need help figuring what cash flow is worthwhile - Posted by Karen

Posted by Karen on August 29, 2001 at 22:02:14:

I got the info from the realtor, it is posted above in a new post. your numbers guessing is actually pretty close but I can’t quite figure how you got the cap rates from the numbers.

I REALLY appreciate the time you and others are putting into my education!

I forgot to put above, this place is really a bit of a dive, the major disadvantage. it is like a trailer park but with apartments. probably the most dive of a place to live in the whole town (not including a trailer park or two). BUT – there is a huge need for rentals in this small town, and no one is building any more of them for now. they are trying to build “affordable” housing for around $100,000 per house (for a 3/2 or 2/2).


need help figuring what cash flow is worthwhile - Posted by Karen

Posted by Karen on August 29, 2001 at 09:42:21:

listed at 650,000, 39 apartments, actually a bit of a dive, probably a lot of tenants on sect. 8. the question is what monthly cash flow should I aim for with my offer, what cash flow is worth the risk and potential headaches of such a big place. I will include budgeting for an on site apartment and manager to minimize my headaches.

thanks in advance,

(who is trying to break out of the equity mindset and into the cash flow world with the big kids). (and who also obsesses about real estate)

Re: what cash flow is worthwhile - Posted by Jim Rayner

Posted by Jim Rayner on August 29, 2001 at 20:56:47:


This could be answered in many ways but I suspect perhaps you are looking for a more generalized approach. I view each deal on several points.

one is annual cash on cash return on investment. my criteria is based on the following equation:

((378.0195 X Percentage of Equity[as decimal 20%=.20]) raised to -.7511249 power)) / 100 = cash on cash return requirement.

If you plot this curve you will find it approaches infinity at zero down an approximately 12% at 100% cash purchase. A 20% down regardless of source requires a 40% Return. This is a pre-tax evaluation

I also check the projected internal rate of return for 3,5, and 10 years

I also watch my holdings return on equity with a target of 20% and and my return on asset with a target range of 3-5%.

Re: what cash flow is worthwhile - Posted by Dave T

Posted by Dave T on August 29, 2001 at 19:46:38:

Without knowing your income and expenses, it is difficult to answer your question with a specific number.

I suspect your real question is what is the maximum price to offer for this property. If so, then let me give you a quantitative approach to finding your answer.

First determine the current monthly rent income if all units were fully occupied at the current rents. Now subtract 15% for vacancy(unless you know that a higher number is more appropriate), then add in any other income sources provided by the property (such as coin laundry, vending machines, etc.) Let’s call this answer your Gross Operating Income.

Secondly, estimate all your monthly operating costs for taxes, property insurance, repairs, management, supplies, trash removal, cleaning, pest control, security, exterior lighting, liability insurance, lawn service, utilities, license fees, a reserve for future maintenance (be generous here if there is a lot of deferred maintenance), as well as anything else not on this list that would apply to your property. Add up all these monthly expenses to arrive at your Operating Expense.

Subtract your Operating Expense from your Gross Operating Income. This number is your Net Operating Income.

Now divide your Net Operating Income by 130% (1.30). I suggest that the answer to this computation is the maximum amount you can afford to apply to your debt service (mortgage payment). It should be easy with a financial calculator to use this payment amount and the prevailing commercial loan rate for your area to derive the maximum loan you could get for this property (use a 15 year term for commercial loans). Since a commercial lender will most likely require that you have 20% down, divide the maximum loan amount by 80% (0.8) to figure out the maximum purchase price you can afford for the loan you seek.

Once you know the maximum price you can pay to have the lender finance the purchase, you set your offer strategy lower to leave negotiating room.

Oh, by the way, subtract your mortgage payment amount from the Net Operating Income to get your cash flow. When you look at the cash flow number, only you can determine if the amount is large enough to be worth all the landlord headaches, time, and effort you will put into this 39 unit property.

I have suggested just one way to approach the answer to your question. Hope this helps.

WE know you are new to the site… - Posted by JT - IN

Posted by JT - IN on August 29, 2001 at 15:21:39:


You must give us a little more factual info to work from, than the price and number of units.

What is the gross rent? Vacancies? Expenses? (specifics) Type of construction? How old? Condition and type of roof? Section 8; what does cert pay, and do they pay any rent in addition to cert.

We will provide many answers, once we have the question.


thank you very much… - Posted by Karen

Posted by Karen on August 29, 2001 at 21:52:06:

this is the kind of info I am looking for, I printed it out. above, in a new post are the numbers from the realtor, would love to hear what you have to say with those numbers.

Re: WE know you are new to the site… - Posted by Karen

Posted by Karen on August 29, 2001 at 16:20:50:

I’ll get working on getting all that info. but my question was a bit more specific, as in after I figure out all that stuff (which I learned how to do, partly from this site and partly from experience), what number should I have left over for cash flow to make it worth around %650,000 – ei, $1,000 per month, $3,000 per month, $4,000 per month?

is another way to ask this what should the yield be on this? it would be likely no money down, 100% financed. (I can do this by re financing another property).

thanks again, next call to the RE agent for the info!


Re: WE know you are new to the site… - Posted by JT - IN

Posted by JT - IN on August 29, 2001 at 17:04:44:


You are going to hate me before this is over.

Karens post: “it would be likely no money down, 100% financed. (I can do this by re financing another property).”

Well, if you are finaincing against another property, then you are actually putting up a down payment, it is just not coming out of your pocket. It is still a Down Payment. It also matters greatly what that down payment is, amount and percentage.

I like to use NOI, (Net Operating Income), when evaluating multifamily properties. The only way to get NOI, is to have the answer to most of the questions, that I asked in the earlier post. But just to try to give you a general overview, I will give an example of NOI.

Lets say you had a property that had a gross rentroll of $ 10,000 per month, or $ 120,000 per year. The expenses, including taxes, ins, maint, and amortized replacements was 38%, or $ 45,600 pe ryear, leaving you $ 74,400 NOI. Now, based upon the type of property, construction, condition and neighborhood, you will decide as an investor what CAP rate (Capitalization Rate) you are willing to accept. If you had all Section 8 tenants, which can tend to be labor intensive, then you will need a higher CAP, (maybe a 12 or 14) which gives you a better return. If it is a pristine property, in the best area for appreciation, low maintenance and turnover, you may have to accept an CAP of 9, giving you a lower return. It just depends upion the property, area and what you the investor, are willing to accept.

With the example of the $ 74,400 NOI, and a CAP of 12, the proeprty would be worth about, $ 620,000. the same NOI, with a CAP rate of 9, would make the proeprty worth $ 826,666.

Most people, when evaluating multifamily properties, leave out some of the expenses,or generalize. this will always cost you. get the specifics and if guestimates are required, “Guess High”. If you are going to make an error, make it in your favor.

Enough for now.

Just the way that I view things…