Follow us in our five part series behind the scenes of our private equity real estate acquisition process.
In Part 1 of our series we wrote about how we find the right cities, neighbourhoods, and properties to invest in.
Narrow the List Down
From our target property list, we narrow it down to the properties that have the best investment potential. From there we further narrow the list down to find the opportunities that best suit our target deal size (dollar wise) and unit type (size, number of bedrooms etc.)
Collect Financial Information
Next, we contact sellers through brokers and/or personally to collect financial operating numbers and begin a process called “underwriting.” At this point, we expect to receive two types of documents from sellers. 1) Rent Roll 2) Cash Flow Statement.
Analyze Building Rents
The Rent Roll states how much each unit rents for on a monthly basis and any other revenue sources such as parking or laundry income.
Analyze Market Rents
Next, we do market research to determine current market rents for a particular unit type and quality. This is done to see if the current rents in the building are close to market rents and if there are is the potential to increase the rents.
Analyze Building Expenses
Next, we look at the Cash Flow Statement to analyze the expenses to see if they’re in line with market rates and/or if there are opportunities to reduce expenses. Typical building expenses include: property management fees, leasing fees, property taxes, utilities (gas, water, electric), maintenance expenses (grass cutting, snow removal, regular repairs and upkeep), garbage removal, insurance etc.
Next, we build a financial model called a “Pro forma” to determine what the investment experience will look like over the investment period.
Kick the Bricks
We do a walk-thru of the property to confirm the property is as advertised.
Decide to Place Offers
Finally, we have enough information to decide if we want to continue to invest time and energy into pursuing particular properties and move into the Offer and Negotiation phase of the acquisition process.
Follow us to Part 3 of our series where we discuss conducting due diligence, placing offers, and negotiating with sellers.
Five Part Series on Our Acquisition Process
- Part 1 of 5 – Research
- Part 2 of 5 – Analyze (this post)
- Part 3 of 5 – Negotiate
- Part 4 of 5 – Close
- Part 5 of 5 – Manage