All Forum Posts by: Sam Watson

By definition, cash on cash is the before tax cash flow divided by the equity investment, however I have also been told to model CoC returns inclusive of property taxes since I like the metric to represent cash as truly possible.

Since NPV and IRR analysis are both found using free cash flows, you should model them in the same way as you measure CoC. I recommend looking at it both ways to see how much of a difference the tax makes.

Inflation won't matter in a Cash on Cash analysis, since its purpose is to give you a picture of how much actual cash you are receiving compared to your equity. However, you can note it when you find the IRR and simply subtract your predicted inflation rate from the IRR as the cash you receive further in the future will inflate away more. Although I see why you are curious about its effects, inflation adjusted IRRs are not generally used in a commercial real estate analysis (especially given the current low-inflation environment). The most important thing is to make sure you do it the same way between each pro forma so that you can make an accurate comparison. Different firms do cash flow analysis different ways, but each one makes sure to compare apples to apples.

@Alex Franks ^

Question(s) for Alex: what was your mindset when you decided to take the taxed cash from each separate unit rather than sitting for cash flow? (I take it you scored a killer deal from these yield-starved international buyers). Economies of scale would dictate that a smaller unit would sell for more/sf than selling the entire complex at once - what was the going out cap looking like on average for those sales? In what submarket of Charlotte was this project located?

Congratulations, by the way. Sounds like a very rewarding (in $ and knowledge) experience!

I don't know anything about Atlanta, but it's probably pretty similar to Charlotte - a nice secondary market that experiences booms in the good times with job growth and lending via our big banks. If you're looking for A properties in a market like that, you're going to get a big pinch in caps since everyone and their Chinese brother-in-law are stepping into secondary markets reaching for yield these days. Globally, everyone's loaded up on cash and looking to take advantage of low rates, so trying to get a piece is gonna be hard.

In Charlotte, I've been building a list of small multi rentals with solid fundamentals right outside primary investment areas. Even at a small cap rate, I know that a property on the fringe of a lower quality submarket will eventually get taken over by the growth before it. This provides an excellent chance to command higher rents, especially if the property can use some rehab to become a higher quality product with new higher quality tenants willing to pay more. If you can find a way to get rents up, then you can justify the going-in cap rate. Look for major market trends and fundamental drivers of growth to make a prediction on where you might see an eventual shift in tenant quality. 

 If you dont mind, what exactly is this course, and where can I find a link/more info about it?