A THREAD that will allow you to fit right in around real estate Twitter.
With terms, definitions and the basics of the lingo you need to know:
NOI = net operating income
This is the profit a real estate asset makes BEFORE you consider the debt service payments.
We use this term as the ALMIGHTY measure because each investor may get different debt terms and thus debt payments.
Cap rate = NOI / Value
Divide the net operating income by the value of an asset (or what somebody paid for it) and you get a %.
That % is a cap rate. 7 cap means 7%.
If you pay $1MM for an asset at a 7 cap that asset generates 70k of NOI
GP = General partner = sponsor = syndicator
These all mean the same thing:
The person who puts together the real estate deal. The person who oversees the deal. They found the deal. They model out the deal and get financing for the deal.
LP = limited partner = passive investor
These people are the folks who put in the money for the GPs to use to buy real estate.
They don't have an active role. They write checks and GPs own part of the deals the GPs put together.
Pref = preferred return
This is the return LPs get first. They get paid this return before the GP gets paid any money.
An 8 pref means the LP is entitled to an 8% annual yield on their money before the GP gets paid.
Promote = carry = the amount of cash above the preferred return a GP is entitled to.
Ranges from 20-50%. This is what the GP works for on the deal.
If a deal makes 15% on a 8 pref 50% promote structure the GP gets 50% of every bit of cashflow beyond 8%.
Un-levered yield.
This is a % return on a deal if it didn't have debt on it. It is the same as cap rate.
Debt service.
This is a term for principal and interest payments on a loan.
Most commercial real estate has a loan on it at a certain interest rate. The monthly payment is the debt service.
Cash on Cash = CoC
This is a return, as a %, on the cash you invest.
It takes into account debt service payments.
If you invest $100k and you get an annual return of $10k after you pay your debt service.
Lease up.
This is the time period it takes to get tenants to rent your space.
"Lease up" on a new storage facility can be 3 years. That means it takes 3 years to lease all of the units and "stabilize" the asset.
Underwriting.
This means to figure out what a deal is worth to you. It involves projecting the cashflow and yield and lease up periods and deciding what you are willing to pay.
Proforma.
This is the excel model that predicts cashflow on a monthly basis.
What do we think is going to happen? Look at the proforma.
Speculation.
This means to make a bet on something that is outside of your control.
Speculators are buying assets that don't necessarily make money but will hopefully be worth more later.
Operate = manage
This is the act of running the business of a particular real estate asset. Leasing, marketing, vetting, collecting rent.
Third party companies do this and some GPs do this.
Self manage means you do it yourself. Generally a fee is charged.
ReFi = refinance
This means you go to a bank after you have owned an asset for a while and get new loans put on it.
Sometimes these exceed the value of the previous loans and there is left over cash. This is called a cash-out-refi.
Asset class.
This refers to a type of asset.
Industrial is one.
Self storage is one.
Multifamily is one.
There are a lot of these.
I'll continue adding to this... but here are a few folks who tweet about real estate and are GPs.
My partner and I started a business out of our dorm rooms in 2011 while Juniors in college.
But our tool of choice wasn’t groundbreaking code.
It was a 1999 ford cargo van we bought for $1500 on craigslist.
A thread about me.
It was a pickup and delivery storage business for college students. When they went home for the summer, we picked up all of their stuff and stored it nearby. Then we’d bring it back to them when they came back.
We didn’t make much money at all the first few years.
A lot of grinding. Late late nights in warehouses. 140 hour work weeks.
95% of entrepreneurs should forget about technology (a few big fish and a lot of sophisticated fishermen) and focus on small business (small fish everywhere and really crappy fishermen).
A THREAD:
Be like water.
Take the path of least resistance.
The goal of every entrepreneur should be:
#1. Gain financial freedom
and
#2. Maximize probability of achieving #1
Because when you have financial freedom your world opens up.
You can start doing what makes you happy.
And you can positively impact a lot more people with project #2, 3, 4 etc. You're in a position to try to change the world if you have financial freedom.
On Sep 3rd 2020 we closed on a 120k sf glove factory built in 1890 in a small NY town.
Has 45k sf of self storage inside and had $14k a month of net operating income at closing.
Let's breakdown this deal.
A THREAD on creating $2 million out of thin air in 18 months...
👇👇
First saw the property on Loopnet in mid 2018. I ignored it. Who wants to try to operate a business in an old factory in a dying NY town.
A few months later I reached out. Broker sent me financials. They were good. $24k a month in revenue and $10k in expenses.
So I visited the property. It was old. Needed a new roof. Full time manager. Only accessible to customers 9am-5pm M-S. No autopay. A lot of folks paying 1/2 market rent.