Estimating Cash Flow on Multi-Family Rental Property

Calculating Loan Investment

In the real estate industry, having skills in math is a must, especially when there’s profit involved. According to investment lenders, by estimating the potential cash flow, seasoned investors can tell if the multi-family rental property on the table is worth the time and money or not.

The good news is, you don’t have to be a math whiz to do it. All that’s needed are some simple equations to get a ballpark estimate of your potential profit. Once you have a better idea if the multi-family rental property you’re eyeing is worth it, that’s when you can perform your due diligence in researching and doing thorough analyses.

To help you out, here’s what you need to know about estimating the cash flow of a multi-family rental property.

Understanding the 50% Rule

One trick that expert investors use to get a quick ballpark estimate is the 50% rule. Here, always keep in mind that the expenses of a property are around half of its potential revenue.

While it’s true that in most cases the actual amount of the expenses can exceed more than half of the revenue, the rough estimate is still useful. For one, the figure will help you gauge if the property is overvalued or if it has the potential for profit. Also, you can use the number as the base for other computations.

Breaking Down the Cash Flow

To help you use the 50% rule, here’s a breakdown for cash flow in the simplest equation possible:

Total Income – Total Expenses = Cash Flow

What you’ll do is take the overall monthly rent amount as the income, then divide it in half and assume that’s your expenses. Subtract the expenses from the income and you’ll get the cash flow for that month.

Example

So, say the real estate is a 5-unit multi-family property where each tenant pays $800 in rent each month. By following the breakdown, the overall income would be $4000, which is 800 x 5 (rent multiplied by the number of tenants). And, by applying the 50% rule, you get $2000 for the expenses (overall income divided by 2).

At this point, you can add the mortgage of the property to have a more accurate estimate of your expenses. For simplicity’s sake, say you’re paying $1,300 in investment property loans. In the end, the total amount is $3,300 (expenses + mortgage).

Using the numbers from that example, here’s what you’ll get:

$4000 (income) – $3,300 (expenses + mortgage) = Cash Flow

$700 = Cash Flow

By following the 50% rule in ballpark estimation, you’ll have $700 for your monthly cash flow, or $8,400 annually from the property.

Expenses by the Numbers

To have a more realistic cash flow, you can adjust the value of the expenses where different factors are taken into account. Aside from the mortgage, here are what you should include in the equation:

  • Insurance
  • Home Owners Association Fees
  • Taxes
  • Maintenance and Upkeep
  • Capital Expenditures
  • Management Expenses
  • Vacancies
  • Marketing

For this part, since these factors can change depending on the situation, their actual figures are almost impossible to get. So, you’ll have to do your research and make a few phone calls to have a more accurate estimate of the expenses.

If you have experience in the industry and are familiar with the local market, you might already have a rough figure of some factors. But, if you’re new to this, the best thing to do is to talk with property managers, realtors, and other entrepreneurs in the business and ask for their advice. Contact Investor Loan Source to learn more about ballpark estimating and for assistance in investor real estate loans.

How Hard Money Loans Can Help Close Deals Quickly

Person Handing Money

Hard money loans are an excellent choice for purchasing a property that you intend to flip or use as a rental. They can be easier to obtain than other loans, especially for borrowers that don’t have a high credit score or are looking for faster funding than traditional loans provide. If you’re purchasing real estate investment property, you’ll benefit from a hard money loan because they are faster to obtain and can help you close the deal more quickly. Here’s how that’s possible.

Flexible Loan Structuring

One reason hard money loans are great for real estate financing in Texas is that the structure of the loan is more flexible than other types of loans. Private lenders that provide hard money loans are more interested in providing financing than traditional lenders that seem to look for any way to keep borrowers from obtaining financing. That means that the private lender is less interested in credit scores or using a traditional loan structure. This makes it easier for borrowers to pay back the loan in a way that’s individualized to the project instead of making the project fit into the timeline of a loan. Since the lenders are more accustomed to making these accommodations, you can get financing more quickly than when trying to get these accommodations built into a traditional loan, which may end up being impossible anyway.

Fast Underwriting Process

Hard money loans have a faster underwriting process, which means you can get the property purchased more quickly so that you can get to work rehabilitating the property for another sell or for renting or leasing. If you’re able to provide the documentation to the lender quickly, you’ll be able to close the loan quickly as well. As long as you have all the information ready for the lender when you make a loan request, you’ll be able to receive a response very quickly. In fact, many private lenders are able to respond to hard money loan requests in one day, and the loan itself can close in just a few weeks. This makes your offer on a property look far more attractive to a seller when you can finish the financing quickly.

Clear Terms

Another reason hard money loans can speed up a deal is that the terms of the loan are made clear during the application process. You’ll avoid surprises that often crop up in the midst of a traditional loan because you’ll know what’s expected before the application is even submitted. You’ll know exactly what will happen to the collateral you offer if you default on the loan so that there aren’t any surprises at closing.

House Model Sitting on Pile of Money

Direct Relationship

Another reason a hard money loan can help you get a deal closed more quickly is that there’s no middleman to work through. Private lenders typically work more closely with the borrower instead of with a broker so that communication is more frequent and succinct. This helps avoid misunderstandings and allows the borrower to work directly with the decision-maker rather than with a group of people, which is almost always the case with a traditional lender.

Important Consideration

When you’re considering a hard money loan for commercial real estate loans, you’ll probably notice a higher interest rate. It’s important to note that the reason for this is to help investors make a better profit. These are short-term loans to provide funding for an investment opportunity, and in most cases obtaining the loan quickly results in a higher return. To learn more, contact Investor Loan Source today.