Cash-on-cash returns
You guys ever seen any multifamily firms strictly focused on cash-on-cash returns? any specific strategies they would use or levers they would pull to maximize c-o-c?
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Not sure about MF in particular but some levers to push coc include cheaper debt, less capex invested, push rents etc.
Usually it’s just about IRR as yields are so low. You’ll occasionally see some syndicator who tout their cash on cash returns, but many institutions don’t look at it. If you’re a long term holder though, you may try to have your COC be at or above your preferred return. I could see a core or core plus fund with a longer time horizon trying to do that. Value add and opportunistic funds will generally sell in 3-7 years so COC returns don’t really matter because it’s all about appreciation.
I agree with everything you said, but why do you think a long term holder would want their COC to be above their pref in particular?
The pref is the minimum payment you need to pay out to investors. If you can meet your pref it means you can pay it. If you can pay it, (assuming the pref accrues), it won’t accrue. This means more money for the sponsor at the end of the rainbow.
Right, thanks, but I understand pref. Was curious as to why a long term holder might look for cash on cash return to meet a deal's pref. Their way of ensuring they can hit their return?
It’s better to hit the pref than not. If you don’t hit the pref, you make less interim cash flow. It doesn’t mean returns are lower (appreciation can make up the difference) but wouldn’t it be nice to hit your return targets each year. And if you were an investor, you would probably prefer it too.
Thanks. Makes sense.
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