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!
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.
Also check out @Michael Ealy response as well for a better understanding of this
Leveraged, mid-teens COC. Cash buys 7% ROE, but larger equity capture and IRR expectation. I'm with Caleb. For 8%, I'll buy an index fund or something with liquidity, without headaches.
I think 8% for a smaller multi family isn’t worth it but a minimum of 8% on something that’s 125+ units is.
Yep, you pointed your opinion out already saying you think 8% is good. I was offering my criteria as someone in the trenches for 17 years. Ideas, ideals, opinions are one thing...
Your idea of a decent COC isn't abnormal and why I am selling much more than buying. 125+ tenants and toilets for 8%? The definition of a free and (mostly) efficient market. I will be on the other side of your closing table, but mine are stabilized and performing.
Value add year 1 COCRs will vary widely. I would oncentrate more on the metric of IRR in those cases. Mine I purchased at a 12-14 cap and am sitting at an avg market cap of 6. Buy above the market cap, too..
I base my offer on what the property is worth today. As a general rule, I try not to compensate the seller for work that I’m going to put in in the future.
If the goal is cash on cash return, then I would analyze how much you can pay to achieve that % return and subtract out your value add costs, and that should give you your max offer.
If the goal is getting your money out in 18-24 months, I would analyze what the property will be worth when you finish (based on area cap rates), take 75% of that, and then subtract reno costs, and that’s your max offer.
Leveraged, mid-teens COC. Cash buys 7% ROE, but larger equity capture and IRR expectation. I'm with Caleb. For 8%, I'll buy an index fund or something with liquidity, without headaches.
I think 8% for a smaller multi family isn’t worth it but a minimum of 8% on something that’s 125+ units is.
Yep, you pointed your opinion out already saying you think 8% is good. I was offering my criteria as someone in the trenches for 17 years. Ideas, ideals, opinions are one thing...
Your idea of a decent COC isn't abnormal and why I am selling much more than buying. 125+ tenants and toilets for 8%? The definition of a free and (mostly) efficient market. I will be on the other side of your closing table, but mine are stabilized and performing.
Value add year 1 COCRs will vary widely. I would oncentrate more on the metric of IRR in those cases. Mine I purchased at a 12-14 cap and am sitting at an avg market cap of 6. Buy above the market cap, too..
I base my offer on what the property is worth today. As a general rule, I try not to compensate the seller for work that I’m going to put in in the future.
If the goal is cash on cash return, then I would analyze how much you can pay to achieve that % return and subtract out your value add costs, and that should give you your max offer.
If the goal is getting your money out in 18-24 months, I would analyze what the property will be worth when you finish (based on area cap rates), take 75% of that, and then subtract reno costs, and that’s your max offer.
True, easy to get caught up in the future value. Good input, thanks!
You can get that in the stock market with a lot less risk and headache. Just a thought.
I think this may be incorrect. My understanding is when people quote 8% returns in the stock market, they're not understanding that's IRR, not CoC. These guys are all talking about RE CoC returns but when you say the stock market nets 8%, that's really IRR. If you want to compare apples to apples you'd have to use IRR for REI. My deals (new construction MFH in Philadelphia market) are around 8% CoC but IRR is more like 15%-20% range, sometimes better. Just wanted to clarify and apologies if I'm incorrect, which has happened to me at least one other time :)
You can get that in the stock market with a lot less risk and headache. Just a thought.
I think this may be incorrect. My understanding is when people quote 8% returns in the stock market, they're not understanding that's IRR, not CoC. These guys are all talking about RE CoC returns but when you say the stock market nets 8%, that's really IRR. If you want to compare apples to apples you'd have to use IRR for REI. My deals (new construction MFH in Philadelphia market) are around 8% CoC but IRR is more like 15%-20% range, sometimes better. Just wanted to clarify and apologies if I'm incorrect, which has happened to me at least one other time :)
Love to hear others views on this!
Totally agree with you Troy. There are 2 numbers being thrown around in this thread and I was about to clarify it but you beat me to it ;)
There are 2 types of returns one gets from real estate investments (or really, for any investment that produces a yield or dividend or income):
Cash on Cash Return - is the cashflow you get every month divided by the cash you invested to acquire/renovate/stabilize the asset
and
Internal Rate of Return - is the total of the cashflow and the net profit from sale (including loan paydown) divided by the cash you invested to acquire/renovate/stabilize the asse
Large apartment complexes in decent areas (A/B), specially when you're trying to do a value-add, will produce 6-8% Cash on cash on YEAR 1 (or even lower) but it increases significantly on year 2 onwards as you're able to increase the average rents/ reduce the expenses through improved management efficiencies (my stabilized project CoC is about 12%).
You can get higher CoC (10% and up) for sure (even on Year 1) with apartment buildings in C/D areas but generally, you tend to get lower IRR due to the lower net profit from sale due to the higher cap rate.
And as far as the advice never to get a property with very low (or negative) CoC on year 1 - well, I agree and somewhat disagree.
I agree specially if you're a newbie investor and has no passive income yet.
But, once you get passive income, you can work on heavy repositioning projects that might not cashflow on year 1 BUT the cashflow and the IRR is significant once you turn the project around. These heavy repositioning projects, if done correctly, can make you MILLIONS and that's just based on my personal experience.