listing prices = negative cash flow - Posted by Kevin

Posted by eric-fl on March 12, 2001 at 11:08:40:

Assuming that you are calculating correctly, and assuming that your assesment of fair market rents are accurate, then there are really only three things you can do:

  1. Lower the purchase price
  2. Lower expenses
  3. Raise rents

Broadly speaking, those are the only three things that can be done to increase your cap rate. If you can’t do any of them, then you can’t buy. Multi-family properties still carry the same caveat that single-family props do: only deal with motivated sellers. You need to find sellers who will sell to you at a low enough price to make the cap rate acceptable. Otherwise, you have to take a look at it, and ask if it is a management problem. Can you lower the expenses? Can you raise the rents? If none of these things can be done, it may be time to move on. One strategy some people use in this arena is to make a full price offer, subject to due diligence. Then, lower the price after the truth comes out, since the sellers pro-forma numbers are fantasy anyway. Otherwise, you can offer a realistic price up front, and negotiate the deal that way.

listing prices = negative cash flow - Posted by Kevin

Posted by Kevin on March 12, 2001 at 10:39:37:

After reviewing 2-4 unit property listings in Chicago over the last few weeks, I have found that the listing prices, if financed at anywhere between 95-100%, equate to a negative cash flow after paying principal and interest at current rates. The prices must be based on future expected cash flows from rising rents and also future value appreciation. Am I only “dreaming” about buying property in the Chicago, or similiar, market with less than 5% down and still having an immediate positive cash flow? Also, a lot of the cap rates that I have computed for this market are below 8%. I read somewhere to not even consider a price at a cap rate below 8.5%. Does anyone here have standards that they would like to share? Also, I would really like to hear from any real estate investors in the Chicago market who are members of an investor/apartment owneres group or would like to at least share information.

Re: listing prices = negative cash flow - Posted by Terry Heilman

Posted by Terry Heilman on March 12, 2001 at 17:43:02:


People are buying 2-4 unit buildings to live in and have the rent offset their housing costs. Owner occupants can get lower down payments and longer amortization periods because 2-4 unit properties are considered residential property when getting a loan. Further, in many areas of Chicago, apartment buildngs were purchased and converted into condos, driving up demand for rentals.

I was looking for 2-4 unit buildngs in the western suburbs and found that I could buy a six unit building cheaper than a four unit building because of the financing.


Re: listing prices = negative cash flow - Posted by surfdog

Posted by surfdog on March 12, 2001 at 17:34:15:

Kev-2-4 unit props may be multi-family, but they are still not considered “real” mult-family. Most of these 2-4 props are bought by retail/amateur labdlords; the real large props (15, 25, 50 unit, etc.) HAVE to make sense economically or they won’t get financed. They often have strict requirements on “debt-coverage ratios”, which means that they will not receive a loan if they don’t service the debt.

Re: listing prices = negative cash flow - Posted by tmac

Posted by tmac on March 12, 2001 at 13:06:56:

Remember, the listing prices are what someone is “asking” for the property, not what it will sell for. Do your market analysis to determine what other 2-4 unit properties are selling for to get a more accurate price.

I may be wrong, but from what I’ve be taught, the cap rate formula is not a very accurate measure for smaller properties, such as the 2-4 unit properties you are looking at. Value determination should be based on the recently sold units - not what the asking price is.

Re: listing prices = negative cash flow - Posted by Nate

Posted by Nate on March 12, 2001 at 12:28:11:

You may be looking only in neighborhoods that are too nice.

When I was first starting out in real estate I spoke to a broker who sold multi-unit properties in Providence, RI, which is where I lived at the time. I had gone to school there and asked him if he thought buying multi-units in the areas around the colleges was a good idea.

He told me, flat out, no! Since everyone wants to own in those areas (college students pay a lot more than most people who live in Providence could afford), the properties were way overpriced and it was hard to make a positive cashflow. His advice was to look in worse neighborhoods for deals with positive cashflow. And you know what, they were out there. Still not easy to find. But they were out there.

Of course, now this seems to be axiomatic to me, but as someone just starting out it was a real eye opener.

You may be looking at the same type of situation in Chicago. In nicer neighborhoods, sellers often figure they can jack the price up because buyers want so badly to be in that neighborhood, and/or are dumb enough to bet on heavy future appreciation. There is also an “ease of ownership” thing. Most people think it is much easier to be a landlord in a better neighborhood. While there is some truth to this generalization, it is just that, a generalization. If you know how to manage property well, and know the neighborhoods well enough to know which “bad” neighborhoods are okay and which ones are not, then you don’t have to spend your time looking at overpriced deals in nicer areas. You may have better luck finding deals in “worse” areas.

Good luck,

Re: listing prices = negative cash flow - Posted by Mark (SDCA)

Posted by Mark (SDCA) on March 12, 2001 at 11:10:45:

I certainly wouldn’t buy any property like you describe? What would be the point? I could get a CD that would perform that well.

A cap BELOW 8?? Not a chance. 10 at a bare minimum and really 12+. If the market is that hot then it is time to be a seller or sit out the market.

Having said that, it can always be tough to get positive cash flow with 100% financing. So you are going to have to sift for better deals.