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The Real Estate God

@TheRealEstateG6

May 9

What's the relationship between cap rate, return on cost, and stabilized yield?

This is arguably the most important relationship in real estate and most people don’t understand it at all

It’s actually really simple

// THREAD //

Let’s start with the basics

- The cap rate is the NOI divided by the purchase price. When you buy a deal, you buy it for an in-place cap rate

- The return on cost is the NOI increase of a specific action (usually a renovation) divided by the cost of that renovation

- The stabilized yield is the new NOI divided by all the costs in the deal

Stabilized yield is an extension of the cap rate through the duration of the deal by adding the NOI changes to the numerator and by adding the additional costs to the denominator of the formula

Read 11 tweets

The Real Estate God

@TheRealEstateG6

Apr 23

You want to start your own real estate private equity firm but you don’t know how much it’ll cost

Here’s how to think about start-up costs:

There are basically 2 ways to set up a real estate private equity firm

1. First way is to start a fund. This means you raise the money first and find the deals later

2. The second way is to operate deal-by-deal, which means you only raise money for specific deals as you need it

Starting a fund involves a ton of legal costs, compliance costs, administrative costs

Wouldn’t recommend even thinking about this path unless you’re planning on raising a lot of money ($50MM+)

It involves a ton of startup costs and a ton that can go wrong

Read 19 tweets

The Real Estate God

@TheRealEstateG6

Apr 23

Most people treat real estate like a numbers game

That’s the wrong way to look at it. Real estate isn’t just numbers in an excel file. It’s living and breathing

Here’s what to look for in a property to make sure you don’t make that mistake:

First thing most investors do when they see a deal is open excel and look at the numbers

“What’s the cap rate?”

This is extremely stupid. You’re not buying numbers in excel, you’re buying real estate

If you buy solely based off numbers, you’re going to make a costly mistake

The real estate drives the returns

If you buy bad real estate that no one wants to live in, no amount of number crunching is going to save you

Bad real estate is bad real estate and you’ll be stuck holding the bag

So you want to vet the physical real estate *first*

Read 16 tweets

The Real Estate God

@TheRealEstateG6

Jan 16

// $0 to $1MM in 5 Years //

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 deals

// 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 GP 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 finaly 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 (this is probably a severe character flaw if no one you’ve met in 20+ years of life would be willing to give you any money – but that’s a separate point), 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 really matter so I’m not even going to bother listing it. 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

// Deal 3 //

At this point you really have the hang of things. You have 2 successful deals under your belt. The learning is (mostly) over. You spent 3 years making pretty much nothing while banging your head against the wall and now you’re looking to make real money

You should have an edge in the market by now (accrued market knowledge and relationships) and should be ready to take advantage of it

So you’re going to scale up again. This time you’re going to look for a deal in the 50-100 unit range and the $2.5MM - $12.5MM size range

At risk of sounding repetitive, you’re just going to use the same exact process (the process outlined above) you used on the prior two deals, just on a slightly larger one. It’s literally the same thing except the numbers are bigger

But you’ve been developing a skillset for 3 years doing smaller deals so it shouldn’t be a problem

Some things will change this time around (on a deal this big you may need a guarantor to help you out with getting a loan, which means giving up a piece of the promote), but the process of analyzing real estate remains the same, the process of buying real estate remains the same, even the execution of the business plan remains the same

It also gets harder to find deals as you get bigger. It’s not impossible by any stretch but it’s definitely harder. This is where your accrued market knowledge and broker relationships pay off. You’re looking to utilize your relationships to scoop up a deal off-market

We’ll assume you’re able to find a deal that stabilizes 200bps+ above the market cap rate, execute your business plan and 2x your money again, this time in a 2 year span (once again, very realistic for a deal in this size range, especially since you have 18 months from the start of Deal 2 to find this deal)

$12.5MM deal = roughly $3.125MM of equity

$3.125MM profit (assuming 2x) * 30% promote = $937,500

Not $1MM on the nose but close enough. And if you outperform (3x+) , you clip $1MM easily

That’s it. If I were 22 again, this is exactly what I’d do (I’d also start up a side business as well while still at my w2 for additional cashflow to pump into deals)

5 years, $1 million dollars, millionaire by 27

Is any of this “easy”? Of course not. Is it all extremely realistic? You’d better believe it. Each step follows the next. As long as you proceed methodically, it’s very achievable. It’s only 3 deals in 5 years - actually wouldn’t be surprised if many of you were able to outperform that. If anyone tells you it’s not possible, they’re just flat-out lying to you

Main reason why people won’t do it?

It’s slow, it’s boring and it requires barely making any money for the first 3 years

Good news is 99% of the planet has the attention span of a rabbit, is unable to follow a simple process, and is flat out incapable of delaying gratification so you have no competition

Good luck!

// If you’d like to learn how to underwrite and buy deals like this (or even smaller deals, my first deal was $200k and I only used $2,500 of my own capital) apply in the next tweet for the Acquisitions Bootcamp to work 1-on-1 with me //

Read 4 tweets

The Real Estate God

@TheRealEstateG6

Dec 14, 2023

“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)

Read 5 tweets

The Real Estate God

@TheRealEstateG6

Dec 11, 2023

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

// Deal 3 //

At this point you really have the hang of things. You have 2 successful deals under your belt. The learning is (mostly) over. You spent 3 years making pretty much nothing while banging your head against the wall and now you’re looking to make real money

You should have an edge in the market by now (accrued market knowledge and relationships) and should be ready to take advantage of it

So you’re going to scale up again. This time you’re going to look for a deal in the 50-100 unit range and the $2.5MM - $12.5MM size range

At risk of sounding repetitive, you’re just going to use the same exact process (the process outlined above) you used on the prior two deals, just on a slightly larger one. It’s literally the same thing except the numbers are bigger

But you’ve been developing a skillset for 3 years doing smaller deals so it shouldn’t be a problem

Some things will change this time around (on a deal this big you may need a guarantor to help you out with getting a loan, which means giving up a piece of the promote), but the process of analyzing real estate remains the same, the process of buying real estate remains the same, even the execution of the business plan remains the same

It also gets harder to find deals as you get bigger. It’s not impossible by any stretch but it’s definitely harder. This is where your accrued market knowledge and broker relationships pay off. You’re looking to utilize your relationships to scoop up a deal off-market

We’ll assume you’re able to find a deal that stabilizes 200bps+ above the market cap rate, execute your business plan and 2x your money again, this time in a 2 year span (once again, very realistic for a deal in this size range, especially since you have 18 months from the start of Deal 2 to find this deal)

$12.5MM deal = roughly $3.125MM of equity

$3.125MM profit (assuming 2x) * 30% promote = $937,500

Not $1MM on the nose but close enough. And if you outperform (3x+) , you clip $1MM easily

That’s it. If I were 22 again, this is exactly what I’d do (I’d also start up a side business as well while still at my w2 for additional cashflow to pump into deals)

5 years, $1 million dollars, millionaire by 27

Is any of this “easy”? Of course not. Is it all extremely realistic? You’d better believe it. Each step follows the next. As long as you proceed methodically, it’s very achievable. It’s only 3 deals in 5 years - actually wouldn’t be surprised if many of you were able to outperform that. If anyone tells you it’s not possible, they’re just flat-out lying to you

Main reason why people won’t do it?

It’s slow, it’s boring and it requires barely making any money for the first 3 years

Good news is 99% of the planet has the attention span of a rabbit, is unable to follow a simple process, and is flat out incapable of delaying gratification so you have no competition

Good luck!

// If you’d like to learn my exact process on how to start buying deals, apply for the Acquisitions Bootcamp to work 1-on-1 with me in below tweet //

Read 4 tweets

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