Explanation on how to receive desirable Return on Investment (ROI) aka Cash-on-Cash Return on a Multi-Residential Investment
Posted by admin at February 27th, 2014
The current multi-family market is a seller’s market: there is not enough inventory of properties to meet demand from buyers. Because of this, desirable CAP rates (capitalization rates – the relationship between net operating income produced by a property and the initial cost invested to purchase it) are not high enough. Certain variables are always considered in multi-family investment analyses that unveil the viability and desirability of a property a buyer/investor is considering.
A vacancy factor is always factored in when analyzing a multi-family investment property. For properties that are five units and above, a vacancy factor of five percent is typically used. This means that over the course of one year, we can assume that an occasional potential vacancy can occur, leaving the building occupied 95 percent of the time. Current rents are always analyzed along with pro forma rents – figures that describe a potential upside to current rents. An investor can decide on a rental amount to charge for a vacancy based on comparable market rents for the area the building is located in. The most crucial figure that determines an investment property’s value is the advertised Net Operating Income. The NOI is a result of taking into consideration all income (rents), deducting vacancy factor and operating expenses (i.e. insurance, property taxes, maintenance, etc…). NOI = Gross Annual Income – Vacancy Factor – Operating Expenses.
Obtaining a desirable loan on a property can enhance an investor’s cash-on-cash return or pre-tax cash flow. A loan officer (also known as a mortgage broker) that can deliver a loan promise with the highest amount of financing possible can decrease a buyer’s down payment amount. Examining all tax returns and property data that a seller provides coupled with a buyer’s sound financial credentials ensures delivery of a desirable loan to value amount.
Real Estate Brokers and agents are responsible for negotiating on sale price with a buyer, subsequently presenting those offers to a seller. The buyer and seller can engage in counter offers, which can last as long as the seller’s patience does not wear thin. The seller will almost always come back with a bottom line price that cannot be negotiated any further.
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