Finding Deals Faster
Recently I spoke with a very large sponsor who told me, his team sorted through more than 280 different Multi-Family Apartment listings and selected 20 to dig deeper into the data for consideration. The sponsor said they only made an offer on 10 of the Multi-Family Apartments after the detailed analysis was done, but none of them were accepted.
I often hear General Partners (GP’s) scrutinize deals using their complete analysis and often end up late at the table or rejected because they are wading through many deals that don’t pencil out in the end. They get discouraged because so much time and resources are used to evaluate the deal.
One thing to help you locate the right deal is to narrow down your choices by selecting a geographical area near you. You know the market better in your area, and more importantly, it provides you with local insider information that can’t be obtained from the internet. Refining your search area will help you find a deal faster. The next steps are to “Bring the Deal” or “Sponsor the Deal.
Here are some suggested steps that may help.
Step 1: Refine the search area. (Locate deals in your area where you know the market best)
After you have a property identified, locate the commercial broker, and ask for the Financials and the Broker Offering Packet to evaluate the property. It will provide more information about the property that you will need. It should include the Date of Manufacture, Size of the Property, Rent History, Asking Price and much more, etc….
Use the sellers data and perform a Quick Analysis of the Property
Step 2:
Determine the Current Operating Income =
# of Units x 12 months x Market Rent x Occupancy (Use 93%)
Determine the Proforma Operating Income (POI) =
# of Units x 12 months x Proforma Rent x Occupancy (Use 93%)
Step 3:
Determine the Operating Expenses (OpEx) = 50 to 60 % of INCOME (USE 55%)
Step 4:
NET Operating Income (NOI) = Operating Income – Operating Expenses
(Do it for the Current and for the Proforma)
Step 5:
Determine Property Value = NOI / CAP (use 5.5%)
(Do it for the Current and for the Proforma)
Following this simple analysis will help you understand if the property under consideration is overpriced or offered at fair market value. What are the opportunities for cashflow? Can you introduce “Value Ad” into the property to increase value proposition? Are there opportunities to reduce operating expenses by increasing efficiencies and lowering costs? Often properties can be overpriced by the seller, listing agent, or listed by a Commercial Broker who may be attempting to find fair market value. The variance can be significantly deceiving if you don’t know current market conditions.
Here are some things for consider:
- Is it a right time to buy?
- Is it a buyers’ market or a sellers’ market? (Timing is essential)
- What are the current financing conditions?
- How liquid is the seller?
- What demographic analysis was done within a 3- and 20-mile radius of the location?
- What are the current rents?
- What are the current occupancy rates?
- CAP rates?
- Interest Rates?
- What are the projected rents and occupancies projected for the next year, or the next 3 years?
- What is the age and condition of the property? (At the very least do a drive by)
Put it in an excel spreadsheet to make it faster and have fun with it.
Common Terms Used:
Cap Rate
The capitalization rate (also known as cap rate) is used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property.
This measure is computed based on the net income which the property is expected to generate and is calculated by dividing net operating income by property asset value and is expressed as a percentage. It is used to estimate the investor’s potential return on their investment in the real estate market.
Operating Income
Operating income, also known as operating profit or earnings before interest and taxes (EBIT), is a financial metric that measures a company’s profitability from its core business operations. It represents the profit generated after deducting all operating expenses, such as the cost of goods sold (COGS), selling, general, and administrative (SG&A) expenses, and depreciation and amortization, from its total revenue.
Operating income is a key metric for analyzing a company’s core business performance and efficiency. It helps investors assess a company’s ability to generate profits from its core operations, independent of financing decisions and tax implications.
Operating Expenses
Operating expenses, often abbreviated as OpEx, represent the ongoing costs a business incurs to run its core operations. They’re essentially the resources needed to keep the business functioning smoothly and are crucial for analyzing its operational performance and efficiency. Here’s a breakdown of key points about OpEx:
- Costs essential for day-to-day operations, excluding costs directly tied to making or selling products (Cost of Goods Sold).
- Examples include rent, salaries, utilities, marketing, administrative costs, and depreciation.
- Typically, repetitive and not directly tied to revenue fluctuations.
Proforma
These are essentially projected financial statements, where hypothetical numbers and estimates are used to forecast a company’s future performance over a specific period.
- Projections of future financial performance, including income statements, balance sheets, and cash flow statements.
- Based on historical data, future plans, and various assumptions about factors like revenue growth, expenses, and investments.
- Not actual financial statements, but tools to help understand potential future scenarios.
Learn more about analyzing the deal by going to our website: https://cwjinvestmentsgroup.com/
If you want to schedule time to talk with Caiyun and Walt reach out on our Calendar above.
