Is this caluclation too simple?

Question

Hello!

Have not yet found a rental analysis tool (such as the BP one for example) that allows for factoring in payment to investors.  Is the following calculation too simple to be accurate in trying to quickly analyze a deal? Scenario is I'm looking to acquire a property.  Interest rate is 8.5% and I need to pay my investor a return of 7% annually.  Would the break even point be a Cash on Cash return of 15.5% and anything over that would go to me? So if deal I'm analyzing shows a Cash on Cash return of 19%, then my personal Cash on  Cash return would be 3.5%? Accurate or completely off?

Thank you in advance,

Pat

Evan Polaski · Answer

@Patrick Hancock, you are both correct and complete off.  High level, you don't add the numbers together like this.  And Cash on Cash Return is distributions paid to investors divided by equity (cash) invested.

But you are correct in high level concept: you need deals that cover your mortgage and all other expenses (repairs and maintenance, advertising, utilities, payroll/mgmt fee, etc), and once all expenses are paid, you have money left to pay your investors, too. And hopefully, there is some left for you to share in too.

But there is a lot of nuance to this question: is your mortgage amortizing or interest only? If amortizing, your 8.5% interest expense is only interest and not the actual impact to monthly cash flow.

Are your investors equity investors with a current return + share of profit? If so, you can certainly structure it how you are talking about: pay them 7% current and you get all remaining cash flow from property, but that is not a "typical" structure, if they are equity and get share in the upside.

But ultimately, you are on the right track.  You need a deal

Patrick Hancock · Answer

@Brock Mogensen thank you and DM sent.

Chris Seveney · Answer

@Patrick Hancock

What is your investor? Are they a loan or a partner who gets a k-1

What is the entity structure ? LLC?

All of these need to be taken into consideration

In reality you should build your own financial model that accounts for investors and multiple loans.

Patrick Hancock · Answer

Thank you all for the responses.  I think I was looking for a simple answer to a much more complex question and it looks like there is not a simple answer.  Some background and more details...I've been investing in residential properties for the past 20 years and currently have a portfolio consisting of 14 single family and one multi family (quadraplex) properties all located in Florida.  I've also been a real estate broker for the same amount of time. I can accurately analyze residential properties in my sleep but over the past six months have started to focus on larger multi family properties.  For example we are currently looking to acquire an 10-20 unit small apartment building as it seems a logical "next step" up from where we are currently.  With that said, we have started to learn how to use the multifamily underwriting spreadsheets including the "napkin" underwriting spreadsheets.  As we are still experiencing that learning curve I was looking for something that was perhaps even an easier/quicker way to look at initial numbers.  We currently have a line of credit at 8.5% which is more of a bridge loan that we have to refinance any acquisition within six months with an approximate 6% interest rate. Our plan is to launch a PE fund this year offering a 7% annual return (all though 4-6% might be more realistic right now).  I've got several variations of underwriting templates with some allowing for the calculating of investor returns and some that do not.  The ones that do are too complex for where we are right now (we are looking for someone to add to the team that lives and breathes underwriting deals with spreadsheets).  For example the one we have has allocations for Class A shares...Class B shares etc.  I am trying to keep it simple and underwrite with just making sure we can pay investors the 7% annual return plus other expenses of course. Hence why I thought that perhaps as long as the underwriting shows a greater Cash on Cash return of in this case 15.5% (the 8.5% LOC rate plus the 7% investor annual return) the "debt" would be covered.  Hope that makes more sense.  @Brock Mogensen would love to see a copy of your model! Thank you!!!

Brock Mogensen · Answer

What you are referring to sounds like a syndication (GP/LP) structure.  To accurately analyze these deals you need a thorough Excel model to do it. There is a lot more that goes into underwriting these deals than a normal deal.

I built my own model for analyzing syndicated deals, happy to send it over.

Andrew B. · Answer

You need to define what that 7% is first before we can help you. Is it 7% of a loan? If so, that's a flat monthly payment. Include it as an expense.

Matt Devincenzo · Answer

If you can find a calculator with a second loan component that is likely what you're looking for. Your calculation won't be correct because the 'split' between how much cash you provide vs. how much your investor provides will vary what CoC you need to achieve your return.

Really the kind of calculation you're discussing is more in line with a syndication model with preferred returns etc. The calculators like BPs are not set up for that, they are designed for SFR rental analysis which doesn't really lend itself to that style of funding.

Mason Liu · Answer

Slightly confused on the deal itself. Do you have a mortgage, and also private money lenders for the property? Are you paying 8.5% on the mortgage, and 7% for the private money seperately?

Also, what is the amortization on the mortgage, as well as the other loan (if there is one).

Is this caluclation too simple?

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