What is the best math technique for determing the best roi for apartment RE across the continental US.

In Buying Property - Asked by Tom T. - Feb 22, 2011
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Answer(s)

Rob B.
Chandler, AZ

Tom....
There are several components to be used in the technique to arrive at the best ROI for apartment RE across the continental US. Some of these contain some math, while others require site study and observation. The factors that go into ROI are: Location of the property, condition of the property, size of the property, adequate sales point analysis, a commensurate escape plan, financing and convenience of ownership. The more you do to a property and the more difficult it is to sell at any given time should dictate a higher ROI for your efforts. This will require purchasing the property at the proper price for the conditions connected to the property. It is often said “the profit is at the time of the purchase, and not at the time of the sale”.
Some of the specific considerations that involve math computations are:
1. Cost per unit
2. Cost per square feet.
3. Comparative rental amounts per square foot.
4. Market occupancy rates.
5. Expense analysis
6. NOI calculations, (actual along with your own proforma
and not the selling broker’s proforma)
7. Cap rate analysis and application
8. Cost of debt service, including interest rate and amortization.
9. Internal rate of return analysis with reasonable in-put factors.
Then you can mix this with ease of management; say a little prayer; and trust that at the time you can actually measure your true return that all the analysis and projections you made will have been achieved. Good luck Tom.... Rob Baird, CA RE License #544165 (One of the oldest, active licenses in CA) 951 515-5855 Email: robertbaird@NewportCpC.com

Feb 22, 2011
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Davide P.
Broker/Agent
Pinole, CA

Personally, I always explain to my clients the cash-on-cash formula. After everything is paid for (mortgage, taxes, utilities, etc) you will have a dollar amount at the end of the year. You take that dollar amount and divide it by the amount you originally invested. For example, let’s say after year one you made $10,000 and your original investment was $100,000. $10k divided by $100k = 0.10, or 10%. The reason I prefer this method is because most new to average investors can understand putting their money in a savings account or CD. Most savings pay under 1%, while CD’s pay around 4% (if you’re lucky!). That 10% example won’t hold true every year due to changing vacancy, rents, maintenance (i.e. new roof), etc., but at least you can get a handle on what you are making.
The only time I suggest using IRR is when you plan on having an exit strategy (aka you plan on selling). Most of my clients are buying to hold for an extended period of time. To try and guess what average growth rate/cap rates/loan rates are going to be in 10 years is just too farfetched. I only recommend using the IRR valuation when you plan on selling within 5 years.

Feb 23, 2011
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D D.
Broker/Agent
Irvine, CA

The answers noted below are quite accurate! The math to determine and true return on investment can be tricky if all the details or variables are truly taken into consideration.
IF debt is to be used in the equation then you have the added complexity of the amortization of said debt which can drastically affect your cash flow on a currrent basis due to reduction of principal but it may not affect the ROI calculation all that much. It in part depends on your holding period.
I strongly suggest using one of the financial analisis software tools like ARGUS and learning it well if you really want to create a accurate ROI analysis.
Keep in mind however that if your assumptions are wildly conservative or wildly optomistic your numbers will be just that numbers.
Research is the key.
Good sources for area by area project operating data do exist and are helpful if you do not have them readily available.

Feb 25, 2011
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