All Forum Posts by: Ben Wilkins

@Rob MacSwan - You have some good advice on here. Someone took a look at the local comps (kudos to @Ronald Martin) and made a good point that your estimated repairs may be low.

Out of curiosity, where did you come up with the $2000 repair and improvement? Will you be doing the work yourself? What all were you including in this (paint and general cleanup?)? For an older home, $2000 might be low unless if it only needed some lipstick. What is the age of the roof, water heater, furnace, etc?

It looks like you used roughly 10% for maintenance, repairs, and CapEx (guessing that's where the $330/month came from) - if so, you're on the right track for estimating expenses. The only thing missing is vacancy.

I would strongly suggest taking another look at the age of the property and determine whether you should increase the percentage for maintenance and CapEx if you expect any of the big ticket items to wear out in the near future (5 years or less).

What I would do:

Determine age of the home and have an inspection done if you aren't experienced. From that, get an estimate on how much repairs and improvements will cost. 

Determine how much CapEx and maintenance you should set aside per month (percentage of income). 10% is a good starting point for each, but consider increasing that percentage based on the age of the property.

Find out how much rent will be. I use RentOMeter or RentJungle to find these numbers.

Decide how much cash flow you want to see

Back-calculate the purchase price based on the above data. Maintenance, CapEx, taxes, insurance - these are all "set" values that you shouldn't play with in order to "create" income. Yes, you can increase cash flow by decreasing CapEx savings. Don't do it. Instead, you can increase cash flow by decreasing your financing payments - decrease the purchase price, find a lower interest rate, etc.

Unless if there are major issues with the inspection, this could be a good property to purchase. You'll have to do a little legwork to decide what the purchase price is.

@Vera Herlihy - congrats on the first purchase!

There are several third party options such as QuickBooks which you can look up. If you're wanting to put together your own spreadsheet and customize it, send me some details on what you're looking for - I'm always looking for some Excel fun

What all does the HOA fee cover? If it is all external aspects of the building (roof, siding, AC?), you might not need a conservative CapEx and Maintenance percentage.

What are your "conservative estimates"?

When looking at a property which includes a HOA fee, the CapEx and maintenance are things that you need to take a close look at.

That said, a mortgage payment on this would be close to $1100 per month if you put down 20% - that only leaves $575 per month for your other expenses. Most likely, you are correct that this is a negative cash flow. Hopefully I gave you some other food for thought to help lighten the blow ;)

@James H. - What are the $50k repairs for?

At first glance, this seems like a no-brainer. You have 10% vacancy accounted for and you still bring in close to $100 per month per door cash flow.

That said, I'm concerned about what the $50k is for and the fact that you only have 5% maintenance and 5% CapEx. If the place needs work now, I would hesitate to only set aside 5% for those two items.

Second concern is that your expenses don't show anything for the utilities. Are you planning to finish splitting out the utility meters? I'm guessing that is what the $50k is for, but that's only a guess. Since you have 24 months in your rehab plan, you'll have to account for the utility bills for two years while you make the change - don't forget to include that as an expense or as a holding cost. If you are planning to split the utilities, I would find a way to get it done quicker than two years.

So my suggestion: This looks like a great value-add opportunity and I would consider taking it. I would figure out how long it will actually take to split the utilities, and then I would include the utility bill for your initial analysis to determine if you'll be losing money during the rehab time. Consider upping the maintenance and CapEx, and look at getting a cheaper lawn care person ;)

It looks like it could be a fantastic deal with a lot of opportunity to increase value and pull some equity out - just make sure that you know what you'll be paying while you work to make those improvements!

@Nikki Anderson - If you could, post a screenshot of your analysis. I would love to help, but it's tough without some numbers ;)

@Account Closed - is this a small multifamily? If it is that or SFR, take Cap Rate and set it aside for now.

Instead, tell us what the cash flow is after maintenance, CapEx, vacancies, taxes, P&I, management. Cash flow is what you should be targeting rather than Cap Rate. Some people aim for $150 per month per door, others aim lower.

That said, Cap Rate is all dependent on the local market. Some areas struggle to get 6% cap, while other areas have 10% cap rate properties all over the place. More info would need to be provided to help give a solid answer.

@Nolan O. - your Monthly P&I and your New Monthly P&I are the same number, so I say go for it! Haha

Ok, joking aside, I'll assume that your new monthly P&I is closer to $450 per month. My philosophy: equity reduces cash flow by decreasing the number of investments that you have. I will always leverage in order to increase overall cash flow even though it decreases the cash flow from the leveraged property.

That said, this strategy only works if / when you can leverage and still produce cash flow.

You only have three options in your case:

1. Leverage for less than $24,000.00. You can pull $15,000.00, which will increase your cash flow by roughly $50 per month (giving new cash flow of closer to $80 per month). This won't give you all of your cash back, but it gives you $15k more to invest with.

2. Increase your income. If you have a tenant that is willing to sign 2 years, you can bet for sure that you're under market value and she's getting the winning end of this deal. She's been at the same rent for a year (at least), and she's locking in to the same rate for the next two years? Suggestion: go to RentJungle or another comparison website and determine a fair market rent value, and increase your rent to match (or be slightly below). Don't lock in to anything longer than 1 year unless if you have a rent percentage increase worded in the lease.

3. Best of both: combine the above options. You don't really have the option of cutting expenses - you look like you're already running fairly lean. If you increase your income and take out a partial refi (not a full 75% LTV), you can very likely increase your overall cash flow by purchasing a second property.

@Corbin Wafford - you are correct that anything under 5 units is valued based on local comps.

That said, I always ignore this rule and I base my MAO as if I were buying a commercial property. If you take the expected income and back calculate, you can determine a price for what cap rate (or cash flow) that you are targeting.

This will not work if you are looking to do a BRRRR strategy, since you are basing your purchase on what a bank will refinance (ARV). In this case, I would talk with a local lender to learn how they valuate / appraise a property.

If you want some examples of how I value a MFR based on cash flow or cap rate, let me know and I would be happy to help you out! I'll save you a wall of text unless if you ask for it ;)

@Cp Rahaim - is there any particular reason for using absolute numbers instead of percentages? For maintenance and CapEx, this isn't a terrible strategy as long as you increase the amount as expenses inflate. The purpose of using percentages for expenses is that it will automatically increase as rents and expenses increase over time. It's also easier to look up a vacancy percentage for any given market.

On to your questions: I usually focus on cash flow for each investment. Like you, I don't want to put more money in than my initial investment. Each property should cash flow and carry itself, plus (hopefully) be leveraged in the future to carry other investments and still maintain cash flow.

With that in mind, I base my investing strategy on two things: What is the current cash flow at time or purchase, and what can I do to improve the cash flow? If I can decrease expenses or increase income, then my cash flow goes up (kinda obvious I suppose). For smaller multifamily investments, Cap Rate won't be a metric that many people look at. 

Find a place that has cash flow, and have a plan in place for how to improve cash flow. Every investment that you make should have a plan to force appreciation and improve your own returns. Trusting to simply inherit a stellar deal is not generally aggressive enough to grow your investments. You might get lucky, but forced appreciation over a short amount of time is a good method for growth.

@Mandy Ellett - the property management number seems high - even higher than the "normal" 10%. That might save you a few dollars on your expenses.

You mention HOA in one of your last sentences, but I don't see it listed in your expenses up above. If there is an HOA fee, what does it cover? You might find that you don't need as much of a maintenance amount if the HOA covers CapEx items, exterior maintenance, etc.

$2400 in utilities for a SFR seems high - I would never pay utilities for a single rental, and would only pay minimal for smaller multi family. When comparing local rentals, what is the "normal"? Does landlord usually pay utilities, or does the tenant? If the tenant usually pays, and the average rental is $1450 along with tenant paying utilities, you have two options: pay the utilities but raise the rent, or have the tenant sign up to pay utilities. Either way, you shouldn't be paying the better part of 14% for utilities on a condo.

If your numbers are accurate, then I would walk away from this deal.

However, I feel that you can save on PM, Maintenance (use 8% maintenance if HOA covers the rest), and utilities. If you can bring those expenses down reasonably, then you might have a deal