How To Analyze A Multifamily Real Estate Deal in 10 Minutes

In this article, we are going to talk about how to get started with real estate investing and how to analyze multifamily real estate deals in just 10 minutes.

If you are into this business you cannot afford to waste hours on analyzing one deal all the time. Let us understand how to analyze the deal within 10 minutes of getting a marketing package, so you can make an offer quickly. That’s where we’re going to cover today.

For people who start with multifamily investing one of the biggest challenges for them is analyzing a deal to make an offer.

What you need to understand as a starter is you should be having the tools and techniques to analyse the deal effectively in a short period of time.

When you get these marketing packages, some of them are twenty or more pages long.

So it becomes overwhelming for a deal analyser and due to this he might choose to quit at certain times.

But we all know real estate is a numbers game. So the more offers you can make the more chances you would have actually doing a deal. This sometimes becomes hurdle for many of us.

So here we are going to discuss the 10-minute offer technique. Within 10 minutes of getting a marketing package, you can make an offer the way it works for you.

Basically take the numbers that are provided to you by the broker in the marketing package.

You apply some rules of thumb and then you essentially use the brokers’ numbers against them to make the offer and this only takes 10 minutes.

If you get a nibble meeting that you get a counteroffer or you are invited to make a writing at that point it’s time to go one level deeper which when I kind of caught cover on this call, but 90% of the deals never get to that point. So why waste time itemizing the expenses making phone calls researching a deal when you don’t even know if you are in the ballpark.

So now we are going to create and use a spreadsheet. It is actually part of the syndicated deal analyzer that you can purchase but you can very easily create this yourself because we are not going to get into deep analysis. We’re just going to work with price.

The 10-minute offer goes something like this.

You would take just the income that you get from the broker you adjust it using rules of thumb then you adjust the expenses and then you apply a cap rate to come up with a new price. So that’s how it looks like an overview.

So once we have this marketing package. This is a 20 unit in Texas. It’s lovely and looks great. It is in a good area and you are provided with trailing financials, which are here. Let us have a quick tour of the market package a broker is telling you. It talks about what they have done to the place and the rent roll.

So this is just a kind of a typical run-of-the-mill package now for the terminal for all. We really care about is the financials now, if you are provided with a real financials.

You are not calling a bunch of people you are not visiting the property you are not doing any of that stuff you are using the broker’s numbers essentially against him- is what we are going to do.

So step one is to basically replicate the numbers. So the numbers those were replicating going to be in a column, which is a trailing 12 months.

So we are going to go over here into our spreadsheet and we are going to put those in here in the column 1 which is the marketing package. So it is a hundred forty-three income. There’s some other income total net income of a hundred forty-five. And then we are going to be having 40,000 dollars in expenses.

So that’s the first thing is simply just replicate what they have done here.

Here the rule of thumb which is the step number one is to adjust the income. Going to take the income as it is. We have no reason to believe the other income is wrong looks about right.

Who knows but what we are seeing is that the rule of thumb is that we have 10% economic vacancy. What does that mean? That means economic vacancy consists of essentially physical vacancy, which are direct units and not rented and then there might be economic vacancy, which means people are not paying their rent, that kind of stuff just in simple terms.

The rule of thumb is that we are going to use a 10% economic vacancy unless we are really in hot markets like New York, San Francisco or Miami or something like that. That is the first adjustment we are going to make to their numbers is we are going to apply vacancy rate to that because they did not do that. They are just reporting essentially full units.

Now step two is we are going to adjust the expenses now, but we are not going to do it. There is room for itemized expenses. But we are not going to do it for the 10-minute offer. At least, what we are going to do is a rule of thumb is that the expenses are 50% of the income. If the landlord is paying all utilities, you might want to go to 55%, but we are going to use 50% for this example here.

And as you see here the reported financials that they had here was only 40,000 which is only under 30%. Take a note here that there are no taxes or property taxes in here at all. So it is missing here. So again, you do not have to go into detail. But the defense is definitely oh low, so you apply the rule of thumb to the income and then you apply the cap rate.

Now if you remember the broker telling us or if not, it holds it either in a marketing package or you can ask them. What is the cap rate now? The cap rate is essentially a multiplier of how much what return people are willing to settle for in a particular building. So as you know apartment buildings, they are valued based on their income their net operating income their NOI which in this case is right here.

Formula for cap rate is price or value equals the net operating income or any y divided by the cap rate. So the cap rate is simply essentially a way for us to estimate the fair market value of a building. So if we know the net operating income, we know the cap rate we can estimate the fair value of the building.

Now we have the cap rate from the broker which is 7.5%. We have a new NOI and we can apply that cap rate the 7.5% to that. So it’s the NOI to bite a cap rate and that value now is 872. These guys are asking 1.1, but nevertheless if we adjust the income to and apply the brokers cap rate. To that income the actual accurate values 872.

So now we know that is actually probably closer to the truth. And that is really as a 10-minute offer.

Now, what we are going to do next is we are actually getting back to the broker by applying what we heard here and essentially making an informal offer.

So far we did three things. We adjusted the income. We adjusted the expenses and we applied the brokers cap rate to the adjusted NOI to get a fair market value of the property.

Now what we can do next is step four, which is to get back to the broker quickly with our analysis and informal offer price.

So it’s very important that we do this because most of the time brokers do not actually hear from any buyers and if you do that, you are going to differentiate yourself. So this is what you are going to get back to with the broker right so you can see and say something like -

hey Rob, I appreciate you sending over the package, it looks really good. Nice solid package. So I was looking really at your trailing twelve financials and I was looking at the income and it is a hundred forty-five thousand and I noticed there wasn’t any vacancies reported. So I’m just going to adjust that with 10%, thinking as 5% vacancy physical vacancy and other 5% of bad debt is a similar to other properties that we have seen as well and a partner of mine actually did one. That is kind of what we are seeing in the area.

So I just add that little bit and then your expenses look low there about 27% of income.

My experience has sinned as well as my partner’s that they are dated to between 50 and 55% of income yours only 27 now, I did not drill it in detail into the expenses because I look a lot of deals right now. I just for example notice that there are no real estate taxes in a p&l. So there is a bunch of stuff missing. I just don’t know exactly where but I know they say if we were together in the contract and look into it at the expenses would be probably at least 50% of income.

So I just did the expense side as well. Now you said this is a 7.5 cap Market. I’m inclined to agree with you even though I’ve seen stuff tray a little higher as well, but let’s go with 7.5%.

So if we apply the 7.5% to the adjusted, the fair market value is really right around eight seventy or so. Now you guys are asking quite a bit more 1.1. Is there any flexibility on the cellar?

So here, you have done three things:

1. You spent no more than 10 minutes analyzing a deal.

2. You got back with the broker and which is huge because it differentiates you.

3. You already just started negotiation process you made an offer is really what is now one of several things can happen from this. You could get no response, which means you are way off base you can get a counteroffer or you could be invited to actually put something in writing at which point you have you get to the letter of intent phase.

At that point you can go deeper in the analysis.

We have mentioned before that 95% of deals you never get. Then why should you spend a lot of time up front? All right, so don’t waste time analyzing your deals, just apply the 10-minute offer.

If you do, well, you are not only suspending you only spending 10 minutes on analyzing a deal

Hope this was useful for you to get started with apartment building investing.