How We Screen a Real Estate Investment in 5 Minutes or Less
At Breneman Capital, we see thousands of deals a year. When a stabilized deal comes through the door that is located in a market we are familiar with; we do not waste much time in deciding whether we will pursue a more in-depth analysis of a potential investment. With a few simple pieces of information, we can often decide in minutes if we will move forward:
1) Annual Rents and Vacancy Allowance – The first step in running a quick screening is determining the Potential Gross Income on an annual basis. (PGI = the total income that the property could bring in if it were 100% occupied). Calculate PGI by using what materials you have on the property, like a rent roll, to determine the rent that would be collected if all units were rented at full price for all months in a year. Then subtract the Vacancy allowance from your PGI to determine your Effective Gross Income (“EGI”). Vacancy rate data can be pulled from many online sources (Moodys, CoStar, YardiMatrix, Brokerage Market Reports, etc.) or be obtained through discussions with brokers and lenders in the market.
PGI - Vacancy = EGI
2) Operating Expenses – It is vital to know the typical operating expense ratio for the market and the type of building. Operating Expenses (“OpEx”) are estimated differently from market to market. Some markets use a % of EGI to calculate an OpEx estimate. Other markets look to a total expense amount per unit. A significant advantage Breneman Capital has is that we already own similar properties to what we are purchasing, so we can pull expense comps from actual buildings we own and operate. There is no guesswork. If you don’t have other similar properties in the area, turn to experienced brokers, lenders, and property managers and ask their opinion on how buyers/owners are underwriting and actually operating their properties. Once we have determined the OpEx amount, you subtract the OpEx from the EGI to arrive at our NOI.
EGI - OpEx = NOI
3) Arrive at Value – We determine value in this screening by the direct cap rate method. We take the NOI and divide it by the Cap Rate prevalent in the market for similar properties. If you’re active in the market already, take a look at recent sales you’ve been tracking or underwrote to determine what cap rate to use here based on the actual NOI and sale prices of those deals you’re tracking. If you are new to a market, lean on research reports, lenders, and investment sales brokers for current-day cap rate information and comparable properties. Researchers, lenders, and brokers are looking at deals every day and will know the going cap rates.
If we arrive at a value at or above the asking price, it tells us that we would be purchasing the property at a discount to market value, and we would likely engage the seller while we conduct a more thorough underwriting. If we are coming in a lot lower than the asking price at this stage, we screen the deal out and move on to another opportunity.
NOI / Cap Rate = Value
If Value > Asking Price ✅
If Value < Asking Price X
Here’s a downloadable link below to the template we use – feel free to try it out.
Property Screening Template File Download Link (Click Here)
Please keep in mind that the above is just a first pass we do in a few minutes to see if we should spend additional time evaluating and should not be used solely as the basis to make an investment decision.
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