The valuation of a quad is based on comps (sales of similar properties in the last 3-6 mos), just like single family homes.

For multi-family, the valuation is generally based on the NOI "net operating income" which is defined as the total actual annual income from the property minus the total actual annual expenses.  Then the formula for the Estimated value is:

Estimated Value = NOI/(cap rate)

Thus if the cap rate is 10% and the NOI is $50,000, then the estimated value is $500,000.

The cap rate will depend on the class of the apartment (from "A" - high end living space & amenities, to "C" - working class functional, to "D" - livable but not nice.)  and the economy.  "A" has the lowest cap rate (5-6%), B (6-8%), C (9-11%), D (12% or greater).  A bad economy tends to increase the cap rate.

Private Investors are very concerned about how much risk you are exposing their money to.  Obviously, renting to a poorly qualified tenant is going to risk eviction costs and cause other problems which could cause a loss of investment or return.  So, even if the investor doesn't ask you, your failure to address that will diminish you chances of getting an investment.

With rentals, you have to address 2 issues for the investor:
1) What is your exit strategy:  When and how are you going to pay the investor back his principal?
2) How are you going to pay the return on his investment. With rentals that return is usually paid out of the cash flow from the rents.  That cashflow should be at least 25% more that the payment you are making to your investor.

Private investors are most definitely interested in wholesale deals.  A quick turn over of their money with a high profit is actually the best scenario, especially when the risk is low.  If for example an invest lends you $50K, and you flip the property for a profit of $20K in 2 months, and lets say you agreed to pay you investor a fixed 5% of his investment.  Then the investor would recieve $105,000 in 2 months.  That's a 30% annualized return.  Your investor would be delighted.

Question: "- - - I don't see being able to pay them monthly, and I am not sure I want to share in the equity - - - what is your take on it?"

Investors can be your most valuable asset, and the cost of what you pay them is always worth it.  So if you can't make monthly payments out of the cash flow from your project then you have 2 choices:

1) Reward investors with equity--a percent of your profit.  If the investor puts up all the money, giving them a minimum of 50% of the profit is pretty standard, and you may want to give them even more to get them on board for your first deal.

2) Offer deferred interest - that is, all the interest due and the principal owed will be paid when you exit from the deal (usually by selling the property).

It should be clear that you only have 1 chance to make a first impression.  So, any private investor is going to judge you on what you say, and how well organized you are.  Because an investor is going to think that the same attitude with which you approach your presentation will be the way you handle his money.  So, you should have at least a clear business plan in your head and a written summary of it that you can share with your potential private lenders if they are interested.  And if they are interested they are eventually going to want to see a complete business plan before they invest.

Powerpoint vs. Flip Chart

Is it really necessary that I create a power point presentation to make my investor presentations?

 

What If I had a flip chart or an overhead projector?

 

Thanks,

Susan

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