Originally posted by
@Nick B.:
Here are my rules/metrics:
- total economic loss after property is stable is 12% (15% in lower quality areas)
This has likely changed since you saw that average in 2009. Occupancy has improved a lot since then. 5% actual with 5% economic might be more realistic for 2016.
- incremental rent growth after the property is stable is 2%
I think we can safely assume a 3% growth rate going forward due to high demand and low supply (depends on your area). What's it growing at now in that submarket? Remember, this number is always made up...a WAG. So it's about the least important number on the sheet.
Reasonable, considering the low inflation rate.
- property tax is 90% of the purchase price multiplied by a local tax rate (usually doubles tax from whatever seller pays)
Probably a little aggressive here; talk to a local broker about what they usually see. I use 80% of the purchase price, and, for my market, that is often too high. NO DOUBT it will go up the year after purchase, however.
- payroll $1000-1200/unit regardless of the property size (brokers claim that 30-units don't need payroll but I don't believe them :-) )
This one, I am not getting. It's hard to justify an on-site manager for a 30-unit. Even 50 units is hard. Why not just use a 5% property management fee? And you can always give someone a rent discount for being your "eyes and ears" on the property, but that shouldn't cost more than a couple hundred bucks a month.
- reserves of $300/unit counted in expenses
Reasonable, but not an "expense," (i.e., shouldn't affect NOI/value). What do you have budgeted for the cost to turnover a unit? What do you have figured for a turnover rate? What is your repair budget?
- exit cap rate is 100 basis points higher than current cap rate (e.g. exit at 8% if current cap rate is 7%)
I've been trying to get investors to understand this. The Law of Averages works...cap rates will revert to their mean one-day. 2 years? 5 years? 10 years? No one knows; it's a function of interest rates and local market conditions. But rates WILL go up. I think 100 basis points higher is a reasonable selling cap rate. But you control NOI, and, with improvements, you can control cap rate to some extent. (i.e., if you buy a junker and fix it up). That all I said, appreciation is a gift from the Gods. If it happens, great. But it might not, for a lot of reasons. Does your overall investment look attractive on a cash-flow-basis only? It should.
- cash-on-cash ROI 10%+ starting in the second year; first year may be lower if this is a value-add
Yeah, 10% is everyone's goal, it seems. And it's reasonable. If you can get that while keeping risks manageable, be happy.
- 5 years total ROI (assuming sale) is at least 100%
Yeah, if everything goes perfectly, but as an passive investor in some deals, I don't really care what you, the sponsor, says about appreciation. I figure I'm getting cash flow and, in a few years, my investment back. Anything else is gravy I wasn't counting on.
- IRR 15%+ over 5 years (al ROIs are net to investors after 20% sponsor override)
Again, these appreciation/IRR figures are just so much fluff. Whatever. We can't know what will happen in 5 years. (Although I can almost guarantee that interest rates will not be 4% then, and thus cap rates will also be higher.)
- I can adjust may metrics to some degree but in order for me to get to the seller's acceptable price I have to adjust most or all of them to unsustainable levels.
Stick to your guns. Offer the price that will give you the cash flow you need. If necessary, show the seller how you arrived at your figures. Give him/her the opportunity to participate in seller financing at 5%.
If you can't make this one work, look for an off-market deal. Brokers are adding 5% to the value of the building to cover their commission, and they have TONS of buyers. My direct marketing campaign is turning up guys over 65 who are anxious to get out but don't like brokers or paying commissions.
Good luck and be patient!
Marc C.
