Conservative Analysis, Restful Nights
With coronavirus, there has been some uncertainty in the single-family and multifamily(100+ unit) space.
Over the last year, Courtney Buck Investments has been sourcing, raising capital, and investing in the large multifamily space, you may be wondering how we purchase to preserve capital, pay at or above a preferred return, and reduce our investor's taxes. Not just the mechanics of the deal but the qualities that make our properties more stable than others. Especially during a downturn.
We lean towards being very conservative in our numbers and have little gray space on whether to proceed or not. This means I have passed on deals that others who are more aggressive and willing to leverage heavily on would buy. My personal belief is this can put their investor's money (and stress level) under undue pressure. Below are just a few of the key metrics I look at...there are many, many others:
- I like to purchase apartment complexes at or near 90% occupancy. This means we do not have to start filling units and rent is already being collected. If we start with occupancy at 50%, for example, this means we can start renovating immediately but our cash flow is not working in our favor. This also means more marketing costs to fill the units. If it’s close to 90, I feel better; if it’s 80 or below it’s a management issue or the local economy is not doing well.
- In an ideal situation, more than 50% of the units on a property are 2-bedroom or more. With 2 or more bedrooms, there is typically more stabilized renter and someone who will stay longer. 1-bedroom renters tend to be more transient and more expensive because of the transition time between leasing contracts.
- When the average unit size is above 750 sq ft, units are easier to rent and keeping the occupancy rate higher. This is not from my experience but the experience of 100’s of other properties over the years.
- We do not assume anything more than 10% rental growth in any one year. Now, is it possible it may grow faster than this, yes! But I never perform the calculations on any higher percentage. If the market weakens over the next 12 months because of a downturn, more aggressive calculations may catch up to you with a lower net operating income (NOI).
- One metric I am especially keen on now is break-even occupancy. This is how many units need to be occupied and paying rent in order for the property to break even. I like 75% or below to stay on the safe side.
- Debt service coverage ratio (DSCR) is Net Operating Income/Total Debt Service is a metric that allows us to finance properly with agency debt and to other options available to close. We like this number above 1.25.
- When it comes to returns to the investor, we like to have above 9.0% for average cash on cash, above 90% for total return, and an IRR of 15% or above. These numbers attract investors that can fund a property on time.
Thank you!
This BiggerPockets post was prepared or accomplished by Courtney Buck in his personal capacity. The opinions expressed in this article are the author’s own and do not reflect the view of the United States government.
