@Account Closed This is a small nit, but I think you intended to have "# of Units" in the column headers of your table above rather than "# of Properties". This is based on the fact that you mentioned multifamily in your post and outlined that you intend to generate "$150 of cash flow/unit/month". Building a plan based on # of units is common and will help with consistency when projecting cash flow/unit and acquisition cost per unit.
I've included a few comments and items to consider below as well as an alternative way to approach your plan based on a set of revised assumptions.
The alternative model below is based on the 17 column definitions listed below. I have included a definition of each column, the revised assumptions where applicable, and additional items to consider. I hope this helps you refine your plan and move forward with greater certainty.
Column 1 - By End of Year: Self explanatory
Column 2 - # of Incremental Units to Acquire Per Year: Self explanatory. You may consider being more aggressive with scaling after you have a few years under your belt. Many experienced investors find that they gain significant momentum after the first few years of measured progress.
Column 3 - Total Cost of Incremental Units/Year (Assuming $60k/Unit): Column 2 x $60k. In your original plan, it appears that you assumed each unit will cost you $100k to acquire. While this will fully depend upon your market and the class of property/neighborhood in which you invest, this price/unit seems high based on the rent per unit you are assuming (i.e., $600/unit). I apologize if I've misunderstood your rent/unit assumption but I moved forward with this in the spirit of providing an alternative perspective. The model below provides an alternate way to look at things with revised assumptions based on $600/unit in rent and the "1% Rule" ($60k price/unit generates $600/month in gross rent/unit). You may have heard of the "2% Rule" in various BP forums but I've found it very difficult to find property that meets this rule. Properties that meet the "1% Rule" are much more abundant. Your ability to generate positive cash flow will depend to a great extent on the ratio of price to rent in your market, the leverage you employ to acquire property, the financing terms you're able to obtain, and your ability to manage operating expenses. I recommend that you review your target market and property class to determine the appropriate median price/unit and monthly gross rent to include in your model.
Column 4 - Assumed Rent/Unit/Month (Assuming 1% Rule): Explanation included above. Check your target market and adjust accordingly.
Column 5 - Total Incremental Rent/Month: Column 2 x Column 4.
Column 6 - Operating Expenses/Month for Incremental Units (Assuming 50% Rule): Column 5 x 50%. You may need to adjust this upward based on the class of the property that you acquire. However, the 50% rule is OK as a starting point for modeling/planning.
Column 7 - Net Operating Income/Month for Incremental Units: Column 5 - Column 6. Please note that this ignores monthly cap ex reserves which will further reduce the projected cash flow outlined in Column 13.
Column 8 - Financing Required to Acquire Incremental Units/Year (75% LTV): Column 3 x 75%. Your plan didn't outline your financing assumptions. The debt service is a key factor in determining cash flow. While the allowable LTV will vary by lending source, 75% is a conservative starting point for planning purposes. This can range from 65% - 80% for multifamily investment property.
Column 9 - Down Payment (25% LTV) & Closing Costs (5%) Required to Acquire Incremental Units/Year (Total 30% of Purchase Price): Column 3 x 30%. As stated in my comments in Column 8, your LTV will vary based on lending source. However, your model should account for a down payment in addition to closing costs.
Column 10 - Rehab Cost for Incremental Units/Year (Assuming $5k/Unit): While this is optional, unless you are purchasing turnkey property you will need to invest capital to upgrade your units. While the capital required depends heavily on your location and property class, this could range $2k-5k for basic upgrades such as paint, flooring, appliances, and fixtures. Consult with a local multifamily broker or property manager to refine this assumption.
Column 11 - Total Capital Needed per Year to Acquire Incremental Units: Column 9 + Column 10. Things to consider: Will you raise capital from others? Will you come up with the capital from your own funds? Your ability to scale quickly will depend on your ability to raise capital from other sources (i.e., passive investors, joint venture partners, etc.).
Column 12 - Total Monthly Debt Service - 75% LTV; 25 Yr Amortization @ 5%: I didn't see any assumptions related to debt coverage in your original model. As you can see, this reduces monthly cash flow significantly. While the loan parameters will vary by lending source, it's unlikely that you will obtain >80% LTV, >25 Year amortization and/or <4.5% interest as a new multifamily investor. Things to consider: As you start out, you can expect to pay higher interest rates (5+%). Additionally, consider that interest rates are at historic lows. Therefore, 10-year financial projections such as the plan you've created should factor in elevated interest rates in the future; this is subject to a wide margin of error as nobody can project what will occur with interest rates with any precision. Also consider that amortization periods of 20-25 years are common for multifamily investment property. You can expect shorter terms when you start out which will increase your monthly debt service and reduce cash flow.
Column 13 - Cash Flow per Month Generated by Incremental Units Acquired During the Year: Column 7 - Column 12. Notice that the revised model produces significantly less monthly cash flow than you had originally assumed. The debt service was the major factor impacting the cash flow. Also consider that you'll need to set aside cap ex reserves to handle unexpected issues. To boost monthly cash flow, you can explore opportunities to reduce operating expenses below 50%, boost rent (note that the model assumes rent will stay constant which is probably too conservative), lower your leverage, or obtain more favorable financing terms. To maximize cash flow, focus on high yield markets (i.e., those with low price-to-rent ratios).
Column 14 - Total Cash Flow per Year Generated by Incremental Units: Column 13 x 12 months.
Column 15 - Total # Units Owned: Sum total of Column 2 at end of each year.
Column 16 - Total Cumulative Cash Flow per Year: Sum total of Column 14 at end of each year.
Column 17 - Total Asset Value Assuming No Appreciation (Assuming $60k/Unit): Column 15 x $60k.
Other Comments:
- To reach your goal of $150k annual cash flow, you'll need to scale faster, boost rents over time by executing value-add initiatives (BRRR strategy), raise more capital / reduce leverage, and/or obtain more favorable financing. It's also worth considering that certain markets provide better cash flow than others. Review the comments in Column 3 above to refine your assumptions regarding price per unit and rent/unit. If cash flow is your goal, seek markets with a low price-to-rent ratios (i.e., high yield markets).
- As mentioned above, after you have a few years under your belt, it's fair to assume that you will be able to accelerate your growth. Many investors find that deal flow and acquisition pace increase after a few years of successful execution.
- As you acquire larger multifamily properties, you may be able to obtain more favorable financing terms, which will lower your monthly debt service and increase cash flow.
- Use models such as the above/below as a guideline, not a precise plan. Develop a base case, pessimistic case, and optimistic case to build a range of outcomes. The goal is to develop a reasonable set of targets based on conservative assumptions.
- Using $40k to get started with multifamily investing is a sound approach. The fact that you're modeling future cash flows and developing a conservative plan of execution over 5+ years is a good indicator of your future success. Too many investors execute at an unreasonable pace in the hopes they'll get rich quick. Additionally, few focus on cash flow and build projections to guide their activities. Both result in eventual failure.