As you know, I partner with my students on their real estate investing deals!
The MWI Multi Family initial Deal Evaluation criteria consist of three parts called 2 - 20 - 100 analysis. Before MWI will consider a deal for the Partnership Program and the full blown Deal Evaluation that we do on every transaction, your property has to meet at least two of the three criteria cash flowing criteria.
The three criteria listed above here are in descending order of difficulty. Make sure your property meets at least two of them and you should have a winner if the property passes the rest of our strenuous Deal Evaluation. I created these formulas so that you could tell very quickly from a cash flow perspective only if this was a deal that you should spend a bunch more time on with the proper and complete deal analysis.
Property Example
For this case study we will be evaluating a 10-plex with a purchase price of $250,000. This building consists of 10 2 bedroom 1 bath units that rent for $550 each. The gross monthly rents are $5,500 which yields $66,000 in Gross Operating Income.
This building has 35% of the annual rents that are allocated to expenses, and we will assume that $2,000 monthly goes to debt service. Make sure you are accurate with your expenses as they play a big role in how successful your asset will be. Use actual numbers, not projected ones. Take a look at the following numbers.
PROPERTY PURCHASE PRICE $250,000
- Gross Operating Income (GOI) $66,000
(12 months x $5,500 gross monthly rents) - Less Expenses ($23,100)
(Factored at 35% of GOI or $66,000 X .35) - Net Operating Income (NOI) $42,900
- Less Annual Debt Service ($24,000)
- Net Positive Cash Flow Annually (NPCF) $18,900
- Monthly Net Positive Cash Flow (MNPCF) $1,575
The rule of 2%
The rule of 2% states that your gross monthly rents should be equal to or greater than 2% of your acquisition price.
In this example our purchase price is $250,000. 2% of that number is $5,000. Our monthly gross rents are $5,500, which is in fact greater than $5,000. Our property passes the first test. This formula again states that:
Gross Monthly Rents > 2% Acquisition price
The rule of 20%
The rule of 20% states that your Monthly Net Positive Cash Flow (MNPCF) should be equal to or greater than 20% of your monthly debt service.
In our example above our monthly debt service is $2,000. 20% of our monthly debt service is $400. Our MNPCF is $1,575 which is much larger than 20% of the monthly debt service. In fact the MNPCF comes in at a whopping 79% of our debt service. Our property passes the second criteria. The formula again states:
MNPCF > 20% of our monthly debt service
The rule of $100
The rule of $100 simply states that your building should net $100 positive cash per unit per month as a part of your MNPCF.
We have ten units in our ten-plex. $100 per month for 10 units would require a MNPCF of $1,000 or larger. Our MNPCF is $1,575 or $157.50 per month per unit. Our property passes the third criteria as well. The formula again states:
MNPCF > $100 per unit x the total number of units in the investment.
Once we pass at least two or three of the tests here, we can rest assured that the property will more than likely cash flow and it is time to write a contract and get all the Deal Evaluation done for purchase.
I have received such a huge reaction to this new formula, that I have decided to teach a Webinar solely dedicated to the 2% / 20% / $100 formula. This LIVE Webinar will take place on Tuesday, May 19th at 11:00am MDT (9am PDT / noon CDT / 1pm EDT). Register here for the Webinar.
I look forward to sharing more tips with you on getting RESULTS with this formula!
