When you get a deal in from your broker, the marketing package usually provides actual financials as well as “pro forma” financials, i.e. the way the building should perform if it were managed perfectly. Most often, the asking price is based on the pro-forma net operating income at the prevailing cap rate for that market.
This is why the asking price for 99% of deals is always too high.
As we discussed previously, your job is to figure out the most you would pay for a building and do so in the shortest possible time.
The way I do this in the Syndicated Deal Analyzer is to compare three scenarios side by side:
- The actual financials as reported by the broker or seller
- My version of the truth
- How the building is likely to perform a year or so after I purchase it.
In the next video, I use the Syndicated Deal Analyzer to determine my maximum purchase price by comparing these three scenarios side by side.
Watch Video and leave me your comments or questions below!
Great info Michael. Thanks for always putting up the quality content and products. Please keep up the great work. We all apreciate having your knowledge and information in the CRE space.
Thanks LC, always good to hear from you!
One of the readers asked: “Hi Michael,,,,i watched one of your videos on your software,,,i noticed there is no space to put holding costs and repairs (everything else is there, down payment, closing costs, points etc), i would like to include that cash i mentioned so we can count them among the cash to raise from the partners,,, i may be wrong though. and didn’t noticed that…
My response:
it’s in there, but not necessarily in that one tab. I don’t necessarily want to sell you my analyzer, but you can watch the 17 minute tour of the analyzer to get an overview of ALL the tabs, which most certainly address the holding costs and repairs etc. The video is here (click the Products link above). Some of the holding cost assumptions are set in the SUMMARY tab and then detailed in the 5 and 10 yr P&L tab. The repairs are listed in the SUMMARY tab and affect your cash to close, which of course affects your returns.
Very helpful, Michael. Aren’t apartment expenses higher than even 45% though, especially if you factor in common area utilities, and/or utilities you have to pay for the tenant, like water? Seems I’ve read the norm is more like 55-65%.
Also, would love to see how you handle the projection side of things with the side-by-side analyzer. Cool tool!
Hi Sharon ! Normally the rule of thumb is 45% if tenants pay the utilities, higher if otherwise. That’s why I use 50% as a conservative figure.
Ah … I am working on the next post that shows the projection side of things – should be out next week. Thanks for the interest!
Michael