Since I've been getting a ton of DMs about the RE career path,
// DECODING REAL ESTATE CAREERS //: An in-depth overview of the career paths in the real estate sector, which ones you want to target and which ones you want to avoid
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Most people will tell you to look for population growth, etc
But that just means more competition
If 15 firms are bidding on a deal (like in bigger/higher growth markets) there's no mispricing and only way you get outsized returns is if you're lucky or have a unique biz plan
So (as long as you're searching for short term flips) I would ignore all of those "population growth"-type stats entirely
The only stat that matters is finding a market that has the most mispricings. Everything else is essentially useless noise
Got some questions regarding the flow of funds in an RE deal
The flow of funds is actually determined by the lender, which is provided in loan docs. Then, the operating agreement will have a separate FOF afterward for "excess" funds
Lender FOF on the left, LLC FOF on the right
Cash Management typically occurs when a debt covenant has been breached (usually the DSCR or Debt Yield dipping below a required threshold)
Once this occurs, all cash is swept into a "lockbox" controlled by the lender and follows the "lockbox" FOF (rather than the normal FOF)
The Cash Management Period can typically be resolved by 2 consecutive calendar quarters above a specific DSCR or Debt Yield threshold, after which time revenue is no longer swept into a lockbox and the normal flow of funds resumes
Majority of your yield is locked in at acquisition, which is why buying well is so important
Even an accretive, high return-on-cost action only represents a fraction of the purchase price - which is why having great deal flow (good purchase price) is so important
For example...
Say you buy a building for $10MM at a 5% cap rate, meaning the NOI is $500k
The building is 100 units and you plan on spending $1MM renovating it to increase the rents by $1,200/year in each unit ($120k revenue increase in total)
That's a 12% return on cost ($120k/$1MM) - which is pretty good, considering you bought the building for a 5% cap rate
After the renovations at the property are complete, the stabilized yield will be $620k/$11MM = 5.64%
Return on cost is simply the revenue boost or cost savings of a specific action (ex renovating units) divided by the cost to get there
Anytime the ROC exceeds the cap rate you bought the property for, that action is accretive
For example, on my newest deal, changing out the toilets to more efficient toilets saves ~$3.5k/year on the water bill. Cost of the toilets will be ~$175/toilet*40 units = $7k. Add in labor costs, $10k total
That’s a ROC of 35%, which is very accretive as I’m buying for an 8 cap
Essentially, the starting NOI was $200k and the purchase price was $2.5MM ($200k/$2.5MM = 8% cap rate)
That $200k NOI becomes $203.5k after the cost savings and the cost of the deal becomes $2.51MM, resulting in an 8.1% yield, a 10 bps increase from the 8% I bought it for