All Forum Posts by: Immanuel Sibero

@William Kelly

I didn't say you would find one, just that there might be one... :-) However, if you were to consider CD's as MMA's with commitment then Google search shows a few paying north of 3%. By they way, there are already MMA's with no commitment paying 2.45%, so we're almost there.

But the point is that a cash on cash of 3% is just not a good rental house investment... regardless of your goals. It's just not worth the risks. A quick IRR analysis can be beneficial as it paints a better picture of the true "return" of the investment. We can then determine whether that return justifies the risks associated with rental properties. For all we know, the OP's duplex could be worth double in 5 yrs (i.e. IRR of 14%+) which beats the long term stock market return handily.

Cheers... Immanuel

@Denton Beam

I would do a quick IRR calculation on all opportunities. Cash on cash is a performance metric strictly about residual cash on a single year. A 3% cash on cash this year can be a -10% cash on cash next year, would you still like it? Assuming your 3% CoC is average for multiple years, there are now probably money market accounts that can beat a 3%. Why would you take the risk of making those numbers from tenants when you can make them from the federally insured banks!!

As far as "cap rate"? I would discard it from your analysis of residential rentals, it is of limited use.

However, I'm actually curious about your analysis - how do you turn a 6% cap rate into a 3% CoC??? The reverse is what usually happens. You take a 6% cap rate, finance it so you can squeeze 9% or higher CoC (i.e. classic leverage strategy). Maybe we need to see some numbers...

Cheers... Immanuel

The way I see it... sources of return on investment in rental real estate:

1- Cash flow

2- Loan paydown and 

3- Appreciation in value.

- CoC is a measure of return generated by TWO sources (i.e. Cash flow and Loan paydown) on an annual basis

- IRR is a measure of return generated by ALL THREE sources (i.e. Cashflow, Loan paydown, and Appreciation) throughout the life of the investment

Which is better? IRR, no contest... but my worksheets always have both because they are both useful in different ways. However, if you're strictly a cash flow investor and don't care about appreciation or you know there is zero appreciation then calculating IRR is like bringing a gun to a knife fight.

Cheers... Immanuel

@Horacio Gutierrez

I would caution using blanket statistics such as 3% average of SFH appreciation. Is this an average of all US markets? In what time frame? When you invest in an SFH, you invest in a specific property in a specific market, you don't invest in an "average" property. Same idea applies to multifamily.

In 2017 the average US household was 2.54 people. I'm almost sure you wouldn't find a single household in the US that had 2.54 people in it.

Cheers... Immanuel

@Chuck Kelley

I don't believe there is an audio version of this book. Might have to do this the old fashion way... sorry :-)

@Gal Alberman

I know everyone is talking numbers - revenues, expenses, cap rate etc. But this is a 4-plex correct? Do you not check on recently sold comparable properties first?

Cheers... Immanuel

@Chuck Kelley

I would second @John Thedford's book suggestion.

Cheers... Immanuel

@Daniel B.

Are there any recently sold comparables in the area? The standard answer is SFH and 2-4 unit MFH are valued using sales data of previously sold comparable properties (i.e. aka COMPS). Cap rate (i.e. income approach valuation) is irrelevant in valuing this class of properties. How about asking the agent how they arrived at the list price or ask an appraiser in the area how they would value the property?

As far as how much negative cash flow is tolerable... none. If negative cash flow is tolerable to you then you must be investing for appreciation. So how much appreciation are you expecting that you're willing to risk negative cash flow?

You lose money by overpaying for a crappy property, but you also lose money by overpaying for an awesome property.

Cheers... Immanuel

@Chuck Kelley

How many years is a "few" years? Consider the IRR of your cash flow below based on various holding periods (you can do this in Excel):

3 yrs - IRR is 28%
5 yrs -   IRR is 17%
10 yrs - IRR is 9%

I'm comfortable with a 15% to 16% IRR (i.e. Required Rate of Return). So if a "few" years means 3 to 5 years, then I would be inclined to sell and redeploy the capital on preferably similar deal. If a "few" years means 10 years, this would be an investment that I shouldn't have made in the first place (i.e. the IRR is far below my RROR comfort level).

Note:

- Cap rate is irrelevant in this case, if this property is a true multifamily then cap rate can be used to estimate your exit price, but you already know it (i.e. 200k).

@Bjorik Mutize

@Bjorik Mutize

Did you mean to say "... you generally want to exit at a LOWER cap rate"? Cap rate and value are inversely related, the lower the exit cap the higher the sale price.

Cheers... Immanuel

@Heather U.

The 1% rule and the cap rate are closely related, the first is a revenue based metric while the latter is an NOI based metric. The difference between them is "operating expenses", one uses them the other doesn't. If you're analyzing residential properties (i.e. SFR and 2-4 unit properties) then I would focus on another metric - CoC (i.e. Cash on Cash). As a matter of fact, I would throw out cap rate all together as it is of limited use.

In your case, you are asking if $332 a month ($3,984 annualized) is a nice profit. Well, I would say it is nice if you only need to put $10,000 into the deal, that's 39%+ CoC. But if you had to put $100,000 to get this deal then your CoC is 3.9%. So I would focus on CoC, besides CoC is also a good rough comparative metric to other investment alternatives. At 3.9% CoC, you'd probably be better off with some mutual funds... BTW, mutual funds come with much less risks than a rent house.

Cheers... Immanuel