Articles

This is one of many articles we will be writing regarding investing in Real Estate.  Today we’ll be looking at Multi Family properties and now to set up a projected cash flow.

Multi family properties are named after the number of residential units they contain.   For example, a property that contains 4 residential apartments is called a 4 unit.   Each unit will produce a gross amount of rent every month if occupied.   To factor the yearly gross cash flow, you simply take the number of units and multiply it by the amount of rent you intend to charge each unit.

So, for a 4 unit that rents out for $1,000 each unit, the annual gross rent would be 4 x $1000 x 12 or $48,000.

Next, we need to calculate our expenses.   There are 2 types of expenses.  Known expenses and projected.    Let’s say we know from past usage that the utility costs for an occupied unit will be $200 a month.   Also, we know from the tax rolls that the property taxes will be $8,000 a year.  We can file this away as known expenses.

For projected expenses, we need to calculate the anticipated vacancy rate and maintenance budget for the property.   Vacancy is what happens if a unit goes unrented for a period of time.  This is actually lost revenue, but we calculate it as an expense of the gross rent and it comes out the same.   Typical vacancy rates are usually 5-10% of the gross revenue.  This number can vary due to rental unit availability in the area and rental demand.  Also, an eviction can cause the vacancy rate to increase depending on the time it takes to reset the unit.

For maintenance, many factors can go into this.  If the property is brand new, the maintenance budget will likely be light.  If the property is old and run down and will need several major repairs in the near future then your maintenance budget will be very high.   To budget for this correctly, determine how long you intend to own the property and what major expenses you should incur during this ownership time.  Then divide those costs by the amount of time you intend to own the property so you have enough money set aside to pay for those expenses.

A typical annual budget might look something like this:

Gross Rents:   $48,000

Taxes: ($8,000)
Utilities: ($2,400)
Maintenance 10% ($4,800)
Vacancy rate 7% (3,360)

NET CASH FLOW:  $29,440

If you borrowed money to purchase the property, your loan payments would also need to be deducted from the cash flow.