Multyfamily Asset Criteria to Give to Brokers

[Noah Krietsch]

Hello All.

I am working on a very clear and concise "send-out" to give to commercial brokers / brokerages that tells them who me and my partner are, our background, why we want to work with this broker/brokerage, and lastly, our list of criteria for multifamily assets.

Using Jake and Gino as guidance, I always hear in their podcast how they gave list of criteria to brokers of what they were looking for. Mom&Pop, 8 caps or higher, high value-add potential, etc...

Included in that Jake and Gino list of criteria was a 10% minimum cash-on-cash return based on ACTUALS. And I think that is a great way to filter out properties when I the investor am underwriting deals.

But here's what doesn't make sense to me...why would I tell a broker what Cash-on-Cash return I want to have when there are variables in that CoC equation that the broker does not / cannot know?

Cash-on-Cash return = Annual Cashflow / Initial Investment. Or.... CoC = (NOI-Annual Debt Service) / (Down Payment+Closing Costs).

The broker has no way of determining what my annual debt service will be on any given deal. Broker doesn't know what APR % I will get on the loan, loan amortization length, % down required for the loan, what final closing costs will be, etc... All of those details can drastically change the annual debt service, and thus, change the CoC return %.

So asking a broker to only bring you deals with 10% cash on cash return (or whatever %) does not seem feasible for the broker to do.  Or the broker will bring you deals that supposedly have a 10% Cash on Cash with no real fidelity behind the analysis that yielded that 10% CoC number. It's like when you see Cash-on-Cash numbers in Offering Memorandums...it means nothing.

Is there a set of "industry standard" debt service variables that a broker would use to analyze the CoC % of a deal? For example, would one assume a 5% APR, 20yr Am, 25% down payment, 5% closing costs, 1% loan points? But again, as interest rates rise, that 5% APR assumption becomes an obsolete analysis metric quickly...

TL;DR - Should I even include CoC return % based on actuals in my list of criteria that I send brokers?

[Gwyeth Smith]

@Noah Krietsch, that is a well thought out point. I am partially biased as I am a member of the community you referenced. Personally, I do include a CoC figure to my brokers. I don't believe they actually send me deals based specifically on that criteria. I think it serves it's purpose by showing there is specific criteria I look for. You have to underwrite by your own standards and if in doing so it does not meet a pre-stated criteria, i.e. CoC, it is a good opportunity to share your model with the broker and perhaps put you in a good position to be thought of the next time a good deal comes around.