Residential Investing – Typical Income Properties:
We look for deals in “B” to “C” areas, both in- and out-of-state.
Residential (4 units and under):
Minimum of $300-$450 NET CASHFLOW per month, per unit.
Commercial (5 units and up):
Minimum 1.2 DSCR
Minimum 8% Cap Rate
Minimum 12% Cash on Cash Return
Must be purchased at a discount – must have a “value play,” or upside to deal.
Maximum Purchase Price is currently set at $5M.
Commercial Investing – Buy and Hold
Properties with more than 4 units are considered commercial. All our multi-unit properties are analyzed based on income.
We Ask: How much do you want to be paid each month?
DUE DILIGENCE is the thorough analysis of every aspect of a property, including exhaustive review of its physical condition, books and documents, and market studies analyzing the neighborhood.
•Physical Inspection includes examination of every unit and mechanical system (air condition, electrical, hot water heaters, plumbing, etc.), and the premises.Take note of issues which will require major repairs using capital not provided by the property’s income.Hire a professional inspector to help you.
•Books and Documentation analysis should include three years of financials, three to six months of rent rolls, tax statements, a lease audit, preliminary title report, and zoning ordinances.
The seller provides three years of income statements and rent roll. The last 12 months are the most important for determining current value.This historical data gives you an idea of the patterns in property income, expenses, rents and occupancy.Enlist the help of your broker.
Income Statements list revenues and expenses, resulting in net income or loss. It has five components:
Rental Income is the gross scheduled income
+ 100% of potential income (if every unit is leased),
-Vacancy loss (income loss from un-leased units),
-Loss-to-lease (income loss from units rented for below market rent)
-Concessions (promotional discounts)
The Other Income is just as important to be evaluated.It is anything that does not have to do with rent, such as laundry, vending, late fees, utility reimbursement, parking, and other fees.
Operating Expenses are all the expenses associated with operating the property.This includes:
•Current real estate taxes (taxes might increase upon closing)
•Insurance (obtain a quote during due diligence)
•Management expenses (third party fees, on-site personnel, administrative costs)
•Maintenance (costs for make-readies, general repairs, contract services, landscaping, and security)
•Utilities (electrical, gas, water, sewer, and garbage collection)
Net Operating Income (NOI) is the most important as it is used to find the Capitalization Rate.
Gross Income—Total Operating Expenses = NOI
Debt Service is the principle and interest on the property’s loan.Use the number based the loan you will be obtaining—it will not be the same as the previous owner’s loan.
Rent Roll gives you an idea of the property’s stability, collection efficiency, and occupancy.It allows you to project lease renewals and ability to raise rents.It should provide important information:
- Unit number
- Tenant’s name
- Apartment type – Number of bedrooms and bathrooms
- Unit size – total rentable square feet of the unit
- Lease start date –the date tenant entered into the lease
- Lease end date –last date of the term of the lease
- Scheduled rent –amount to be paid
- Concessions/promotions – anything offered to the tenant
- Collected rent – during the most recent month
- Other income –such as late fees, application fees, utility reimbursement, etc
- Date paid – the date(s) each payment was made
FIVE FINANCIAL INDICATORS for evaluating an income producing property:
Capitalization Rate (Cap Rate) measures the relationship between Net Operating Income and selling price.Many investors use a predetermined Cap Rate and the last twelve months of NOI.The Cap Rate varies based on possible risk and is market specific, so consult a broker familiar with the market.It is useful because it considers vacancies and operating expenses, however it only looks at one year and does not account for financing or taxes.
NIO /Purchase Price = Cap RateNOI/Cap Rate = Value
Gross Rent Multiplier (GRM) is the number of years the property would take to pay for itself in gross received rent.It does not consider vacancy, uncollected rent, operating expenses, debt service, taxes, or income past the first year.It is useful for comparing similar properties.
Purchase Price/Gross Annual Rental Income = GRM
(Lower the number, the better.)
Cash-on-Cash Return measures investment performance.It takes into consideration vacancy, loss to lease, uncollected rent, operating expenses, and debt service, however it does not consider taxes, increase or decrease in equity, or a future sale.
Before Tax Cash Flow/Cash Investment = COC Return %
We Ask: At what price would the cash flow be acceptable?
Internal Rate of Return (IRR) compares the profitability of investments.It is the only measure which takes into account all the factors property ownership.Monthly cash flow (“return on” investment) net proceeds of sale, which includes “return of” initial investment.
Debt Coverage Ratio (DCR) measures property’s ability to cover the annual debt service—interest and principle.The most common ratio is 1.20, but it varies from 1.00 to 1.35.The lender/investor must understand this ratio when analyzing if a property will meet requirements
Net Operating Income/Annual Debt Service = DCR
Notes on Due Diligence
We make sure to double check:
•Copies of Leases
•Copies of Rent Rolls
•Statement of Expenses / Profit & Loss – 2 years
•Tax Returns – 2 or 3 years
•How is the fuel paid?
•Do all units have an occupancy permit?
•Are the following included in the expenses:
–Snow Plowing / Grass & Leaf Removal
–Water / Sewer