Multi Family Pricing
Hi:
We are looking to buy a multi-family rental to purchase as soon as possible. As we were looking in our local market for potential properties we found we properties around $300,000-$310,000 for 4-plexes with the average rental income of about $625 per month per unit. When we ran the numbers we came up with a GOI of 27k , OPEX of 9.8k ,NOI 17.1k, and a debt service of 21.9k leaving a negative cash flow of 4.7k. We checked several properties in the area that when we ran the numbers they came back negative as well. So here are the questions:
1. Is this typical for retail pricing?
2. How do we change these deals into positive cash flows?
Please let us know whay you guys think.
Thanks,
TLSargent
As an investor you need to buy wholesale, not retail. You should be looking to buy properties that make you money. I personally would never buy a negative cashflow property. Maybe down the road if I have all kinds of cash laying around but not now.
Here are some ideas that can make things cash flow:
1. Raise rents (are they below market?)
2. decrease expenses
3. do your own maintenence
4. manage the properties yourself
5. negotiate a lower price on the property
6. put more $$ down (smaller loan)
The best idea is to simply look to find another property. Remember you will need to look at 100 properties before you can make an offer on 10, out of which 3 will be accepted and you will actually close on 1. It is a numbers game. Go get um! GOOD LUCK
My goal is that with each property I purchase I will be MORE (not less) able to buy future deals. Therefore I don't want to use my own money, I need to buy properties that I can easily manage or afford to have someone else manage them, they need to cash flow and have some equity in them.
These deals DEFINITLY do not pass my test.
Keep hitting the streets. Get to know the prices and the values so that you're able to recognise the deals when they do come along.
You can take my advice with more than a grain of salt, as I have just recently found this site and have started to learn many things that will result in a change in how I have done my RE investing to date.
That said, is buying a property with a negative cash flow always a bad call? I would say no, but it depends on your goals.
I have purchased three small multi-family buildings in the last two years in the greater Seattle area. This area has been pretty hot for these properties and prices are often high and they sell quickly. Deals are out there, but they are deals I have not yet been willing to touch because I wanted to build some experience before I start messing with rehabs.
So, of the three properties, two have had negative cash flows when I purchased them to the tune of about $10K a year in one case and $3K a year in the other. Since I had good job during this time, the monthly outlay of cash was not a big deal and time should show that the appreciation will have been well worth it.
How did I deal with negative cash flow?
1. Fixing up the units. Depending on the current state of the units and the rental market, you might be able to get another $50 a month without a huge outlay of cash.
2. Get tenants in. Let their stuff settle. Raise rents some even if the area is not going up. Inertia is a powerful force and renters are often willing to take that increase rather than go through the hassle of moving. Obviously, there is always some risk here.
3. Refi later and put in more cash (or put more down now if you have it). Ah - is that the sound of screaming I hear from the audience?
Again, this depends on your goals. Mine are to build a small portfolio of easy to manage properties, get at least to a break even, sit on them for a few years, cash in equity and go on to bigger and better things. So, I sunk in more cash and got to monthly profit. I'm OK with my money there - it's a nice safe place. And, if rents significantly rise, as it appears they may over the next few years here, I can always cash out some of that money and use it to buy more properties.
Compared to many on this site, my plan appears ultra-conservative. And, having learned a thing or two here in the last few weeks, I would (and will) do some things very differently. However, if your time frame is long enough and you are willing to tie up more than the minimum cash (and you have the cash), any deal can make good sense in a nicely appreciating area.
There are just probably better deals, though they may require more to find, fix, and tune.
Everything depends on your goals. Even with about $45K sunk in per property, my RE investment has still far performed my stock investments, will only perform better each year unless the market turns in a serious way, and has required little work on my part.
I could have applied some of the things I've learned here and probably had much better performers. I also could have waited and not bought anything because I was afraid of a little negative cash flow and that would have been a mistake (for me). As an investor, I'm looking a few years down the road, not a few months, and I know that the road gets nicer the longer you're on it.
Bill
This is not unusual retail pricing for a 4 plex. The reason for this is that 4plexes are usually bought by amatures who believe that appreciation/inflation will bail them out. Look at bigger buldings. The average "weekend warrior" will not look at anything much bigger than a 6 unit. So if you will start looking at 20 units and bigger you will find they cash flow easily because the price per unit will be much smaller.
Hahaha! Commercialking, I think you just summed up my very long post in one short line! I think I've just been schooled
.
Bill
Thanks to all of you for your help...just trying to figure out how/why people would be picking these up at neg. cash flow. Maybe it is just reflective of the market we are in..
Thanks to all for your time and input!
What we knew all aloung. The big multi family can be had cheap if you shop. I shopped big multi 50+ units for a whole year before I found a sweet deal 1200 miles from home. I paid only 1.3 million for 74 units, no defered maint! The single family,duplexes and 4plexes are just for cutting your teeth on and building credit for bigger deals. Dont get me wrong its always nice to make an extra 30k on a home but how about going to closing 1or twice a year to bank a million in equity. Never buy negative cash flow prop unless your already bursting at the seams with extra money. The big deals are there.
Just to see if I get the point here
I have one quad and 3 deplexes now and have been looking for another triplex or Quad bldg.
Now, should I be looking for a 6 -10 unit instead. Will they be less expensive per unit???? I never really thought of it this way..........And have never realy looked at anything bigger than a 4 plex--just figured it was out of my range or too big for me..............
If what you guys are saying is right .....Then I am missing the boat here,,,,,,,,
Some of the answers given above are true but your market may be unique. Never Never buy negative cash flow property unless your short selling some great piece of real estate that you can turn the deal shortly after closing. How many negative cash flow deals can you do before your done making deals. Read Robert Kiyosaki ,Rich Dad Poor Dad. Skip the 4 unit and find a better deal. Do the 100 -10 -1 rule. 100 offers 10 counters 1 close. Make sure you write on property that generates rent that is at least 1.2%+ of the value of the property. If the house is 50k you should get 600 rent or more. This is a start but I always try for 1.3%+ as a cap rate. Good luck happy hunting!
Before I put a gun to my head, in my area you can't touch anything with a positive cash flow..we have seen steady appreciation here. apx 6% last yr. A recent 3 flat came on the market about $ 50K under the mkt. I bought it, no contingincies and even under the mkt it still neg cash flows. Now maybe you guys wouldn't touch it but assuming I can close I think I got a real good deal. I am going to use an option arm on it, Interest only with a second at prime for 5% down. Units are good shape, rent can be raised maybe 5% at lease renewal. Now I also subscribe to the I don't want to write a check out concept, so I went with the Option ARM in order to let the building fund itself.
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I'm a conservative investor I admit, I won't play unless I'm pretty darn sure to win. If you say you found a place for 50k under market and are using an interest only ARM and are flipping it I can follow the logic, but to keep a negative flow property and on an ARM to boot I just can't understand.
Some basic stuff...The fed has made it pretty clear rates are going up. Property value is more accurately measured as a cost per month or as total cost over the course of the loan than it is on a sales price. IE a property at 100k and 5% is equal in cost to a property at 70k and 8.5%.
Bottom line, barring extenuating circumstances specific to a local market, as rates go up, sales prices will drop accordingly. The value per month as well as the total cost paid will remain relatively stable. So, you are on a fixed rate and cash flowing, rates jump, your 100k house is now selling for 70k. No big deal because it's still worth the same monthly amount it always was, you would take a beating on a sale unless you have someone take it sub to, but keeping it is no trouble because it will still cash flow the same as before. Conversly, if it's not cash flowing and you're on an ARM things are just going to go from bad to worse as rates go up.
Maybe the Fed is just blowing smoke and rates won't go up, or the economic outlook will change and keep them down, but a positive cash flow on a fixed rate is pretty darn solid, a negative flow on an ARM is a gamble. And a gamble with pretty bad odds in light of the information currently available.
I saw it a few years back in the market, it was hot and everyone was making money, new investors were flocking to the action, go for it mr new guy, it's a sure thing, use that margin account. Greenspan was unusually blunt in calling it irrational and a bubble. Caught up in the hype few listened. They learned the hard way. Now REI is the hot ticket, go for it Mr new guy, it's a sure thing, use that ARM.
If you're an old timer who's been around the block and likes ARMs please don't flame me, I know there are uses for them, I'm just saying that to make a bad deal work temporarily isn't one of them. To quote a friend who likes them..."If they raise rates to the point it annoys me I'll just pay them off".
I would avoid anything negative cash flow.... also consider what these will bring with even higher interest rates in the future, could devalue them quite a bit. For compairson, less than 2 weeks ago I closed on a <5yr old duplex rented for $600 each side on old leases (has $625-650 comparable upside in area) for $113k. I probably would have not have bought if it wasn't for access to great financing of 3.75 ADJ (max adjusment 1% every 2 yrs through a credit union). P/I/Escrow is $531. My market is also flooded with investors, using 30yr fixed and/or large down payments to make things work out.
I agree with your thinking on rates going up.. it's a shoe in. Here's my CONCEPT.
Now I know I'm taking a risk..there are no risk free investments, right ? Though I don't think a big one. I have factored rates going up and with Int Only I will be able to apply cash flow excess to principal. This loan works like a HELOC, it recasts monthly. Also the rate is tied to a 12 month average of a Treasury index so even with rates rising it will go up very slowly. Also, if I elect I can make minimum payments below the note rate and defer the difference and add it to principal. I don't plan on doing this but it is an option with this program. Since I bought this under the market ($35-50K)in a very tight mkt I believe I have room in there value wise. I plan to refi in 5 years or sooner depending on appreciation.
What I believe is that the value of the dollar is going to go down. I am deferring reducing principal to the back end so I can pay back the princ with devalued $ and use the purchasing power of the $ I have now for further investment before inflation pushes RE prices higher. Everything is cyclical. Prices for ALL commodities are going higher. Oil, building materials, etc. It is only a matter of time that these costs get passed thru to consumers. Back in the '70's interest rates went up and RE prices took off. The pendulem always moves to extremes. We are just coming out of a deflationary enviroment and switching to an inflationary one. There will, imho, be a lot of $ chasing tangible assets and RE is the most basic one.
So, in inflationary times..leverage is good and rents will keep pace with inflation. Now, this is just my opinion and observation.
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I didn't see this mentioned above...
1-4 units = residential property
5+ units = commercial property.
Residential properties are appraised based on comparative analysis whereas commercial properties are appraised based on income rather than comps (comparing cap rates rather than properties). This often drives up the price for other reasons that have been mentioned above. Appraisers can continue to appraise them that high (even though they don't cash flow) because that's what people are buying them at.
Its a good idea to make many offers in an attempt to obtain a good price for a multi family rental home. Looking at some of the advise (100 offers), where would one go to look for that many properties to make offers on? The retail market, MLS ?
Quote:
On 2004-05-20 03:37, dcech wrote:
Some of the answers given above are true but your market may be unique. Never Never buy negative cash flow property unless your short selling some great piece of real estate that you can turn the deal shortly after closing. How many negative cash flow deals can you do before your done making deals. Read Robert Kiyosaki ,Rich Dad Poor Dad. Skip the 4 unit and find a better deal. Do the 100 -10 -1 rule. 100 offers 10 counters 1 close. Make sure you write on property that generates rent that is at least 1.2%+ of the value of the property. If the house is 50k you should get 600 rent or more. This is a start but I always try for 1.3%+ as a cap rate. Good luck happy hunting!
The market where I'm living/investing is similar right now. Rents have not come close to keeping up with prices so it's hard to get a positive cash flow on anything but the big multis. I'm new to REI, but my solution was to buy a 3 unit duplex (one side a large single home, the other 2 apts) with two large detached garages at the back of the property, bordering on an alley. I bought the houses below market with hefty rehab credit, but they still would have never had pos cash flow on their own, but I'm renting the garages sep. for $150 and $175 ea. for cars and watercraft., etc. That's what made the deal a winner for me. It's a riverfront community, and parking space is a premium.
(I'm fortunate to have a close friend who's a very succesful REI in my area to be mentoring me. He was the one who told me to rent the garages on their own to make a good cash flow) :-D Didn't occur to me!
Just an update to my financing: On my 3 flat I am doing a Interest Only 5/1 ARM at 5.375%. While I do think rates will go up, I believe that having the option to pay interest only will help with any potential neg cash flow. I plan to make some improvements so I can raise rents. At Int only, assuming vacancies, repairs and getting hit by lightening it does cash flow. What I like is if I choose I can reduce principal off the front end if I want or just make the int only payment. I expect RE prices to be higher over the next 5 yrs so I anticipate being able to refi anywhere along the way that the cashflow makes sense.
My CONCEPT is not to reduce principal but to leverage my $ and RENT the banks $. If you consider the true cost of amortized fixed rate you will see that you are paying back appx 140% in interest plus orig princ. I don't think that is a good way to build wealth albeit a traditional one. I believe we invest in property for 1. cash flow, 2. Appreciation, 3. Depreciation, & Tax Ben's. I get all of those without reducing princ & at a lower rate than a fixed and with better cash flow. Just my 2 cents.
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