All Forum Posts by: Richard Haiber

I appreciate your time to respond. Its worth more than its weight in gold.

Now, considering that, does the following now make sense?

If I'm still missing a key aspect of the application of these concepts could you provide a simple example done correctly so I can see the process I need to be following?

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Didn't realize that I should only be applying DCF to my NOI (rather than the CFs after debt service and capex, etc.).

I understand the differences between income, expenses, NOI and CF after debt svc, etc. What I've been doing is taking the time to learn how to compute DCF analyses on properties but needed a little guidance on the application in practice.

Also, when you typically calculate a DCF for a property how are you personally determining what you'll use as your discount rate? Because depending on what discount rate you use, it will greatly affect your calculations. I understand you should use the "opportunity cost of capital" so am I just using whatever my desired rate of return per year happens to be for the investment?

Thank you for your response, it's greatly appreciated!

For example, a brand new class A property will probably not greatly impact a class C property as theyre competing for different rental populations.

You should do your best to determine how competitive you'd be for the same renters as this new building to begin evaluating the impact it would have then study your local rental market. Can your area absorb the additional units?

Because I know for DC, no matter how many class A units for $2500+ the builders build, it probably won't much impact a class C building renting out $1200 units. The people theyre competing for are different.

There's been (and currently is) an explosion of new units coming online. I'm sure that for a period of time it'll have an impact on the demand for all the existing units within range of the new building's rent range. But over time, this market has enough jobs and enough people in the rental market that it'll reach an equilibrium and vacancies shouldn't be a substantial issue even for buildings with similar rents.

In essence, there isn't an answer we can give you except to know the market youre looking to buy in, and determine how X number of units in X property class will impact you.

Smaller markets will obviously have more significant impacts if a new, large building is built.

Hope that helps.

Interesting arguments made by both sides and it reveals a lot about the inner-workings of the thought processes that different people likely use when evaluating an investment decision. I don't think either method (CF or long-term equity) is wrong. Just different and produce different results. Hell, I think a mixture produces the best all-around scenario for any investor. Why stick to just one or the other if each has their own advantages? A baseball pitcher who can only throw fastballs isn't going to be very effective. Neither is the one who can only throw changeups. The better pitcher throws both.

Also, for the long-term equity investors, are you taking into account the time value of money? $1 today is worth more than $1 in 10 years and has an affect on your actual % return. The timing of the return on your investment matters.

Quick question on discounted cash flow analysis for anyone who has any input on the topic.

Say we are dealing with the following hypothetical scenario:

T12 Actual Income: 1,000,000

T12 Actual Expenses: 475,000

T12 NOI: 525,000

Then say I'm assuming a 2% NOI increase per year for the next 5 years:

Yr1 NOI = 525,000

Yr2 NOI = 535,500

Yr3 NOI = 546,210

Yr4 NOI = 557,134

Yr5 NOI = 568,276

So, this gives us:

Year 1 CF = 210,000

Year 2 CF = 220,500

Year 3 CF = 231,210

Year 4 CF = 242,134

Year 5 CF = 253277 + 2,300,000 = 2,553,277

Total CF = 3,457,121

CFs were derived because my debt service on this property is  could be roughly 315,000 per year (5,830,000 purchase price with 25% down pmt and 6% interest over 30yr amortization).

That would leave roughly 4,000,000 as pay-off for the loan after 5yrs. of making P&I payments.

With a yr5 NOI = 568,276, that would give me a property value of roughly 6,300,000 using the same 9% cap that I bought with for simplicity's sake and a sale profit of roughly 2,300,000 (as reflected in the total Yr5 CF above).

Then say throughout my ownership I spend 500,000 total on cap ex to fix roofing, hvac units, etc. so say it worked out to 100,000/yr deducted from my CFs:

Now those numbers are fine and dandy, but I'm looking to see if I'm correctly applying discounted cash flow analysis as follows:

Actual CFs                               Discounted CFs

110,000                 (Yr1)                 98,113

120,500                 (Yr2)                 96,244

131,210                 (Yr3)                 94,128

142,134                 (Yr4)                 91,792

2,453,277              (Yr5)                 1,807,957

2,957,121             (Total)               2,188,234

*These CFs include cap ex deductions of 100k/yr

So, discounting CFs and considering cap ex gives me a difference of: 768,887 between the two columns.

Does this mean my IRRs are as follows?

IRR (actual CFs): 12.29%

IRR (discounted CFs): 5.06%

That's a huge difference and seems like the investment isn't worthy when considering discounted CFs. Or am I calculating discounted CFs wrong/using them wrong when trying to analyze a property?

If I'm out in left field I hope someone can help get me back into position as I'm here to learn.

***This is also all pre-tax as well.

The riots of 1968 in Baltimore had a significant impact on the city. I don't think these riots will have as big of an impact, but they could on a smaller level in smaller pockets of the city. I suppose how far the riots go will determine the ultimate impact. Violence of any kind never tends to have a positive impact on trying to present an investment property in a positive light. How long-lasting and widespread this impact is depends on many factors.

46% could be accurate but any deferred maint could increase your expenses any given year. be careful not to assume the property will continue operating at the same pace if the owner has neglected anything major. I think aside from the expenses others have pointed out, keep a conservative eye on the 11500 for annual maint they presented to you. that number could be significantly higher in future years on an older building. for peace of mind I would say not to calculate offers on less than 50% total expense:income ratio.

I don't know about you but I don't want to buy a property at a lower cap in a market that can produce properties at a higher cap. use actual data and based on your desired cap make offers on properties. pro forma and current owner suggestions don't fly when youre trying to acquire property that fits your investing standards. problem is you seem to be winging this to make a property fit your needs which isnt a good way to start. have defined goals and walk from things that don't fit.

like greg said youll want to verify numbers. are they actual numbers from the property? or are they estimated pro forma numbers they've created? if those numbers are accurate/actual (noi = 60450 and price = 465000) then that could shape up to be a good deal.

a lot still needs to be uncovered through due diligence and examined such as:

-title report

-inspections/inspection reports

-previous yrs income/expense statements, rent rolls, utility bills, any service contracts attached to the property, previous years tax bills, etc.

-existing loan documents

-any open litigation against the property?

-floor plans (any renovations needed? theyll help you with estimating what it might cost per unit)

-actually visit the property (with someone knowledgeable) and assess the condition of the expensive items (roofing, heating/ac systems, foundations, plumbing/elec, etc).

some of these things will most likely be req'd by whoever your lender is anyways. of course some sellers wont oblige the requests for such detailed info until theyre confident in your offer/ability to purchase

also, sometimes people only look at their buying plan. you want to have a further view and have a plan on exiting (selling it when youre done). how you finance it can impact this because youll want financing that's favorable not only to yourself but to a future buyer as well.

being able to sell it off as easy as possible is an advantage and you should always think how you can approach a property thinking "how can my actions help the property be worth more in the future and ease such a sale/transfer when im done?" essentially, try to be as conscience as possible with everything you do to the property. that still leaves a lot out of the equation but I hope it covered some good points that might help you in the future!

have to agree with this. various factors determine if a deal is good (or if the 2% test is achievable/necessary).

property type has an impact. if we want a class a rental, we probably wont hit the 2% test. some properties in a lower class would be more likely.

what about larger apartment buildings? they tend to be hard to hit 2% with also.

for ex: we could put in an offer on a property with the following scenario:

offer price - 5M

avg mo rental income - 80000

avg mo expenses - 40000

avg mo noi - 40000

now this works out to be: 80000/5000000 = 1.60

with the right financing and specific factors with regards to things we can do to add value as the owners (as well as our business plans for it like how long we'll hold it or how much its worth after we add value), this property could cashflow very well and produce very good returns even though it's not a good property according to the 2% test. it doesn't seem to take enough factors into consideration. 

so it doesn't meet the 2% test but could have good cashflow, dscr, grm, and roi and a profitable re-sale if we can find a way to add value.

regarding smaller properties, I also don't know of any that I could buy for say $100k TOTAL investment and rent out for $2k/mo. etc.