All Forum Posts by: Chris Washington

@Julien Plouffe Great question. It certainly isn't easy to find the right deal, but yes we are still looking to acquire. I'll explain why:

There's 4 elements to successful investment in commercial multifamily:

1. Buy Right

2. Finance Right

3. Manage Right

4. Exit Right

In today's market, I believe buying right is more important than it ever has been. When the market is appreciating and rents are growing 3-5% a year, you can make a mistake when you buy and still make out ok. However, I definitely believe apartments are closer to the top than the bottom of the market cycle, and as such I am not projecting significant future appreciation in our underwriting calculations.

We are also only looking at buildings with value add opportunities to force appreciation and ensure we have some headspace to protect ourselves in the event of a market correction. We look for 12-15% cash on cash return upon acquisition, with targeted cash on cash returns after value add in the 20-25% range.

Hope this helps...feel free to send me a PM with any other questions.

@Patrick O' Connor Welcome to BP and Cincinnati. I just moved to Cincinnati from LA myself about 6 months ago, and am working on finding my first apartment complex here. If you are serious about getting involved in the REI community, @Joe Fairless has started a great RE networking meetup group. I just learned about/started attending the meetup 2 months ago, and have already learned a ton from the group.

Below is the link to the BP forum for the Cincinnati meetup, as well as the direct link to sign up for the May Mastermind:

https://www.biggerpockets.com/forums/521/topics/20...

https://www.eventbrite.com/e/cincinnatis-best-ever...

Hope to see you there...

@Aaron Einfrank Great to hear that you've got a detail plan laid out to get you where you want to go. Unfortunately, I am 100% focused on my local Cincinnati market at this point, so I do not have any network in Columbus. However, I've seen a lot of discussion around Columbus market here on BP, so I don't think you'll have a problem finding some connections in your local area.

Best of luck! I look forward to seeing your future success...

Don't want to hijack this thread, but seeing a lot of misinformation in this thread about CAP rates...hopefully I can help clear up some confusion:

First, CAP rates are a way to value commercial properties, while residential is primarily valued based on fair market value (rooted in recent local comparable transactions). The idea of talking about CAP rates for a triplex is a waste of time, as when you sell or refinance neither a bank nor a buyer will take local CAP rates into consideration.

Second, CAP rate ranges are determined by your local market and class of asset. For example, a class A asset in CA may have a CAP rate as low as 2 or 3%, while a class A in Ohio would be closer to 6-7%. CAP rates can change, but it is a slow change over time driven by market economic conditions, not anything 1 person specifically does with his or her property.

Finally, for commercial assets the correct calculation is annual NOI/CAP rate = Value. If you purchase an asset with a $10,000 NOI in a market with a 10% CAP rate, the value of that asset would be $100,000. If you are able to increase the NOI for that property from $10,000 to $15,000, at the same 10% CAP rate your asset would now be worth $150,000. Notice CAP rate didn't change, but because you have been able to drive higher income with the asset you reap the benefits of a higher valued asset. Increasing or decreasing NOI has no impact on the CAP rate, but based on the CAP rate increasing or decreasing NOI will change the overall value of your asset.

Hope this helps clarify things a little.

@Eric Schaaf

Couple of quick observations:

1. Are all utilities x-Garbage paid by tenants?

2. No management expense in your numbers. Understood you may want to self manage, but I always underwrite management expense in my properties for 2 reasons: 1) you never know when life may change and you will want/need to hire professional management and 2) You should be compensated for your time and energy if you self manage. If the deal only pays out without any management fees, you may be surprised at how much you are getting "paid" for managing the property if you calculate the amount of return you make divided by the numbers of hours you put into managing the property. 

3. Since this is a commercial property, you likely will not receive a 30yr mortgage and will need a higher down payment. I am underwriting now with a 25% down and 20 yr AM, 5% interest.

4. I do not see enough closing costs in your "Total Cash Needed" figure. Based on quick math of a $160k purchase price at 25% down, I'm coming up with $62k needed to acquire (including inspection costs, prepaid insurance, contingency account, etc.), not including your $10k for renovations. Not capturing all your costs to acquire would over-inflate your CoC return projection.

5. Without knowing your specific area, its hard to comment on your calculations for vacancy, maintenance, taxes, etc. I would just recommend that you review these to ensure they are in line with the Class of asset and class of area (i.e. if this is a class C property in a class C area, you will want to probably over estimate your maintenance costs due to age of property and include a bad debt factor for any lost/missed rent payments).

Finally, since you say all these expenses are estimates I would highly recommend having your realtor get a T-12, Rent Roll, and P&L from the current owner. You should ultimately calculate all your figures and purchase price based on actual performance of the asset in the last 12 months. 

Hope this helps...best of luck!

@Aaron Einfrank 

Congrats on taking the step to acknowledge your REI failure over the last 8 years. First step to recovery is admitting you have a problem... :)

Having said that, while stating your goal is great I would highly recommend you break that goal down into much smaller pieces so you are able to track your progress (i.e. Analyze 3 properties a day for next 90 days, Contact and meet with with 3 local RE broker(s) in next 30 days, Close 1st REI deal netting 15% annual cash on cash return by 12/31/16, etc). I would also tie this to broken down financial goals as well (i.e. if your current income is $100k, your goal could be to generate $10k passive by 12/31/17, $25k passive by 12/31/18, $50k passive by 12/31/19, etc.). Its hard to hold yourself accountable when you have 1 goal with 1 number that's so far in the future. Also, goals are only as good as your determination of what you are willing to do to accomplish them.

I would also recommend digging deeper to understand why you have not made any REI moves in the last 8 years. Is it lack of knowledge of your investment strategy? Being afraid to reach out and connect with local RE professionals? Not having enough money and not knowing how to creatively finance?, etc.... Once you are able to identify the gap, you can put together a specific action plan to close that gap and propel you forward. In my experience, I've found that almost all causes of inaction are related to lack of education. It's a lot easier to move forward when you understand how exactly to do so.

Hope this helps...best of luck and I hope your next 8 years in REI are better than the last 8!

@Eric Schaaf More than happy to take a look and provide my opinion, but your link did not work for me either, so to Greg's point not really able to help based on the information in your OP

@Sean Ryan Are you looking for residential or commercial financing?

@Jean-Claude Governale

Couple recommendations:

1. Visit loopnet.com and look up the type of property that you are interested in, in the area that you are interested in. Many of these properties have advertised CAP rates. While the proforma information is typically inflated, the advertised CAP rates should give you a decent indication of the CAP rate range for the type and class of asset.

2. Connect with a local commercial broker in your area. You may not want to do this until you are serious about investing (i.e. if you found the right investment that met your criteria, you would actually buy) so as to not be labelled a tire kicker. But a good broker should be able to give you a range of CAP rates by asset type in your area

3. You can always post here on BP and ask other active investors in your area what CAP rates they are seeing. If you take that option, just be sure you specify exactly what type of property, class of asset, and class of area otherwise you won't get much help.

Finally, 2 BP forum best practices:

1. When responding to posts on BP it's best to "mention" the person by using the @ and their name (i.e. @Chris Washington). Fortunately I came back to check this thread, otherwise I would have never known you wrote a response to my initial post.

2. If you find someone's post helpful, be sure to vote for it. This lets the poster know they are providing value, and allows the community to recognize people who provide quality contributions to the forums.

Hope this helps! 

@Jean-Claude Governale

The best definition I've heard of CAP rate is a measurement of the risk premium of your investment when compared to 10-year Treasury Bill (considered a "risk-free" investment). For example, if the T-bill is paying a 2% return, and you can purchase a property with a 7% CAP rate, you are receiving a 5% premium on your investment in exchange for your time and accepting the inherent risk associated with investing in Real Estate.

In essence, unless you are betting heavy on future market appreciation or have a strategy to quickly force appreciation in the asset, there is really no reason to purchase a property at less than the current yield for the T-bill as you would be better off investing in the risk-free T-bill. The definition of a "good" CAP rate varies by market and must be determined by each individual investor in terms of their overall investment strategy.

CAP rate should not be the only measure of the quality of an asset. I would also recommend looking at other metrics (i.e. Cash flow, Cash-On-Cash return, Debt Service Coverage Ratio, etc.) to determine your whether an investment is right for you.

Hope this helps...best of luck!