Return on cash on lower risk apartments

5 Replies

Hello guys,

I want to buy my first 4-8 plex to diversify my investment portfolio. Want an income producing hard asset to hedge against the stock market as most of my investments are in the market. I'm 35 years old and just getting started at this.

I've done my research and understand the 50% rule, cash on cash, noi, irr, annualized yields etc. I understand class a, b, c, and d apartments.

I've looked into just joining a crowdfunding site like realtymoghul... not sure about it.

One thing I've noticed is that the cash on cash on a lot of the realtymoghul investments is 7-10%. IRR is 15%. I think I can beat that if I just buy my own complex.

I was reading that the goal should be 15% cash on cash unless it's a rapidly appreciating market... then goal could be 10%. This is much higher than properties listed on realty moghul.

I can't find much here in hampton roads. have a lead on a 4 plex that was just put on the market for 395k. its class b and just renovated. 3 bedroom/1 bath 1000 sq foot units. Its in a very desirable area of town and would attract professionals. Many large homes mixed in with homes converted into high end apartments. Better appreciation because in a nicer/desirable area.

Let's say I get it for 350k. Mortage would be 21600/year if give 20% down (70k). 10k for lawn/property tax/insurance. lets say 4000k maintenence/year. lets say property mgt takes 6% of rent. Assume 5% vacancy. Figuring out the rent needed to get 15% cash on cash is simple algebra.

15% of 70k downpayment = 10,500

rent = r

r - (21600 + 10000 + 4000 +.06r) = 10,500

.94 r = 46100

r = 49042.. 48 rent payments a year. since assuming 5% vacancy need to generate this much from 45.6 payments (5% of 28 is 2.4).

49042/45.6 = 1075/month rent per unit.

Before renovation they were getting 1000/month with utilities. After upgrade they are estimating 1200 month rent including utilities... Doing a zillow search comparables are advertising for 1200-1300/month so this isn't unreasonable.

Utilities is almost 250/month! So they are acutally only estimating 1200-250 = 950/month for pure rent. Clearly this does not meet the 15% cash on cash threshold. The actually cash on cash is:


57600 (total rent) - 10000 (lawn, property tax insurance)-4000 maintenence-12000 utllities - 3456 mgt fees- 21600 (mortgage = 6544 profit per year.


6544/70000 = 9.35% cash on cash if I get at 350k.


Of note: using 50% rule = 57600 rent/2 = 28800.

28800-21600 = 7200 profit... this doesn't include added expense of utilities... with utilities the cash on cash is actually negative (utilities is 12k/year).

Does 50% rule include utilities as an expense? Very important to know.

So lets says we assume the actually calculation is correct and the expected cash on cash is only 9.35%. Is that so bad? it's in line with realty moghul. You guys talk about 20, 25% cash on cash but that seems like higher risk class c and d investments with unreliable clientele and the need for lots of upfront remodeling costs. Isn't a 9.35% cash on cash not so bad for safe investment with reliable renters, best in town location, and higher appreciation potential?

Thanks

Just realized numbers are wrong because lawn should be part of mainenence... Overestimating maintenence costs.

57600 (rent) - 7368 (tax and insurance) - 4000 (maintenence) - 12160 (utilities) - 3456 (mgt fees) - 21600 (mortgate) = 9016.

9016/70000 = 12.9% cash on cash is actually 12.9%. I don't think this is bad for the area. If rents slowly rise would eventually hit 15% cash on cash. Would you guys laugh this off?

Originally posted by @Sajan Mahajan :
Just realized numbers are wrong because lawn should be part of mainenence... Overestimating maintenence costs.

57600 (rent) - 7368 (tax and insurance) - 4000 (maintenence) - 12160 (utilities) - 3456 (mgt fees) - 21600 (mortgate) = 9016.

9016/70000 = 12.9% cash on cash is actually 12.9%. I don't think this is bad for the area. If rents slowly rise would eventually hit 15% cash on cash. Would you guys laugh this off?

Thanks for laying out your thought process Sajan. It is always nice to see how other people go about evaluating their investments.

I think you should be careful taking advice from others on what is an acceptable return. Everyone has different needs and risk tolerances. I actually would be pretty happy with a 12.9% cash on cash return. I would suggest asking yourself two things to determine if the 12.9% cash on cash return is good enough for you:

1) What other opportunities do you have for your money? Do you have another investment that could earn more than the 12.9% return?

2) What is your investment goal and does a 12.9% cash on cash return allow you to achieve that?

Best Regards,

-Clinton


Property management generally runs at 10% of rent and I did not see any consideration for vacancy. Just my quick review.

Best of luck in your search. It's worth the work.

like your intuition suggests, don't underestimate the quality of location/tenant profile. My Investments are all in SF, where the 50% rule is a joke (actual expenses are significantly less.) And you only get 15% cash on cash returns after several years of ownership. But magically they are awesome investments (appreciation is massive.) Just search my name/comments for more info on this. Good luck.

If the owner pays utilities most would put the expenses of 60% of income instead of 50%. You can do a RUBS sytemtn to bill back the utilities to the tenants and lower your expenses to improve cash flow.