All Forum Posts by: David Almeida

Since there are no comps, it will be valued based on cash flow—or net operating income. If it's in a less desirable area there will likely be a discount required. So definitely contact a local broker who specializes in apartments.

Yes, refinancing affects the IRR; all cash flows do. Simply put, what money is invested and when? Then what money is returned and when?

As far as cash-on-cash goes, once investor capital has been returned there can be no cash-on-cash return--there is no cash left in the deal. This is why hurdles are calculated using IRRs or Equity Multiples. You can still check the math on what your cash-on-cash return is per quarter--it's nice to present to investors and for valuation purposes--but from a waterfall perspective it's not relevant.

You leave them in the deal because they require it in order to invest. If you can find investors who are OK with being cashed out after a certain equity multiple, then by all means consider working with them. 

Due to the dearth of good deals, sponsors are in a better position than ever to negotiate favorable terms with their investors. If you find a great deal and you have a track record, you should be pushing to own as much as possible after returning their capital and delivering the preferred return.

So this is the classic Return ON Capital vs. Return OF Capital discussion. If you go through the exercise in Excel, you'll find that Return ON Capital is usually vastly superior to the Sponsor, and the IRR to the LPs isn't much lower--at least not enough to flag the deal.

Return on Capital, as other have mentioned, is paying a preferred return first and returning investor equity at capital events second. 

The wealthiest private multifamily investors I've seen have used the Return on Capital structure, or they've used Equity Multiple Hurdles. If you're raising money from institutions, however, you'll be using Return of Capital, because they know better and they want to reduce their downside. They have mandates to protect their investors so they want their capital back first.

On opposite ends of the spectrum are Return of Capital and Equity Multiples. To give you an idea of the difference between Return of Capital and Equity Multiple (EMx) Hurdles, I've seen sponsors using EMx hurdles get close to 50% of the total deal-level cash flows after capital events for a 20%+ IRR deal. Whereas the same deal with a typical private equity Return of Capital structure might see the sponsor get low 20s% of the total deal.

If you're on the principal side and will be working extensively in Excel and Powerpoint, then you want to go with a PC. 

If you're not building complex Excel models and using hotkeys to do so, then you can get away with a Mac but you still might need to install Parallels. 

As @Raul R. said, if you plan on having employees and needing to buy computers for them, then PC is much more affordable.

As mentioned, you should be underwriting these repairs in your proforma; it's capital that needs to be raised before closing. Let's say the renovation requires $100,000 in capital expenditures. You can (1) raise this as a part of the total deal equity, (2) raise a portion of it / get the bank to cover a portion of it, (3) fund it from operating cash flow and slowly renovate, or (4) get a second loan from private capital. Option (1) is the most common, but it depends on the type of renovations.

@Lien Vuong's solution is a good one if there's enough cash flow to cover the additional loan, or you can structure it so that the interest accrues and the entire loan + outstanding interest is due at the end of the 2 years. But be careful, more leverage oftentimes equals more risk.

The problem is that there aren't many buyers for leasehold interests. So you're going to be selling the cash flow from the asset at a big discount and in all likelihood it won't make sense to do so. 

The prudent approach is to assume some slight increase in interest rates-- usually 5 to 10 bps per year. But with the Fed's monetary policy these days, they might go lower before they go higher. 

Regardless, it's also prudent to assuming the new loan will be the lesser of three values (or two if it's a smaller- to mid-sized multi) based on: (1) Loan-to-Value % (LTV), (2) Debt Service Coverage Ratio (DSCR), or (3) Debt Yield (DY). The first two are the most common.

Let's say you plan on refinancing in year 4 of your proforma. You'll take the trailing-12-month Net Operating Income (NOI) and calculate the property's market value using an assumed cap rate. For example, a $100,000 NOI with a 10cap would be a value of $1,000,000.

Apply the loan-to-value % (LTV) to get your first market value. Let's assume 80%, so that's a loan of $800,000.

Next, let's assume the bank requires a 1.20 DSCR. Divide the NOI of $100,000 by 1.20 and you'll get $83,333.33. This is the maximum annual debt payment the property will support. You can then take that number and use a financial calculation to get the Present Value assuming the new loan's interest rate and amortization period. This will give you the second loan. (In this case, I assume a 5% interest rate and 30-year amortization and got a loan of $1,281,038).

Finally, the Debt Yield (DY) is simply the NOI divided by the debt amount. So if the bank says they have a minimum debt yield of 8%, you'll get a maximum loan of $1,250,000.

So the minimum of these three is the LTV approach of $800,000. Now this example isn't perfect because I used a 10cap at the start, but hopefully you get the idea.

At this point, you'll be paying off the balance of your acquisition loan with the new loan and will need to pay the up front fees for the new loan in cash, so don't forget those. The difference will be the cash-out.

Since you can't offer value-add, you'll be offering in-place cash flow, moderate growth opportunity, and tax benefits. Value-add deals are en vogue, but many investors would be happy with modest cash-on-cash returns and some nice depreciation. 

Furthermore, if you believe you have insight into areas that are experiencing positive demographic growth, you can pitch the deal as an appreciating asset over the longer term.

Would love to hear more about these deals. Looking forward to the post! Also glad to hear deal volume is keeping up in the Midwest. It has really slowed down in suburban Northeast markets.