50% rule

[Tony Velez]

My question is this. If I use the 50 percent rule in my market. Most of these properties qualify easy. Do I make an offer then ask for actuals?  There's many properties I want to pull the trigger on. Any advise?

Thanks 

Tony V

[Joe Fairless]

@Tony VelezI do 3 levels of analysis. 

Level 1: the "are we remotely close to offer price" analysis  

• Take the gross potential income and allocate 50% - 60% (exact percentage is determined by property age, amenities, and current condition) of it towards expenses 
• Then take NOI and divide by cap rate which gives us the high-level valuation
• This takes 5 - 10 min to do 
• side note: another way to do this is knowing the average expenses per unit per year for that property time in that market then allocating that towards expenses instead of the 50% - 60% 

Level 2: the "ok, let's get serious and specific" analysis  

• If after doing Level 1 it makes sense to continue then Level 2 is done 
• In Level 2, you use property and market specific information to run your analysis
• Some (but not all) things to consider for the specific market/property: taxes and how they are evaluated, vacancy trends, what's currently being billed to residents vs. what could be billed to residents (i.e. water), etc. 
• Basically every expense line item on your analysis spreadsheet will be filled out based on the market/property 
• This might take days or even weeks to do depending on your level of familiarity with the market, submarket and property and the responsiveness of the seller/seller's rep  

Level 3: the "time to verify" analysis  

• After you get it under contract you move to Level 3 where you verify your assumptions during due diligence
• You verify all the line items in your analysis spreadsheet by looking at leases, water bills, bank statements, etc. 
• You'll update your assumptions if/when things don't match up then determine how to approach it with seller