How to analyze a multi family deal with 100% financing

Question

Hello all,

I’ve been investing for about 5 years in single family properties that I manage myself and decided to jump into multi families.

My question is, is how would I calculate a deal using the cash on cash method without actually putting cash down. Say if I have a 20 unit I want to buy for $500,000 and I come in with $75,000 equity from my properties and the seller takes back $50,000. Would I use a different metric completely to analyze this type of deal? I know I need more than just one analytic to size up a property but I’m just curious.

Another question I have is, I know, a broad one. What kind of returns (ballpark) should I expect on a financed 20 unit property after all expenses are paid annually. A property that’s well kept of course.

Joseph Gozlan · Answer

@Joshua Simon I think you nailed it on the head with "not worth my time" in a 100% financing many of the standard KPIs are skewed.

The best way to look at it is ROT: Return On Time. How much time & efforts you will need to invest in this property and how much value will it deliver in return.

If the $/HR ratio is lower than what you expect, pass on the deal.

James Kojo · Answer

@Joshua Simon : I sometimes "cross-capitalize" some of my properties in the way that you describe (pull money from one to pay for another.)

In your specific case, I would say that you're actually bringing 75K into the deal, not 0, so you can compute your CoC return based on the 75K going in.

Also, I would still account the borrowing cost against the property your borrowed from. So if you are borrowing 75K from property A to buy property B, reduce your "invested capital" in property A by 75K, but likewise increase the debt service of property A by whatever you're paying for the 75K.

Just think of it as a cash-out-refi of property A. You could choose to go buy a car with it, or do the smart thing and re-invest it, but it's still a cash-out refi. Since you choose to re-invest it, that 75K is now your new working capital and will be the basis for any investment you make with it.

Makes sense?

Asking about expected returns about a MFR is a little like asking what's the expected return on a stock. It kinda depends. :) If you're looking at B class properties, here are some stats.

AVERAGE cap-rates across all of the US for B class stabilized properties:

Tier 1 metros: 4.72Tier 2 metros: 5.39Tier 3 metros: 6.04Avg for all metros: 5.15

Those are not good cap-rates, those are average. My gut-feel is that you should be looking to take down deals at-least 200 basis points above the average. More importantly, you should be thinking about your exit strategy. If you're going to buy and hold forever, then you care about cap-rate. If you want to sell after a fixed time-period, then you care less about caps and more about forced-appreciation, which you can do at any cap-rate.

Hope that helps!

James

Joshua Simon · Answer

Thanks for the the replies.

Basically what I am getting at is I was trying to find a different metric to calculate the properties I’m looking at because the numbers weren’t looking right. I buy properties to hold and the cash flow is my income stream so I don’t flip.

I know of course about cap rate but I think the problem is the properties I’ve found so far just have not been good deals and were making me think I was calculating something wrong. For instance there’s a 38 unit I was looking at that would only cash flow around 20k which is just not worth my time.

Along with that apartment there’s plenty more that I would be loosing money if I came in even close to asking price after paying the mortgage.

Immanuel Sibero · Answer

@James Kojo

@Joshua Simon

The OP specifically states that no cash was paid and that this was all 100% financed. My interpretation is that the OP is not out any cash at all but offers the equity of another property for 75k. This is different from a cash out refi (i.e. no cash actually changes hands). The OP does not "borrow" (i.e. takes out cash) from property A to partially pay for property B.

If this assumption is correct, then Cash on Cash can not be computed... many investors would say Cash on Cash is "infinite". I prefer the term "undefined" or "can not be calculated". The OP can however calculate ROE (return on equity) but this is a metric that's less commonly used.

Cheers... Immanuel

How to analyze a multi family deal with 100% financing

Most Popular Reply