I've done $1 billion in Comm. RE acquisitions, ask me anything

24 Replies

I have worked as an acquisitions analyst for the last four years at a large REIT and then a private equity multi-family shop

I have acquired over 1 billion (with a B) in real estate spread across 22 deals in 5 states 

I see a lot of questions on here about underwriting or deal analysis especially for multifamily. I have underwritten thousands of deals, so ask me anything

would you say the same principles apply for the smaller investor looking for their 500k to 2 mil deal that might be more realistic with the majority of BP members.. 

with your very large deals  making an assumption    but do the reits look at smaller returns given the velocity and size.

most private investors really are looking to nail those deals that have the highest returns possible/ and a lot of times un knowledgeable or prepared for the risk/ reward  scenario. 

@Jay Hinrichs

Between 4 units, 40 units, or 400 units, the same basic principals apply for underwriting future cash flows. The differences really come about with your ability to project those cash flows. With a 400 unit property, you have historical financials, so you know the property made a certain amount this year and last year, so you can more easily project that going forward by tweaking those cash flows. You have also hopefully underwritten other deals in the area so you can better see how this property should perform compared to its comps. For smaller deals, you do not have the same access to that kind of information especially if you are a beginning investor.

With any deal underwritting correctly is about identifying the risks in a deal. There are risks in every property of every size, and you can only effectively invest if you understand those risks and how you are going to mitigate them. Where people make the biggest mistakes is by not accurately identifying risks in a deal

@Jay Hinrichs

Returns wise, I have worked with a lot of different REITs and private equity investors and everyone has different return metrics and investment objectives that they are looking for. It is impossible to lump them into one return category to compare them to personal investors

@Ethan Smith

Most of the deals I do are marketed by a brokerage company. They are being sold similar to how single family is sold by a realtor

The best deals come from identifying value-add potential that others have missed, like adding a RUBS billback program for water/sewer, adding washers-dryers to the units, cutting marketing expense from a better deal with online marketing

@Bill Plymouth

Probably not getting enough comps. Before buying a deal you should have rent comps, sales comps, tax comps, and expense comps

Or confirmation bias, they either pick out comps that support their investment or they look at all of the comps and believe that their deal is better because it is their deal

@Megan T. When investors look to make the leap to commercial, what are some things that are often miscalculated/underestimated with respect to proper analysis of the property?

@Jay Hinrichs the last part of your post caught my attention. Do you think that being unknowledgeable/unprepared for the potential risk/reward situations is due to speculation and the hope for landing a large deal? Almost reminds me of when people invest in the stock market without having much knowledge of where/what they have invested in, but are hoping for the stock to take off.

@Megan T. I've heard that some speculators (who haven't invested in this space) are scared off by the bigger tax percentages and that property reappraisals ~3 years after purchase can eat away the profits that are expected to be made. What cautions do you give or how do you account for the variability when underwriting a deal? Thanks for your time.

@Scott Mac

I was a finance major, real estate minor in college. I ended up at the REIT for an internship during college and then was placed on their acquisitions team after graduation. I learned all of my modeling and underwriting skills on the job and the fundamentals and real estate basics in college

I have done unit walks and lease audits during due diligence. You definitely come across some interesting finds during unit walks

@Andre Jernigan @Cara Kennedy

I can answer these both at once because I think real estate taxes are the most common misunderstanding in a lot of financial models

Every county and even every city in some areas have different real estate taxes. Some reassess every year (FL), some are every 2 (CO), some every 4-8 (NC, SC). Some jurisdictions will hit you with your sale price after the sale, some will not. Since every jurisdiction is different, it is important you understand how real estate taxes work today and how they will be impacted after the sale. The best way to do this is to check real estate tax comps (maybe the property across the street sold recently and you can see how their taxes increased) and by speaking directly with the county assessors office.

Cara, in terms of avoiding this asset class due to RET increases, it is just another risk that you need to understand and underwrite correctly. Everybody should be underwriting RET increases similarly, so this risk is already baked into the pricing. Also, I believe these increases apply to residential real estate as well (once again depending on the area) and are something everyone regardless of deal size should be educated in and understand.

Yes absolutely. I fortunately cover the southeast where these are not as popular, but I know of a few deals that have deteriorated due to rent controls.

Originally posted by @Alexander Hish :

For multifamily, are there ever concerns of states/counties enacting rent control acts? Have any of the properties you've dealt with seen unexpected profit loss from such acts?


Account Closed

EXCELLENT question, and a tough one to answer

My advice would be to run the numbers by as many people as possible. In my experience, the more people who look over something the less mistakes it will have because everyone will find something either big or small. So if you are a brand newbie, definitely run your deal by a few friends and family before you invest. They do not have to be investors, everybody lives somewhere so they all have experience with housing. Maybe a friend who is currently a tenant tells you your rent is too high or too low, maybe your uncle reminds you that the roof is old and will have to be replaced soon. To avoid confirmation bias, when people raise concerns or ask detailed questions really think about them and don't just blow them off because you are educated via podcast and books.

I do not do deal by myself. By the time a property is acquired 5-10+ industry professionals have looked through my numbers and investment rational, and I still make mistakes. So definitely run it by as many people as you can. Real estate is not overly complicated, so you should be able to effectively communicate your investment plan and answer questions from anybody.