Investor · Queens, NY · Member since 2016 · 327 posts · 152 votes
Hey BP,
I have a question for anyone experienced in value add deals, specifically large apartment complexes. Being that the rents are below market value, and the loss to lease is high for a lot of value add deals, what are you guys targeting for your Cash on Cash return for Year 1?
Are you guys basing your offer on achieving an 8% cash on cash return (or whatever your goal is) from Year 1? Or are you looking to achieve that post-renovation? I am guessing the answer is post-renovation, but I want to be sure.
Any advice, or feedback is appreciated. Thank you!
@Jordan Santiago your yr1 cash on cash returns for year one may not be the greatest. You do want to gauge your cash on cash returns over the avg life of the investment which should be somewhere between 7-12% over the holding period.
@Jordan Santiago your yr1 cash on cash returns for year one may not be the greatest. You do want to gauge your cash on cash returns over the avg life of the investment which should be somewhere between 7-12% over the holding period.
Hey Tj, thanks for the response. Yes, from my calculations pre renovation cash on cash return based on a competitive offer I can give would be around 2-3%. Post renovation, above 9%.
I have a question for anyone experienced in value add deals, specifically large apartment complexes. Being that the rents are below market value, and the loss to lease is high for a lot of value add deals, what are you guys targeting for your Cash on Cash return for Year 1?
Are you guys basing your offer on achieving an 8% cash on cash return (or whatever your goal is) from Year 1? Or are you looking to achieve that post-renovation? I am guessing the answer is post-renovation, but I want to be sure.
Any advice, or feedback is appreciated. Thank you!
You want to look at the stabilized average returns over the life of the business plan. You could have a property that is negative for the first 2 or even 3 years like with new construction or heavy value addbut the overall average returns are double digits. It all depends on the property and business plan. There is no one size fits all.
@Jordan Santiago There is no right or wrong answer everyone has different goals. Personally I would not get out of bed for 8% . My personals all have not less then 20% NET caps some much higher.
I have a question for anyone experienced in value add deals, specifically large apartment complexes. Being that the rents are below market value, and the loss to lease is high for a lot of value add deals, what are you guys targeting for your Cash on Cash return for Year 1?
Are you guys basing your offer on achieving an 8% cash on cash return (or whatever your goal is) from Year 1? Or are you looking to achieve that post-renovation? I am guessing the answer is post-renovation, but I want to be sure.
Any advice, or feedback is appreciated. Thank you!
As Greg Dickerson said, it's project dependent.
I used to do a lot of heavy repositioning deals where there's no cashflow on year 1 since they are vacant and undergoing major renovations. However, when I sell, I literally make MILLIONS and the project equity multiple is 4x-5X or even higher. Projects like this one:
But given where we are in the Cincinnati market lately, most of our projects are easy or light value-adds - blacktop the driveway and update the interior finishes - and we can command a $300 a month increase in rents. Those we can get 8-9% cash on cash the day we acquire the property and we renovate as we turnover the units. Once all the units have been renovated and rents have been increased, cash on cash we get double digits and when we sell, we get 3X equity multiple on the project level.
I have a question for anyone experienced in value add deals, specifically large apartment complexes. Being that the rents are below market value, and the loss to lease is high for a lot of value add deals, what are you guys targeting for your Cash on Cash return for Year 1?
Are you guys basing your offer on achieving an 8% cash on cash return (or whatever your goal is) from Year 1? Or are you looking to achieve that post-renovation? I am guessing the answer is post-renovation, but I want to be sure.
Any advice, or feedback is appreciated. Thank you!
As Greg Dickerson said, it's project dependent.
I used to do a lot of heavy repositioning deals where there's no cashflow on year 1 since they are vacant and undergoing major renovations. However, when I sell, I literally make MILLIONS and the project equity multiple is 4x-5X or even higher. Projects like this one:
But given where we are in the Cincinnati market lately, most of our projects are easy or light value-adds - blacktop the driveway and update the interior finishes - and we can command a $300 a month increase in rents. Those we can get 8-9% cash on cash the day we acquire the property and we renovate as we turnover the units. Once all the units have been renovated and rents have been increased, cash on cash we get double digits and when we sell, we get 3X equity multiple on the project level.
Yeah that is what I’m going for. To make 8% at minimum year 1, but the deal I’m looking at now the expenses are high, and the rents are over $100 plus below market. The Year 1 cash on cash I believe conservatively around 2.5% but by year 3 I think it will achieve 10-11% conservatively cash on cash return.
@Jordan Santiago There is no right or wrong answer everyone has different goals. Personally I would not get out of bed for 8% . My personals all have not less then 20% NET caps some much higher.
@Jordan Santiago ALL IN 40K, rent net 7300 on gross of 12k , all in 50k net 10,500 on gross of about 18k, . all in 60k net 13k on gross of 24k,, all in 375k, net 85k , all in 800k, net about 250k, on gross of 500kish ,, Its all about knowledge and your team . THIS IS NOT A SOLICITATION ADMIN, JUST EXAMPLES .
@Jordan Santiago ALL IN 40K, rent net 7300 on gross of 12k , all in 50k net 10,500 on gross of about 18k, . all in 60k net 13k on gross of 24k,, all in 375k, net 85k , all in 800k, net about 250k, on gross of 500kish ,, Its all about knowledge and your team . THIS IS NOT A SOLICITATION ADMIN, JUST EXAMPLES .
Good Luck
Got it. Seems super hard to find those type of deals but home runs when you do. Thanks a ton.
@Jordan Santiago I can you cant :) I provide about 10 -14% net caps, NOT soliciting admin,
Well on smaller deals 2-40 units I can see that being more common especially with off market properties, but with deals over 100 units I’m sure they are super rare.
@Jordan Santiago incorrect, there is limited inventory, 2 , 3 years ago, as many as you want, now try finding a good deal on a 4- 10 unit in the cleveland markets .Try finding one under 30k per unit, not going to happen , I can :)
@Jordan Santiago incorrect, there is limited inventory, 2 , 3 years ago, as many as you want, now try finding a good deal on a 4- 10 unit in the cleveland markets .Try finding one under 30k per unit, not going to happen , I can :)
Good Luck
Recently just assigned a 4 unit at a 21% cap. I’m not familiar with the Cleveland market so can’t speak to it. Either way, thanks for rubbing that in my face lol I need to get on your level. All fun. Thanks for the insight Bob, appreciate it!
My 2c , never buy property that does not make profit ( on paper) from day one or tenant coming in.
No matter what you plan in life, life has plans for you. It may look good on paper, surprise , it costs more to fix , less rent , bad tenant. No tenant, Etc. it will make a negative situation even worse.
Folks. You are not Amazon or Uber. You cannot go negative from day one.
@Jordan Santiago 8 percent doesn’t get me excited enough to deal with all the headaches that come with owning rentals, and the risk.
You can get that in the stock market with a lot less risk and headache. Just a thought.
You don’t think a minimum of 8% cash on cash return on apartment complexes over 125 units is good?
I think it’s average if that’s your total return. It’s not horrible but it’s borderline.
Real estate is among the riskiest forms of investment. 99 percent of people on BP don’t talk about risk at all. They just look at return. You need to look at risk adjusted return. 8 percent for the risk you take in an illiquid, non-diversified investment doesn’t seem very high to me.
@Bob Prisco Hi Bob, do you mind me asking where it is that you’re seeing these returns? I’m in the Philadelphia, PA area and tend to see coc returns on average of 12-15%
My 2c , never buy property that does not make profit ( on paper) from day one or tenant coming in.
No matter what you plan in life, life has plans for you. It may look good on paper, surprise , it costs more to fix , less rent , bad tenant. No tenant, Etc. it will make a negative situation even worse.
Folks. You are not Amazon or Uber. You cannot go negative from day one.
You’re not understanding the business and what I’m talking about. This is not like building a company that has no profit just for the sake of users.
Any new development project will not generate revenue until complete and stabilized. Many value add projects that have significant upside will not cashflow until the business plan is complete. It’s just like a flip property. You make no money until the rehab is complete and you sell the property. This is just a different business model and how it works.