New deal memos e.g. real estate underwriting
Hello readers—in addition to the quarterly fund updates, I wanted to experiment with a new type of content for you all.
I started blogging roughly 8 years ago and found myself writing about personal development, business, and investing. From there I found an accidental niche publishing my deal memos on startup investing, but became disillusioned over the asset class because while it was trendy, it mostly undelivered on the promise of transformative wealth for the average (unaccredited) investor. So 2-3 years ago I doubled down on investing in real estate, starting my fund, and leveling up my operational skills, but mostly have not squared the circle on how to fuse my interests in content and real estate together.
Today, I'm sharing with you a "deal memo" for a very different asset class—namely, what it takes to buy seven figure million dollar plus apartment buildings. In the last four years I've mainly stuck to 1-4 residential multifamily, graduating to 6 unit apartment buildings in 2022, and this year my goal is to execute a seven figure commercial BRRRR so I can offer this higher level option to my investors. My goal in sharing this content is 1) to entertain, 2) to educate, and 3) to express myself and sound check my thinking in public. Let's see how this goes.
America pioneered the 30 year mortgage, and with access to both residential mortgages and commercial mortgages, I truly find real estate to be the asset class for building intergenerational wealth from relatively little. That said, it is a super messy asset class and intimidates many, so why not sit back and live vicariously through my adventures navigating this topsy-turvy industry. In addition to my core values of sharing Prosperity with my readers, my aim is also exploring how to live my values of Empathy, Authenticity, Reflection, and Light-Heartedness (PEARL) in my content.
One ask for you: if you know anyone working who shares my PEARL core values working in real estate investing, would you please introduce me? My goal is to build relationships with commercial brokers in particular, but anyone of good character in the industry I may be able to help and connect to someone else I know.
Feedback welcome as always. Thanks for sticking along and without further ado, the Parkside Apts, Jeffersonville IN underwriting deal memo follows:
Listing:
https://www.loopnet.com/Listing/810-811-Howard-Ave-Jeffersonville-IN/35042640/
Link to my underwriting:
What Has to Go Right
- Lower Purchasing Price: At a purchase price of $3m and NOI of $130k, there is just not enough meat on bones.
- Capital Expenditure: Obviously need to find a team to manage and execute on renovations in the local market.
- Financing: I've never had a deal where a bank offers a secondary mortgage.
What Could Go Wrong
- Debt Burden: What's interesting about this deal is they already have debt in place, so while the terms are good on that, the existing $2m of debt means you'd have to get a second mortgage/financing to close the $1m in remaining.
- Rent Ceiling: Current GSR (gross scheduled rents at 100% collection) is $398k, and even at $900 instead of $800 currently, that is 12.5% increase in rents $447k
- Cash Out Terms: Commercial real estate is basically on sale right now becuase federal funds rates are so high, so it's choking the supply of buyers and also refinancing terms.