I'm new to MF investing. I've heard the SFR guys and gals talk about what they must see in a deal in order to pull the trigger - for instance:
I've heard people say, any deal I'm looking at MUST:
* Have $200/month minimum cash flow
* 12% Cash on Cash Return
* Must meet the 2% Rule
I'm curious, when it comes to MF (and apartments specifically), are there any minimum requirements you all are looking for in a deal?
I sincerely apologize if this question has already been asked and answered on the forum. I looked, but couldn't find it...thus this post! All responses are welcome!
Everything depends on your market. Most of those rule of thumbs I can't get in my market. Since I started investing, I've never seen a property that would meet the 2% rule in my market. Not that it won't happen, I just haven't seen it. My first condo I purchased at about 1.2%. My second one is right at about 1%.
I have a quick calculation (on my excel spreadsheet) where I can plug information in and get PASS/FAIL. If it passes, it still doesn't mean it's a good deal, just that it has the potential to be a decent deal. (PASS/FAIL criteria is set for: Cash Flow > 150, CoC > 7.5%, DSCR > 1.3, and RGM less than 10). (silly blog, I'm not trying to add html code, I'm trying to use less than symbol... Ugh)
Because I'm in the condo space, most areas are typically similar (Taxes, Insurance, etc), so I basically can just type in HOA, Sale Price (That I would offer), and rent and it spits out everything else for me either through calculations or hard coded values. Since I like condos, I also pay pretty close attention to the HOA and reserves / past expenses and increases. I want to make sure that the HOA is attentive problems and have a plan for the future, so as not to get hit with a 10K assessment down the road.
In Arizona, I typically look for 8%+ CoC, and $175+ per door. I don't own any MFR, only condos, but if I were looking at a 4-plex, I would want to see at least $600 in cashflow a month. Again, it entirely depends though on the deal and the location. With those numbers, I would still technically think it's a bad deal if I don't see much appreciation potential in the area. I tend to focus on a mix of CoC and appreciation potential when I analyze deals. Others on this site only look at CoC and ignore appreciation, treating it as icing on the cake down the road.
Paul...thanks for the reply. I intended to throw the “I realize every market is different” disclaimer to my post. Thanks for adding that.
Realizing that every market is different, I am still curious what metrics are important to different people. I’m hoping to get some input that I can then apply to my market. And, actually, my plan was to take the input from anyone who replies and create my own spreadsheet. Sounds like you already have one that works for you. If you would be open to sharing yours, that would be much appreciated. If it’s proprietary or you’d rather not, I completely understand.
Your reply contained exactly what I was looking for...so THANKS!
@Jason D. , do you mean $250-$300 per door per month? What size properties are you usually working with?