Campbell, CA · Member since 2018 · 8 posts · 0 votes
I have an opportunity to purchase 2 multi family apartment buildings.
12 unit with 9% cap rate, $400K and ~$110 per door monthly cash
8 unit with 10% cap rate, $300K and ~$110 per door monthly cash
Seems to be after all cost a ~3% return on debt investment. (Without management fees it would look far better... but I’m out of state.) Is there a rule of thumb I can trot out to evaluate investments on a debt to monthly cash flow ratio. Like for every $50k invested you should see $100 in monthly cash flow to be in the ballpark of good. Does something like that exist?
Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
8y
@Jacob Carter , I don't understand your metric? Debt can magnify your return, but there is no return on debt unless you are the lender. Cash on cash, ROI, IRR, those are what you should be looking at and if this deal is better than you can get anywhere else then it should get closer scrutiny.
Campbell, CA · Member since 2018 · 8 posts · 0 votes
8y
@Edward B. I agree and normally use CoC, ROI, and Cap Rate but here I was hoping to find a heuristic for borrowed capital utilization. Almost a rule of thumb like the 1%/2% rule for monthly rent, or 50% for expense estimation. And my first pass at something would be like what I mentioned above: For every $50K in, you should see $100 monthly cash flow. I'm just not sure that is reasonable.
I'm just testing my desire for monthly cash flow vs general investment opportunity. I've only really looked at SFH and this jump to multi family gives me pause.
I am looking to start with a duplex but I think I will have to come up with 20% down.
SFR’s are much harder to cash flow in my area so I am staying clear of those ;)
Really wish you the best of luck with these deals. Regardless I would love to hear how it turns out!
Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
8y
@Jacob Carter , they are mutually exclusive in my opinion. You have measurements of performance to determine if it's a good investment and then measurements of liquidity to determine if it is a safe investment. If you try to combine the two then you may skew the results and get into something that is either not good, or not safe, or both.
Campbell, CA · Member since 2018 · 8 posts · 0 votes
8y
@Edward B. I agree. It wouldn't absolve you of due diligence and actual evaluation of the property... But much like the 2% rule for monthly rent or 50% of gross income going to bills we have these things for quick evaluation.
It would just be interesting to see what debt load people justify for what level of monthly income.
Investor · Midlothian, VA · Member since 2015 · 980 posts · 823 votes
8y
@Jacob Carter , sounds to me like you are talking about DSCR. Like any measure of risk, that is highly dependent upon your risk tolerance. Banks like to see 1.25 or higher if they are going to lend on a project so that is not a bad place to start.
Campbell, CA · Member since 2018 · 8 posts · 0 votes
8y
@Edward B. Thanks for pointing me to the DSCR. I will look into it. When talking to the bank I have been focusing on debt service ratio, NOI, Cap Rate and the like.