Cap Rates, DCR, Verified Investor Contacts, and Modifying Bank Watch Lists

Hey, welcome to this week’s Monday, Q & A. Let’s get right into it. I get this question.

This is from the investor database. Multi-family property is 150 plus units. Now, these are an investor’s investment criteria, $2 to $10 million caps of 8% or greater, 12% cash-on-cash, 1.6 DCR, 85% occupancy, and rising BRC neighborhoods with pitched roofs and emerging markets.

Post-1978 construction with minor repairs only, no major structural work needed – proximity to local school shopping and employment centers. I understand everything other than caps of 8% or greater, 12% cash on cash, and 1.6. DCR. So can you please explain? 

So first, let me say that When you see this kind of investment criteria, you should be encouraged because it means that this is someone who really knows what they’re looking for.

They’re very specific on the numbers and the construction, and everything else. And when you see that, you know, that the person’s definitely for real. Okay. Or so it would seem, and so here’s what we’ll talk about is the caps of 8% or greater, 12% cash-on-cash return, and 1.6 debt coverage ratio.

So a cap, or what I believe he’s referring to here, would be a cap rate. And so a cap rate is typically is a way that commercial real estate multifamily and whatnot is valued. And what that is, what a cap rate is, is the net operating income divided by the purchase price, excluding debt service.

So, if you had a property that was bringing in net operating income, that’s NOI; if it was bringing in net operating income of a hundred thousand dollars and you paid $1 million for it, then you would take the $100,000. And divide it by the million dollars, and you get 10%, that would be a 10 cap. Okay.

If it was making $80,000 net operating income, that’s after expenses, but excluding debt. Okay. Then that would be 80,000 on a million is 8%. That’s an 8% cap. Okay. So you’re going to find that on right now. Well, let me back up. So the lower the cap rate, the higher the pricing, right? If you buy something at a five cap versus a 10 cap, what’s that mean?

That means that if you’ve got $50,000 coming in on a million-dollar property, that’s quite a bit different than if you’ve got a $100,000 coming in on a million-dollar property. And so, when we’re talking about commercial investment real estate, a cap rate is a really good, consistent way to always know what the actual pricing is that you’re, that you’re paying on that real estate.

I hope that makes sense – 12% cash-on-cash. Cash-on-cash is kind of an old-school way to value a property. Maybe people are going to jump on me for saying that, but I can tell you that most of the folks who I’ve worked with when they’re thinking about cash-on-cash return – that’s how much cash they’re going to put out versus how much they get back in a year.

That is mostly with, like I say, some older school investors. Now I’m ready to be wrong. If you’re a new-school investor in your cash-on-cash return, let us know in the comments. DCR is a debt coverage ratio. Okay. And I’ll put a link down below rather than trying to explain the math here, but 1.6 is a debt coverage ratio. Okay. 

Has Distressed Pro done any due diligence on the investors listed in the database or how have they been vetted or is that our job to do? I’m okay if it’s our responsibility. And yet I’m asking because a couple of the listings don’t even have contact names, and the email addresses are from Yahoo and Gmail.

So, plenty of investors just have Gmail addresses or other free email addresses. However, we are looking into this because every investor should have a name. Each of these should be registered. The way the verified investor platform works is people sign up, and then they have to pay in order to get in there.

Then we get all of their investment criteria. And then, we communicate with them via email, and then we publish them. Now that doesn’t mean that we’re endorsing them as individuals or as companies. It doesn’t mean that we’ve done, you know, had a look at their P & L or balance sheet or anything like that.

So anytime that you’re dealing with anybody, you’re going to want to have some communication with them, but what we do ask them to do is to attest that everything that they’re submitting is true and then have these brief email conversations with us. And so that is what we do on the investor side.

Where do we see short sale information on a call report? 

Short sales aren’t reported on a call report so there isn’t a way to pull that out of there. 

Would like to delete multiple items in my bank watch list all at the same time. How do I do that? 

Okay. So right now, today, I don’t have a good way for you to do that, but I want to, what I want to do for just a minute is – this is sort of a quiet announcement, but we’re about to unveil – we’ve been working hard on this for quite a while. 

We’re really overhauling Bank Prospector quite a bit to make it much faster and much easier to use and to allow you to get more out of it while spending less time in it. This is going to be the new dashboard that’s going to be very much you-focused and on the things that you’re doing with Bank Prospector. This will be a dashboard with your favorites and your contacts, and you’ll be able to see a nice history of everything that’s going on with specifically your targets and with your contacts all on your homepage. We’re also, I mean, we’re redoing the thing soup to nuts.

We’re going to give you better insight into what’s happening with each asset type over longer timeframes. And we’re just really cleaning up everything so that you can get in here and just get right down to brass tacks and do the things that you are looking to do, so that you can get back out there and start finding deals and making money.

So there’s a huge overhaul coming here and things like being able to do things in bulk are some of the things that we’re addressing. We have been listening since 2009 to all of that kind of input, and we’re coming up, sort of cresting this major development initiative that we’ve had internally going on.

I have a lot of people working on it. I’m investing a ton of money into it. And I think it’s going to be awesome, and I hope you think it’s going to be awesome. Maybe we’ll start to see that towards the end of the month, but I want to be careful about saying that here on the 7th.

So that’s it. I hope that you are having a great day and a great week. Make sure you’re productive this week. Get out there, make your calls and start digging up some deals. There’s a lot of stuff changing right now with forbearance and default and evictions and foreclosures. So this is a very dynamic sort of moment in this business. So, definitely pay attention to all that. And I can’t wait to hear about your deals. 

Thanks for being a member. Thanks for watching this video. We’ll see you next week.

Learn more about:
DCR aka Debt-Service Coverage Ratio (DSCR)
Cap Rates
Cash-on-Cash Return