ProForma-nator Says No - Am I Crazy?
I am considering two buys. ProForma-ator says no-go on both but I think I need a human to tell me so.
Option #1 - newer 4 family asking $350k, rent roll is $42000/yr, all owner expenses (taxes, insurance, maint,...) are $13600/yr. Tenants pay all of their own utils. Cap rate is ~8.1% without accounting for vacancies. I can get a 30 year fixed at 6.5% and 10% down = $1940/mo mort payment. Cash flow is 42000-13600-23300 = $5120/yr.
Very nice looking place in decent middle class area that had seen its heyday long ago but has been slowly coming back and does have good upward growth potential.
Option #2 - 1960's 6 family asking $450k. Roll is $57500 and owner expenses are $16500 (utils, taxes, insurance, maint,...) Cap rate is ~ 9.2 without accounting for vacancies. Assume financing at 30 year fixed at 8.25% and 10% down = $3050/mo. mort payment. Cash flow is 57500-16500-36600 = $4400/yr.
This building is somehow legal and sits in the middle of a small development of lower-middle class SFHs. Lots of rental housing and complexes in the surrounding area. Appreciation here is negligible.
(Option #3- keep looking for values in SFH while waiting for that market to decline. cap rate on two SFH I already have is 8.8.)
Maybe I'm crazy, but if I am handling management and, if upon review vacancies aren't excessive, aren't the cash flows above decent? I'm new to this "hobby" but am planning to acquire sufficient properties to provide $8-10k cash flow per month in about 10-15 years. (This used to be 10 rental houses, but with the way appreciaition has taken off in my area, it is difficult to determine just how many will ultimately be required and how long it will take. My area, as many others, has seen explosive appreciation overt the last 4-5 years and finding decent low priced 3bd/2bath homes ($100-150k) is just not possible. 1% rule is out the window!)
How strictly should one observe Proforma-nator advice given varying market forces?
Thanks in advance,
RD
PS - I made the suggested edits. Thanks for the advice.
PSS - Assuming Seller won't be completely honest, does anyone have any suggestions as to the most reliable sources for determing vacancy rates?
Thanks again![ Edited by rdatsksb on Date 02/25/2004 ]
Option #1.
Rent roll is: $42,000 (per month, per year?)
Expenses are: $13,600 (per month, per year?)
You typed your numbers wrong. You can edit it so that it's more clear.($13,600 in expenses per month, not $136,000). Double check that they're right now. Took me a few minutes to figure it out.
13% vacancy is your break even point. Have you included allocations for capital improvements (roofs, driveways, carpets, appliances, furnaces, etc) in your budget? Those things do happen and do cost a lot of money. It's a slim deal, but if you can weather it for the first bit, it could be a good thing. Sellers will always overstate income and understate expenses. Compare what he's told you to his taxes of the past 3 years. 8.1 Cap is slim....and you're not even calculating all of the expenses.
Option #2
I don't get it. Why don't you calculate vacancy? That is a real expense. In this area should you count on 3% or 15% vacancy? 8% is generally a safe average. Same comments as above for improvements. This will vary from area to area (should be higher in yours most likely) but you need to figure out what deal is good enough for YOU. My personal guideline is that in a Multi, if it's not going to cash flow AT LEAST $50 per unit per month, it's not a deal worth doing. I shoot for $100+. Your properties are more expensive there...I'd maybe say $75 if it were me. You should expect even more than that if you're coming in with a down payment.
The proforminator is a tool....not a crystal ball. It turns inputs into outputs and trys to hold your hand a bit. Make sure your numbers are sound. Make sure you have the real expenses and income (from the sellers taxes preferably) and don't settle for what he says they are. It boils down to your decisions and your level of comfort.
How much can rents drop before you're loosing money?
How many vacancies have before you loose money? On an SFR, if you have a vacancy for 1 month (not uncommon) that's a 9% vacancy rate.
Do your due dilligence and then make up your mind. You may want to approach a couple of local landlords and ask them to review it and see what they think about it. Good luck.
I noticed as well when using any cash flow calculator, that you need to play around with it.. Change numbers around. I noticed they have some defaults set as well. If those dont apply, change it. Mine said a so- so deal with the proformanator but i changed a couple numbers around. (trying to think creatively) and it turns out to be a heck of a deal.. Good Luck
Thanks to you both for the insight. I was monitoring the Multi forum for quite a while and it seemed there that no property was even considered unless Cap was over 10 and it would pump lots of positive cash flow.
I was beginning to think every landlord was "getting rich quick" except me.
Quote:I was beginning to think every landlord was "getting rich quick" except me. I only played with option #1 and I could only replicate your numbers if the interest rate on your loan is 6.25%. At your numbers, I would assume about a 5% vacancy rate (2 units per year, one month each).
It appears that your cash flow is a little too thin. You don't mention a replacement reserve contribution either. With only 10% down, you will have PMI to deal with too. This can be a large number on a $315K loan amount. Even $150 per month for PMI raises your debt service to $25100 per year -- reducing your cash flow even further.
You must also take property tax increases into consideration. When you record your deed and purchase price, will the tax assessor reevaluate your assessed value? If so, then you need to use a larger number for property taxes.
All in all, I would pass on this one too unless you can get a much better price and you are prepared to put more money down to eliminate PMI.
If you are looking for a path to "get rich quick", landlording is not your yellow brick road. Landlording is typically a "build wealth slowly" investment vehicle.
Thanks Dave - Option 3 wins , I'll let these pass.
Sorry for the lame attempt at humor - far as I can tell, the only way to get rich quick is to marry well or have daddy give it to you.