Property Manager · Austin, TX · Member since 2017 · 514 posts · 297 votes
If the property can generate adequate net operating income to support sufficient debt to finance the property and provide a satisfactory cash return to the developer-investor, the project is financially feasible.
Real Estate Agent · Austin, TX · Member since 2017 · 229 posts · 259 votes
7y
Mini accountant rant...
If the difference between acceptable NOI and unacceptable NOI is the cost of lawn care, the investor isn't an investor. They are an over-leveraged consumer who has no business risking their family's liquidity so they can call themselves an investor!
Real Estate Agent · Austin, TX · Member since 2017 · 229 posts · 259 votes
7y
Mini accountant rant...
If the difference between acceptable NOI and unacceptable NOI is the cost of lawn care, the investor isn't an investor. They are an over-leveraged consumer who has no business risking their family's liquidity so they can call themselves an investor!
Real Estate Agent · Austin, TX · Member since 2017 · 229 posts · 259 votes
7y
Matt, I like that equation. The biggest variable I see people screw up is estimating the OE. People just aren't good at counting all of the associated costs. Then they get into the deal 2-6 months and start shoving issues off on the tenants or their contractors. People want to own the asset, but they don't want to own the responsibility.
I'm curious -- what steps are you taking to achieve that 18% ROI?
Burnaby, BC · Member since 2017 · 282 posts · 268 votes
7y
Never a bad investment opportunity if the income generated from the property will cover all related expenses. Many people do end up breaking this rule in hot markets so they can aquire a place or just because they purely speculate on rising values
@Beau Fannon I agree, most people I've seen posting don't take into account all expenses related to a property.
Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
7y
@Lexi Teifke - As always, the theory like the theory, but in practice is what counts.
The internal rate of return hurts my brain just to read the definition, never mind calculating it: internal rate of return on an investment or project is the "annualized effective compounded return rate" or rate of return that sets the net present value of all cash flows (both positive and negative) from the investment equal to zero. Equivalently, it is the discount rate at which the net present value of future cash flows is equal to the initial investment, and it is also the discount rate at which the total present value of costs (negative cash flows) equals the total present value of the benefits (positive cash flows).
Can you shed some light on how you calculate the IRR for your rentals?
As for the rest, there are major differences between Net Operating Income and Net Annual Income (or annual Cash Flow – which I consider the real measure of an investment performance, how much money puts in my pocket on a regular basis) and Cash on Cash Return on Investment.
Net Operating Income is calculated before debt.
Net Operating Income = Gross_Annual_Rent – (Vacancy + Operating_Expenses)
Where Operating Expenses = Taxes + Insurance + Monthly HOA x 12 + Monthly Management Fee x 12 + Repairs and Incidentals (Warranty, Utilities if any paid by owner and/or during vacancy, CapEx reserves, etc., don't forget the CPA and Lawyer costs)
Again Net Operating Income is calculated before debt - what matters more is the NET Annual Income (or annual cash flow): NET Annual Income = Net_Operating_Income - Mortgage_Payments
And that leads to the Cash on Cash Return on Investment:
And I'm willing to bet you don't get C/C ROI above 10% on any SFR in Austin area (based on these calculations and bought with conventional means, not subject-to or assumptions, or owner financing or other creative financing).
Specialist · Austin, TX · Member since 2017 · 136 posts · 109 votes
7y
The OP statement is fairly well worded as a short distillation.
It's behooves the individual to really understand that there are a lot of conditional factors and risk weighting to be done, per individual goals, and per deal.
IRR is a tool. Good, but can cut you too. Dangerous some as many don't understand it's not comparable to say the APY on the basic CD. Everyone generally gets a CD APY. I see too many syndicated deals where the sponsor incorrectly explains it to investors. A few calculated it incorrectly. The average person does not know discount rate, present value etc. If IRR is too fuzzy, look at the return multiple. It's simple and can't be easily used to give potentially false impressions like IRR can.
Rental Property Investor · Round Rock, TX · Member since 2016 · 1k+ posts · 971 votes
7y
@Lexi Teifke - I was hoping you could share how you do the IRR for your rentals, a sample of IRR calculation - I'm always looking to advance my analysis of RE investments.
Kudos to you if you manage to get properties at 50% of ARV. At that aquisition cost (is that including rehab?) you should have excellent ROI. However I contend that is not characteristic of the general investor - the majority get marginal deals.
Developer · Austin, TX · Member since 2010 · 371 posts · 284 votes
7y
I don't like IRR because you have to speculate the sales price which you just can't know. You're playing with chicken bones. If you can cash flow it from day one and understand your expenses well enough that your cash flow is real and the deal works from the day you buy it, then count it as a performer. Some will do better than others and you can still speculate about what your exit price will be, but there is always going to be some factor of luck. If you keep the fluctuation above your profit line then you are going to be looking at a range of IRRs that are all positive. IRRs to me are a bit of a distraction and I always treat them with suspicion.
Plan for all of your replacement costs for your holding period at purchase time and be prepared for a few negative years if you have a major expense show up. You can still be satisfied during that year because you planned it up front.