Entry 2. Finding deals and running your numbers

 
There’s gonna be a lot of this

There’s gonna be a lot of this

 

I’ll be tagging this series of blogs about my next acquisitions with “first time investor”

The hardest job in this market is finding deals. Here’s some of the ways people will find places to buy.

  • Wholesalers. If you got the cash, buying from wholesalers is the cheapest way with the biggest discounts. You can refinance your cash back out afterwards and lean on someone else's ability to funnel in deals

  • Agents. I currently have the feelers out in the cities I don’t live in. These agents are my preferred way of getting access to off market deals for commercial properties.

  • Other investors (networking). Personally I hate networking, but just have your pitch ready about the type of work/property you’re trying to do. The only reason someone would bring you in is because you have the deal, the capital, or the experience.

  • Direct marketing, this is pretty much a job in itself, but you get first dibs on discounts.

Underwriting is my forte, I’m a data guy. Run your numbers conservatively and stay firm to them. People lose money once they let emotions guide them instead of math. Here’s some excel sheets to get you started.

Some terms and equations you should know if you’re planning on doing valuation and rehabs

  • NOI. Net operating income is the income generated after you subtract all expense besides the ones related to your loans. This lets you compare to a buyer of your property since they would likely have different loan terms.

  • Cap rate = NOI/PurchasePrice. This allows you to compare easily to other properties in the neighborhood to see if you’re buying above or below value. Cap rates are usually higher in rough neighborhoods, or properties that need more work.

  • Cap rate is really the most important for figuring out your exit/refi price, don’t think too about it for purchase price. That's because you might buy at a "high price for the cap rate" but then you make your money back for a cheap fix like making the tenants pay for their own utilities and raising rent.

Valuing the property after rehab

  • Income based valuation. Commercial property prices are more dependent mostly on the NOI that they’ll make. You divide your NOI/cap rate. In my acquisition, we went a bit more conservative with a 5.5 cap even though CBRE data reports say class A in Chicago is closer to 5 cap. ~5.85 million.

  • Comparable sales valuation. This is what you’ll likely be doing in single family homes and small multis. Look at sold nearby properties that are similar in number of bedrooms and square footage.

  • Cost basis valuation. The valuation you'd get if you built a brand new property from scratch. A bit more uncommon.

Figure out your rehab costs

  • Go with a contractor. Luckily my mentor and partner is the one on this project, but smart investors care most about big cap ex projects. That means heating/AC/roof/windows should be the most important part of your inspection, not the wall color or cheaper fixes.

  • Do the math yourself, here’s an excel sheet I use for smaller properties. Don’t forget to add 20-25% at the end as your contingency budget. Prices can be found on homewyse, homeAdvisor, etc.
    https://docs.google.com/spreadsheets/d/1fmrh46pX-qHv99QNutGO_MWCNijTZUyG1wa141BBYCY/edit?usp=sharing

How do you price an offer?

Normally I’d want 80% ARV (after repair value), but this is in prime Chicago downtown. So we’re currently going for just a 90% of exit price. The reason we’re ok with this is that it’s the neighborhood with the fastest growing rent in Chicago, this gives us good reason to believe we can hold on and get good cash even though we might see more vacancies (luxury rent discounts are also priced in in my underwriting)

(Exit price) x (ARV target percent) - (Repair costs) = (purchase price)


5.85 x 90% - 2.7 = 2.6m offer price

You can barter over percentages all you want, but we already conservatively wrote our projections. We might still get denied, but you have to be willing to get rejected on these offers. We presented our data to the seller as well to understand why we’re were lowballing their listing price by close to 1m and so far they’re still negotiating with us, largely because we’ve shown our ability to close.

Let me know where to go with my next post, because we're currently negotiating the price still (it comes with a free single family home on the side and is right across from a massive park)

Nelson LinFirst Time Investor1 Comment