Target Rental Profit From Each Apt Unit?

Question

Hi all,

I'm taking the plunge into commercial real estate investing - specifically apartment buildings - and so for those of you that currently are apartment building owners, did part of your analysis prior to purchasing include setting a target profit amount from each unit?

So, for example, if you were looking to purchase a 100 unit apartment building, do you calculate what the actual rental profit from each unit would be - say $250 in actual profit (money in your pocket each month) - and then use that in your decision making?

Asked another way, what is the MINIMUM amount of rental profit (money in your pocket) that each unit has to provide in order for you to consider pursuing the deal?

I hope this makes sense and isn't a total wacky way of evaluating potential deals. :/

Thanks!

Marlen Weber · Answer

@Charles Smith congratulations on taking the plunge into commercial real estate investing and best of luck on this journey.

Stace Caseria · Answer

Welcome @Charles Smith to the Bigger Pockets neighborhood. Another recommendation for Michael Blank's portfolio of instruction. If you have his SDA, watch all the videos on his site, plus YouTube.

I haven't read his book, but based on @Shelon Hutchinson's reco, I may pick it up. The Joe Fairless book and comprehensive library of podcasts are great too.

And have to mention the BP forum's own @Michael Ealy. He's a wealth of info and inspiration. I don't know the Joe Fairless podcast episode number, but Michael was a guest in the last 2 weeks. Great lessons about his rise, fall, and return to CRE profitability.

Shelon Hutchinson · Answer

@Charles Smith read the Michael Blank book below that will give you a lot of pointers on the lingo to include a few scripts.

Financial Freedom with Real Estate Investing: The Blueprint To Quitting Your Job With Real Estate - Even Without Experience Or Cash https://www.amazon.com/dp/B07GD5SDZF/ref=cm_sw_r_cp_api_i_pAixEbT7XV4ZD

Also check out Joe Fairless book.

Best Ever Apartment Syndication Book https://www.amazon.com/dp/0997454326/ref=cm_sw_r_cp_api_i_7DixEbQDCTKT5

Charles Smith · Answer

One additional question I have for all of you who have been kind enough to respond is: what is the most effective way for a newbie CRE investor like myself to be taken seriously and considered for off market 100+ unit deals?

Charles Smith · Answer

@Kristina Sparrow Thank you and funny enough, I just realized I actually have Michael's SDA! I got it a couple of years ago and forgot all about it. Thank you both for the reminder! :)

Kristina Sparrow · Answer

I second Shelon's suggestion for Michael Blank's SDA. The most important metrics I consider are IRR, equity multiple and cash on cash return. Target metrics would differ depending on the riskiness of the deal you are analyzing. I underwrite heavy value add deals and won't accept anything less than a 18% gross IRR, 1.5x equity multiple, or 7% cash on cash return.

Charles Smith · Answer

Thanks for the feedback, gents!

Greg Dickerson · Answer

You don’t want to use cashflow per unit as a metric for underwriting and evaluating the investment or measuring returns. It’s all about cash on cash, IRR and AAR. every property is different and will require a unique business plan so your returns at acquisition will be different after stabilization or value add. Many deals have no cashflow at all for the first couple years until improvments are implemented and income is increased.

Shelon Hutchinson · Answer

Dele,

This is a very wacky way of analyzing multi family properties. Just kidding man.

I typically do not underwrite it with a focus on income per unit.  My focus is, am I able to cover all my expenses, meet my debt service coverage ratio (DSCR), and provide my investors with their expected returns off a minimum of 8% cash on cash return.  Great place to start if you are underwriting a lot of multi family properties is to purchase the Michael Blank SDA.  It will be the best $130 you spent in 2020.