Multi family price craziness

[Mark A.]

I am current resident of Hoboken, NJ, and a yet-to-be property investor.  I am currently looking for a great place to invest my money.  I have spent a decent amount of time understanding the basics of equity investing, and other than placing my money in index funds, i do not think it is for me.  At least not at this point in my life.  

My Journey has led me to real estate investing.  At this point, i have devoted a substantial amount of time to real estate investing and feel that i have a fairly decent understanding of the basics.  Obviously without doing a deal, and actually collecting rent i have yet to fully understand any of the practical aspects of it.  However, i do believe i have enough of an understanding to know when something is a "good" deal, at least on paper.  

It befuddles me understand the current marketplace surrounding me, and i am hoping some of the more experienced investors can chime in and help me understand it.  I am, of course, talking about the NYC Metro area.  I have yet to see a multi family property, whether that be in Hoboken, Astoria, Brooklyn, Jersey City, or even any parts in Queens, that come any where close to providing 10% Cash on cash return, after taking into account all necessary expenses.  In fact, many properties are listed at prices where the collected rents will not even cover the mortgage payment.  This to me, seems ludacris, and i do not understand what "investor" would possibly put their money into such a thing.  

Please do not respond back to me "you need to look outside your local area", as you will be missing my point.  I am interested in understanding the price dynamic for these "investor" properties, which are supposedly based upon their income.  Is it based upon pure speculation regarding market appreciation? Is it a bubble market? Is it too many investors (like Mr. David Greene's recent great article speaks to)? Or have i completely overlooked something? 

Your feedback is greatly appreciated!

Mark

[Llewelyn A.]

@Mark A.

The Answer is actually quite easy.

The Valuation of an Investment is underwritten using an Internal Rate of Return (IRR), not just a simple Cash on Cash Return (CoCR).

So, what does an IRR take into account? EVERYTHING. So why would you use just CoCR? Beats me. But as others have mentioned, if the Cashflow isn't a necessity upfront (but typically an IRR Investment Property will give you large cashflow in later years), then it is difficult for someone who needs the Cashflow NOW to invest in IRR Investments. This debate has been going on an on on this forum.

I invested with Partners and we own approx. $15 Million of Brooklyn Properties that we bought in the span of 20 years. We have been making Millions in profits and a very healthy Cashflow over time. We are expanding our portfolio of MF properties in Brooklyn. The last Property we bought was last November for $1.71 Million. We are now targeting MF properties around $2 Million plus.

Our IRR target is around 15% IRR given a 10 year holding period. That's quite doable. You just have to know how to do the calculations and work out the details with the properties and future economic developments.

IRR can evaluate everything, including hot Markets like Brooklyn and Cashflowing Markets like the ones mentioned by others on BP.

CoCR can only evaluate Cashflow Markets.

Here is a really good Article everyone should read by Ben Leybovich of BP:

Cash Flow vs. Appreciation: What Experienced Investors Know About the Debate That You Don’t

Here's one of the quotes: "I've written about the IRR a lot; please look up the other articles. Having said this, have you ever wondered why big time investors never give a hoot about things like cash on cash (CCR) and capitalization rate (Cap Rate), and all they want to know is the IRR? Why is this?"

I recommend reading the Article. However, it will take some time to understand IRR.

Once you get an understanding of it, then you can make your decision on whether or not you want to own in Markets where the CoCR doesn't make sense to own the Investment but the IRR tells you it's a Fantastic deal!

Personally, those that only use CoCR keeps my competition away from the best deals. That's the way I like it.

Investor Llew