All Forum Posts by: Jared Foster

Joel - Thanks for the response. I am going through this for my business plan to purchase 5-20 unit properties and trying to pull together a proforma to understand what the potential investment would look like. I might be going about this wrong, but figured I should understand what I want my investment to look like (my model) before I start digging into properties etc. To answer your question, I am looking to buy and then sell at some point in the future, I am sort of thinking in 5 year increments. For now I am not assuming rent increase except to keep up with inflation 1.5-3%, but epxpenses would increase at the same rate so a wash. I don't really know how to improve rents yet so don't want to assume I can make that happen.

Also, is this the right forum for these types of questions? I have asked other questions but have not received any responses.

Thanks again,

JaredF

Curious how people model future property values for multi-family investments. Seems that there are two approaches. 1. Based on Appreciation 2. Based on Rental Income I generally struggle with Cap Rates and whether I should use them to value property, but it seems everybody else does, so it may not matter what I think. Anyway in a pro-forma I am trying to decide if I should use income and cap rate to back-into an estimated selling price for a property or make an assumption about appreciation. Thanks, Jared

Does anybody have tips for building a proforma? I am looking at a market for multi-family properties 5-20 units. My criteria was going to be Cap Rate = 8%, Debt Coverage Ratio = >1.1, and looking for an IRR in the high teens or mid 20%. I have been using loopnet to look over properties and finding that it is hard to determine economics. Either they don't provide, or show a NOI that assumes either higher rent than my research indicates or an OpEx in the 30% range. So my question is should I be building a proforma on the assumptions I listed or from what the market seems to be indicating based on cursory view. Maybe my market research isn't what I tought it was or the sellers want to much for their property. Thanks, JaredF

Jeff - Yikes, your post has completely put me into a tailspin. I was going through a thorough process to draft up a business plan. I have found working through the plan brings up questions and forces me to learn a bit more and find the answers. Do you have an example of a single pager that you found useful?

Also, for some background, what I would like to do is purchase (2) multi-faimly properties in 1 year. I am looking in the 5-20 unit range. I don't plan on managing the properties.

Do appreciate your thoughts and thanks for the post.

Bryan/Dion/Bill - These are some great discussions. I am new to real estate so probably don't know what I am talking about, but I guess that is the purpose of these forums. I am one of those excel monkeys that like to crunch numbers etc. and I tend to use IRR for understanding value and will admit that I probably don't fully understand the investment risk (learning). So, I think people agree, understanding the risk is difficult, which then makes picking a hurdle rate difficult. Why not approach the problem with the mind set that you won't pick the right hurdle rate so try to provide some margin in your assumptions? That way even if we get the hurdle rate wrong we have some room. Here is my newbie approach for trying to see if a market is somewhere I want to be.
1. Research the market area. Figure out comps for rent and pick a number to apply to the property. Now reduce that number to something lower.
2. Research vacancy rate and pick a number that represents the market vacancy rate. Now increase that to something higher.
3. Assume 0% appreciation.
4. Assume that income and expenses escalate at the same rate. Maybe assume expenses increase more than income.
5. Assume 50% expenses, seems reasonable.
6. Crunch the IRR. How does that number compare to a "riskless" investment, say a government bond. Lets say bonds are at 5% and your IRR is 10%. The question I would ask is whether all this work is worth a 10% return if you could make 5% doing nothing. Maybe you can do a sensitivity to determine a range of IRRs

Appreciate your feed back and if I missed this discussion already above, apologize, there was a lot of material to read through and back and forth.

Jared

Joe - Good luck! I am going through the same process, but I have less experience than you. I am writing up a formal business plan that should help to answer the types of questions you raise. On Market Research I have found HUD, the Census, public studies by private appraisal companies, and other data useful in trying to figure out the market conditions. I would love to hear how it is going with you. Jared

Tom- Thanks for the suggestions. What would be the best way to upload here? Just upload and post a link in the forum? Is there one forum that is better than another? Should I upload in word or PDF? Jared

All - New to Bigger Pockets and new to real estate investing. I am currently drafting up a business plan, which has been a good learning process. Does anybody have suggestions for getting a business plan reviewed. I have thought about approaching family members, but I don't think they would understand what they are reading. I have thought about co-workers, but they are as busy as I am. Appreciate suggestions. Jared

Since it appears this post has stopped being added to, I thought I could pose a related question without hijacking the post. I have no real estate investing experience, but reading learning etc. I do have some transferable skills though. I have built a proforma and started drafting up a business plan. I figured if I can't get through the business plan, then I shouldn't be in the business. Anyway, one of many things I am struggling with is that I don't have a ton of cash sitting around to put 20% down on a property (say I need 120K) and was thinking about looking into private investors.

I do have some questions related to investors and the type of funding. Would investors typically provide funding to cover a portion of a down payment on a loan..etc..I think there are some legal issues associated with private investors that I need to be cautious of; however, related to IRR. I am thinking that when modeling an opportunity we should be considering multiple IRRs.

Assume that I have (3) Investors and the property is sold after 5 years.

(2) Investors Put in 30K, (1) Investor puts in 40K, and the business puts in 20K.

1. The property (call it the Project). Accounts for all equity, cashflows, and sales proceeds. Say IRR = 25%

2. It seems we should look at the IRR for each investor which would include their equity, some % of cashflow and some % of sales.

3. Business IRR (ME). Includes my 20K of equity, remainder of cashflows, and sale proceeds.

So in this example, it is not clear to me what should be paid to the investors. Should they get a pro-rated portion of the cashflow and sale based on amount invested? If one does this there wouldn't be enough for the business to reinvest. I assume since I would be the one managing day to day stuff I should received the highest return. Thoughts? Also, how does this work if you wanted to hold on to the property. From what I can tell the only way the investors will get paid is by the sale of the property.

Finally, on CAP RATE. I am having a hard time seeing the usefulness of this number unless you are doing estimates in your head while looking at opportunities. Seems to me the IRR is the more accurate way to value this. Thoughts. The reason I ask, is I am looking at at market that has a lot of 6% Cap Rates, might be able to move these up slightly during negotiations, but they are a lot lower than I was thinking my target should be (8-10%)

Thanks, also if you have any suggestions on other posts to read that would be great. I am trying to learn anything I can.

Jared