How to Analyze Real Estate in 2023

[Summary of Transcript] Welcome back to Money Mondays, where we provide you with new content every week – from real estate investing, business strategies, partnerships, to technology – all in new videos that equip you with the right tools and tricks on how to analyze real estate deals in 2023 on your own. Or, if you prefer a more hands-off approach, you can invest with us.

At Disrupt Equity, we underwrite deals and analyze real estate opportunities to make sure you earn the best returns possible. With over 700 million dollars in real estate and 4,500 units currently under management, we’re proud to say we provide our investors with consistent net returns of 30 to 50 percent annually.

In this video, we’ll analyze real estate deals for 2023 including financing, the types of properties you should be considering, the important market trends to look out for in different regions, and how to analyze potential deals. It doesn’t matter if you’re a seasoned pro or a first-time investor, we guarantee that you’ll walk away with more tips, tricks, and strategies on how to buy the right deals.

Analyzing Macroeconomic and Micro Submarket

There are two types of markets: a macroeconomic market and a micro submarket, and when you analyze real estate you want to be sure to look at both. The macro market looks at the big picture, such as if it’s in a recession, experiencing inflation, or rising interest rates. These factors affect the debt and loans for any property purchase. 

But here’s where it gets hyper-local: the micro submarket. Real estate experts say that it’s all about location and understanding the market at a more granular level. What’s the population and job growth like in the submarket you’re targeting? Are there Fortune 500 companies and new development moving in or high crime rates and poor schools? All of these factors determine whether you’re investing in the right market at the right time.

Once you’ve analyzed the macro and micro markets and found the right markets for your investment, you can dive deeper into specific properties. Look at the sales price, cap rate, and inventory levels. Evaluate the rent growth in that market too, which is driven by supply and demand.

In the end, we’re trying to leverage supply and demand imbalances to increase returns. If demand is high and supply is low, prices will rise, and vice versa. This is true for multi-family, commercial, and residential properties. By comprehensively analyzing each property and market, we can make sure we’re making the right investment decisions.

Analyze the Financials

Once you’ve identified the target market and shortlisted properties, it’s crucial to analyze the numbers in order to ensure that the deal makes sense. Underwriting a deal involves analyzing the historical financials, plugging them into an underwriting model and projecting future cash flows to calculate whether the investment meets the desired return thresholds. Cash-on-cash return is often considered the most important metric as it measures the annual cash returns generated from the investment relative to the amount of capital invested. 

Other important metrics to consider include average annualized returns and total return, both of which are useful for longer-term projections. Internal rate of return (IRR) is also a key metric, which typically falls in the 13-17% range for Class B and A properties. If everything checks out, the next step is to evaluate financing options. For larger properties, permanent loans from Fannie Mae or Freddie Mac (3-20 year options) may be considered. For properties requiring more attention, such as bridge loans, returns can range from 8-10%, with leverage upwards of 60-70% of loan-to-value (LTV) or loan-to-cost (LTC). Be sure to carefully consider and weigh the pros and cons of your financing options before closing the deal.

When it comes to acquiring financing options for a property, Fannie Mae and Freddie Mac are great options to consider for stabilized properties with higher occupancy. These entities provide the liquidity and loans that give leverage to the lender. Keep in mind that you won’t be receiving loans directly from Freddie Mac, but from the lender.

Bridge loans, which have variable rates, are a viable option for properties that require extensive work. But for properties that are already stabilized and have a consistent income stream, Fannie and Freddie are good options for permanent loans, with potential fixed rates between 5.5% and 6%.

Build a Team

Once you’ve determined your financing options, building a team that consists of the best insurance providers, a top-notch property management company and a trusted general contractor is key.  This ensures that your underwriting and projections remain accurate throughout the property’s lifespan. 

Physical Due Diligence

Finally, it’s essential to conduct a physical due diligence, examining each unit for any issues or discrepancies. By investigating every corner of the property, you can ensure that the overall condition and occupancy are what you expected them to be.

You’re validating the last few pieces of information to confirm that the property you believed boasted a great location and good properties check out. Third parties verified your assumptions and, through onsite visits and unit inspections, you viewed the evidence for yourself. Furthermore, we recommend underwriting with a fair amount of reserves. Given the current economic climate, we’re seeing rising inflation that could lead to inflationary costs on matters like payroll, appliances, and contractor fees. This necessitates having enough reserves in the property to support any market changes. Keep in mind that this doesn’t necessarily reduce or dilute returns significantly compared to the capital raise. For instance, five to ten percent of the raised capital is the bare minimum for reserves but could go up to twenty percent based on asset location and condition. This will provide an extra cushion in case some costly repairs or unforeseen issues arise. 

Remember that real estate investing is no get-rick-quick scheme; it requires long-term approaches. Before diving in, conduct your due diligence and double-check your numbers. If you follow these guidelines, you can secure a prosperous future for the next 5, 10, or 20 years.

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