What are some thumb rules or guidelines while investing( For eg : $500,000 to $1,000,000) in commercial multi family apartment units ?

Here is what we look for:

• Positive cash flow
• Cash on Cash return of 10%
• Cap rate greater than 7%
• Investor return 10%-15%

This is for a "C" class property.  We would add value in the form of new flooring, new kitchen and bath and work outside.  Increase the rent and hold for 5 years.

@Larry Lemer Thanks for your valuable feedback.

Here are just a few off the top of my head- these are "general rules" and don't always apply as there are always exceptions. These are for commercial multifamily in general. 

Expenses should be anywhere between 40-50% of the income from the property.

10% economic vacancy assumption.

Breakeven economic occupancy should be around 75%+-.

Look for at least a 200 bps spread between your interest rate and your cap rate. 

We target 8% cash on cash in y1 and target an average cash on cash over 10% over the life of the deal. 

We target 15% IRRs and want to see a 2X equity multiple over a 5 year hold. 

Average rent is less than 20% of household income within a 2 mile radius.  

Trending demographics (population growth, job growth, income growth, good supply and demand balance, etc)

$250-350/unit for insurance

If there is onsite staff estimate $900-$1200/unit.

Properties with 50+ units can start to afford onsite staff. Assume 1 onsite staff member for every 50 units. 

3-5% property management fee depending on the size of the deal.

Originally posted by @Spencer Gray :

Here are just a few off the top of my head- these are "general rules" and don't always apply as there are always exceptions. These are for commercial multifamily in general. 

Expenses should be anywhere between 40-50% of the income from the property.

10% economic vacancy assumption.

Breakeven economic occupancy should be around 75%+-.

Look for at least a 200 bps spread between your interest rate and your cap rate. 

We target 8% cash on cash in y1 and target an average cash on cash over 10% over the life of the deal. 

We target 15% IRRs and want to see a 2X equity multiple over a 5 year hold. 

Average rent is less than 20% of household income within a 2 mile radius.  

Trending demographics (population growth, job growth, income growth, good supply and demand balance, etc)

$250-350/unit for insurance

If there is onsite staff estimate $900-$1200/unit.

Properties with 50+ units can start to afford onsite staff. Assume 1 onsite staff member for every 50 units. 

3-5% property management fee depending on the size of the deal.

 

I would add debt coverage ratio of at least 1.20, with higher being generally better (there are always exceptions to any rule of thumb like this) 

@Taylor L. Absolutely. 

@Taylor L. And @Spencer Gray good insights here, I agree with your rough rules of thumb

@Larry Lemer

What is a cap rate?

Hi @Keegan Dsouza

I agree with much of what's been already said, for example Debt Service Coversage Ratio (DSCR) of >1.2 (I look for 1.3+) and proper CoC, ROI, and IRR, but I also like to look at the demographics as well:

Population growth of over 15% from 2000-2019

Job Growth increase of 2% annualized

Unemployment Rate and Poverty Level

Overall demographic: College town? Married with kids? Low-key town with elderly?

Good luck!

@Spencer Gray

Great suggestions. Do you find it challenging to meet that 8% return in the first year given it’s a value add property? I’m reviewing a deal with almost exact metrics as you’ve stated but I run into the problem of seeing how the 8% is achievable if all the units are being renovated during that first year causing vacancies to spike. Does this assumption include renovating units as the tenants turnover? If so, does that first year have a dry period for the first quarter or two?

Tyler Mulcahy