The free cashflow of a deal is not only the profit, it is your downside protection. Do any of the experienced investors have a minimum buffer, either as an absolute number or as a percentage?For example, I am looking at a property in New York State. It has 126 pads, 84 occupied. Total rent is $320k/year, NOI is 158 (~50%). Asking price is $1.5m (before any negotiation). I am looking at 113k in annual financing costs, leaving $45k in profit, before tax. I just don’t think this is enough downside protection or profit. If just 10% of the tenants leave, you have $13k left.Thoughts from the community are are appreciated.
If 10% of the tenants leave, you are doing something horribly wrong. If you have done good due diligence (particularly the test ad) and the demand is there, you should not have a problem like that. The general rule of bank financing is a coverage ratio of, say, 1.2 x note payment. This deal, as presented, meets that criteria. You’ve got the expense ratio off on this deal, unless there is something I’m unaware of in New York State. It should be 30% to 40%, and not 50%. That should give you some more buffer. If you had a crisis, you’d use up all of your cash-on-cash return before you would stop paying the mortgage (hopefully) so you should have plenty of buffer. But that comment is predicated on doing terrific due diligence. As Ben Franklin said “diligence is the mother of good luck”.