Rental Property Investor · Philadelphia, PA · Member since 2016 · 28 posts · 3 votes
Hello BP,
Excuse my ignorance, because I do mostly single family rental investing. It's pretty straight forward, because I base my numbers on the ARV, purchase price and repairs. But, how do you guys compute a "good" deal for 5+ units? I only hear people say that its based on cash-flow, but there has to be other factors included! A good book recommendation will help here too...
Try "What Every Real Estate Investor Needs to Know About Cash Flow" by Frank Galinelli who teaches at Columbia in its graduate RE program. And what other factors do you think would be important besides cash flow? Commercial RE is all about cash flow. Property valuation is based on cash flow (NOI divided by Cap rate). If you increase cash flow without a corresponding increase in operating expenses, the value of your property increases and you force appreciation. So, IMO, its all about the cash flow.
Try "What Every Real Estate Investor Needs to Know About Cash Flow" by Frank Galinelli who teaches at Columbia in its graduate RE program. And what other factors do you think would be important besides cash flow? Commercial RE is all about cash flow. Property valuation is based on cash flow (NOI divided by Cap rate). If you increase cash flow without a corresponding increase in operating expenses, the value of your property increases and you force appreciation. So, IMO, its all about the cash flow.
@John Lee. You will need to be able to understand specific terminology for the commercial space such as NOI, Income, Expenses, Cap rates to be able to understand how such assets are valued (in general).
Buying a 5+ units is like buying a business. A good deal depends on a lot of factors. And you are the one who knows the importance of each of these factors to your overall goals.
Some buy for cashflow (meaning, they want a certain amount of money remaining after they have collected income and pay all their expenses).
Others buy for value-add. Meaning, monthly cashflow is less important. What's important to them is that they can grow the value quickly through well established strategies such as rent increases, amenities improvements/additional, ...
There is plenty of blogs on this site about those.
@John Lee a "good" deal is subjective to the investor. If your a 1031 exchange buyer your most likely going to have different parameters for a "good" deal than someone who is looking to syndicate and has returns to meet for their investors.
So, what all goes into figuring out what a deal is worth. Going in Cap Rate, projected exit cap rate, what value can be added to the asset, what type of returns does your investor base want (if your syndicating), can you lower the expenses, can you raise rents, how long are you going to hold it, how long does it take to cash flow, does it cashflow from day 1, have you adjusted for new taxes, what fees are you property management taking, how will the deal be structured.
From a high level, these are many factors that go in to whether or not you have a deal worth pursuing.
As you noted the analysis for commercial deals can be a little more complex. With single family deals you have the ARV, purchase price, and repairs, the equivalent in Commercial real estate would be current market cap rate, Exit market cap rate, repairs/value add plan to increase the value of the property.
So if you are syndicating a deal like @Scott Morongell was talking about you will have to analyze the property and see if your business plan will satisfy investor driven returns. If you have capital and want to buy all cash and get a set percentage return then you could have quite a bit more flexibility in what you do.
Dave Lindahl's books Multi Family Millions and Emerging Markets are good places to start. I found them to be quick and engaging reads. Joe Fairless's Best Ever Apartment Syndication book is a really thorough read if you want to learn more about the syndication process and nuances of multifamily investing.
Feel free to reach out anytime if you have any other questions or just want to chat.