Investing, how does it really work?
This one word carries a lot of weight. We know it’s what we’re supposed to be doing. But how does it really work?
Next week we will explore A little more with Mr. financial advisor, but this week we’re focused on real estate!
A cap rate as a way to determine whether or not the deal is worth getting into. I love that there is an app for that! There’s an app for flipping everything now, including your investing. You’re welcome, for two dollars, you too can have a caprate app, making all mathematical equations pertaining to investing a whole lot easier.￼
For most of northern California, the best Rate we’re going to find on multi-family is going to be 6% or maybe if you’re lucky, 7%. The days of 10 to 12% cap rate on a multi-family in the Sacramento area or outlying areas are long gone. Sorry to report such bummer news, but, if you are looking for an amazing cap rate you can find one out of state.
For today’s metric, we will be using Northern California as our investment ground.
Using the above-mentioned caprate, these are the applicable numbers. The property value would be your purchase price. The Gross rental income would be monthly income times the number of units, times twelve, to create annual gross rent.
The vacancy rate, I use 10%, and operating expenses are used 20%. I have not found that anything less than a total of 30A% has been appropriate in Northern California, sometimes more but rarely less.
Remember there will be repairs, the owner always pays for water, sewer, and garbage. (unless otherwise negotiated upfront with rent)
The vacancy rate is real. People will move out, after leaving a mess that you will need to repair, even something as simple as paint and Carpet can run you $5000 per unit and must be accounted for in your numbers up front.
Don’t get lost on just the Rate, there is more to the whole picture. If you consider each unit may run you a total of $100,000. Let’s take an example of a four-unit the total could be $400,000 but each unit with the $100,000. Using 25% down for a multi-fam that size would give you $25,000 down per unit.
If you were to put that $25,000 into your credit union, or into your savings account, what would your rate of return? Probably less than 1%, right? How much money could that $25,000 investment make you?
Let’s not forget the depreciation, the tax benefit, and the fact that someone else is paying off your mortgage.
If you’re ready to explore the explore multi-family a little deeper and see if multi-family investing in Northern California is for you, we are ready to help!