You’ve heard some incarnation of this saying – There are more than one way to Paris… This is so true in all things business, nut specifically when we invest in real estate!
Having said this, I would be disingenuous if I didn’t tell you that while there are a lot of ways to do things in real estate, some produce better results than others…surprise, surprise 🙂
One of the areas where this is most evident is in the way we underwrite opportunities. I see people all the time advertising deals with low operating costs as percentage of effective income. Folks are smart to recognize that at its core premise, income property is less about the income and more about the cash flow and that as much as anything, this is a function of controlling the operating costs.
Armed with this notion, everyone seemingly tries to make an impression on the community — and perhaps on themselves — by presenting deals with apparent “low” operating costs. As in,wow, see how good this deal is… it only cost 35% to run?!
Let’s chat about this for a minute…
The Way You Invest in Real Estate
Let’s say you are analyzing a 100-unit building. You’ve received the OM containing a Pro Forma underwriting and 12 months worth of trailing financials. (In reality you will rarely get the latter, at least not on deals that are worth the paper financials are written on, but let’s have fun, shall we?)
You analyze the data, and you think that you have a good idea of what things cost in this building based on the information at hand. You come up with an NOI, and from there capitalize a value. Furthermore, you think that you can hike rents by like $125/month. All and all, you figure you’ll make out like a bandit…
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