Is 14% IRR good or not?

Question

I’m currently running the numbers on a B+ multi family investment. The before tax I RR is 14.74%. The after-tax is slightly over 10%

Do you consider this a good return? Or do you consider it too high and too risky? Or too low and not enough return?

Charles Seaman · Answer

@Ashley Garner for a B+ asset, that's a great return if you're using conservative and realistic underwriting.  The market is very competitive now and will remain very competitive for the foreseeable future, so people should expect to see those types of returns if they're using conservative underwriting.

Mark Fedorov · Answer

It depends on what your other options are, and also depends on the risks inherent on your modeling which got you the 14%. .. what is your vacancy assumed (5% hopfully), how much are you assuming for capital replacement? Is the assumption of your labor cost in line with the rates of the market you are in?

.. never be enamored by a number, worry about the assumptions that got you that number.

Arn Cenedella · Answer

@Ashley Garner

@Charles Seaman

I agree with Charles. 14% IRR for a good solid property is dandy fine.

Ashley Garner · Answer

@Charles Seaman thanks for the reply.  I tend to be pretty conservative on the underwriting front ...so hopefully the true performance will be better.  That being said this is running it as a 10 year hold and selling in year 11 with a 6% cap rate. After 3 % annual increases to rent/expenses for 10 years.

Todd Dexheimer · Answer

I would consider this to be a below average deal - not terrible. 3% rent growth is aggressive in my opinion and will really make your numbers look good 5+ years out.  Also, only using $250/unit for reserves is the bare minimum - I typically use $300/unit.

What you didn't mention is the cash on cash return, exit cap vs todays market cap, debt service coverage ratio and LTV. Those all play a large factor into determining a good deal.

Jordan Burnett · Answer

7% Economic Vacancy? or 7% physical vacancy?

7% Economic Vacancy might be a bit aggressive depending upon the market you're investing in and what the supply looks like. In many markets, Class A properties are currently making concessions to get leases which may cut into your B+ occupancy.

Allan C. · Answer

@Ashley Garner returns are proportional to risk and effort. 14% is great if low risk and low risk and low effort.

You haven’t provided enough information (ie. your underwriting assumptions) for anyone to provide meaningful feedback.

Henry Lazerow · Answer

14% is low. Unless you are not underwriting any appreciation or buying with more then 25% down. I like to have a healthy margin so when things don't go as planned the deal is still a success.

Ley Nezifort · Answer

@Ashley Garner IRR never really tell the full story. So I personally like to look at a combination of IRR, Cash on Cash, Equity Multiple, Yield on Cost etc. Especially if you’re projecting a 3% rent increase that is compounded from Year 1, that will have a very big impact on your exit NOI, thus also exit Sales Price and IRR calculation.

Also, if LPs are involved, the actual IRR result will be misleading because it’d require LPs to RE-invest cash flow distributions at a similar return, and they almost never do haha (another reason I’m not crazy about IRR metric).

But all in all, 10% IRR for a core-plus/ B+ investment sounds good, but unless you’re getting amazing yearly cash flow, I’d think you can achieve a higher return if you choose to sell earlier.

Rodney Robinson · Answer

@Ashley Garner Hello Ashley. Out of curiosity, what is the 5 year IRR? As others stated, 10 years may not be as attractive for investors. Would you’reusiness plan support the shorter 5 year hold?

Is 14% IRR good or not?

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