All Forum Posts by: Brett Cook

Thank you Nathan! I hadn't thought to convert this to a rent/price ratio. That will certainly make it quicker to identify potential deals. I take it the ratio is the total monthly rent divided by price.

The vacancy rates I gave are from 2013, the latest census data. The first quarter was 21%, improving to 11% the last quarter. However, advertised vacancies in this area are closer to 3%. I don't know if I can trust those figures though, they are just the figures entered in the MLS by the listing agent.

I'm trying to develop my search criteria for a small multi-family unit, say a 4-plex. I wanted to get some opinions on whether I understand the 10,000 foot view or not. I have selected a couple of nice neighborhoods in my area, Tucson, AZ that I think may be able to cash flow. The problem is, that my numbers aren't working, or else I haven't figured out how to make them work. I'm using some rules of thumb to down-select to a few properties that I could then dig into more closely.

My assumptions based on rules of thumb:

Vacancies are 25% (avg in Tucson in 2013 was from 11%-21%)

Expenses run 50%.

Avg cost of 4-plex is ~ $300,000 (mortgage = $13,750 at 4%, 30yr with 20% down)

There are two basic methods I've seen to come up with a value for the property, cap rate and cash flow.

To get a 7% cap rate (3% above par value on borrowing money for fixed, 30yr), I calculate the property would have to bring in 56,000 gross, or $1167/mo/unit. The average is more like $710 for this area. To get 7% cap rate, I'd have to get this property for $182571 (

[710*4*12*.75*.5]/.07). That seems unlikely.

Method 2 is to look at cashflow, and that's what I'm most interested in. The zero cashflow point is where the property just pays for the mortgage. This would give me an offering price of 267,691 (Yields a 30yr mortgage at 4% with 20% down of 12,780, which is the earnings using the rules of thumb). This might be possible. Any improvement in vacancy rate or expenses would give me cashflow, but I know I'd be able to at least pay the note.

Am I expecting too much? I suppose another way to look at this would be to figure out how I might be able to increase the rents (more money for updates), or reduce the asking price (so I could afford to do updates and increase rents), but I haven't seen any properties that even come close to the price point.

Any advice would be appreciated!

Brett

Hi Christian;

Sure! I'd love to talk to someone who knows the Tucson market. Maybe I could buy you a cup of coffee sometime.

I am analytical, and it's easy to get stuck in analysis. It is helping me to understand details I wouldn't see otherwise, but I fear I might not be seeing the forest because I'm focused on the trees.

I live on the NW side of town. I'm more familiar with that area, although I know there are very nice pockets of housing around town.

I don't mean to hijack the post, but I've been wondering much the same thing. There is one area in my town that has a high ratio of rental units to SFR's, and all are priced way above what a SFR with the same sq. ft. goes for. Of course, the rentals are priced according to their rents. This made me wonder if it would be worth buying a SFR at a lower price and doing a split to create two rentals, which would possibly get good cash flow and force some appreciation. I worry that I wouldn't get the same rents as a true duplex, which have no common wall and separate everything. Maybe I watch too many TV shows, where they make it look like a great idea to convert.

Thanks for the welcome everyone. I definitely will check out the forums and blogs.

Elizabeth; I lean towards buy and hold myself. I like the idea of having cashflow, and it takes a long time for me to make a decision to buy anything, so I will probably hold on to it. I hope to be able to use the cashflow to save money to buy another property.

Brett

Hi;

I've been an engineer for the past 26 years and would like to be able to afford to retire at some point. I think my best bet is in realestate, but I know I have a lot to learn.

I've been reading a lot and have been scouring the MLS looking for properties and doing basic analyses on them. This has given me some basic understanding, but I thought participating in a group like this might be a big help.