All Forum Posts by: Immanuel Sibero

@Andrew Hodgson

I have not used BP calculators, IMO if the calculators included CapEx in NOI then they should come with a disclaimer... :-) Some lenders require that Reserve Requirement be included in NOI but I imagine they do so for their own internal metrics and consistency when evaluating their borrowers performance. So the calculators may consider this standard practice.

I did my fair share in financial modeling and analysis so I tend to build my own tools. I might play with the BP calculators and see figure out the inner workings. If I do, I'll post back. :-)

Cheers... Immanuel

@Chris Russell

Congratulations on finding the property you like. I'm concerned because you mentioned CAP rate. Since it's a 4 unit property, it is a residential property. In this case COMP is more relevant than CAP. Have you checked the recent sales of comparable properties in the area?

Cheers... Immanuel

Why am I still reading this thread?

@Yaya Y.

I would say CoC and Cap Rate are not correlated, at least not directly. As a matter of fact they might even be apples and oranges. CoC is an "investor" specific metric, whereas Cap Rate is an "asset" specific metric. CoC measures how well the investor performs and Cap Rate, in general, measures how well the asset performs. For example a common strategy in real estate investment is to find a well performing asset with a good cap rate (i.e. good property level return) and further enhance this return by financing/leveraging it so as to yield even higher CoC (i.e. investor level return).

So conceptually we can say that when Leverage = 0 then CoC = Cap Rate. This is why many investors define cap rate as the expected return (i.e. CoC) if you were to pay all cash for the asset. Once you add leverage to the picture you then start to see CoC come alive. It may interest you to see the examples below how leverage affects CoC. Note that Cap Rate in this case is held constant at 5% so no correlation to CoC is observed.The sensitivity tables below were run in Excel using actual property data.

- Effect of leverage on CoC. Higher leverage leads to lower CoC. Notice that when Leverage = 0%, CoC = 5% which is also equal to Cap Rate.

- Effect of Cap Rate/Interest Rate spread on CoC. This is assuming the typical 75% leverage. Higher spread of (Cap Rate - Interest rate) leads to higher CoC. Notice how easy it is for CoC to approach 1%. All you have to do is get a loan with interest rate approaching the Cap Rate. For example, if you were to finance a 10CAP property with a 9.5% interest loan, you would likely end up with very low CoC.

NOTE: The above sensitivity tables are meant to show the general nature of the correlations between CoC and Leverage (i.e. direct or inverse). Your specific property would likely calculate different CoC numbers but the nature of the correlations shown should be the same.

Cheers... Immanuel

Great analogy. I knew the theory of evolution had a place in REI somewhere :-) And to think that I'm not even prey yet.... I better get to work!!

Cheers... Immanuel

@Account Closed

Interesting topic. I'm a newbie with W-2 and rental houses but currently dabbling into syndicated apartments by investing passively. I have interests in becoming a sponsor, so I'm frantically educating myself in this space. As some of the other posters pointed out what I'm finding is that many sponsors I have met already have sources of income to cover their living expenses (i.e. many are in the tech or medical fields). My take is being a sponsor in a syndication is more about building wealth than earning a living so you have to have something else set up to earn a living, at least in the early stages.

Cheers... Immanuel

@Shawn Clark

I apologize, I think my response was incomplete and therefore ambiguous. I should have said "the income the properties generate is insignificant in determining the value of the properties". Of course the context here is 1-4 unit properties.

I agree that as an investor, income matters. As a matter of fact income is the only thing that matters, income is what investors pay for. But when it comes to 1-4 unit properties, investors are constrained to recent sales of comparable properties which are not based on income. Within this market, there is another class of buyers - owner occupants! This class of buyers purchase the properties for reasons other than "income" (i.e. good school districts, desirable locations, emotions, etc).

In your Baltimore property example, if the "comps" support $200k, obviously you would list it at $200k. But if the recent "comps" have been trading at $150k, would you list it at $185k because it's bringing in $1,850/month rent? I suppose you could list it at $185k, but do you think people will pay it? This is what I meant by "the income is insignificant in determining price/value... for 1-4 unit properties"

Cheers... Immanuel

@Shawn Clark

1-4 unit properties are valued using recent sales of comparable properties. The income the properties generate is insignificant. Have you looked at the "comps"?

Cheers... Immanuel

@Eric Kristt

This would depend on you - how risk averse you are, how fast you want to grow your real estate investment.

Leverage does two things to your investments:

- Lets you buy more than you have capital (volume leverage)

- Lets you make more than the investment makes (return leverage)

Some investors leverage for the first reason, others for the second reason, most investors leverage for both reasons. Investments are about balancing returns and risks. Just be aware that the two things leverage does (i.e. volume leverage and return leverage) usually increase risks. Make sure you're comfortable with it.

There is a good reason why older investors tend to deleverage, and younger investors overdose on leverage. It's easier to recover from a loss when you're younger. If you're young, I'd say leverage away... interest rates are at historic lows.

Cheers... Immanuel

Thank you for summarizing the changes. One of them actually puts me in a position to do what I wanted to do but couldn't.

Now if only Texas would allow HELOC on investment properties...

Cheers... Immanuel