Certainty Comes From the Actions We Take

One of the most important skills we’ve developed:

The ability to move fast while still accounting for the details.

After underwriting hundreds of properties, we typically know whether we have a deal or not within 10 minutes of looking at it.

We’ve memorized every portion of local zoning codes, know the price per sq.ft costs across neighborhoods, have a strong sense for insurance pricing (though we always have it priced out well before closing), know which locations to target and avoid, understand the rental rates we can receive today based on the condition/location, can closely estimate renovation costs on a per unit basis, and learned every portion of property tax assessment schedules to nail that upcoming tax bill.

5 transactions and dozens of what we thought could be transactions have also refined our underwriting in terms of operational expenses and maintenance costs.

Pulling data from existing portfolio properties in the same area provides valuable insights and better solidifies our inputs.

The ability to move quickly while still being confident in your underwriting only comes from local expertise and granular knowledge of the development processes in it.

Good deals don’t sit out around, and we account for that through the above.

We’re still a long way from perfect but continue to refine our processes and seek out more angles to create value for us as well as our surrounding communities.

Breaking Down Cash on Cash Returns

One crucial metric in multifamily real estate is the Cash on Cash (CoC) return.

This metric helps investors evaluate the annual return they are earning on the cash they invested in a property.

Let's break it down with a specific example.

What is Cash on Cash Return?

Cash on Cash return is the ratio of annual pre-tax cash flow to the total cash invested.

It's a straightforward way to measure the profitability of a real estate investment, particularly for those who finance a portion of their purchase with debt.

Formula:

CoC Return= (Annual Pre-Tax Cash Flow) / (Total Cash Invested) X 100

Example Calculation:

Property Details (keeping it simple here):

Purchase Price: $1,000,000

Down Payment (25%): $250,000

Loan Amount (75%): $750,000

Annual Rental Income: $120,000

Operating Expenses: $60,000

Annual Debt Service (mortgage payments): $40,000

Step-by-Step Calculation:

Calculate Annual Pre-Tax Cash Flow:

Annual Pre-Tax Cash Flow = Annual Rental Income – Operating Expenses – Annual Debt Service

{Annual Pre-Tax Cash Flow} = $120,000 - $60,000 - $40,000 = $20,000

Determine Total Cash Invested:

The total cash invested includes the down payment and any other initial costs, but for simplicity, we'll use just the down payment in this example:

{Total Cash Invested} = {Down Payment} = $250,000

Calculate Cash on Cash Return:

{Cash on Cash Return} = $20,000/ $250,000 × 100 = 8%

What Does This Mean?

An 8% Cash on Cash return means that for every dollar invested in cash, the investor earns 8 cents annually before taxes (showing the immediate return on the actual cash investment).

Why is CoC Important?

Direct Feedback: It provides a direct glimpse into the profitability of the property without considering long-term factors like appreciation.

Comparative Analysis: Investors can compare the CoC return with other investment opportunities.

Financing Impact: It highlights the impact of financing on returns, helping investors understand the benefits/drawbacks of utilizing debt (which amplifies both good and bad).

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The Cash on Cash return allows us to make more informed decisions and ultimately create baselines for the yields we need to execute projects.

The Touch Points We Need

Matching property management to your portfolio is more nuanced than most think.

Have to be very careful in pairing sizes appropriately. The PM firm with 10,000 units across 35 buildings isn't going to provide the touch points you need for your 10-unit.

Need to seek out the emerging mid-sized PM companies, get in front of them, and ultimately determine if they're a match (references are huge here).

A search for that delicate blend of good people, an embedded sense of urgency, attention to detail, responsiveness, and general market knowledge (to bolster your own).