Our typical business model is holding an apartment complex for 5 years and implementing our value add strategy. We look for apartment complexes of 100+ units that have on-site staff in a growing, diverse market. Since the valuation of apartment complexes is based on the Net Operating Income (NOI is Income minus operating expenses), we aim to increase the NOI to get a higher valuation of the property.
When we underwrite the deal, we underwrite for a 5 year hold and we calculate a total investor return. We aim for a 80% total investor return or higher. That means, if one of our investors invests $100,000 into our deal, we want to return 80% ($80,000) plus their initial investment of $100,000.
We try to target a cash flow of 6%+ average (of the 5 year hold) and send out quarterly distributions to our investors. This equates to an IRR, or Internal Rate of Return, of about 15% or higher. Of course, if we sell sooner than the 5 years we underwrite, the IRR would be higher. If the average cash flow over 5 years is 6%, the remaining return on investment would be at the sale of the property.
Let’s look at an example: If you were to invest $100,000 and the overall return is 95% and the average cash flow is 6%, you would receive $6,000 each year, or $1,500 each quarter. After 5 years, you would have $30,000 (or 30% return of your initial investment). When we sell the property, we project you would receive the remaining amount plus your initial investment. That means the remaining amount 65% ($65,000) plus the initial investment of $100,000 would be returned at the time of the sale. Over the 5 year hold, you would receive $30,000 in cash flow, $65,000 at the time of sale, and the $100,000 initial investment would be returned at the sale.
Of course, we try to implement our plan in less than 5 years. This means we would sell sooner than the 5 year plan. This does not mean the overall returns would be less. It means the IRR would be higher and we have executed our plan sooner than anticipated.