How do you evaluate whether a deal is “fundable”?

Question

Before approaching lenders or partners, what numbers do you personally check first? ARV, exit strategy, cash flow, or something else? Interested in how others analyze deals.

Kenneth Garrett · Answer

@Brandon Lee

From a BRRRR perspective, the followings things I look for:

1. What will the ARV be?  I only look at what it could be. Not what it is today.  In that same light, my purchase price has nothing to do with a sellers price.  The only thing that matters is what I am willing to pay for it.

2. What are the rent comps?  Realistically, what is the market rent.  I’m not interested in the high end market rent.  Those tenants don’t stay long term.  I’m looking for slightly under market rent where I can keep tenants for 5 years or longer.  The cost to an investor is truly tenant turnover.  Loss of rent and cost of rehab are investment killers.

3. DSCR ratio number.  Not 1.0 that’s not the way to go.  I still stick to the old 1.25 ratio.  The property must cash flow.  I prefer to be 1.50 or better.  The real number is cash flow.  Will it cash flow?  Lenders don’t like marginal deals. This might take more time to find the right deal.  Better deals always out perform volume of deals.  It’s not the number of doors; it’s the money in your pocket.

Doug Smith · Answer

What type of deal are you asking about? A rental? A flip? Ground-up construction? There will be a few differences with each. Overall, we're going to look at the experience of the borrower, their liquidity/financial assets, and how they've performed over time (credit/character) before we ever get into the individual deal. We'll look at cost and ARV. We'll usually underwrite any investment with a "what if" in mind, meaning will deal cash flow if you can't sell it and have to hold it as a rental. We'll look at skin in the game. There is a lot that goes into us underwriting a deal, but if you can be more specific with the type of deal you're talking about perhaps I can be more specific with my answer. Happy and answer.