Just wanted to add something. Mike is correct in saying 1-4 units are residential and 5+ units are commercial, but don’t get caught up in the terminology. This is for loan purposes only. This is not descriptive of the building itself. A 300 unit apartment complex is a residential building, the land is zoned for Multi-family Residential. Residence live there. The loan you apply for is a commercial loan.
Mike just thinks that cap rates, dscr, and any other evaluation technique is a waste of time and that is simply untrue. You have to understand cap rates to know what kind of value you are buying and to be able to compare different properties and their performance or lack thereof. DSCR you have to understand so that you can look at a deal from the perspective of a banker. Typically banks want to see a 1.2 dscr, you’re wasting your time if you’re running around evaluating deals that don’t meet this benchmark. That’s why you need to understand the dscr. You can do your cash flow projections all you want, and you can get your $100/unit all you want, but if the dscr isn’t 1.2 or real close to that the bank isn’t going to do the deal. Also, if you want to get to the big time, which I assume most if not all of us do you are going to be dealing with sophisticated investors/bankers. These guys make their decisions based on percentages, rates of return, debt coverage, etc. not “Is this property making $100/unit” and to be able to speak their language and communicate in their terms, which you definately want to do, you need to understand cap rates and dscr.
Certainly I use other formulas, I like to project future value, I like to look at growth rates in submarkets, my evaluations include all that good stuff like DSCR, Cap, ROI, IRR etc. but we all know Mike’s stategy by now. It’s $100+/unit and this has worked for him. If you are cashflowing $100/unit you will meet any banks criteria, Mike just chooses not to underwrite the deal himself using those guidelines. Certainly the bank will realize everything when they underwrite the deal. I think we get his point.
Jordan