Good friend asking me to enter a RE deal. He gave me this: Going in at 8.8 % cap rate with upside to 9.8% cap
Return 40% of equity with in the first 12 months( bank is funding earn out)
7 years IO at 5.2. Thoughts?

likesmart
Posting as :
works at
You are currently posting as works at

That sounds like a best case scenario… what does it look like if cap rates slide, or interest rates don’t do what’s expected? Are they getting an ARM? Is there a rate cap? What do the reserves look like?

Best case scenarios always sound good… but this isn’t a healthy environment to be getting into.

like

You cannot get good feedback with the information you’ve provided. 40% ROE in year 1 with cash flow is unheard of. Something with your numbers is wrong…

like

Isn’t prime Los Angeles always a good bet?

PM1 this exactly

Actually it is heard of. I preparer his tax returns for several of his deals and I see he returns a lot on year 1 bc of refis he does

The rates right now are pretty bad right now. Must be a heavy value add deal if he’s doing a cashout refi within a year and returning significant capital.

Value add = a lot of things to go wrong, especially with the current supply chain and labor markets

I said “with cash flow.” And by cash flow, I mean operating cash flow. Getting cash out by adding debt via refi is not supposed to be included in an ROE calculation. I assume you mean 40% ROE by extrapolating unrealized cap gains based on appraisals?

Think about it this way, if it were true, then he’d be the richest man in the world. Projecting a 40% ROE in year 1 isn’t credible.

I read it as return OF equity, not return ON equity

Ah. I stand corrected.

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