What would YOU look for?

Question

I'm working with an investment property specialist in SoCal, and he recently asked me a few questions on Multi Family investment criteria. I have a good idea of what I want but I want to hear answers from YOU guys because I respect your knowledge and want to get a second opinion.

How would YOU answer (in terms of a multi family investment) and why?

1. Would you want a property that is fully occupied or vacant?

2. Would you go with a fixer upper? In other words, are you more interested in a depleted property that has potential for higher rents once a capital investment is made to rehab each unit?

3. What is an acceptable Net Rental Yield?

4. What is an acceptable Cash on Cash Yield?

Jeff S. · Answer

Just to close the loop: GRM = price/annual rent

So according to Nicâ€™s definition, rental yield would be the inverse of GRM.

A typical GRM in Los Angeles is well above 10.

Loc R. · Answer

1.  Either, depends on sales price.  If I can buy fully occupied at a true 12%+ cap rate, that's a no brainer.  If I can buy fully vacant where I can create equity, then of course I'll go with the value-add play.

2.  In Southern California I would rather go with the fixer, since turnkeys tend to be overpriced.

3.  Net Rental Yield?  I don't understand this term.

4.  Cash-on-Cash:  12% minimum.  My current 4-plex deal is projected to bring in 17% annualized, since I do not expect to have it fully rented until May 1st.

Jon Klaus · Answer

There isn't a "right" answer for these questions, but for me I'd be looking for the best cash flow potential in a halfway decent area,  Probably a C or C- property in a B to C+ area.

1. Would you want a property that is fully occupied or vacant?

I'd want 60-75% occupied.  Enough to pay the bills, but discounted because of less than optimum performance.  I'd go for one that I should be able to get to full occupancy within a few months with some aggressive leasing tactics.

2. Would you go with a fixer upper? In other words, are you more interested in a depleted property that has potential for higher rents once a capital investment is made to rehab each unit?

Some deferred maintenance is fine.  Perhaps the empty units aren't renting because they need paint, carpet and appliances.  Again, this would help me buy for my price.

3. What is an acceptable Net Rental Yield?

I'd like to see the potential for a GRM of 3.  As in, pay $25K a door, all in, and lease for $694/mo.

4. What is an acceptable Cash on Cash Yield?

25%

Loc R. · Answer

Well, here is my thought process when I see a listing, since it is my experience that 99% of listing agents & 100% of private sellers can't seem to put the #s required to sell an income property together.

What are rents per month?  What is asking price?  From there I get a quick "rent ratio" (referenced to here on BP as the 2% level).  I don't see anything near 2% here in So Cal, but anything above 1.1% in the San Gabriel Valley & 1.5% in Riverside peaks my interest.

From that I will "try" to get all the information from the agent/seller.  At this time I will also inquire about the sales structure, whether financing will be available or not.  During this time I will calculate actual & pro-forma cap rates, as well as my expected cash-on-cash return.

As to the 50% rule, my personal experience, confirmed after discussions with Steve L. and other local investors, is that operating expenses are closer to 36-43% here in So Cal.

Jon Klaus · Answer

#3 as you describe it might also be gross rent multiplier or GRM.

Nic DeAngelo · Answer

Thanks for the replies guys!

@SolidReturns and Jeff S: Rental Yield= annual rent/price. Not a ratio I have used but my guy wanted to know so I wanted to put it to the BP crew to give me some perspective on it.

@Jeff S: "investment property specialist" is more accurately "a guy I work with who is really good at finding investment properties but doesn't have the cash to buy in so instead finds them for investors for a fee." I thought the former was more efficient. 20% was my original COCR number but I wanted to make sure I wasn't overshooting it as I haven't worked with Multi familys before.

Thanks guys!

Anyone else?

Jon Klaus · Answer

I should add that I can probably meet my criteria in my Dallas/Ft Worth area, but it might be near impossible in LA.

Steve Babiak · Answer

Jon has pointed out the more commonly used terminology for what was just described.  GRM is measuring the same components - rent vs purchase price.

Jeff S. · Answer

1. Your ultimate goal is to have a fully rented property with market rents.  If itâ€™s in good shape, makes acceptable money, and you like the tenants, then stick with them.  Obviously, if it needs work, you want them out prior to closing.

2. I agree with Loc. I donâ€™t know what an â€œinvestment property specialistâ€ is, but more than likely heâ€™ll be showing you the overpriced crap everyone else tries to sell around here.  If you canâ€™t buy existing equity, which is very difficult in L.A., youâ€™ll have to drive it by improving the property.  Donâ€™t fall into the trap common around here of buying a negative cash flow building and expecting to make money through appreciation.  Thatâ€™s a recipe for failure.

3. Ditto.  Never heard the term.

4. If this question came from your â€œspecialist,â€ then congratulations.  Maybe you found someone with an investor mindset willing to help you make money.  The more common question is, â€œWhat cap rate are you looking for.â€  Iâ€™m asked this all the time.  My cynical response is usually that a 3 or 4% cap rate is acceptable to me, however I really have to make 20% on my money (i.e. cash-on-cash).  Cap rate might be convenient for relative comparisons of value, but itâ€™s no indication of profit.  The cash in a cash-on-cash return is spendable.  Assuming he has deals, a broker (or â€œinvestment specialistâ€) who focuses on verifiable cash-on-cash returns could be worth his weight in gold.

Iâ€™ll add that the COCR acceptable to me might be much more or much less than what is acceptable to you.  It's really a personal question that must be weighed against your other opportunities, your goals, time horizon, financial plan, risk tolerance, etc.

What would YOU look for?

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