In real estate investment analysis, more commonly referred to as ‘the numbers’, is the be-all and end-all for many investors and soon-to-be investors. In meetups, on forums, and in the real world, investors as a whole have this obsession with the best spreadsheet, tool, or person to analyse a property for investment.
Yes, analysis is vital to having success in an investment, especially in real estate. The type of analysis I so frequently see is simply plugging in given numbers into some super complex spreadsheet. In reality, the fundamentals are only doing basic math.
What so many fail to see is that anyone can do this type of analysis. There are literally hundreds of spreadsheets online that allow the same analysis of an investment property. Often the spreadsheet gets downloaded, the income and expenses for a property get plugged into the spreadsheet, and out pops a number for cash flow, value, COC, ROI, IRR, or whatever else you could ask for.
Anyone Can Analyse A Good Deal
I believe creativity is greater than analysis. Whether you’re buying single-family houses or large apartment complexes, if you simply take the actuals and plug them into a spreadsheet and say, that’s what the property’s worth, and I want to buy it for 70% of that figure, then you will forever get outbid by someone who can see an opportunity that doesn’t show up on that spreadsheet anyone can create. Now, don’t get me wrong building in a margin is crucial if you want to make a profit, there are ways to leverage a deal that can provide greater value, especially for an experienced investor.
As competition continues to increase in most real estate investment strategies, the above statement only becomes more true. This is when you either decide to cross your arms and complain that it’s too hard to find a good deal. Now is the time to read between the lines of the spreadsheets and look at the properties in ways others may have missed. By using creativity, you can see the opportunity for value that a spreadsheet cannot communicate
Example #1: Tulisa Mews
A great simple example of this is a property I recently purchased — a 70sqm 3 bed, 1 bathhouse. That apartment sat on the market for a very long time because there was not any demand for rentals in that area. There was no apparent way to remedy the kitchen due to the size restraints of the house and the floor plan limiting expansion.
Rents in South Africa have not improved much over the last 2 years with 1.7% being the national average compared to the 10% experienced in 2015. With a large inventory of sectional titles and the increased competition from bigger companies, my maximum allowable offer was 350K a 45% discount on the current market price. Fortunately, through creative lenses. The deal could work as rental if we could acquire the property at R250K I simply had to convince the seller to maintain some equity through another entity. This freed up enough equity so we could compete with larger businesses. I was able to get the property at a great price and with some minor changes, allowed this property to be a fantastic investment. It seems so simple once it is done, but somehow loads of investors looked at the property, ran the numbers, and let it go.
Example #2: The Apartment Complex – The Master Lease
A larger-scale example of creativity being greater with Steve. Steve found out that a couple was about to list their 12 unit apartment complex in a good neighborhood. Through some impressive investigative work, we found out that the couple did not want to sell their apartment. They were managing the apartment remotely. Steve also found that each apartment was renting out and R5,000 a month and that it was only half vacant.
Steve does not have the 30% downpayment he needs to get bank financing for a commercial loan. So Steve comes up with a creative offer presents it to the owners. Here’s how the deal works:
- Steve enters into a 5-year lease agreement with the owners with an option to buy at R5,000,0000.
- The owners agree to a monthly rent of R15,000 for the lease agreement.
- During the next 5 years, Steve works hard to get rid of delinquent tenants, increases occupancy and raise rents by R500 per unit. The total gross income comes up to R66,000. By the end of year one and after spending 50% on expanses his is left with R33,000 and after paying the owners R15,000, Steve is left with R18,000.
- Steve saves half of the R18,000 cashflow for five years, accumulating R540,000 by managing the property effectively. The Owners agree to partner sell Steve the apartment for 10% of the Purchase Price.
- After 6 months the appraisal for the 12 apartment complex came to R6,200,000. With R1,200,000 of equity in the property, Steve has the option to sell the property off or refinance at later date and use the capital on another investment,
The best part is that rentals have increased over the last five years resulting in a greater NOI, which means there was a more likely chance that his property will be sought after by other investors.
Deals are Made Not Found
This is why I now say spreadsheet analysis is a commodity. It is basic math that everyone can do. There are free spreadsheets online to plug in the correct income and expenses in the correct slots to pop out a value. The real value in investment comes from creativity between those lines to force value. Using terms as leverage in a deal is about seeing the value that has been left unnoticed.
The analysis is important, but it is not the be-all and end-all. True value is found between the lines. Take the time to see the property for what it can be. That is where you will add value and boost returns.