BASICS – It’s Easy! 5 Minute Deal Analyzer!

Analyzing real estate deals isn’t particularly hard, you just have to know basic math and have some information about the property.  Today I want to share with you how I use my 5 minute deal analyzer method on a property to determine if it’s worth a deeper look.

Here are a few things to keep in mind:

• You have to look at a lot of deals before you’ll find a good one.  Really, a lot.
• The better you understand the process, the quicker you’ll get at evaluating a deal.
• We’re going to use estimates.  THEY WON’T BE ACCURATE! So don’t ever make an offer based on this quick analysis.

What you need to know:

• Location – before you even look at the financials take a look on Google Street view / Maps and make sure it’s an area you like.  A good deal in a bad location is just going to cause you headaches.  
• Price – If the property is listed, this is usually easy.  But if you’re dealing directly with the owner, they might expect you to make your best offer.  
• Number of units – I like 10-50 unit properties, but the method will work for smaller unit counts.
• Gross Scheduled Income (GSI) – If you can’t get this, you can get close by just taking rent x unit count x 12.  
• Occupancy rate – I will usually assume 90% occupancy.  If you know it has down units, or other reasons for a lower occupancy rate, adjust accordingly.
• OpEx – operating expenses, I’ll assume 50% of net revenue. This includes all costs to operate the property (not including your debt).  Property management, leasing fees, maintenance, property taxes, etc.

EXAMPLE 5 MINUTE ANALYZER

A spreadsheet is worth 1000 words, so you should build your own.  I’ve got one available for you to download, but you really need to understand how to do it yourself.

For our example, we’ll use the following details:

Price – $750000

Units – 12 (8 studio units, 4 -1 bedroom units)

GSI – owner didn’t provide, just said that he’s getting ~$600/unit for studio units, and ~$700 for the 1 bedrooms

Occupancy rate – owner says it’s always full (ok, but we’ll assume he really meant 90%).

So, here we go.  First we’ll calculate GSI.  Here’s the formula:

GSI ($91200) = (((8 x $600) + (4 x $700)) x 12) 

Next we’ll calculate Net Revenue.  

Net Revenue ($82080) = GSI ($91200) x Occupancy Rate (.90)

Next we’ll calculate OpEx.

OpEx ($41040) = (Net Revenue ($82080) * .50)

Now we’ll calculate Net Operating Income (NOI).  Here’s the formula:

NOI ($41040) = Net Revenue ($82080)  – (OpEx ($41040))

Hopefully the math made sense and wasn’t too painful.  I really encourage you to look at or build a spreadsheet, it’s way easier than reading through my description of the 5 minute analyzer.

But now we know this property has a NOI = $41040, great! 

But is it a good deal?  Here’s where you might need to talk with a broker to get the local cap rates, you can also compare to other deals in the area, or look to sources like Marcus & Millichap or CREXI, both publish reports for major MSA’s that will have cap rate information for different asset types.

The cap rate calculation for our example would be:

CapRate (.05472) = NOI ($41040) / Price ($750000)

As a percentage, the cap rate would be expressed as 5.4%.  

The last calculation I’ll leave you with is the mortgage payment.  For 5+ unit multifamily properties at this price point your best bet for financing are local banks and credit unions.  

The terms won’t be as good as residential.  Expect to put 20-30% down, pay a higher interest rate, have a shorter amortization period (20-25 years) and these loans typically have a 5 year rate adjustment and 10 year term.  There are plenty of websites and apps to calculate a mortgage payment, so I’ll leave you to search for that. 

For our example I used 20% down payment ($150000), so the loan amount was $600000,  4% interest rate and 20 year amortization.  That resulted in a monthly payment of $3635, or $43630 annually.

CONCLUSION

Well, that was a lot of text to describe a few simple calculations.  Hope you found the 5 minute analyzer helpful.  Realize that the more you practice doing the calculations the easier they become.  Also, it really does help to just look at a lot of deals.  You’ll find unique and interesting issues that will help you in evaluating deals.  

Before we wrap up, did you think this was a good deal?

Nope, I didn’t.  Not at that asking price.  The NOI ($41040) won’t cover the debt payment ($43630).  So, a bank or credit union wouldn’t loan you money for this deal.  They use a Debt Service Coverage Ratio (DSCR) to evaluate deals, most require the DSCR to be 1.25 or greater.  This means that your NOI / Payment needs to equal at least 1.25.

I’d suggest you take a few minutes and work through the process again and find a sales price that might work.

Hope you found this helpful, please leave a comment if there’s anything I missed or could make more clear.