Cash Flow Fluctuations Naturally Occur on Multifamily Deals: And That's OK

When we underwrite deals, we use the trailing 3 months of income and annualize it (multiply by 4). We do this to see the most current income numbers.

So if we want the most current numbers, why do we still use the trailing 12 months as our expense number?

The reason is because the expenses are often paid in lump sums as they come up through the year. For instance, if a large repair and maintenance item occurred in month 7 of the calendar year, it wouldn't show up if you only took month 9-12 and multiplied by 4. The same goes for paying a lump sum of property taxes and insurance early in the year.

Because of these natural fluctuations in expenses, the cash flow of the deal will fluctuate month to month. And that's ok. Expect it to happen if you're getting into real estate investing.

Here's a deal I'm invested in as a limited partner. As far as deals bought in 2022 are concerned, this deal has performed well hovering around breakeven cash flow levels. Many deals bought at this time don't have that luxury. The screenshot shows natural fluctuation in the income and expenses of the property across June July and August. September is the month where the Fed dropped interest rates by 50 basis points after the historic interest rate hike. With the lower interest rates, this deal looks to refinance into long term agency financing.

Conclusions:

These fluctuations are a reason you shouldn't get too caught up in the monthly reporting. A month is too short of a time frame to judge whether your investment is doing well or not. As a limited partner, it may be useful to even skip reading the monthly reports as they come in. Instead, you can read 4 every quarter to get a better picture. Although I'm not strict about doing it this way, it's useful to know you have this option. It doesn't mean you're a bad limited partner if you skip reading them. In my opinion, it actually makes you a better limited partner because you're less susceptible to emotional reaction based on performance on too short of a time frame.