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The Real Estate God

@TheRealEstateG6

Sep 2

HOW PRIVATE EQUITY FIRMS ANALYZE DEALS:

Most important metrics:

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

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The Real Estate God

@TheRealEstateG6

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:

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

The Real Estate God

@TheRealEstateG6

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]

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The Real Estate God

@TheRealEstateG6

Aug 11

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

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

For example, if a property was purchased for $1MM and the NOI was $100k, the *cap rate* would be 10% ($100k NOI / $1MM PP)

If you executed a $100k renovation and that increased the rents and therefore the NOI by $20k, the *return on cost* of that specific renovation would be 20%

($20k NOI increase / $100k renovation cost)

Then you add the NOI increase to the numerator ($100k + $20k = $120k) and the cost increase to the denominator ($1MM + $100k = $1.1MM)

Which leads to the *stabilized yield* being 10.9% ($120k new NOI / $1.1MM total costs in the deal)

So you take the initial cap rate and add in each return on cost action (the new revenue gets added to the numerator and the new costs get added to the denominator) to get to the stabilized yield

It’s that simple. People try and complicate RE a lot but it’s literally division

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The Real Estate God

@TheRealEstateG6

Jul 31

1. Go to tertiary market
2. Find a product type that’s profitable to build
3. Check zoning code and figure out the zoning that allows for that product type
4. Reach out to every property zoned for that use but currently operating as a *different* use
5. Buy, profit

// THREAD //

This takes the “off-market property” strategy one step further

The issue with most off-market strategies is that the owner actually has some idea of the value of the property

For example, most owners know approximately what a multifamily property should be worth in the area

That’s because of three reasons

1. They can base the value off the in-place cashflow
2. They can base the value off comps (and there’s always a ton of multifamily comps)
3. They can call up a broker to tell them what the value should be (and the broker will actually know)

This isn’t to say you can’t get multifamily properties for a discount off-market (you absolutely can)

Just that it’s harder to get a steep discount on them because the market for them is so transparent

The brilliance of the strategy laid out above, however, is that the market becomes a black hole when you switch uses (ex from industrial to self storage)

It works so well because the owner legitimately has no idea what the value of their land should be once you change uses

The valuation methods used above no longer work

1. The owner can’t base the new value off the in-place cashflow because the cashflow obviously changes when you change uses

2. There are barely any comps for switching uses and the ones that exist are almost impossible to look up

Anyone can look up a multifamily sale, how many unsophisticated owners can look at sales in their market and ascertain which properties have switched uses?

My guess is literally zero

3. Brokers (especially in tertiary markets) have no clue how to value a property when you switch uses so the off-market seller can’t even go to them for advice

For example, a property I’m prospecting off-market is currently operating as 3,000 SF owner-occupied industrial facility

But it sits on 10 acres and can accommodate ~200k SF of self-storage. The owner has no idea

Read 5 tweets

The Real Estate God

@TheRealEstateG6

Jul 22

I get asked all the time “how do you choose a market” & to be honest it’s pretty simple

Instead of approaching it from the statistical jargon perspective, I approach it from the “can I actually find a deal in this market” perspective

Here’s how I choose a market to invest in:

First let’s talk about how institutions look at deals & why it doesn’t make sense to look at deals that way as a smaller investor

Way I see it, there’re 2 strategies when choosing a market

1. “rising tide lifts all boats”
2. search for dislocations/discounts

Strategy 1 is used by institutions who need to deploy a lot of capital

This involves them playing “economist”. They need to find markets with high population growth, rent growth & appreciation

They operate in a competitive segment of the mkt ($20MM+) & it’s difficult to pick up assets for a “discount” in that range

So instead, they have to find mkts where competitors are underpricing future growth

This is dangerous since if you guess wrong, it could be a disaster. But institutions are built for this as they have analysts & data they can use to correctly pick the next high-growth mkt

As a smaller investor, you don’t. You have no edge over large firms. It’s not a smart place to compete

But as a smaller investor you don’t need to deploy a lot of capital

So you can use strategy #2

Instead of playing economist, you search for the least competitive mkts, where there’re the most pricing dislocations &, therefore the most discounts

Basically I look for the market with the least competition that’s stable

// Choosing a Market //

Ignore the data & focus on making money (finding markets where you can stabilize over the market cap rate)

A 4 step process:

Step 1: Look for cities/towns under 250k pop
Step 2: Vet supply
Step 3: Vet demand
Step 4: Make sure there’re mispricings

(Assuming shorter term holds)

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