The Real Estate God Profile picture
Mar 29, 2021 5 tweets 4 min read Read on X
“A Roadmap For The Future”: How to not only avoid being left behind in today’s world, but a step by step process on how to thrive (next 5-10 yrs will be one of the easiest times in history to get rich) ImageImageImageImage
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More from @TheRealEstateG6

Sep 29
HOW PRIVATE EQUITY FIRMS ANALYZE DEALS:

Most important metrics: Image
1. Stabilized cap rate (yield):

Since we focus on value add, the entry cap doesn’t matter, as long as we can service our debt

The stabilized yield matters because it shows the intrinsic cash flow of the deal

The stabilized yield is the stabilized (post-renovation) NOI divided by all the costs in the deal

Very simple calculation (see below for an example) but very important

We typically need to get to at least a 150 bp spread between the stabilized yield and the market cap rate for a deal to pencil (ex if market cap rate is 5%, need a minimum 6.5% stabilized yield)

For example, buy for an in-place 4 cap, increase revenue to get to a 6.5, sell for a 5 cap. If you buy for $10MM with an NOI of $400k, put in $2MM in renovations and bump the NOI to $780k, you stabilize at a 6.5 yield ($780k/$12MM)

Property is then worth $15.6MM ($780k/5% market cap), for a profit of $3.6MM

Speed matters as well (quicker the better for IRR)

Stabilized yield is a more important metric than IRR because it displays the intrinsic value of the cash flow

Whereas IRR is a bet on the state of the capital markets (debt financing available) at sale as well as cap rates at sale, which basically makes it a total guess
2. Basis (you can show us any IRR you want and we’ll toss the deal if the basis is bad)

What does this mean? It means that you want to look at comps and make sure that in any deal you buy, you’re paying less than the market average

For example, multifamily is valued per unit

So if you take 10 comps and the average price is $100k/unit, you want to be buying for well under that number

Otherwise (barring the real estate being markedly better), you’re not getting a good deal, you’re simply paying “market”

Furthermore that means, in order to sell for a profit, the next buyer will actually have to pay you “above market”. Which is a dangerous bet to make - you’re essentially betting on a “greater fool”, which brings us to the next metric
Read 10 tweets
Sep 23
Probably the most common question I get from younger guys is “How would you do it all again if you were my age?”

I’ll do you one better. Here’s an extremely realistic gameplan to get from ~$0 to $1MM in 5 yrs

I’m going to assume that you have a W2, are roughly 22 and have limited capital coming out of college

We’re going to get you from $0 to $1MM in just 3 dealsImage
// Deal 1 //

You’re broke and have no skills. Everyone was here at some point. You can either whine about it or you can get moving

Reason most people think making money is hard is that they focus on how hard the end goal is (making $1MM) instead of focusing on the first step of the process – gaining the knowledge necessary to start making money

This first deal doesn’t matter at all. The only reason it matters is to “get you in the game”. Once you buy a deal you start accruing market knowledge, you start accruing relationships (lender, investor, broker, etc) – you start to become “dangerous”

You obviously want it to be a good deal but it doesn’t need to be a *great* deal. Because the purpose isn’t to make money, it’s to gain knowledge/skills/relationships so you can make real money on future deals

So what does this mean in a practical sense?

Step 1: Figure out how much equity you either have yourself or can raise

I was literally dead broke for my first deal so was only able to put $2,500 of my own money in. I reached out to my entire network and was only able to gather ~$100k. That wasn’t enough to buy a triplex all cash in my market (which is what I was targeting)

So I reached out to friends who could possibly partner up in the deal. Meant splitting the profits but didn’t matter to me. Was going to do whatever it took. If I needed to take on 10 more partners, I would have. It wasn’t about the profit, it was about the skillset

I finally found a partner and using our combined networks, we were able to muster $200k, which allowed us to buy a triplex

I’m going to assume you can raise a similar amount, but if not, no problem. Whatever amount you can raise, you back into a deal of that size. If you truly can’t raise any money, start up a real estate social media account, share your thoughts/analysis, create a network and raise the money that way

Step 2: Finding the deal

- The market: You’re going to go into a market where deals sell for less than $150k/unit. Additionally, deals in the market should be selling for 6% cap rates at minimum otherwise you’re going to find it too difficult

- You’re going to search on Zillow/Redfin for duplexes, triplexes and quads (loopnet and crexi only really work for bigger properties)

- Open up excel. Make a list of every property listed in the market. Track the price per unit it’s listed for and note the price per unit it sells for. There should be 50+ properties on this list or you’re doing it wrong. Download any and all financial information that’s included in the listing. If there’s no information in the listing, call up the broker and get it from him. By the end of this process, you should know exactly what price per unit properties sell for in the market and exactly what cap rate they trade at. You’ll be looking to buy a property below the market price per unit and above the market cap rate (stabilized yield). Simple

- Market rents: Same thing. First use the mls/costar if you have access to it. If not, get comps from brokers (still have to vet them yourself). Worst case scenario, use Zillow/apartments.com for active comps. Put them all in excel, discard any outliers and take the average. You’ll still need to run the “market rent” for each new deal you look at as each property differs slightly, but this should get you close initially

- Expenses: Use the P&L information you now have. Line each individual P&L up next to each other in excel & for each individual line item, note the cost per unit, cost per square foot & the overall expense load as a percent of revenue. Now you’ve figured out both revenue & expenses. You now should be able to create a brand new P&L for new properties you look at from scratch

- Brokers: Every time you see a broker on a listing, you’re going to call him up, ask him a few questions about the deal, tell him your criteria & ask him to add you to his mailing list. You should start receiving “passive” deal flow to your inbox every morning. Should also set Zillow/redfin alerts for your criteria. You’ll probably have to look at over 100 deals before pulling the trigger

- Underwriting. You’re going to underwrite 3-5 deals a week minimum. You’re going to underwrite them based on their stabilized yield (if you don’t know what this is, search my tweets for it). You’re looking for a 200 bps+ spread between your stabilized yield & the market cap rate. The higher the stabilized yield, the better. The goal is to understand exactly what price per unit & stabilized yield you’d buy a property in this market for so you’re ready to pull the trigger when the time comes

Step 3: Pulling the trigger

Your “buy box” should already be established, only thing left to do is find a deal that fits it. You should be tracking the aggregation sites daily, have plenty of broker contacts at this point & have a lot of deal flow hitting your inbox

When you see a deal that fits your criteria, pull the trigger

Since this is your 1st deal, you may have a hard time getting a loan. Instead of whining about this (like most people do), you can:
1. Do the deal all cash
2. Use seller financing
3. Get a guarantor to hop on the loan

Doesn’t matter which one you use, just get the deal done. As quickly as possible

Deal 1 Summary: Depending on your access to capital, your first deal should be 1-5 units in the $200k to $500k range. The timeline should be quick (doesn’t take long to renovate 5 units or less) & the profit doesn’t matter as much so I’m not even going to bother listing it (obviously if you do raise money though, be honest about the return profile up front). The idea is to “get you in the game”
// Deal 2 //

While you’re stabilizing Deal 1, you should be working on Deal 2. It’s not hard to operate a sub 5-unit property so you’ll have plenty of time. Idea is to close Deal 2 ~18 months after closing Deal 1. This is a very realistic timeline (I know because I’ve done it)

Deal 2 is different. You’re no longer a beginner. This makes life a lot easier. You’ve already established your market, you know your buy box, you have lender relationships & broker relationships. The only thing that’s changing is the deal size, which should now be bigger

This is the big mistake people make. Instead of scaling up after Deal 1, they do a similar-sized deal. They stay in their comfort zone. This is the opposite of what you want to do. Instead, you want to treat the first deal as a stepping stone to larger deals

This next deal should be in the 10-20 unit range, $500k - $2.5MM size range. The timeline should be roughly 18 months and your personal profit should be $38k - $188k. Honestly think this is a low bar but we’ll go with it anyway (you can beat a 2x return on a deal this small)

So how will it work?

You’re going to buy another value-add multi deal using the same process laid out above. Stabilized yield 200bps+ above the market cap rate (gets you to roughly a 2x return) Let’s say you buy a $2.5MM deal. 75% debt, 25% equity. You don’t have to syndicate this deal but I’ll assume you’re still capital constrained & need to

$2.5MM * 25% = $625,000 total equity. I’ll assume you’re putting in 10% of the equity or $62,500

I’ll assume you’re able to 2x your equity in the deal over the course of 18 months (short timeframe again because of the low number of units), which is very doable for a deal in this size range. 2x means $625,000 in profit

Since you syndicated the deal (assuming a 30% promote), you’re entitled to 30% of the profits even though you only put in 10% of the equity

$625,000 profit * 30% = $188k. Not bad for 18 months of work

And you also obviously get your initial capital back, which gives you a decent chunk of change to invest in your next deal. But you’re just getting started
Read 5 tweets
Sep 22
Here’s exactly how I analyze a real estate deal:

This deal is a perfect example of clear signs you can look out for

This 68-unit deal arrived in my inbox a while ago with 5 massive red flags Image
1. The deal wasn’t listed on loopnet (came straight from a not-that-well-known broker). Means 90%+ of the market didn’t even see it
2. The location was not disclosed in the text of the initial email. Anytime there’s any sort of “effort barrier”, that further reduces the buyer pool
3. The link in the email directed you to an old listing. Another “barrier to entry” and also proof of an incompetent broker
4. The financials provided were horrible. Most notably, the broker underwrote essentially the same rent for the 1-bed and 2-bed units, which is obviously not true. This led to the broker’s proforma revenue being significantly lower than the actual market revenue, which presented an opportunity (most unsophisticated offers came in too low because they were relying on the broker’s numbers)
5. The asset was operating with higher-than-market vacancy with 5 evictions currently in motion (way too many). I know the market and this made it clear the owners were significantly mismanaging the asset

Basically there were clear signs of broker incompetence and owner mis-management. That means the deal is definitely worth looking into

Now let’s get into the deal itself
The Business Plan:

The deal is 68 units, split into 1/3 studios, 1/3 1-beds and 1/3 2-beds. The property is currently half renovated but management hasn’t done a good job of pushing rents

Business plan was to renovate the other 34 units and bring the other units to market, taking the revenue from $900k to $1.2MM and bringing the NOI from $491k to $756k, stabilizing the property at 9.11%, a 211 bps spread from the market cap rate – which would result in $2MM in profit and a 1.6x equity multiple

So the business plan was actually pretty simple. The tough part for this deal was the capitalization (how to structure the debt and equity). The deal was underwritten with a 60% LTV, 7% interest rate loan. Why’s that?

For a deal like this (where the in-place income is relatively low compared to the purchase price), you have to be a bit creative with the capitalization
Read 8 tweets
Sep 2
HOW PRIVATE EQUITY FIRMS ANALYZE DEALS:

Most important metrics: Image
1. Stabilized cap rate (yield):

Since we focus on value add, the entry cap doesn’t matter, as long as we can service our debt

The stabilized yield matters because it shows the intrinsic cash flow of the deal

The stabilized yield is the stabilized (post-renovation) NOI divided by all the costs in the deal

Very simple calculation (see below for an example) but very important

We typically need to get to at least a 150 bp spread between the stabilized yield and the market cap rate for a deal to pencil (ex if market cap rate is 5%, need a minimum 6.5% stabilized yield)

For example, buy for an in-place 4 cap, increase revenue to get to a 6.5, sell for a 5 cap. If you buy for $10MM with an NOI of $400k, put in $2MM in renovations and bump the NOI to $780k, you stabilize at a 6.5 yield ($780k/$12MM)

Property is then worth $15.6MM ($780k/5% market cap), for a profit of $3.6MM

Speed matters as well (quicker the better for IRR)

Stabilized yield is a more important metric than IRR because it displays the intrinsic value of the cash flow

Whereas IRR is a bet on the state of the capital markets (debt financing available) at sale as well as cap rates at sale, which basically makes it a total guess
2. Basis (you can show us any IRR you want and we’ll toss the deal if the basis is bad)

What does this mean? It means that you want to look at comps and make sure that in any deal you buy, you’re paying less than the market average

For example, multifamily is valued per unit

So if you take 10 comps and the average price is $100k/unit, you want to be buying for well under that number

Otherwise (barring the real estate being markedly better), you’re not getting a good deal, you’re simply paying “market”

Furthermore that means, in order to sell for a profit, the next buyer will actually have to pay you “above market”. Which is a dangerous bet to make - you’re essentially betting on a “greater fool”, which brings us to the next metric
Read 9 tweets
Aug 13
I own over $30 million of real estate

I bought my first deal with $2,500 of my own capital

If I had to start over in 2025…

Here’s how I’d find a market in just 4 steps: Image
Step 1: Look for cities/towns under 250k population
Step 2: Vet supply
Step 3: Vet demand
Step 4: Make sure there are mispricings
Step 1:

This main point of finding a smaller population market is to narrow down your funnel to an area that has less competition

You’re not going to find a deal in a big city as a beginner. You need to be buying in lower competition markets to make money
Read 6 tweets
Aug 12
One of the biggest places beginners get tripped up is the property tour. They don’t know what to look for and they don’t know what anything costs

Here’s what to look for when touring a property so you can accurately price the renovation costs:
Generally a renovation for a Class C 1-bed unit costs me $10k-$15k

Below are the items I focus on when touring to maximize rent and minimize cost

You should think about the property in the 3 categories outlined below
1. Bathroom (~$5k)
2. Kitchen (~$8k, grouping in all appliances & materials)
3. Floors/Paint/Other (~$2k)
Bathroom
1. Shower/Tub: What’s there right now? Do you have to rip everything out or can you reglaze or tile over? Does the shower valve & fixture need replacing? Will you tile the shower or install an acrylic shell? [Costs to redo can run you between $250 & $2.5k]
2. Floor: Are you going to tile the bathroom or run LVP? Can you run the LVP over what’s there now? [LVP is going to run you ~$5/SF & tile will run you $7-15/SF]
3. Toilet/vanity/mirror/lights: Do you need new ones? [Price materials online, the labor for installation should be minimal (~$50-100/item)]
4. Extras: Do you want to add something extra to increase longevity or attractiveness? Embellish walls (tile, shiplap, wainscoting), shower niche, sliding glass shower door, stone countertop, shower ledge, etc [Here costs can get out of control. Way to avoid this is to look at the comps achieving the market rent in your market. Only renovate to that scope & do nothing more. Additional renovations won’t get you a higher rental rate]
Read 6 tweets

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