You will have to come up with answers to many questions when you consider acquiring a multifamily property. The first, and likely the most important question is: what will the rents be?
This conversation may be more appropriate for a book (I’m actually thinking about writing that — should I?) than a blog post. But, there are, as far as I am concerned, some absolutes in this conversation. That’s something I can cover in an article. If you simply follow the precepts I lay out here, you’ll save yourself lots of heartache. Let us cover those highlights. Here are the absolute rules for setting rent prices in your rentals.
1. Minimum Rent Requirement
Let’s think about rents in the most simplistic terms. As the rent comes in, it has to be high enough for you to be able to afford all expenses, and for something to be left over as your cash flow.
Well, I don’t like rules of thumb, but for the purpose of this conversation, let’s just assume a 50-percent expense ratio, which covers both the economic losses and the operating expense (as if, but let’s pretend). Thus, in the case of a $500 rental, a 50-percnt expense ratio would leave us with $250 to cover three very important things:
Unfortunately, for all practical purposes, $250 is simply not enough to cover all three of the above. And since debt service is mandatory, the choice we face is between our profit and CapEx reserve. What we often see is landlords pocket the money left over after debt service, and then go write an article for BiggerPockets about how great their cash flow is. This goes on for a couple of years, and then their house gets trashed and they find themselves needing to replace the flooring, the water heater, and a stove. And what they suddenly experience is that tragic feeling in the pit of their stomachs, which accompanies the flow of cash flow in reverse: All of the cash flow they thought they’d made over the two years prior suddenly transfers from their account to their contractor’s.
Guys, this is what happens when one has to make a choice between CapEx reserves and cash flow. And while there is no hard-and-fast rule to suggest the minimum blended weighted rent, we are certainly not talking about anything less than $650 in apartment setting — and likely more like $750. And as to single family rentals, this minimum rent requirement is much higher.
Incidentally, I’ll have you know that the picture I painted above…