All Forum Posts by: Justin Goodin

I spent $33,836 renovating this unit.

Here's the breakdown:

-Quartz Countertops: $3,500
-Heat Pump System: $5,500
-SS Appliances: $1,773
-LVP 20 MIL Flooring: $4,406
-White Shaker Cabinets: $4,000
-Washer & Dyer: $400
-Bathroom accessories, ceiling fans, black matte fixtures, toilets, light fixtures, faucets, etc. : $2,347
-Paint, all new doors, plumbing fixtures, drywall work, garbage disposal, carpet, bathtub: $3,934
-Labor: $7,976

The previous owner did not do any updates to this unit for the last 25 years!

My goal here was to replace all major components and renovate to a premium level finish in order to charge market rent.

By installing high quality finishes, I am setting this property up to be a low maintenance long term hold 📈

What kind of renovation costs are you currently spending on your properties?

Let's break down these common return metrics in the most basic terms👇

1. Cash on Cash Return:
The cash distributions you receive on a quarterly basis.

2. IRR:
Internal rate of return. Annualized, time-weighted return of your investment.

3. Equity Multiple:
How many times you are multiplying your money when it's all said and done.

4. AAR:
Average annual return based on the hold period.

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Keep in mind, when a sponsor shows a potential investment:

- These are always projected returns, NEVER guaranteed.
- Returns are based on the assumptions in the underwriting model (trust but verify)

Which of these return metrics is most important to consider for a real estate deal?

I bought this townhome community with NEGATIVE leverage going-in. And don't regret it...

What's negative leverage?

When your cap rate < interest rate.

In this case, we bought this property at a 5.5% cap and locked in an interest rate of 6.7%.

Some would argue it would be cheaper to buy the property in cash.

So why the heck would anyone buy a deal with negative going in leverage?

✅ Future Upside Potential

In our case, we were willing to accept a lower yield in the beginning, in exchange for a higher return at stabilization.

Our stabilized cap rate is projected to be close to 10%. With a yield on cost at 8%.

I could care less what the going-in cap rate is, as long as I see a path to substantially add value to the property.

Many value-add investors do exactly the same thing.

What are your thoughts about buying deals with negative leverage going in?

 Every comment you post just goes into another direction about something irrelevant to my original post. You seem confused so I’m happy to offer my time on a call to you. Please send me a DM and we can schedule something. If not, I wish you the best! The forums is a great place to continue learning so you’re doing the right thing 👍

Unfortunately, your comment doesn’t really hold any water. You’re claiming multifamily owners don’t make any profit? I won’t waste much time on your empty comment, but I guess if nobody made profit, companies wouldn’t be buying properties 😅 Let me know if you need any further help. I’m glad you are on BP to further your education. 

Hey BP fans! I see a lot of discussion here about commercial multifamily underwriting and questions around this topic. 

If I had to narrow down commercial multifamily underwriting into 7 steps, here's what I would say...

1. Determine In-Place Income

Using a rent roll, determine the in-place rent amounts the property is collecting.

2. Input Operating Expenses

These are expenses needed to run the property. Marketing, payroll, and real estate taxes just to name a few.

3. Model Your Business Plan

Are you doing renovations and increasing rents? Are you going to start valet trash in month 6? Accurately model your business plan in the spreadsheet.

4. Capital Expenditures

This is your rehab or construction budget to fix up the property.

5. Growth Rates & Assumptions

Determine year-by-year inflation rate. Input accurate numbers for physical vacancy. Determine the exit cap rate.

6. Debt & Equity

Which loan product is best for this asset and business plan? Where is the equity coming from?

7. Determine Valuation

Based on the level of risk the deal presents and the returns you are seeking, determine the correct purchase price.
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Step 7 is key!

❌ As the underwriter, you are not trying to get to the seller's asking price.

✅ You are backing into a potential price that can deliver your desired projected returns sufficient for the level of risk the deal presents.

What would you add to this 7-step process to underwrite a commercial multifamily property?

 You should read the Best Ever Syndication Book from Joe Fairless. Great resource!

Thanks for the insightful comment! Yes leverage is a very powerful strategy. If you have any questions, let me know. I would be happy to explain it further so you understand. 

Question for the BP Forum: 
If you invested $100K and received $500k back, is that a good deal?

It depends...

We need to consider the length of time it took to receive that $500K.

That's where the IRR, or internal rate of return, comes in.

I bet you would be less excited if it took 30 years to earn that $500k vs. if it took 7 years.

// Simply stated: IRR is the annualized, time-weighted return of your investment.

Real estate investors can use the IRR to compare different investment opportunities. Many people have heard of IRR, but in my experience, very few understand the purpose of it.

So what the heck is a good IRR?

Generally speaking, here are some guidelines:

// Acquisition of stabilized asset – 10% IRR
// Acquisition & repositioning of asset – 14% IRR
// Development in established area – 20% IRR
// Development in rural area – 30% IRR

What questions do you have about IRR?

 I would recommend you do a simple Google search, look at Costar, or look at the management companies your competition in the nearby area is using. Good luck!