3.A2. Basic Deal Calculator Video Walkthrough Pt. 3
Cash Management Strategies for Real Estate Investments
Funding the Reserve Account
- The speaker discusses cashing out $956,000 and emphasizes the importance of fully loading a Reserve account.
- They calculate six months of expenses at $11,500 per month, totaling $69,000, plus six months of loan payments amounting to $87,000. This results in a total reserve need of $156,000.
- Additionally, they consider 12 months of principal and interest payments calculated at approximately $175,000. The higher figure is chosen for reserves.
- A separate checking account is recommended for holding reserve funds to cover any necessary expenses without monthly reservations unless the balance drops below $175,000.
Distributing Funds to Investors
- After funding reserves, the next step involves distributing remaining funds back to investors based on their investment percentage.
- The refinance process is described as a liquidity event that allows investors to retrieve their capital while maintaining low cost bases.
Projected Occupancy and Cash Flow Analysis
- Yearly occupancy rates are discussed: starting at 20% in year one and stabilizing around 93% by year five due to expected vacancy rates.
- Free cash flow projections indicate that year one shows good cash flow primarily because it includes interest-only payments during construction phases.
Investor Returns Over Time
- In year two, free cash flow decreases significantly due to full expense coverage; thus no distributions occur as costs exceed income.
- By year three, stabilized operations allow for potential distributions based on net operating income (NOI).
Liquidity Events and Long-Term Planning
- If sold in year five using a specific cap rate calculation, net proceeds available for investors are highlighted alongside annual distribution figures from previous years.
- The overall strategy aims to provide clarity on investor returns over a five-year period through careful financial planning and management practices.
Conclusion: Evaluating Financial Viability
Development Costs and Investor Summary
Understanding Development Costs
- Discusses the importance of tax abatements in reducing overall development costs to improve returns on investment.
- Highlights the need for accurate data entry, specifically mentioning an error regarding land square footage that affects calculations.
Investor Summary Preparation
- Emphasizes creating a clear investor summary table that summarizes key deal information for easy understanding.
- Introduces the concept of "skin in the game," where sponsors show their financial commitment alongside investors to build trust.
Loan Terms and Financial Projections
- Reviews loan terms including a $2 million loan at 7% interest, with a suggested holding period of 5 to 10 years for long-term cash flow.
- Explains how amortization is set for new construction projects, indicating bank collateral will be based on real estate assets.
Return on Investment (ROI)
- Details assumptions about ROI, including projected sales after five years and total cash flow estimates over that period.
- Notes that annualized cash flow is projected at 31%, with a cap rate assumption of 6.75%.
Break Even Analysis
- Discusses break-even occupancy rates necessary to cover debt service coverage ratios, manipulating vacancy numbers to achieve this goal.
Exploring Public Infrastructure and Development Costs
Understanding the Role of Public Infrastructure in Development
- The speaker discusses the importance of public infrastructure in reducing development costs, emphasizing its potential to enhance financial returns on investment.
- They inquire about possible collaborations with the city to lower overall costs through mechanisms like tax abatements.
- The focus is on identifying actionable strategies that could make a proposed deal viable or more attractive.
- The speaker seeks clarity on whether there are feasible options available to improve the project's financial outlook.