All Forum Posts by: Spencer Hogan

@Jenny M. If you are trying to be more precise - You may also want to consider if the lender assumes interest payments based on a 360-day year or a 365-day year as well as the number of days in each month which could be 30 days or the actual number of days. Most loans assume a 360-day year and 30-day months (360 / 30 = 12). In that case, your calculation would be (Outstanding Loan Amount * (Interest Rate / 12)) = Monthly Interest Payment. The loan documents should tell you whether to use 360 vs 365 and 30 vs actual. These variations in assumptions surprisingly have a meaningful impact on your returns / interest payments over the course of the loan. Hope this helps.  

@Peter D'Auteuil  

Welcome back to BP and nice to meet you. I am also 27 in San Francisco but I am stuck in the 9-5 rat race. Luckily I work in commercial real estate but my goal is to eventually break away and invest on my own so your story is very inspiring. Thank you for sharing!

@Adam Silverman

It really depends on the investor and the risk-adjusted returns. Some investors are more focused on appreciation / IRR and don't care so much about cash-on-cash. An extreme example would be a development project where most equity investors do not anticipate any cash flow until stabilization.

Cash flow distributions should be at the discretion of the sponsor. It is somewhat common for sponsors to not distribute any cash flow to investors while capital improvements / renovations are underway until the project is stabilized. The reason is that sponsors like to build up cash flow reserves out of the gate to mitigate the risk of a capital call in case costs exceed the CapEx budget. A strategy that I have seen to improve cash-on-cash returns is to overcapitalize the deal upfront and distribute the excess working capital to investors while the project is being renovated. This strategy will hurt the IRR though. I highly advise being very transparent with your investors to manage expectations.

@Mindy Jensen Keep in mind that the basis of the land is excluded from the "substantial improvements" requirement. This may get you closer if you weren't already factoring this in.

For example, if you bought an existing property for $1M allocated as $800K towards the improvements and $200K towards the land - you would only need to invest another $800K towards improvements over 30 months to meet the "substantial improvement" requirement.