All Forum Posts by: Ken D.

@Chris Youssi @Dustin Beam @Marc Winter Let me clarify my comment on Cap rates and LTV. I also understand how this can confuse new investors because it took me a few months to figure this out. I also don't think there are different definitions of cap rate on BP vs other places.

There is only one definition of cap rate: cap rate = NOI/value

The problem is that how NOI is determined and value are determined are not always consistent. Value can mean ARV, purchase price, or asking price depending on the context. For NOI there is huge variation on what is included as income and expenses. For marketing material, I've found most caps rates bogus. Some are gracious enough to clarify how they calculated the cap rate. The investor survey I refer to clarifies that the cap rate excluded cap ex reserves. Which can swing a calculation by several percent. Data is from A and B class properties only.

Where LTV comes in is your debt service is part of your expenses. So generally as you go into a deal with more equity the better the cap rate looks. The survey I refer to uses three brackets of data and a average cap rate for each (LTVs of 75%, 50% and 68%). I see how I presented the data can create confusion. You're right! a spread of averages makes no sense at all.

I'm at a point I'm sure many other new investors in BP are at where significant time self educating has been spent, but are struggling with the lack of experience or network to make some of the strategies and guidelines recommended work in the near future.

Going back through podcasts and posts led me to @Brian Burke's blog post from several years ago about needing base hits before you can get the grand slam. Yet most conversations center around good deal vs bad deals, or around more experienced investor's guidelines. I get it; we want to model those who are successful, but what about the mediocre deal that get's your foot in the door? To my point, there have been some recent satirical threads that have capitalized on seemingly ridiculous posts (which I have thoroughly enjoyed as well). But when all you hear is "how to buy with no money down" or "I get $XX.XX dollars per door all day in my market" that's what you get. The 2018 second quarter RealtyRates Investor survey says that apartment cap rates are on average between 4.9-13.8 nationwide depending on LTV, but the survey is not limited to recent acquisitions and I assume that those that participate in the survey know what they are doing .

So this bring me back to my question: for those who are actually set up to responsibly invest but don't have the experience or network to hit the 15% CoC returns in today's market where the pros are also claiming good deal are hard to come by, is shooting for the 5 cap cash purchase on their first deal to learn the ropes a crazy idea? I haven't seen this advice given in the many posts asking about what type of returns new investors should realistically expect. Why not and what about that base hit?

And full disclosure, I'm in contract for a small commercial multifamily property that is probably considered a mediocre deal by many, but one that I have confidence (for what that's worth) won't lose money, with the intent of using it as a learning platform and equity tap for better performing acquisitions. Happy to share more details for those interested in my situation or want to charitably help me make some critical decisions in the next couple days.

Here is Brian's article I'm referring to: 

https://www.biggerpockets.com/renewsblog/2013/01/2...

 This is an interesting distinction. I'll have to think about how the two categories affect my investment strategy. These also don't have to be mutually exclusive which I'm sure complicated valuations and analyses. And to my earlier comment about experience, quantifying higher returns to offset the risks is where I'm struggling. I suppose no one said it'd be easy. (note to other new investors that come across this thread).

 I am in total agreement on the experience comment. I am painfully aware of my inexperience right now in a property I have under contract. It is difficult for me to gauge how accurate my assumptions are and lack other data points to make quick decisions. If the market is able to support the sale of 4-5 cap dogs and time is limited for digging deeper, since experience is what I need what would you recommend? Purchase anyway and learn from a mediocre deal (not loosing money of course)? The alternative is finding a partner who can bring experience to the table, but it sounds like everyone is having trouble finding great deals these days. 

@Ivan Barratt and @Brian Garrett thank you for this rule of thumb. This helps me a large amount in figuring out at least a reference point to work from as I figure things out. I hope others find this post and are able to use this info as well.

 Are you moving on these 4-5 caps? Interesting that you're finding deals that turn out better than listed. Many of the properties I've looked at in my market of interest are largely listed at higher caps than they actually are. I am actually in contract for one right now that I thought was an 8 Cap and turns out will likely be a 5 cap after renovations and stabilization. Full disclosure, it's one of the motivation behind this post.

I should attend a local REIA meeting. The reason I haven't so far is I'm inviting OOS and wasn't sure how productive it'd be. But I guess if I don't go I won't know. Thanks for the tips.

I've heard time and time again that value add multi-families are one of the best vehicles to build wealth. Look for properties with tired landlords who are losing money if possible. 

How are you valuing a property with negative NOI and what do you consider a "deep" discount? What criteria do you use to determine if you are overpaying or not?

@Joel Owens I have a few hundred K to invest and have been taking the buy books and programs and learn on my own approach, though I've finding this path very unnerving. I've had to explain to my agent how to valuate a 5+ unit because he kept sending me comps using the SFR method even when I was asking him for cap rates for commercial multi. Calculating for investment goals and criteria is one thing, but overpaying for a property because you valued it incorrectly is never a good idea.

I will say this, you learn a lot more breaking through road blocks than flipping pages...now to working on finding some one who knows what they're doing so that I don't blow all my money!

@Eddie Werner I've already gotten inspections done, so I know what cap ex's will hit me in the immediate future. It's quantifying "ample reserves" that I'm trying to figure out.

I stumbled upon Brandon's Blog Post recently that has been very helpful.

https://www.biggerpockets.com/renewsblog/2015/10/13/real-estate-capex-estimate-capital-expenditures/  

I'm branching out into commercial real estate and running into a road block: running the numbers. Sure there are great tools available like the ones here on BP, but with any analytical tool:

garbage in = garbage out.

Most inputs are easy to figure out with some leg work on stabilized properties. I'm having a hard time in 2 areas:

-Maintenance and cap ex estimates. Moving these a few percent especially for larger purchases affect margins by quite a bit. I'm currently in the Pittsburgh market and looking at small to midsize multis and apt over retail using 7% for each. Most of my estimated expenses far surpass the 50% rule. I'm more at the 60-70% rule which seems overly conservative to me although many buildings are very old and need a lot of work.

-Rent estimates for retail space, especially vacant ones. I see price/sq ft used for larger retail and office space. Does this apply for smaller storefronts as well? What about other aspects such as desirability from location on the street, how appealing the entrance or display window is, restaurant vs office space, etc? Better yet, how do you work in renovation cost to fit a new tenant?

I expect I'll get better at this with experience, but I'm hoping to avoid any crippling mistakes (and also I suppose overly conservative criteria). Looking forward to the feedback and discussions.