Which to focus on CoC or Cap Rate?

Question

Hello all, just curious. Which should I be focusing more on CoC or CAP? Perhaps both? Also what numbers or percentage do you other investors like to see in your returns?

David Thompson · Answer

Hi Eric,

Most of our investors don't really give a hoot about entry cap rates, but higher exit cap rates would be important to them in our forecast model. Of course, they do want to see that we are buying our apartments at relatively below market prices versus recent sales comps for same age / number of units and that our rents are undermarket at purchase and that after renovations we are still very competitive.  Re: CoC, 8-10% is what we are seeing out there.  If you can offer or receive a preferred return of say 8% that is attractive to investors....LP gets paid 100% of distributions, refi or sales up to 8% first, before GP gets paid their split).  All in IRRs we are seeing 18% to 20%.

Should should only be buying into value add strategies where renovations and improved management can add value to the property, especially where the market is today.  We like B class best but B/C value is has downside protection versus buying retail or class A, the latter much riskier at this stage of the cycle (over supply, concessions, paying at the top w/no value add opportunity).  Re: Market & Submarket, must be diverse, > 250K MSA, very strong w/pop/job growth above natl avgs.  Team is key, experienced operators.

Couple of my blogs you might find of value, good luck !

https://www.biggerpockets.com/blogs/9145/53820-why...

https://www.biggerpockets.com/blogs/9145/53959-vet...

Immanuel Sibero · Answer

@Eric DeVito

Neither one is sufficient measure. Be aware that CoC and Cap rates are snapshot, one-time metrics so they do not reflect the overall performance of the property. These metrics can be useful to screen properties. But once a property passes your screening, then look at the the more robust metrics such as ROI and IRR.

Since you're asking about CoC and CAP I'm assuming commercial properties so as far as performance numbers investors like to see (assuming passive investor in a syndicated deal such as apartments), how about - 10% CoC or greater, 20% ROI or greater, double your money in 5 years or less??

Cheers... Immanuel

Adam Sanders · Answer

Both are important. Real estate investors tend to focus on cap rates more because it makes evaluating and comparing potential properties easier as the number is not influenced by how the property is financed. What return or cap rate investors look for is highly dependent on a large number of factors including the size, risk, and type of the investment.