How to Determine Multi-Family Cash Flows
When I sit down with first-time investors, many of them are unsure how to look at investment property and evaluate it. It's different than shopping for single-families, where the choices are more reflective of what the buyer actually needs/wants. Here, you're really shopping for a building that will be a good investment.
Image by Mykl Roventine via FlickrSo, let's take a look at that at a high level. Basically, a good investment property is one that will allow you to make money (that's the investment part), so all buildings need a business plan breakdown. That means we need to look at revenues (primarily rent) and costs.
Multi-Family Revenue Calculations
The first step is to get a handle on revenues, whether you're looking at annual or monthly, you need to know what the building can produce right now. Usually, the seller has existing rents, but whether he does or not you need to make your own determination about the rent. Is the seller giving the tenants below market rent to keep them? If so, that means you may be able to raise the rent, and that increase in revenue could turn a soft building into a winner. Is the seller exaggerating rents? This can happen as well. If you aren't sure the rents are possible, or it will be a risky trying to keep tenants at those prices, you should adjust them. Better to be conservative now then have vacancies later!
Multi Family Investment Cost Estimates
Now, costs. The first two are the mortgage and the taxes. They are typically 70-90% of the expenses for income property. Make sure you're converting them to monthly or annually just like you did with the revenues, and make an adjustment for other costs: Electric, water, insurance, maintenance. Electric and water are usually nominal, but every building is different, and you'll need to check. Lastly, heat is a very special case: In buildings where the heat can not be metered/seperated, it's is usually the landlords job to pay the heat bill. This is not ideal (for lots of reasons), but since paying for heat can really throw your calculations out of whack, so you'll need to get a handle on it for sure.
Once you've got your numbers, you'll be able to determine the monthly cash flow for the building. This is an estimate, but an important one. You'll probably notice that in general, the more units a building has, the better the cash flow - up to a point. Many buildings don't offer good cash flow and if it's not obvious how to improve it, I'm not sure those buildings make sense as investments.
