All Forum Posts by: Christopher Za

@Vincent Crane

I've never heard that. Are you sure you mean CoC and not total return on equity? Aside from D properties, and all of the headaches and time-demands that go with it, 30% CoC is astronomically high and not something I'm seeing ANYWHERE.

@Vincent Crane

Can you be more clear? I'm guessing you think that's low?

As I said, I'm pretty sure I can increase rents and decrease expenses and pretty quickly get that CoC number to 13-14%.

Of course, it's a zero money down deal for me so the real CoC % is infinite!

@Steve Vaughan

Ha, and the schools are absolutely terrible, go figure!  Everyone in the area sends their kids to private/parochial schools, which are quite cheap...

Thanks for the input though. I've gone into contract and am a little nervous.  I have lots of ways to get out of the deal but I'd like it to work!

Here's the breakdown of the deal:

9 unit multi-family in B area.

Purchase Price: $450K

Financing: 25% Down, 3.25% 5 year ARM, 15 year amortized

Amortized monthly payment: 2371 ($28,452/yr)

Additional Interest Payment*: 267 ($3200/yr)

Gross Rents: $6300 ($75,600/yr)

Taxes: 7200

Management (5%): 3780

Maintenance and Cap Ex (2% of purchase): 9000

Vacancy (5%): 3780

Water: 3339

Gas Elec: 7100

Insurance: 4020

Total Expenses: $38,219/yr (50.5%)

Net Income: 3115 ($37,381/yr)

Net Cash Flow: 477 (5729/yr)

Cash on Cash return: 5%*

Current DSCR: 1.31

* I am not putting any of my own cash into this deal. I'm offering an investor 2 pts above my ARM for the DP cash, plus 10-20% ownership of the LLC that will own the property.

- The rents at this property are currently about 10% below market.

- The owner is currently paying all utilities but it is accepted practice in this area to pass along utilities to the tennants.

- The insurance payment also seems to be high given my research (I've been ballparked a figure of $2700).

I'm pretty sure I can cut expenses and/or add rent to free up approximately $8,000 per year in cash flow, which would bring the DSCR to over 1.6. Cap rate varies in the area, but 8.5 is ballpark.

@J Scott

Thanks. We are thinking of cash flow the same way, I was just wondering if there was some kind of standard metric (understanding that these sorts of things are very subjective) that people used whereby they could determine if their cash flow was "enough." I do have reserves to cover any maintenance, but, for example, if you never have to tap that but can instead rely on cash flow for those projects, the investment is truly self-sustaining on it's own merits.  

Here's the breakdown of the deal:

9 unit multi-family in B area. 

Purchase Price: $450K

Financing: 25% Down, 3.25% 5 year ARM, 15 year amortized

Amortized monthly payment: 2371 ($28,452/yr)

Additional Interest Payment*: 267 ($3200/yr)

Gross Rents: $6300

Taxes: 7200

Management (5%): 3780

Maintenance and Cap Ex (2% of purchase): 9000

Vacancy (5%): 3780

Water: 3339

Gas Elec: 7100

Insurance: 4020

Net Income: 3115 ($37,381/yr)

Net Cash Flow: 477 (5729/yr)

Cash on Cash return: 5%*

Current DSCR: 1.31

* I am not putting any of my own cash into this deal. I'm offering an investor 2 pts above my ARM for the DP cash, plus 10-20% ownership of the LLC that will own the property.

- The rents at this property are currently about 10% below market.  

- The owner is currently paying all utilities but it is accepted practice in this area to pass along utilities to the tennants. 

- The insurance payment also seems to be high given my research (I've been ballparked a figure of $2700).

I'm pretty sure I can cut expenses and/or add rent to free up approximately $8,000 per year in cash flow, which would bring the DSCR to over 1.6.

@J Scott

It's sound advice. I do have the reserves to cover, but I'm trying to look at properties with a cold investment-only eye (I'm also putting zero personal money down and would like to keep it that way if possible).  You want to buy a property for an amount that, when including stabilizing its issues, still cash flows.  Thanks to @Ben Leybovich, I'm finding that DSCR is really the metric I've been looking for.

At the end of the day, there's always some calculated risk when engaging an investment over the unknown future.

The first property I'm looking at has a DSCR of 1.31 right now, and will pretty easily reach 1.6+ based on Ben's suggestions above. It will also cash flow at 12% (currently 5%) CoC. Those are all decent numbers, but I'm also open-eyed about the fact that the building will need some work which needs to be taken into account.

What's interesting is that, in residential real estate, you can usually get construction/renovation loans that would account for things like the improvements needed, but I guess the commercial real estate game is just a lot tougher, and for good reason.

I can supply the cash myself in this case (I'm doing 100% financing deals by offering a 2% higher rate of return on privately borrowed money -- all of which is factored into my final cash flow #s).

I also think this may answer the biggest philosophical real estate question that I've had, which is: why isn't a property that is cash flow break even, and that pays itself off over 15 years, not a great investment?). And the answer is that you need cash flow to pad your reserves, address unforeseen expenses, and buy more property!!

@Ben Leybovich

So I've found a couple of properties that have opportunities to value add.

One is at 1.31 DSCR. Rents seem to be about 10% below market, but the owner is currently paying all utilities in a market where it is legal/acceptable to pass along to the tenants. Making even one of those changes would bring the property over 1.5.

The other property has mind bogglingly high expenses (65-70% of gross rent). The owner is also paying all utilities, but paying 4x the local rate for insurance, 3x for attorney/legal etc. Right now it doesn't touch 1.3 (probably more like a 1.0), but with some small changes would easily top 1.5 or 1.6.

I think the bank would finance the 1st (though it has an older boiler, will need new windows at some point (60 of them!), and has an older roof (that is not leaking but...) but will they finance the second? In other words, will they finance based on projected DSCR rather than actual/current?

Thanks.

Wow, thanks @Ben Leybovich!

1.5-1.7 is almost shockingly high to me.  Do you find that nicer properties (lower CAPS) generally are going to have lower DSCRs?  I'd probably have to start looking at C properties in the places I've been looking to get in that universe. 

I think I've discovered the proper term, now I just need to get opinions on what people look for.

Cash Flow Coverage Ratio.

Here's the investopedia definition:

For conservative investors focused on cash flow coverage, comparing the sum of a company's capital expenditures and cash dividends to its operating cash flow is a stringent measurement that puts cash flow to the ultimate test. If a company is able to cover both of these outlays of funds from internal sources and still have cash left over, it is producing what might be called "free cash flow on steroids". This circumstance is a highly favorable investment quality.

BTW, the Debt Service ratio is above 1.20, which Ben Leybovich mentions in his blog is the number that banks are looking for. 

@Wayne Brooks

Thanks! The cap rate is in line with the market, but that still doesn't tell me whether it's cash flow is safe to cover for the future. Financing is 3.25% with a 5/1 ARM amortized for 15 years.

I'm really just wondering if anyone every looks at a target number for the downside, and I can't think of a better way to analyze that than cash flow as a percentage of expenses. But what's "safe?"