All Forum Posts by: John Fortes

@John Fortes Building on @Todd Dexheimer response, in major markets (100+ units), it's not feasible to expect 10% CoC (avg. or YoY). Unless you find that elusive deal or have a lot of luck, you will be swimming upstream when targeting specific metrics in isolation.

As Todd said, I'd much rather take a relatively lower CoC return in a growing market than a higher CoC return in a meh market.

Hi John. 

A good CoC return depends on the return goals of your passive investors. Usually, they will have a CoC return goal and a IRR (internal rate of return goal). You need to understand their goals before structuring the partnership and analyzing apartment deals.

For example, if you investors want a CoC return of 10% per year and a 5-year IRR of 16%, then your business plan needs to meet or exceed those returns. Usually, you will offer a preferred return and a profit split. For example, an 8% preferred return and a split of 70/30 (70% to the investors, 30% to you) for the remaining profits.

Now, as you mentioned, the year 1 and year 2 net operating income may be lower due to renovations. However, if you have an interest-only loan during the first two years, the debt service is lower, thus the cash flow is higher and could meet or exceed 8%. Also, you don't technically need to hit the 8% starting day one (although that is ideal). The preferred return can accrue. For example, you pay out 7% year one and then 9% year two, or pay the difference at sale. Overall, there are lots of options.

Also, there are two difference CoC return factors: 1) excluding profit at sale and 2) including profit at sale. For example, for a 5-year hold period, the average CoC return excluding profit at sale could be 10% and including profit could be 20% or higher.

Hope this helps and let me know if you want clarification on anything!

I try to make the average of 5 years of the project to be over 15% cash on cash return. And that includes a sale in year 5.