I like this approach, keeping things as simple as possible to not get bogged down in decisions.
I'm a real fan of the KISS acronym, Keep It Simple Stupid.
Derek, I'm curious about this... What sort of factors do you look at to help you decide how long you're going to keep a property in your portfolio when investing in a buy & hold?
Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
4y
@Zackarias Aitchison I'm old school; back of an envelope works great. You need to be sure you have the right numbers and not something off a pro forma or listing. Being a long term buy and hold investor I figure out the current CF and CF once it is utilized my way. There may be existing leases that are sub optimal and you may have to wait, or buy them out. You have to look at the total investment and not just one measure like Cash on Cash or Caprate; as an example if you are paying with cash then Cash on Cash is of no value . The method that best expresses your investment goals (and method) is what you should follow.
Rental Property Investor · Philadelphia, PA · Member since 2021 · 774 posts · 500 votes
4y
Zackarias Aitchison - In my opinion the answer is always based on your investment goals as others have stated, but for multifamily properties I typically run a proforma and determine the overall investor IRR. My thinking is that if a project is worthy enough for a investor you'll have a better chance of securing funding for the deal, PLUS you have the flexibility of another approach (JV or Taking it down yourself if you have the capital). If a deal pencils out as a syndication structure with fees and returns to investors, then you also know it's a good deal as a buy and hold individually or as a JV.
Thanks so much for adding this. I'm starting to see that the simpler the better.
First and foremost you need to know what your goal is with investing, and then use the simplest method possible to decide whether or not that investment fits your own personal goals as to not get bogged down spinning your wheels all day.
I appreciate what you guys have added to the discussion. Thank you!
Residential Real Estate Investor · Kansas City, MO · Member since 2014 · 10k+ posts · 5k+ votes
4y
For SFR, the biggest by far is a comparative market analysis. I also use cash on cash and rent to cost. For apartments, cap rate, cash on cash and IRR.
A great deal of effort goes into sourcing, rehabbing, and managing a successful rental property. For this reason, I only buy properties that I see myself wanting to own forever. My neighborhood preferences have changed throughout my career and likely always will. However, I have never prioritized the bottom line over a quality building/location. A quality building/location will yield quality tenants, which makes your job as a landlord more enjoyable/sustainable.
Rental Property Investor · San Anselmo · Member since 2015 · 659 posts · 600 votes
4y
@Zackarias Aitchison
I suggest using a analytical approach, followed by a common sense/experience approach.
Cap rate is typically for a commercial deal, but still can be utilized in residential simply as a means of comparing apples to apples, basically know if your buying a decent performer.
Cash on cash is a great metric. It is literally your "realized" ROI. This is your return on your money that you can actually spend (if needed), not factoring in your wealth multipliers (appreciation, principle payday, tax advantages.)
Buying below market or with a value add play is also important, because everyone needs an out.
Combine this analytical method with common sense and experienced eyes will limit your risk. Understand where the local market is going, economic factors, school districts, crime, local demand, employment, nuisance factors (trains, traffic, cemetery, etc). This doesn't guarantee a homer every time, but if you meet your analytical and common sense standards with each purchase your portfolio as a whole will be golden.
I like this double-sided approach, making sure the numbers for the investment make sense, as well as making sure the location and neighborhood the property is in will make sense to find high-quality tenants and to be able to charge high-end rent.