Unlocking the Code: A Recap of Our First Live Commercial Real Estate Modeling
Welcome back to "How to Invest in Commercial Real Estate," where we bring you insights and expertise to navigate the complexities of commercial property investment. In our most recent episode, titled “Episode 132 - Cracking the Code: Modeling Commercial Real Estate Deals in Real Time” we explored a unique aspect of our approach to real estate analysis. This week, we took advantage of a powerful tool we have introduced but have never used—the smart board. Join us as we delve into a recap of our first ever live deal modeling, where we broke down our approach to offering memorandums, and shared our expertise in negotiation experiences.
Treating it as a Numbers Game: The Discipline of Underwriting
Contrary to the misconception that modeling begins after finding a property you love, Criterion emphasizes the importance of treating it as a numbers game, akin to a strategic chess match. Like sales or door-knocking, underwriting and modeling demand a strategically disciplined approach. We explored the importance of evaluating numerous properties daily, establishing basic parameters, and honing modeling skills through consistent practice, ultimately unveiling the secrets of mastering the art of modeling.
The Numbers Behind the Beauty: Identifying the Deal of the Decade
Drawing parallels to the excitement of car shopping in Tulsa, Oklahoma, Criterion highlighted the value of examining a considerable number of deals to identify the deal of the decade. Whether it's a sleek BMW or a promising commercial property, understanding the market and comparing options nationally allows investors to recognize a genuinely good deal from a genuinely bad deal, transforming the search into a treasure hunt with substantial rewards.
West Ridge Plaza: Spotlight on a Promising Property
Moving to the main content of the episode, we presented "West Ridge Plaza" in Topeka, Kansas—a property that caught our attention like a hidden gem. As we vividly discussed the location overview, tenant lineup, and key features such as Target as a shadow anchor, corporate Hardee's, and bustling retail corridors, the viewer/listener got an inside look at our initial assessment of the property, where we crunched the data to see if the numbers made sense.
Analyzing Risks and Upsides: Rent Rolls, Lease Expirations, and Tenant Distribution
Analyzing the rent roll, lease expirations, and tenant distribution, we shared our approach to identifying potential risks and upsides, turning the assessment into a high-stakes detective story. Our discussion covered the thrill of aligning tenants with demographics and strategically managing lease expirations for maximum value, as we unveiled the suspenseful layers of commercial real estate analysis.
Financial Aspects Unveiled: Estimating NOI and Cap Rate
Next, we transition to the financial aspects of the deal. Utilizing a “quick and dirty” model, we estimated a net operating income (NOI) of $1,349,651, offering the property at a 9.18% cap rate. Exploring assumptions on fees, closing costs, and working capital, we unveiled the thought process behind our numbers, inviting you into the captivating world where every digit contributes to the unfolding narrative of a potential investment.
Income and Expense Details: Simplifying the Approach
In the income and expense details, we simplifed our approach, acknowledging that detailed analyses come later in the due diligence process. With an assumed NOI growth rate of 2% in the initial years, we establish a foundation for a conservative yet optimistic financial outlook, laying the groundwork for a financial adventure with calculated risks and promising returns.
Financing Insights: Debt Quotes and Future Interest Rate Considerations
Delving into financing, we provided details on the debt quote, highlighting the potential impact of future interest rate cuts. Our equity details and distribution assumptions followed, showcasing a preferred return of 8% and a standard 70/30 split. As we navigate the financial landscape, you feel the pulse of strategic decision-making in real time, understanding the stakes and rewards.
Exit Strategy Essentials: Projecting Cap Rate Compression and Justification
The pivotal point of our model lies in the exit strategy. While projecting a cap rate compression from 9.18% to 8.25% may seem aggressive, we justified it based on market trends, property quality, and potential future economic conditions. Join us in this critical moment where every decision shapes the outcome, and the narrative of success unfolds.
Financial Outputs Unveiled: Metrics for Informed Decision-Making
We concluded the episode by breaking down the financial outputs of our model, emphasizing metrics such as debt service coverage ratio, cash-on-cash return, equity multiple, and five-year internal rate of return (IRR). Our goal was to demonstrate how a streamlined yet comprehensive model can provide investors with a quick evaluation of a potential deal, arming you with the tools to conquer the challenges of commercial real estate investing.
Empowering Investors: Your Guide to Commercial Real Estate Success
As we share our electrifying insights and walk you through the steps of our live modeling process, we encourage you to check out the visual representation on our YouTube channel. This episode serves as a testament to the meticulous yet thrilling approach we employ when assessing commercial real estate opportunities.
Stay tuned for more exciting episodes where we unravel the intricacies of commercial real estate investing and empower you with the knowledge to make informed decisions. Whether you're a seasoned investor or just starting, our podcast aims to be an informative resource on your journey in the world of commercial real estate.
