I keep telling you guys: Underwrite your numbers! Look at the trailing financials, sure. Understand broker\u2019s pro forma, sure. But underwrite your numbers\u2026<\/p>\n
Understand this:\u00a0It doesn\u2019t matter how much income the previous owner brought in or how much the broker thinks you should be able to bring in. What matters is how much income YOU think you can bring in.<\/p>\n
Similarly, it doesn\u2019t matter how much the previous owner spent to run the property or how much the broker thinks you should spend. It\u2019s how much YOU think running this property correctly will cost you.<\/p>\n
Underwrite to your numbers. Got it?<\/p>\n
I spent a couple of days working up 120+ units in a submarket I know very well. This is a community that just came on the market with a national broker.<\/p>\n
Even though the community is listed as \u201cun-priced,\u201d having seen a lot of OMs by this company, I knew just by looking at their pro forma that they were aiming for no less than\u00a0$4,000,000. Having spoken to them, I realized that I was wrong–they are really pushing $4,500,000.<\/p>\n
As I mentioned, I know the market very well; it is in my target area. I also know all of the heavy hitters in this area. There has never been a transaction involving 100+ units that\u00a0traded anywhere near $40,000\/door, ever! Players in this submarket understand that the dynamics there just do not warrant this type of pricing.<\/p>\n
You should also know that I had personally contacted the big investors in this sub-market for two reasons: to establish whether anyone would be pursuing this deal and to gauge what people thought the value of it was.<\/p>\n
As it turned out, none of the typical players, aside perhaps for me, was interested in playing. And everyone agreed that the price at which the deal made sense was considerably less than that which the broker was peddling this for–considerably<\/em>\u00a0less.<\/p>\n Here are some points of interest:<\/p>\n My gross potential income–this is the total income if I had zero economic losses–is within $5,000 from the broker\u2019s projection. Basically what this says is that I agree with the broker\u2019s estimate of what rents the property can bear.<\/p>\n My other income–which includes income from laundry, pet rent, application fees, late fees, etc.–is lower by about $25,000 than the broker\u2019s projection. But my number is practically identical to the trailing 12 number. This is the broker saying to me, “We know that the current management has only been able to achieve $xyz, but you are better and will achieve $xyz + $25,000\u2026”<\/p>\nMy Underwriting<\/h3>\n