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Accredited Investor
An Accredited Investor is defined by the Securities and Exchange Commission to include a natural person with:
1. A net worth or joint net worth with the persons spouse exceeding $1 million, not including the value of the primary residence, and / or;
2. An annual income of $200,000 in each of the two most recent years, or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income in the current year.estments that transform communities for the better.
Investment Return Expectations
The first most common benchmark yield is a capitalization rate or cap rate. The cap rate is the yield on the investment if you were to pay all cash on the purchase of the property. Note that approximately less than 5 percent of firms pay cash for commercial investment properties. This is a leveraged, or financed, business so the capitalization rate becomes another comparable metric on where assets are trading in the marketplace. If you were to ask a broker, “what's the cap rate?” their answer would be based on if you were to pay all cash. But again, in most cases, you're not paying all cash, so the cap rate becomes just like a price per unit metric comparable, rent comparable etc. It is just another metric to understand what the risk level is on the investment.
The higher the risk of the investment property, the higher the cap rate, the lower the risk the lower the cap rate.
This is because, again, if you were to pay all cash on purchase, and it's a riskier deal, you want a higher return. If it's a lower risk deal, you can expect a lower return on your investment or a lower cap rate.
Though there are many return types and expectations for partnerships on multifamily and apartment community investing to consider, this article will consist of four main categories that investors review. Those four are internal rate of return, or IRR, Cash on cash return, the equity multiple, and the return on cost.
First, Internal Rate of Return, or IRR is the most complicated, and is a very complex financial formula. It is a time value of money calculation. Most real estate investors use it. If you were to invest in an opportunistic deal, and your IRR was a 25, or you were to invest in a value-add deal, and your IRR was an 18, you would have to make the decision based on your specific risk tolerance:
What IRR do you want? Do you want cash flow each year and a lower risk? Go with the value-add deal.
If you have a high-risk tolerance, and you don't need any cash flow, but you want a large multiple on your investment, you'd go with the opportunistic property in this example.
Next, Cash on cash, is the yield on the investment of the cash that you invest. So, if you’re getting a preferred return, as we've discussed, preferred return may be 8 percent year over year, and that would be cash on cash that you’re getting. Now, if it's not being paid current and the property is not producing cash flow, your cash on cash may actually be 2,3, 5 percent out of the gate and ultimately you hope it grows to that 8 percent to 10 percent. So, on an average basis, you may end up with an 8 percent cash on cash. For example, if you invest $1 million in a deal and your cash flow is $100,000, then you'd be making 10 percent cash on cash on the deal. Simple example.
Next, Equity multiple is if you give me $1 and the deal is operated for three years, and after three years I give you back $2, you would have a 2x equity multiple or two times on your investment. You would then calculate IRR and cash on cash and return on costs and other metrics based on the time of the investment. In this case, it's three years. So, there's a couple of calculations and most general partner, sponsors and investment firms will break all this down. Post disposition, most firms will then send out performance metrics on this specific deal and investment.
Lastly, return on cost is another comparable to use when analyzing different investment opportunities. Investors like return on cost because it is the yield on dollars invested in the deal If you were to pay all cash. Similar to a Cap Rate but includes capital expenditures (renovations) dollars invested. It’s the potential future yield. The calculation is the future NOI in the expected disposition year divided by the purchase price plus capital expenditure (renovations). This would give you the potential yield if you were to pay all cash or return on cost of the project.
In summary, there are many ways for you to analyze apartment community investments.
In our opinion, these are the four main return metrics that you as an investor should be considering, to pursue apartment community investment as it relates to investment yields and expectations - cash on cash return, return on cost, internal rate of return, equity multiple.
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