you have a solid average for each unit.

Let’s say that they told you that they have 50 10x10’s, 20 10 x 15s and 20 5 x 10’s and 10 of the other two sizes. If you know that a 10 x 10 rents for $126 a month and you have 50 units that is $6300 a month in income. You find out the other rents and come up with $12,600 a month or $151,200 a year. You know that the average occupancy rate for that area is 84.3% so you are going to multiply those two numbers together. This gets you $127,461 in revenue.

Now that you know how much the property has the potential to bring in, you can multiply that by the area’s cap rate. If the cap rate for the area is 8%, then the maximum offer for that property is only going to be $1,019,692. On the other hand, if you are in an area where the cap rate is higher, the seller is going to expect a higher offer. At this point, your job is to figure out if you can cash flow at whatever you are thinking of offering.

You need to find out what the monthly payments will be on the property. How much, if anything, are you going to have in capital expenditures? What are you going to have in monthly expenses? This number is usually around 40% of your cashflow. This covers everything from management to deferred maintenance. Now that you have subtracted everything, is there anything left for profit?

Next you need to look at the upside potential. Does this property have the ability to be upgraded? Can you add more units? Is there enough land to add boat and RV parking? Is it underperforming so that you can go in and make it perform better. When a property is underperforming or needs a lot of repairs, you are not going to offer a market cap rate. You are going to get it at a discount.

When you are looking for a property, your main goal is to find a property that you can buy lower than the market rate with an upside potential. This is what your investors are paying you to find. They want properties that have the potential to grow and increase in value. Make sure that you are always on the lookout for these properties and don’t be afraid to walk away from properties that don’t fit your criteria. As always, happy investing.