SF Peninsula Real Estate Guru

Clients often want to invest in real estate but aren’t sure where to start.

Often clients would like to buy a small apartment building in Menlo Park or Palo Alto. They ask me to find a property they can buy with a 25% cash down payment and have at least a break even cash flow. This generally is not possible in most areas of the Peninsula. More typically a 50% cash down payment is required to obtain at least a break even cash flow.

Let’s look at a typical small apartment building in Menlo Park.

1161 Noel Drive has just been listed by Anne Wilber of Coldwell Banker Commerical-Wilbur Properties. List price is $1,250,000. This is a 3 unit building contained two 1 bedroom units and one 2 bedroom unit. The property is well-maintained and has a good Menlo Park location not far from the Civic Center, CalTrain, and Burgess Park.

So how does this property look from a cash flow/income point of view?

Current rents are $2,000, $1,700, and $1,200 per month which produces a gross income of $4,900 per month or $58,800 per year. This property is priced at $1,250,000/$58,800 = 21.26 times current gross income. It can be said the property is listed at a 21 gross rent multiplier.

Typical expenses are property taxes, utilities, maintenance, and insurance. These typically run at approximately 35% of the gross income. So in this case, let’s estimate expenses at 35% of $58,800 = $20,580.

So the net income of the property (at current rents) will be approximately $58,800 less $20,580 = $38,220 per year.

$38,220 per year net income will service a loan of approximately $550,000 at 7%.

So at a $1,250,000 purchase price, one would need to put $1,250,000 less $550,000 = $700,000 cash down.

The above is just a “quick” analysis of the property - each property is different: are the current rents at market? can the rents be easily increased? who pays the utilities? - but I have presented the above to give you some idea of the issues involved in the analysis.

If the rents are currently 10% below market, gross income would be approximately $64,680 - net income would rise to approximately$42,000 - which would service $600,000 in loan payment - requiring $$650,000 cash down payment at $1,250,000 purchase price.

My next post will complete a similar analysis of new duplex properties being built in the Dallas/Ft. Worth area.