Per the title, I am evaluating small multi's on the MLX (duplex - quad size) and have found 90% of the deals I encounter don't pencil. The confusing part to me is that the MLS listings will provide the 1) Gross Annual Income 2) Insurance Expense 3) Gross Annual Expenses, however a quick division exercises reveals that #3 Gross Annual Expenses are 100% of the time less than 30% of #1 Gross Annual Income. Everything I have read on here mentions 40% expense ratio at the bare minimum should be assumed and often that should be closer to 45-50%. General assumptions I am making thus far include (assume duplex on deal below though per unit figures provided to generalize how I'm analyzing anything in the 2-4 unit range):
Financing:
-3.5% - 10% downpayment (depending on total capitalization), 4.65% interest rate o/ 30 year term
-1.75% upfront PMI required, with 0.8%/year amortized into loan payments for ongoing PMI
-3% plug for closing costs
-2% of loan amount for financing fees
-8% vacancy/collection loss
-$450/unit/year insurance
-7.5% Mgmt Fee on gross potential income
-$500/unit/year for R&M
-$300/unit/year for capital reserves
-All utilities pass through to tenant
-$30/month for landscaping
-$40/month for pest control
As mentioned, my cash flow after debt service on nearly all deals I look at (after adjusting the brokers' 20% expense ratio up to the 40-45% I am comfortable with) turns out negative or nearly $0/month, making me question whether the selling prices are absurdly high right now, whether my assumptions are far too conservative, or whether levering a deal to 90-96.5% (utilizing FHA 3.5% or anything up to 10% down) prevents anything from working due to the high monthly cost of financing which includes PMI. If the deals are truly this thin right now, then it would make sense that one has to pay 50% down or even all cash to get stuff to work. I'm in Dallas FYI, but would appreciate any insight from others on the above and whether your experiences have been similar as of late. Thank you!
