All Forum Posts by: Joshua Nicholas

Unfortunately there's no way to aggregate cash on cash returns for a given area.

Cash on cash return is dependent on leverage, operations and the market.

For example, leverage. One guy can be using 75% LTV and another uses 50% LTV. Cash on cash returns will differ. One guy borrows with a 30 year amortization, another with a 25 year amortization. Again, COC differs.

Operations: Some long time owners spare no expense in repairs as they look to hold their properties for the long run. Some quick flip guys/private equity ones try and minimize repairs so they can meet return hurdles for investors. Again, each is going to have a different NOI due to differing management styles and hence different cash on cash returns.

Markets: When people report on rent growth in a market it's almost always inaccurate. You can't aggregate every single apartment in a market (or even a sub-market or a certain street) because you don't know how each apartment looks. One property may have a 3% rent growth while another has 10% rent growth because the renovations during unit turns are vastly superior. This would impact both the expenses side of operations as well as the revenue side, hence causing different cash on cash returns.

@Account Closed couldn't agree with you more. I'm buying a property in the NYC area at a 6.8% going in cap rate but in 5 years I'll be at a 17% cash on cash return. I see Indiana with 15% going in cap rates but how the heck can you grow the rents and what's your exit cap going to be. 

People don't understand when you're in an expensive market that despite taxes going up each year your expense ratio ultimately keeps falling due to aggressive rent growth. In Manhattan you have properties with 20-25% expense ratios despite landlords paying all utilities because rents are hitting $100/PSF.

@Joel Owens I think you're overlooking the fact rent control helps landlords who know how to game the system. Landlords publicly complain about rent control while secretly loving it because it discourages new construction, it makes market rents rise even faster than normal and it gives you downside protection because your property will never see a decrease in revenue even in recessions. Bad economics and a terrible idea I agree but it's a boon to landlords who know how to game the system in NYC and SF.

Brian, where in BK is your two family? That's going to impact the advice people will give you here.

Where are you looking to invest if you do sell it, and are you certain you have no additional equity in your property? The Brooklyn market is scorchingly hot right now so I find it hard to believe that your property hasn't appreciated at least 20% in the last 3 years. Even Crown Heights, Bed-Stuy and East NY have gone up tremendously in the past 3 years.

 Hi Travis,

Thank you for this explanation! 

One question however is I don't know exactly how to formulate the following:

If I forego giving distributions, each time I make an extra payment on my mortgage I am accelerating the amortization so mortgage payment may be the same for 60 months but each month the amount of interest paid on the mortgage is changing.

I could technically just take cash flow after debt service and use that to calculate the ending balance but it wouldn't be correct because of paying the mortgage down more quickly will also pay off principal quickly. Do you know how to build a model where I could run both analyses and see which one leads to higher IRR?

Thanks for your help :)

Hi everyone,

This question is probably for the more financial modeling experienced people but any help would be greatly appreciated.

I would like to figure out how to determine on a 5yr hold whether cashflow distributions versus deleveraging the investment would lead to a greater IRR if I purchased a property in a high interest rate environment leading to a low interest rate environment.

I'm in the process of putting together a pitch book for a distressed debt fund as I think we're at the peak of the current market and we are in for a world of hurt when the correction comes. 

As such, I need some help figuring out how to do this. I've built my own Excel model in Google Drive but I don't know exactly how to figure this out and I'm debating just purchasing the RealData course or REFM course in order to learn how to calculate this more clearly.

Thanks in advance for your help.

Lance, where is this 200 unit you're looking at in NYC? 

I haven't seen many assets of that size really come "on-market" as in the NYC area, you're looking at a minimum price of $30mm+ for a building like that and most brokers with those kind of assignments only need to make 2-3 phone calls to institutional buyers in order to close a deal.

Most valuable indicator is at least in commercial real estate notes (not to say you're going to find many, if any, MF NPNs today) is recourse vs non-recourse.

If a guy thinks you're going to enforce recourse provisions in his loan and take his home, cars and dog if he doesn't sign over the deed or make your life easier then you're going to have a much easier time getting title to the property.

Credit score of the borrower wouldn't really concern me even in SF/1-4 investing because if they've defaulted already they have already taken a hit to their credit score. Equity or not is vague as well because if there's no equity and the guy has defaulted but the property is vacant and needs repairs, it doesn't mean it's a worthless asset. 

I was recently at an auction for a 5 family that needs significant repairs but only has 1 unit occupied. Even if I got the property at a 50% discount to UPB and a deed-in-lieu of foreclosure it would still be underwater currently. However with some repairs and a fully occupied building it would probably be worth 2x what 50% note value would cost.

Underwriting distressed debt takes a lot of time and effort, I would rank UPB, cost of foreclosure, time to foreclose and recourse vs non-recourse as most important things to take a look at first. (If you're buying solely 1-4 notes then eliminate the recourse/non-recourse metric.)

Talking to a foreclosure attorney in your area might also give you some ideas, I'm talking to one myself this week in NYC so I can see how his other local clients underwrite notes before purchase.

NYC today is WILDLY overpriced.

Now it has some positive traits that people not from here can't understand.

Rent stabilization can be cumbersome and annoying but there are ways to game the system via MCIs, tenant buyouts and individual apartment improvements. They call it "stabilization" but in much of the outer boroughs the free market rents aren't far off from stabilized rents.

In addition, if you look at the 2008 financial crisis, multifamily properties in NYC fell 16% (using cap rate data) I believe. But rent stabilized properties still had a 4% rent increase so they held up better and lost only around 10% during the worst financial crisis since the Great Depression.

Another huge benefit to NYC is the HORRIBLE HORRIBLE zoning and planning boards. It's so difficult to build anything, zoning is so restrictive, rent stabilization laws are cumbersome and there are huge amounts of height restrictions in areas. This helps to keep supply growth at nearly 0 and buildings are ALWAYS between 95-100% occupied. 

It's also the most financeable asset class in the world, local banks here were making loans constantly through 2007-2011 without a hitch and the local banks here are extremely healthy. All require 25% down payments, they usually use 25 year amortizations and they know rents, especially stabilized rents, will rarely fall even during a crisis.

NYC (Westchester as well) is something that should NOT be purchased today. I have a deal I am hoping to go under contract on (30 units, 7%+ cap rate, 100% occupied and rent stabilized with 50% below market rents) but aside from 1-off opportunities, you need to wait until crises occur and buy NYC then. You could have purchased Manhattan multifamily in 2009-2010 at 6% cap rates and today they sell at 2% cap rates and rents have gone up 50-100% in many areas. I know you could have bought Phoenix at a 12% cap rate, but let's be honest, NYC is where the biggest guys play and that's not an accident. 

Thank you very much Ann I will speak with the building department to verify if that's the requirements, as I didn't realize thats a possible requirement.

 Hi Andrew,

Thank you for your insight and all your help, much appreciated.

To answer your questions, I think I was using the term gut wrongly. I don't care to remove every single wall and gut it from top to bottom, if the plumbing and electrical are OK I will keep it.

My whole gut renovation thoughts were based on making it look as nice as possible while minimizing energy and water bills as this building is a half hour outside of Manhattan so utility bills can get wild.

I'm focused on doing the following:

-Installing new energy efficient windows

-Wrapping pipes to lower heating and hot water costs

-Installing a high-efficiency gas boiler

-Putting on a new roof

-Installing low flow toilets, showers and faucets

-Ripping out sheetrock and double insulating the walls that are most exposed to the elements.

I'm not sure if that qualifies as a "gut rehab" but I know the scope of work is significant.

I'm just assuming it will take around a month per unit to put in 6 new kitchens, bathrooms and sheetrock and put in the new boiler.

As to the layouts, I'm working with the city to get a chance to go in and take a look but I won't be changing the layouts. If it's a railroad style (which means kitchen leads into a bedroom with two doors, leads to another bedroom with two doors and a third bedroom with two doors, all of which connecting in a single line like a railroad), I will be passing on the deal. Here is a link to a layout blueprint http://www.nyhabitat.com/floorplan-ny-apt/15899/15...

I haven't gotten a chance to walk this with my GC and it's my first deal so I don't know exactly how to estimate it roughly. If you think it will take a longer time frame than that, or more per unit (as I'm assuming Boston prices are similar to my area), please let me know.

Thanks again Andrew (and anyone else).

Josh

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