Susan,

Great information, as always! Thanks for sharing with us.

I have a question that I hope you can take a few minutes to address. In your presentation you spoke about the differences between “value plays” and “long term holds” — and that you prefer holds. One of the things that I’ve always found difficult with buying properties without some value play element is the fact that the numbers don’t work out very well unless the cap rate is really high or a larger down payment is made (which also affects cash on cash returns). For example, assume that one can buy a property with a true 8% cap rate. The NOI will not be sufficient even at that cap rate to meet DCR requirements for a loan with just a 20% down payment. Plus, even if it did get funded, the cashflow is going to be poor. For example, a $1MM property at 8% cap will have $80k NOI. For an 80%, 6.5% 240mo loan, the annual PI will be $72k. That won’t meet DCR reqirements…and would only cashflow $8k per year anyway (4% cash on cash ROI).

Can you please take a few minutes to elaborate on this? How are you actually doing these deals without some sort of value play? Putting more down than 20%? And how are you able to retain your investor interest with such a low cash on cash ROI?

Susan, you’re the greatest! Thanks for all you do.

…which results an a higher cap rate for the acquisition.

But you did note a third option that I failed to include…a longer amortization period. Incidentally, using the example I noted above, but with a 30 year amortization instead of 20 does work out…well within 1.2 DCR and cashflows at about 9.7% cash on cash ROI.

Thanks for your help, Susan!