You may have noticed things are looking a little different around here lately.
I'm excited to share with you some updates from the Flywheel, starting with our new branding and site...
New Site Launch
After months of tinkering we've finally re-launched our site and would love for you to take a look:
The intent of the redesign was to better represent our mission – to make real estate accessible to all investors through a focus on education and transparency.
We still have quite a few educational resources and partnership programs to develop, but we think the site accurately represents our differentiation in the market.
Thank you to all the investors brave enough to put their face, name, and testimonial on the site!
What do you think? Anything you want to see more of? What would make Flywheel Equity a site that you refer back to consistently as you evolve as a passive investor?
The Return on Cost Measurement
In last month's newsletter, and in several recent talks, I've pushed back on our industry's use of the IRR return projection as the primary factor when determining the profile of an investment (IRR stands for "Internal Rate of Return"). Instead I propose the use of much less speculative measures: the Return on Cost (also known as the Unlevered Yield on Cost) and the Debt Yield.
I want to talk in more detail today about the Return on Cost.
I believe the return on cost is far superior to the internal rate of return because it isn't reliant on your exit price – which is a completely unknowable number based on the macro economic factors that may or may not exist in your market 7+ years from now.
Instead the return on cost is calculated from your stabilized NOI and all your acquisition costs, including renovation budget, and is defined as:
RoC = ------------------------------------------
(Purchase + Tx fees + Renovation budget)
Given that your stabilized NOI should be based on current market comps, all the inputs to this measurement are knowable to a very high degree and are much less speculative than some state of the market 7+ years from now.
Here's an example:
-------------------------- = 7.18%
($17M + $1.75M + $5.25M)
A property purchased for $17M with a $5.25M renovation budget, typical transaction fees, and a projected stabilized NOI of $1.725M would have a 7.18% RoC.
So what's a good return on cost?
I like to aim for a RoC that is 1% (or 100bps) greater than the current market cap for that asset type. So if comparable assets in my market are selling at 5.5 cap, then the above example has a return on cost of 168 bps higher, making it a great(!) value.
It can take time to feel comfortable with a new performance metric, but we feel the return on cost is a far superior, and much more reliable, indicator than the IRR. Keep that in mind the next time you are reviewing an multifamily offering.
And, as always, please feel free to reply with any questions you have!
We continue to search for our next multifamily acquisition and have submitted two LOIs in the last month, neither of which were we the top bidder for.
Both were 100+ unit properties in central NC markets we are very familiar with. Practicing what we preach, both had returns on cost well above 100bps at our offer prices.
Finding value in this market remains elusive, but we'll get there!