Help me underwrite! Focus on CoC, IRR, or ROI?

Question

When underwriting properties, I look for a 5-year ROI of >100% and an IRR of >12% (screenshot below of how those are defined). Please let me know if this is off-base.

I am familiar with valuing companies, and I think these are the minimum returns needed when compared to alternative investments like the stock market.

Should I be paying more attention to CoC return?

Below is a picture of a duplex I evaluated. The CoC is terrible. But the 5-year ROI and IRR look okay.

My goal is to hold the property long-term.

Please help!

Samuel Eddinger · Answer

@Evan Swanson - I own quite a bit of real estate in and around Middletown, CT (the area you are analyzing). My take on underwriting is to never believe the numbers given to you. I could be wrong but I don't believe that property is a 6.5 CAP (at that price) when you consider all the areas that should be put in underwriting guidelines. I am extremely conservative with my underwriting which is why I am not buying in this market.

Does your underwriting include, CAPEX, vacancy, bad debt, property management, etc? If not, like everyone else buying in this market you are going to lose. I'd be happy to talk about this if you want to DM me.

Does your underwriting include, CAPEX, vacancy, bad debt, property management, etc?  If not, like everyone else buying in this market you are going to lose.  I'd be happy to talk about this if you want to DM me.

Evan Swanson · Answer

Hey Sam. Just sent you a connect invite.

Jeremy Horton · Answer

I run my stuff a little simpler as well...

As far as CoC ROI it depends on the property. A great SFH in a great location I'm happy with 7% CoC ROI. On top of that I want $150/door (after budgeting for all expenses). I don't calculate IRR since I don't have a plan of when I would sell honestly - I shoot for 15% equity capture at the buy on SFHs in a great location (meaning I'll be in for 85% ARV max)

If you're talking a 4-plex in an affordable location I'm looking for 15% CoC ROI, $100/door and 20%+ equity capture at the buy.

So it kind of differs depending on the property type and location for me - I think different properties have different risks.

There's a lot of "returns" that are difficult to calculate in REI - appreciation, tax deductions, principal paydown on the loan, 1031 exchanges etc

Alecia Loveless · Answer

@Evan Swanson I guess I just don’t get that into the fine details. I look for a cash flow of $200+/door/month and a decent CoC and IRR. I think you’re probably being too greedy in the current market in most places. I would never expect my properties to have a full return of value in 5 years, that’s insane!

Many other markets will likely cash flow more than $200/door but that is fairly standard in my market.

Pre-pandemic my area was seeing about a 12% appreciation YoY and since then it’s been higher. Our market is still very hot if you price your property correctly and it is well maintained.

Help me underwrite! Focus on CoC, IRR, or ROI?

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