Insights on Evaluating Deals
- Concept:
- Subjective Evaluation:
- How does it feel to you. Go look at it and see if everything checks out.
- Do i want the deal? Can i sleep at night if I buy this? Will I still want this in 4 years? etc...
- Evaluate a lot of deals so you have something to go off of.
- Examine 100’s of fucking deals so you know what you’re looking at.
- Objective Evaluation:
- This is where you run your numbers.
- It should be profitable without a rent increase
- Do you want it in 2050 or when the economy goes bad.
- Expect rents to stay the same and expenses to increase, then do you still want it.
- Economic Evaluation:
- Drive By Visibility
- Persona (scottsdale; venice beach)
- Rare quality (waterfront; etc)
- Supply & Demand:
- Cost of owning vs renting
- Employment & Population
- Move In Specials
- Economic development
- Commercial Real Estate Evaluation:
- Net Operating Income Formula:
- Gross Potential Rents(150u @ 100% @ x rent)
- Vacancy Rate + Credit losses (lets say 20%)
- ------------------------------------- (this gives you)
- Effective Gross Income
- Other Income
- -------------------------------------- (this gives you)
- Gross Rental Income
- Operating Expenses (50% Rule)
- = Net Operating Income (yay!!!)
- Net Operating Income (NOI):
- NOI = Gross Rental Income - Operating Expenses
- Cashflow:
- Cashflow = NOI - Mortgage
- Cash on Cash Return (CoCR):
- CoCR = Annual Cashflow / Downpayment
- (10%+)
- Valuation:
- Value = NOI / Cap Rate
- Cap Rate = NOI / Sales Price
- 8%+
- NOI = Cap Rate X Sales Price
- Debt Coverage Ratio (DCR):
- DCR = NOI / Annual Mortgage
- (1.2+ [“.95 is negative cashflow after debt service. 1.2 is 20% more cashflow after debt service”])
- Gross Rent Multiplier (GRM):
- GRM = Sales Price / Gross Rental Income
- Break Even Occupancy Ratio:
- Break Even Occupancy Ratio = Total Operating Expenses + Total Debt Service / Gross Potential Rents
- Numerical Considerations:
- Cashflow:
- At least 10%; Ideally 12% +
- $100 - $200 per unit/month
- Cash on Cash Return:
- Aim for 10% or more
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