BARE BONES NUMBERS ---- WHAT WOULD GET YOU TO INVEST ?

5 Replies

I pose this question to EXPERIENCED multi family unit buyers. 
2-3-4-5-6-7-8- Plex units. 

WHAT ARE THE BARE BONES RETURNS YOU NEED TO INVEST ?

For Example.  Lets say your going to buy a 4-Plex for 120k and it needs 20k in rehab to be market ready.  Total investment 140k.  

What is the MINIMUM return you need to invest and how do you calculate it (I know there is a calculator on here)
-What cap rate do you need to make the deal worthwhile?
-What demographics do you look for and how do you run them?
-What is the rent you look for ?  Does $600/unit attract the wrong kind of tenant?
- Do you pay cash or do you finance?
-Do you carry liability insurance? how much does it cost?

Basically, what's the recipe?

I don't look at cap rates or demographics. The only thing I care about is my cash on cash return (total investment cost divided by annual Net income). I want this number to be at or above 20%, although many investors are fine with 10%.

If you can, pay cash up front and finance later. Cash offers that can close in less than 30 days give you negotiating power.

I budget 1-1.5% of purchase price for annual insurance premium, as a general rule.

@Nicholas Moffett we'll primarily look at two numbers.  

The annualized cash on cash like @Michael Roy described and IRR which takes into account your time value of money-- ie., $40 in your pocket today which could be reinvested, etc. has more value than $40 in your pocket 6 months from now.

We'll target 12-20% IRRs depending on the asset class and risk profile.

Hope that helps!

I agree with @Michael Roy about COC - 20% with leverage is my norm. My cap rates of are 12-16% on 100-year old apt bldgs, closer to 10% on property built in the 60's. 8% would be my min for new construction. For less than 8% I can invest without having a tenant or toilet to take care of. Insurance example is $2800 annual premium on replacement value of $720k from a class A commercial insurer. My big number to dig into a multi for further analysis is gross rents equaling about 1% per month. My numbers may be old-school and not really feasible anymore. These are what I have purchased in the past. I don't actively look for new deals that much anymore. I'm actually reducing a bit in this market. Hope this helps!

It's a pretty complicated formula but, if you google IRR definitions there are some pretty decent explanations.

Within Excel you can do: =IRR(cell range including total equity in the cell all the way to the left as a negative, followed by each of the year by year cash flows)

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