Multi Family Investing Strategy
I invest in multifamily properties in the monmouth county new jersey area, within 60 minutes of manhattan. I buy properties if I break even with the rent income and don't look at cash flow but at the equity that is growing. I think it will continue to grow because there aren't affordable housing options near the ocean and within an hour of manhattan.
after reading some articles, everyone talks about cash flow and I am wondering if this is only possible in more rundown areas or with foreclosures. Is it too risky to buy for equity build up only? 
some investers do buy this way. but i personaly tink that your aproach is risky what if amain pipe line breaks or its time for a new roof where does that money come from? i hope not your own pocket. I make sure that my cash flow goes in an account to fund repairs. I laerned a great formula that i use. I
take the total amount of annul rent and times it buy 7 years. I do not buy unless it fits these guide lines. this formula will always give you a good cash flow. plus plenty of equity up front. it has not done me wrong i have 2 duplexes 4 fourplexes and a positive cash flow after expences ever month of $4250.00 amounth and in my repair acount 1300.00 a month in it. when the repair acount reaches 50,000 than i start looking for the next investment but i dont drop below 50,000 in my reserve acount. It works well for me hope this helps. good buying!
thanks for the advice. i took your formula and applied it to my properties when i first bought them (all bought within the last two years) it worked for all but one. But, i don't seem to have much positive cash flow after all expenses. I have refinanced 4 of them once and one twice to get cash out for purchases so that may be why. Do you find that you have much positive cash flow right away with that formula or does it take a year or more of rent increases to reach that?
thanks again for the advice.....anyone else ?
Guru-I really don't understand the end result of the formula. I know what you are saying but what exactly are you looking for to be able to buy the house.
Thanks
Guru - please clarfy the formula for us. Thanks
Yah, I agree. You're formula's a little fuzzy.
What comes after multiplying the annual rents by seven years?
I think what Guru's getting at is a variarion of the quick and dirty calculation that you should try to get about 1% of the purchase price in rent every month ($70,000 price, $700 rent), which is easier to calculate than (7 x 12 x Rent ) but gives a similar result. It is only a rule of thumb and an old but not a bad one.
Monmouth is a great area that will no doubt experience some good appreciation if the market holds.
How long have you had your properties? If you've had them long enough I'm sure you've experienced the repairs and maintainence expenses that are involved. If not, just wait.
To me, this is a bit risky. Positive cash flow properties are out there. Even in Monmouth county. It may take a little longer to find them but they make a better investment.
CASH FLOW, CASH FLOW, that's the name of the game when holding properties for rental.
Not only do you need reserves for unexpected repairs, but your banker likes to see the money as well. Once your income vs expenses gets too tight, your banker will be reluctant to loan you money for fear of a default situation. For my comfort level, I use a vacancy factor of 1 months rent as well as 1 months rent for unexpected stuff, and I still cash flow a minimum of $ 1200 per unit per yr or I don't do it. If it's not vacant and the rug rats don't break something then I am up to $ 2000 +++ per unit. This formula works for me with 15 yr mortgages and little or nothing down.
YES, these deals are hard to find outside of the "war zone" but they are well worth it for cash flow, appreciation, higher rents, and better tenants.
Keep looking, modify your thinking and you will find some situations out there that will make you money from day one. Remember, making money on a property starts when you buy it.
Good luck and make $$$.
Tom
thanks everyone for the advice. when i read about it in books i think it is not possible to find such positive cash flow, maybe it is. my problem is i get impatient to invest if i have the down payments ready to go. i am going to rethink my strategy.
thank you again!!!
As they say "make your money when you buy." In my opinion as a general rule anything that cashflows will also appreciate. Many of the things that you read about buying and selling houses should apply to multi's as well. Namely, BUY FROM MOTIVATED SELLERS! Buy low. Look for SELLERS and not PROPERTIES.
Are you buying from motivated sellers? Are you walking into equity? Do that and your numbers and cash flow will be a totally different story. Look for properties that ALWAYS have a "for rent" sign up and contact the owners. Talk to people and find out where no one wants to live. Find the worst property management company in the city, find out which apartments they manage, and contact those owners and see if they want to sell. The great thing about multi's (5+ units) is that if their income is low, the appraisal will be low, and the price will be low.
You're right that it is easier to get both appreciation and cash flow in distressed areas. Look at the worst looking properties in the areas that you like. Get in, rehab them, get rents up, and you'll probably have both.
I also agree that it's a risky strategy. Markets go through cycles. You may buy a property at FMV that has no equity and be upside down for the next ten years until the market flips. Additionally, rents drop as markets ride out these cycles. What happens if rents drop by 10%? 20% 30%. At what point are you going to loose everything. If you have no cashflow and your rents drop by $1000 per month, then that's $1000K per month that you've got to cough up from you job. Suddenly RE has you trapped rather than freed. I don't think your strategy is bad if you have a LOT more money than time and you can buy properties with big down payments because you have the cash, and you can afford to loose $30K per year or more when rough times come, but most of us are not in that situation.
Bottom line: Your cash flow is your cushion and your safty line. The bigger it is, the greater your ability comes to weather out the economical storms that are inevidible when you're in the market for a while.
Here's the algebra lesson of the day:
GRM (Gross Rents Multiplier) = Price / Rent (annual or monthly....you choose)
Price = GRM X Rents
Rents = Price / GRM
Guru's equasion and the 1% rule are both manipulations of that equasion. (read on)
Guru, What you're saying is that you demand a GRM of 7 (or 84 if you calculate monthly rents). (GRM = price/gross rents) The "1% rule" is the same thing, only with a lower bar (GRM = 8.3 or 100) (...and remember, lower is better). It's a good place to start, and a good rule of thumb, but it does not take into consideration expenses or debt service. Probably wouldn't work if you had $80K in defered maintenance, 55% expense factor, and a 14% rate on your loan (which is extremly high now, but RE has seen those rates in the last 2 decades). Case in point: kilocolette in New York has a harder time making those numbers work than Guru in Washington. I know taxes and insurance in NY are at least double what I would expect to pay in my area. Many other aspects will be more expensive in NY also. kilocolette, feel out your market, run numbers LOTS and you'll get a feel for what numbers work in your area. It may be that Annual rents X 5 or 6 are good indicators of the properties that will work for you. I prefer cap for a detailed analysis of how it will perform. I bet all of the properties that you bought at a cap of 10% or better are cash flowing (Cap = NOI/Price)
I hope that's helpful, because it's sure not exciting to read! Good luck.