All Forum Posts by: Sam Grooms

@Vlad Denisov, You should not be looking at rent growth nationwide when underwriting a specific property. You need to look at market specific data, and probably submarket data, if available. 

That aside, yes, I would consider the investment to have a very low risk of not being able to meet its debt obligations. I'm assuming that's what you're referring to when you say very safe (Note that I won't use the word "safe" when referring to an investment, as that could be taken as a guarantee by my investors, which the SEC doesn't allow).

First, are these asking or effective rents? Second, even if they're effective rents, you need to take economic loss into account. During the recession, economic loss nearly doubled in a lot of areas that saw little to no rent decreases. 

Yes, investors definitely care about the equity multiple. IRR assumes the investor has another deal to put their money into once this deal is exited. In today's environment of fewer deals, equity multiple becomes a lot more important than before.

We like to see a multiple of at least 2 on a 5 year hold and 2.5 on a 10 year hold (at the LP level). And you're right, this is usually with a 70/30 split after an 8% pref. This is for large value-add ($300+ bump) deals of C Class properties in the Phoenix area. 

We've had co-sponsors ask for the equity multiple at the GP level, but its not a criteria we consider when making a buy decision. 

Yes, exactly. Investors want to know what their cash on cash will be from operations only. A big part of the IRR is coming from from the exit. However, what happens if we can't sell the property? Say financial markets have dried up and it affects interest rates, cap rates, or both, and we hold on for an extra few years. What will my cash on cash from operations be?

I would ask for seller financing.

 Correct. In the commercial space, most people purchase from a broker. Direct mail is not as common. 

Just another reason so many Californians invest in Phoenix, right @Ben Leybovich?

It usually won't happen until you have the property under contract. The landlord/owner will then give the tenant 24-48 hours notice (depending on the state laws) that he will enter the property for an inspection. 

You're welcome, @Donald Kellogg. 

To follow up on the $100 per door per month. I believe that's his target because he's using creative financing, so it's a little harder to calculate return (you'd need to look at return on equity). Looking at the report, you're thinking of putting 50% down? I'd say $100 per door is not enough if your'e putting 50% down. But more specifically, your cash on cash will be very low. Something under 4%. Granted, this doesn't take into account depreciation or appreciation, which could boost your return, but this doesn't seem like a great cash flow deal. 

@Donald Kellogg, note that the 50% is a rough estimate, and should only be used for preliminary numbers. You'll want to get actual numbers from the current owner. For now, though, we can assume $1,600 in expenses. I think your rents sound reasonable. So, we have topline of $3,200, OpEx and NOI of $1,600, and debt service of $1,094 (from the report). That leaves us with cash flow of $506, or $125 per door. If you follow the @Brandon Turner school of thought, that $100 per door per month is a good target, you're good to go. This could be a deal worth pursuing. Again, you'll need to use actual dollar amounts when doing a more detailed analysis, and not just percentages. 

Going back to your current leases of $2,300, that's topline of $27,600 per year. So right off the bat, you know $31,000 of NOI isn't possible. If I use the 50% rule there, I'd get NOI of a little under $14K. At a purchase of $335,000, that's a 4% cap rate. Now we're talking about under 5 units, so cap rate doesn't mean a whole lot, but just want to clarify what's in the report.

So we know it could work as an investment, but is the purchase price OK? Instead of looking at cap rates, you'll need to take a look at the comps. Is $83,750 per door a good deal for this neighborhood? Probably. I just purchased a 98 unit for around the same price per door about 7 miles away from Sunny Slope. But you'll need to look at comps specifically for 4-plexes.