Just like selling notes, but not. - Posted by Dan in WA

Posted by jimi on September 29, 2009 at 06:02:53:

Cash On Cash Return

Just like selling notes, but not. - Posted by Dan in WA

Posted by Dan in WA on September 13, 2009 at 10:27:04:

I am currently in the process of not only buying a multifamily complex, but doing an exiting “outside the box” financial improvement with it that will add 35% to its value within the first 12 months.

Problem was,I am short on funds to capitalize the improvements. My solution? I’ll lay it out in steps for ease of explaining:

  1. Property under contract.
  2. Investors are found that want a 10%++ return.
  3. I lease individual units to those investors for a term of 10 years for a one time payment of $30,000.
  4. Regardless of occupancy (risk free to investor) I lease the units back at $500 per month for the same 10 years.
  5. I then sublease the units out to tenants at $600+ and keep any future rent increases.

I have found great reception to the concept and thought you folks might find the idea useful. As for the return the investors are making? Go ahead and run it for yourselves. Sure beats the heck out of a CD, and requires about the same amount of attention.

Return = Good Enough - Posted by Michael Morrongiello

Posted by Michael Morrongiello on September 15, 2009 at 11:44:48:

Lets see the Investor puts up $30,000 and the gets $500.00 per month for 10 years (120 months). Lets plug that into our financial calculator:

N= 120
I= ? - is 15.86% Yield
PV= $30,000.00
PMT= $500.00 per month
FV= 0

They are getting a 15% + yield on their $30K initial investment with no management and you doing all the “heavy lifting” - LOVE IT

You have little if anything invested other than time, expertise, etc. and are generating $100.00 per month per unit (or more as rents increase over time) cash flow or income! - The question is what type of return does that generate?

Answer; Good Enough!

This type of deal would be excellent for an exchangor who is coming out of an exchange, has cash, and needs to target a replacement property where they don’t want the hassles of any more management. In a way its similar to a NNN - Triple NET lease arrangement.

Well done and thought out…

Happy Hunting.

Michael Morrongiello

Re: Return = Good Enough - Posted by Dan inWA

Posted by Dan inWA on September 15, 2009 at 18:33:02:

Thanks for the thinking this one over. I appreciate the input.

Ideally I would like to get $35,000 per unt which would be roughly a
12% return for the investors.

The key here is that the right property needs to have a true existing
COCR that is about 1.2 X the yield the investors will receive based on
ACTUAL numbers. If the return to investors will be 15.8%, and the
COCR is 19% I’d say we have a winner. But only if that “free” control of
the property and rehab funds also comes with opportunity for forced
NOI increase.

My local commercial broker I thought I could count on to market this
wants to make it more complicated than it is and decided that I am
somehow selling a security. I know it’s not, so that leaves me t believe
it just didn’t fit into his black or white product experience.

My mistake was probably in offering him (as a closing tool) the ability
to sell each investor an option to purchase 1/4% of the project equity
for $1.00 at the end of their lease.

And in my search for an agent to market this the very first line of my
phone call follow up email was:

The best fit will most likely be with an agent that regularly works with
investors that prefer NNN properties and have experience with
multifamily complexes.

If I lease ten units to ten different investors I suspect I will come out of
this with 2-4 great team members that will share
experiences/knowledge/ advice for future deals. And that is something
that is worth every penny of return I will be paying them.

It looks like I need to go back to seeking a marketing broker.

Once this is up and running and the improvements are in place I
should be making 7% of gross scheduled rent overall. And that is after
I deduct a standard management fee from the financials, even though I
plan to live on site and eliminate that expense.

Thanks for your thoughts. If you know of someone that may be
interested in marketing this for me please let me know. I have a
meeting with my number 2 choice later this week, he seemed very
exited about the project.

What Is COCR - Posted by david

Posted by david on September 28, 2009 at 18:51:14:

I give up. What does COCR stand for?