What Cash-on-Cash Return Should I Target in Multi-Family?

Question

I am looking to deploy 200-250. I understand that IRR is the more common metric in MF. Just curious in the near term what I should expect to make on my money. I am willing to do some value add. I am looking for B class property.

Evan Polaski · Answer

@Charlie Moore, the challenge I have with this question is: how are you planning on calculating CoC returns.  There is no universal way, especially when directly owned.

If you buy a $1mm asset, you will likely be putting all $250k into the down payment, leaving nothing left to renovate.  So your renovations will be from cash flow.  So your early CoC will be 0%.

Or you buy a $600k place, and hold 50-70k for Renos.  Now, you have a Cash on Cash in year 1, because you are not using cash flow for renovations.

Assuming the second way, anything north of 5% in year 1 is probably good.  Anything north of 10%, I would assume you are likely not underwriting correctly.

I see many on these forums assume that a Class C or D property will have the same assumptions as an A or B.  But in reality, you will likely have more frequent turn over in C and D than A and B assets.  On top of, typically, higher vacancy as you wait for a qualified tenant to apply.  So more vacancy + higher turn over costs quickly eats into the C and D returns, often yielding returns only marginally better than A or B assets.  Additionally, C and D assets have lower rents, but roto-rooter and Home Depot don't care whether you get $500/mo in rent or $5,000/mo.  That plumbing bill or new appliance will generally cost the same, so higher R&M reserves, as a percentage of rent, are needed in lower quality/lower rent assets, too.

Account Closed · Answer

I'm an active broker in the Minneapolis area, happy to chat about the local market if you'd like. Shoot me a DM.

For $1M you can generally buy around 8 to 12 unit properties in the Minneapolis area. More if you go to more rural areas around the city. But as @Gino Barbaro mentioned, rural has its own challenges - fewer PM companies, lower rents, and less appreciation.

12-14% CoC isn't impossible but very difficult. You usually have to do significant renovations to the property and build up to that kind of return over time. I don't see many "Going In" 12% CoC deals.

Gino Barbaro · Answer

@Charlie Moore

Be careful with going to smaller markets, especially if you're looking to use 3rd party. They can be difficult to find. Also, be careful with exit strategy where the more rural areas may provide more cash flow, but may not appreicate and are gonna be tougher to sell in a down market

Gino

Account Closed · Answer

Are you looking to deploy the 200-250K into syndications run by other sponsors? Or do you want control?

If you want to own it, you're looking at a deal size of around 900K to $1.1M I'd guess. I rarely see people talking about IRR at that size. It's mostly cap rates and CoC.

I always recommend looking at multiple valuation metrics, not just one.

If it's a heavy value-add deal, cap rates and CoC might look terrible in year 1. Most of the return comes after stabilization, re-finance, or sale.

If it is stabilized, CoC will look better in Year 1 but won't increase as much over time.

So it's very deal-dependent.

I'll say a number, but take it with a boulder size grain of salt.

I see a lot of people anchored at the 8% CoC number.

Alecia Loveless · Answer

@Gino Barbaro Agree. My market used to have one larger property management company. The owner closed and retired about 5 years ago. Now you are hard pressed to find anyone decent and none of them has significant systems in place to provide reports and consistent services.

I sold a building to an out of state investor about a year and a half ago and they put it under the largest remaining property management company. The tenants who were my worst tenants have over run the property and trashed the exterior. I imagine the new owners will be very unhappy the first time they come to see their new investment.

Be careful with small markets. While there’s often room for large returns and cash flow the quality of management, contractors and service can be sketchy.

Joseph Bui · Answer

I target about 15% cash on cash in all my deals in the Midwest. I have 9 doors across the Midwest and they all do a minimum of 10% but usually it’s around the 15% mark after a refi, since I normally do BRRRR style deals.

Tim Swierczek · Answer

Agreed, I had this exact conversation with another investor today when they brought up the lower purchase prices in small-town Minnesota.

Gino Barbaro · Answer

@Alecia Loveless

For larger assets that have institutional buyers, there has to be property management in the market. If you're talking about smaller assets, it's a different story. And if you're going to manage yourself, it doesn't matter.

The pool of buyers decreases as the access to property management decreases. And when these markets go into recession, it depends upon their job base. They are more susceptible to price decreases.

Alecia Loveless · Answer

@Gino Barbaro Depends on the market. I’m in at best a third tier market but probable lower than that. Any MF that goes on the market that is priced where there’s a little meat for an investor lasts less than 48 hours before it’s snapped up.

Not all small markets are difficult to get rid of a property.

What Cash-on-Cash Return Should I Target in Multi-Family?

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