What is a good equity goal to shoot for?

Question

Husband and I have been working primarily in the SFH market in Chicago and are going to go into the commercial market. We’re trying to set a goal for 2019 but could use some help! We’re looking at a 2-unit with a storefront, what would be a good number to increase the value by that we should start with? We were thinking 60k at a minimum in order for it to be worth the effort, thoughts? We know there’s no right or wrong as long as the numbers work but what’s a good place to start for our first? Thank you in advanced!

Erik W. · Answer

This question is sort of like the one that gets posted here every week "How much cash flow should I get?" True, it's equity, but the same thought-process applies, and I supposed a good way to start is the same way you analyse your cash flow targets...."What is/are your goal(s)?"

Compare your options in terms of opportunity cost. Why cap it at $60K on the low end? Would you be happy enough if you made $50K? Would doing that deal prevent you from hitting other targets? If $60K is your low, what's your high? And what do you plan to do with that equity since you can't eat it or spend it? Are you going to sell and reinvest (i.e. trade up), borrow against it, let it sit on your books so you can feel satisfied that you have a fat balance sheet?

If you set up your minimum at $60K and other deals slip by because they aren't quite as good as your minimum, what else will you be doing in the meantime that will generate better value? Let's say it takes 250 hours to do whatever deal you do, if you make $50K, that's $200/hour. Pretty good wages, compared to some professions. Would you pass that up because it's not $240/hour (same deal, but $60K)? Your difference is only $40/hour. What will you do with the time while you wait to more than recapture the lost value from not doing the $50K deal?

Happy thinking!

Christina Torres · Answer

@Calvin Ozanick thank you!

Christina Torres · Answer

@Michael Reilman thank you!

Christina Torres · Answer

@Erik Whiting hadn’t thought about it that way, that’s super helpful, thank you!

Michael Reilman · Answer

I think you should focus more on % rather than the number. Sure, I wouldn't do all the effort to just get 10k, but if you make a return that matches your investment criteria, then go for it! As said earlier, seller financing is a real thing and can be like getting real estate for "free". But to more directly your question. What do you feel is worth your time? Think about the effort that goes into a project like that. Maybe the flip takes 3 months, or 6 months to complete? So is 60k worth it?

Whatever you do, underwrite conservatively! Something always goes wrong!

Calvin Ozanick · Answer

I personally think it should be whatever makes your numbers work. If you can get into a property with $0 down through programs at your disposal and your income covers your expenses, then your income on the property is through the roof. There is no way to even assign a percent to your return. I assume that if you are buying a property that is not in horrible condition, and you get high quality insurance, coupled with a good property manager then the risk is low.

What is a good equity goal to shoot for?

What is a good equity goal to shoot for?

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