All Forum Posts by: Pinaki M.

Hello, maybe someone can make this more clear for me. I used to think that as long as the interest rate of an mortgage is less than the cap rate of the investment, the investor is guaranteed to make positive cash flow every month and end up with a cash-on-cash return which is greater than the cap rate. However, working through the numbers for a few potential deals, this does not appear to be true. 

For example, I was looking at the property for which the price is $1,100,000. According to my estimates, this would result in a gross profit (cash flow before mortgage payment) of about $65,000 per year, which is just over $5,400 per month. So the cap rate is 5.9%. Now, taking a loan with 5% interest rate, 15 year amortization and 20% down, the monthly payment comes to about $6,950.

In the above example, since the cap rate is greater than the interest rate, my thinking was that I will make some positive cash flow in the end, and that the cash-on-cash (with 20% down in this case) will be higher than the cap rate (which is basically 100% down). But of course, this is not correct, as the numbers above prove.

My question is, is my understanding completely off the line, or am I missing something small? Is there any relationship between the cap rate and the interest rate at all which will quickly tell me if the investment is cash flow positive? I mean something intuitive, without having to do the whole calculation.

Thanks.

@Michael Vallee Thanks. I have watched some of his videos on youtube. Pretty solid advice.

Thanks @Account Closed. I will check out those resources.

Would you be kind enough to share some key points you learned from investing in that first deal (or anything else after that)?

Do you invest locally in the Bay Area?

@David S. Thanks! You answered most of my questions.

I recently moved from the Bay Area. That's where I had heard about the law. Seems like the requirement can vary by state. I will check the local laws.

I meant "mandatory" as in dictated by the law. I heard that for 16 units or more, the law requires the presence of an on-site manager. I wanted to check if that's correct.

I agree with your general point. My concern was that, if I like a 16 unit apartment and the above is true (that is, an on-site manager is required by law), then it will be difficult to make the numbers work, whereas it would be much easier for a 80 unit apartment (assuming the manager gets paid a monthly salary which will be almost the same). I don't know what most investors do in such a scenario. What you mentioned earlier (having a tenant oversee the property for discounted rent) can be a reasonable solution though.

Thanks. Regarding PM.. I was recently looking at a 80-unit apartment. It already has an on-site manager. In that case, what would you recommend? Continuing with the current PM (which probably makes more sense as they are already familiar with the property, unless they are doing a really bad job), or getting someone new? I mean, if I had talked to a PM first and then found this property, they will probably not be happy if I decide to go with the current PM.

Now, let's say if a buy a 16-unit apartment, I agree with you that having a full time onsite manager may not make the numbers work (that's one of the reasons I am looking for a larger apartment). That's why I wanted to know if it is mandatory to have a PM onsite. I heard that for >= 16 units, having an onsite manager is mandatory. Is that correct?

I would like to invest in commercial multi-family properties (> 4 units). I am confused about the steps of the process. I am hearing (and reading) different stuff from different people. For example, some sources tell me to have a contract in place and then apply for financing. Others tell me to get approved for financing first and then sign a contract with seller. I am just starting out, so all this seems pretty confusing, and I am not clear where to start. Can someone please break it down into the various steps involved from the point I find a property to the point of closing the sale?

Also, under what conditions is it mandatory to have an on-site manager? Not sure if the rule changes by state, but I am looking in Arkansas.

Thanks!

@Edward Rhoads

"Inside the loop is tough until you have lived in the town for a year or two."

Why is it tough? Does the inside of the 465 loop has bad neighborhoods?

@Andrew Pearson Thanks for the info, and good luck to you too. I might PM you if I decide to pursue Indy as an option.

@Trevor Kolb Thanks. Do you personally invest in CS too? Or somewhere else in Colorado? The good thing about Colorado is that the cities aren't too far from each other, so I think it should be easily possible, for example, to live in CS and have rental properties in say Denver. But the not so good part is that most of those markets have already gone up in price quite a bit.

@Larry Fried How do you invest in those places? Could you please share more details. Thanks.