What is your favorite metric for analyzing deals?

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Chris Martin
Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
3y

For most of my investment career, the general formula was/is: 

#1 Net Income, assuming full leverage at current market rates, after non-cash expenses, should be greater than $0. #2 Acquire at a discount to a 1004 comparable sales valuation, generally at 20% or more. 

This is an old example, but should get the point across:
100K single family acquisition on 130K valuation, 82.5K improvement, 17.5K land

Depreciation is $3,000 per year ($82,500 / 27.5) or $250 per month. At a (mortgage) rate of 6%, P+I payment on $100K is $600, interest roughly $550 per month. taxes and insurance $100 per month, reserves about $100 per month, repairs and vacancy about $100 per month, and Property Management and incidentals about $100 per month. 

Adding it up: if we could get $1200 per month in rent or more, we would acquire the property.

It may be hard to believe now, but in strong buyer's markets we could achieve these numbers in the Raleigh NC metro market on a regular basis. 

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  • Corby GoadeBusiness Member
    Investor · Boise, ID · Member since 2014 · 3k+ posts · 3k+ votes
    3y

    I want equity. So- % of equity vs. cash invested. 

    1Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    3y

    For most of my investment career, the general formula was/is: 

    #1 Net Income, assuming full leverage at current market rates, after non-cash expenses, should be greater than $0. #2 Acquire at a discount to a 1004 comparable sales valuation, generally at 20% or more. 

    This is an old example, but should get the point across:
    100K single family acquisition on 130K valuation, 82.5K improvement, 17.5K land

    Depreciation is $3,000 per year ($82,500 / 27.5) or $250 per month. At a (mortgage) rate of 6%, P+I payment on $100K is $600, interest roughly $550 per month. taxes and insurance $100 per month, reserves about $100 per month, repairs and vacancy about $100 per month, and Property Management and incidentals about $100 per month. 

    Adding it up: if we could get $1200 per month in rent or more, we would acquire the property.

    It may be hard to believe now, but in strong buyer's markets we could achieve these numbers in the Raleigh NC metro market on a regular basis. 

    3Reply
  • Adam SchneiderPro Member
    Lender · Raleigh, NC · Member since 2012 · 955 posts · 639 votes
    3y

    @Roy Palmer -- While everyone wants cash flow and appreciation, most people lean heavily one way or the other when making that either/or decision. So, you'll have different people analyzing deals differently. For the people who use ROI % or cap rates of some sort, the one word of caution is to have a minimum actual amount of cash coming in....so for lower priced deals, the % returns need to be higher than for higher priced deals/rents. If you want to clear say $400/month net, then you need to do the math like Chris Martin did. If you want appreciation, just ask Zillow what the market is going to do next year!!

    2Reply
  • Paul De Luca
    Real Estate Agent · Chicago, IL · Member since 2018 · 1k+ posts · 1k+ votes
    3y
    Quote from @Roy Palmer:

    Wondering what everyone's go-to metric is for analyzing the value of a potential investment property? 


     Cash on cash return - it shows how hard your money is working for you.

    2Reply
  • Ricardo Hidalgo
    Real Estate Agent · Member since 2019 · 569 posts · 257 votes
    3y
    Quote from @Roy Palmer:

    Wondering what everyone's go-to metric is for analyzing the value of a potential investment property? 


     Cash on Cash Return then equity multiple to see how quickly I can refi the property or sell it off into a 1031 exchange for a bigger acquisition. Cap rates doesn't mean a property is cash flowing! I would look into the reserves of the property for potential maintenance and improvement expenses that are upcoming. 

    1Reply
  • Roy Palmer
    OP
    Member since 2021 · 19 posts · 9 votes
    3y
    Quote from @Chris Martin:

    For most of my investment career, the general formula was/is: 

    #1 Net Income, assuming full leverage at current market rates, after non-cash expenses, should be greater than $0. #2 Acquire at a discount to a 1004 comparable sales valuation, generally at 20% or more. 

    This is an old example, but should get the point across:
    100K single family acquisition on 130K valuation, 82.5K improvement, 17.5K land

    Depreciation is $3,000 per year ($82,500 / 27.5) or $250 per month. At a (mortgage) rate of 6%, P+I payment on $100K is $600, interest roughly $550 per month. taxes and insurance $100 per month, reserves about $100 per month, repairs and vacancy about $100 per month, and Property Management and incidentals about $100 per month. 

    Adding it up: if we could get $1200 per month in rent or more, we would acquire the property.

    It may be hard to believe now, but in strong buyer's markets we could achieve these numbers in the Raleigh NC metro market on a regular basis. 


     Thanks for this info and example Chris. What is a 1004 comparable sales valuation? 

    0Reply
  • Roy Palmer
    OP
    Member since 2021 · 19 posts · 9 votes
    3y
    Quote from @Adam Schneider:

    @Roy Palmer -- While everyone wants cash flow and appreciation, most people lean heavily one way or the other when making that either/or decision. So, you'll have different people analyzing deals differently. For the people who use ROI % or cap rates of some sort, the one word of caution is to have a minimum actual amount of cash coming in....so for lower priced deals, the % returns need to be higher than for higher priced deals/rents. If you want to clear say $400/month net, then you need to do the math like Chris Martin did. If you want appreciation, just ask Zillow what the market is going to do next year!!


    I love the point you made about not focusing strictly on cap rate or ROI without considering the actual cash flow coming in. Thanks Adam!

    1Reply
  • Adam SchneiderPro Member
    Lender · Raleigh, NC · Member since 2012 · 955 posts · 639 votes
    3y

    @Roy Palmer. My pleasure, Roy. We get so doped up on the ROI sometimes....need to see the forest through the trees.

    0Reply
  • Eliott Elias
    Investor · Austin, TX · Member since 2021 · 9k+ posts · 5k+ votes
    3y

    %70*ARV-Repairs.

    0Reply
  • Chris Martin
    Investor · Willow Spring, NC · Member since 2009 · 5k+ posts · 3k+ votes
    3y
    Quote from @Roy Palmer:
    Quote from @Chris Martin:

    For most of my investment career, the general formula was/is: 

    #1 Net Income, assuming full leverage at current market rates, after non-cash expenses, should be greater than $0. #2 Acquire at a discount to a 1004 comparable sales valuation, generally at 20% or more. 

    This is an old example, but should get the point across:
    100K single family acquisition on 130K valuation, 82.5K improvement, 17.5K land

    Depreciation is $3,000 per year ($82,500 / 27.5) or $250 per month. At a (mortgage) rate of 6%, P+I payment on $100K is $600, interest roughly $550 per month. taxes and insurance $100 per month, reserves about $100 per month, repairs and vacancy about $100 per month, and Property Management and incidentals about $100 per month. 

    Adding it up: if we could get $1200 per month in rent or more, we would acquire the property.

    It may be hard to believe now, but in strong buyer's markets we could achieve these numbers in the Raleigh NC metro market on a regular basis. 


     Thanks for this info and example Chris. What is a 1004 comparable sales valuation? 

    The 1004 form is an appraisal form that conveys the property valuation to a lender using recent sales of similar properties. As the form states: "The purpose of this summary appraisal report is to provide the lender/client with an accurate, and adequately supported, opinion of the market value of the subject property."

    The form also has provisions for cost and income valuation methods, but these are generally not used. 


    1Reply
  • Justin Moy
    Investor · Kansas City, MO · Member since 2020 · 400 posts · 278 votes
    3y

    IRR or CoC depending on the business plan of the property. Lately we've been leaning more on cash flowing deals.

    0Reply
  • Roy Palmer
    OP
    Member since 2021 · 19 posts · 9 votes
    3y
    Quote from @Chris Martin:
    Quote from @Roy Palmer:
    Quote from @Chris Martin:

    For most of my investment career, the general formula was/is: 

    #1 Net Income, assuming full leverage at current market rates, after non-cash expenses, should be greater than $0. #2 Acquire at a discount to a 1004 comparable sales valuation, generally at 20% or more. 

    This is an old example, but should get the point across:
    100K single family acquisition on 130K valuation, 82.5K improvement, 17.5K land

    Depreciation is $3,000 per year ($82,500 / 27.5) or $250 per month. At a (mortgage) rate of 6%, P+I payment on $100K is $600, interest roughly $550 per month. taxes and insurance $100 per month, reserves about $100 per month, repairs and vacancy about $100 per month, and Property Management and incidentals about $100 per month. 

    Adding it up: if we could get $1200 per month in rent or more, we would acquire the property.

    It may be hard to believe now, but in strong buyer's markets we could achieve these numbers in the Raleigh NC metro market on a regular basis. 


     Thanks for this info and example Chris. What is a 1004 comparable sales valuation? 

    The 1004 form is an appraisal form that conveys the property valuation to a lender using recent sales of similar properties. As the form states: "The purpose of this summary appraisal report is to provide the lender/client with an accurate, and adequately supported, opinion of the market value of the subject property."

    The form also has provisions for cost and income valuation methods, but these are generally not used. 



     Got it. So where would one obtain a 1004 form, from one's lender?

    0Reply
  • Roy Palmer
    OP
    Member since 2021 · 19 posts · 9 votes
    3y
    Quote from @Justin Moy:

    IRR or CoC depending on the business plan of the property. Lately we've been leaning more on cash flowing deals.


    Which situations do you like to use IRR vs CoC?

    0Reply
  • Justin Moy
    Investor · Kansas City, MO · Member since 2020 · 400 posts · 278 votes
    3y

    @Roy Palmer Typically a high IRR deal will have much shorter timelines and typically would involve a fairly heavy value add. Generally higher payout potential in a much shorter timeline and with higher payout potentials & shorter timelines come higher risk.

    We have high IRR deals with our new apartment builds but look for a greater CoC and long term deal timeline when we syndicate existing apartments.

    0Reply
  • Owen DashnerPro Member
    Lender · Omaha, NE · Member since 2008 · 1k+ posts · 1k+ votes
    3y

    I know this isn't exactly what you meant, but zip code is my favorite metric.  My first search filter is location.

    2Reply
  • Roy Palmer
    OP
    Member since 2021 · 19 posts · 9 votes
    3y

    Got it, thanks for the detailed explanation! 

    Much appreciated.

    0Reply
  • Roy Palmer
    OP
    Member since 2021 · 19 posts · 9 votes
    3y
    Quote from @Justin Moy:

    @Roy Palmer Typically a high IRR deal will have much shorter timelines and typically would involve a fairly heavy value add. Generally higher payout potential in a much shorter timeline and with higher payout potentials & shorter timelines come higher risk.

    We have high IRR deals with our new apartment builds but look for a greater CoC and long term deal timeline when we syndicate existing apartments.

    Got it, thanks for the detailed explanation!


    0Reply
  • Taylor DaschBusiness Member
    Real Estate Agent · Temple, TX · Member since 2022 · 1k+ posts · 700 votes
    3y

    This is a great question. I personally look at 1. Can I buy/rehab the deal with no money out of my pocket? 

    2. If its in the right location - I am fairly selective in my market with the deals I buy - most wholesalers here get them under contract in subpar areas. 

    3. If its the right location and I can rehab it with low/no money down, It should cash flow fairly well but I like to have a cash flow from $300-$500/mo. This isnt a deal breaker for me though! 

    [email protected]254-718-4249
    Taylor Dasch | EG Realty560 Reviews
    WebsiteView Page
    1Reply
  • Mike Dymski
    Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
    3y

    5-year IRR of 25+%

    0Reply
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