All Forum Posts by: Bikran Sandhu

Quote from @Jonathan Greene:

This was a cut and paste post anyway. You can tell from the formatting. I don't understand what the purpose of the post is. Are you posting logic puzzles to a group of investors much more seasoned than you are? What is the goal of your post? To add value? I don't get it at all.

Johnathan- I wrote this myself and copied it over from Linkedin, I am new to bigger pockets, but I am just trying to create conversation and hear different perspectives.

Thanks for the input, Joe - you make a great point. 

Ultimately you want to determine how fast you can profit from the project and how much profit you will make in the investment horizon.
The point of the various return metrics is simply to evaluate potential investment projects.

You should apply these metrics to each of the REI projects as they allow investors to view projects from a different point of view. While some projects may value one of the return metrics more heavily, others may not. For example, a BRRR project would be a better investment vs. a home flip project as some investors value cash flow over high equity multiples that come with higher risks.

It's always useful to look at the different sets of data!

Let’s talk Return Metrics...

There are four main return metrics in real estate deals: equity multiple,

average annual return (AAR), internal rate of return (IRR), and average

cash flow. In this post, I’ll start with explaining two of these

metrics: equity multiples and average cash flow.

What is average cash flow?

Average cash flow is equal to the total amount of money that is comes in or

leaves your bank account divided by your total investment divided by the

hold period.

For example, if you invest $100,000 into a real

estate deal, and receive $3,000 cash flow during the year, your average

cash flow is equal to 3% ($3,000 / $100,000) for that year. In the next

year, if you only receive $5,000 in total cash flows, your cash flow is

equal to 5% ($5,000 / $100,000) for that year. Therefore, your average

cash flow for the two-year period is equal to 4% (($3,000 + $5,000) /

$100,000) / 2 years.

What is an equity multiple?

An equity multiple is equal to the total proceeds received from a project divided

by the total equity that was invested in the project.

For example, let’s say you invest $100,000 into a multifamily project.

During the hold period, you receive $3,000 in year 1, $5,000 in year 2,

and $160,000 in year 3 on exit. In order to calculate the equity

multiple, you add all cash flows received from the investment and divide

it by the total cash invested. In this case, the equity multiple would

be equal to ($3,000 + $5,000 + $160,000) / $100,000 = 1.68x

Equity multiples are an easy way to evaluate a project but the issue with

equity multiples is that it does not consider the time it takes to

achieve that equity multiple.

For example, let’s say you are comparing two investments. Let’s also assume that the projects have

similar risk profiles (e.g., both are value-add, multifamily investments

with similar characteristics and location). In other words, the chances

of either project succeeding are equal.

Project A is expected to be held for three years. It requires a $100,000 investment on day 1.

You receive no cash flows until end of year 3. On sale, you receive

$168,000. Therefore, the equity multiple is 1.68x:

Project B is expected to be held for five years. It requires a $100,000 investment on

day 1. Through the hold period, you will receive yearly cash flows of

$5,000 per year for five years, and, at the end of the fifth year, you

receive $180,000. The total equity multiple for Project B is 2.00x.

What Project is Better? Project A or Project B?

Congrats Megan!

@Robin Boyer Hey Robin, It's well. I'm still researching. I've developed my preliminary deal analysis templates for Fix/Flip, and possibly BRRRR, but, unfortunately, I don't think I can find any properties that will meet that criteria (at least in South OC). I'm trying to expand my search to at least 2 hrs driving distance from my house so that I can cover a lot of different markets.

Thanks for asking!

I'm new to investing in real estate but I've been living in Southern California for the past 9 years. Based on the research I've done, the market is crazy so I don't think it's your selling skills. Basically everything is selling these days. I feel with fix/flips there's really no alternative exit strategy if the market tanks. 1% rule is out the window here and only real way to make money is hold and hope the property appreciates until you're ready to sell because you'll most likely be cash flow negative for 10-15 years. Even cap rates are in the low 2-4% based on multi-unit properties on loopnet. That's why I've been looking into investing out of state but I'm still researching. Hope that helped!

I still do. Diversification is key in my opinion. Real estate will just expand my portfolio and stocks/bonds will keep me invested in the market in general through mutual funds/ETFs.

Thanks for the warm welcome everyone!

This all looks amazing! I'm hoping my first rehab turns out this beautiful as well! Congrats! If you don't mind, can you share the details behind the deal?

Hey @Micah Kelderman, I'm in the same boat as you. I'm a beginner as well and am in the "learning" phase. Based on what I've read and understand the business so far, I will also be pursuing getting a license. When it comes to getting leads, I will be networking at local REIA groups and will offer referral/finder's fees for any properties to ensure that everyone who has skin in the game gets paid in the end.

Hope that helps!