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Beginner’s Blueprint: Analyze Rents, Expenses, and Market Before Buying

Let’s say you’re a beginner looking at a new market for the 1st time Figuring out where to start can be daunting Here’re the steps you should take so you can start buying deals 1. Source market rents 2. Understand expense load 3. Get to know the market Let’s get into it: The goal is twofold. 1. To be able to build a P&L in the market from scratch and 2. To know where/where not to buy in the market 1. Market rents - ideally you have access to the costar or MLS If you don’t, you can ask brokers who’re currently marketing deals for comps on their specific deal and catalogue those If you don’t have access to costar/MLS and can’t get comps from a broker, look on Zillow or apartments dot com. This won’t be perfect as they’re not “closed” comps but you should still be able to triangulate. You can also call up neighboring buildings and get real live rent quotes 2. The expense load - Go on loopnet or Crexi. There should be tons of deals being actively marketed for sale in the market Click on the individual deals and download every single P&L you can find (if they’re not publicly listed, call the broker and ask for them) You need to get 5+ P&Ls at minimum. Take them and line them up in excel next to each other Now you want to catalogue and record: - the cost of each line item per unit (utilities, insurance, etc) - the cost of each line item per SF - the overall NOI margin What does this allow you to do? Well now that you have this information, you can underwrite new deals from scratch Once you know the unit count, you can simply reference your data to see what the appropriate cost per unit should be and plug that into your underwriting You can also talk to property management companies in the area to get a good sense of expense load So by this point you should be able to build out an entire P&L as you have the revenue (market rent) and the expense load down pat 3. The market - you want to understand the places to avoid and the places to buy You’re going to call up 5 brokers and (while discussing a deal they have listed) casually ask them what areas they like and what areas they don’t This won’t be perfect, but it’s a good way of quickly getting up to speed as the really good and really bad submarkets will become apparent immediately This gives you a guide of where to buy In addition, properties are valued based on the market cap rate So you’re also going to want to figure out the market cap rate as that’s how you’ll be valuing every property in the market So how do you do that? - Get financial info (NOI) on every property listed for sale in the market (this is either publicly available on loopnet/crexi or you’ll have to sign a CA to get it) - Wait for the deals to transact to find out the sale price, note down in-place cap rate and stabilized cap rate - Adjust for any idiosyncrasies So at this point you now know the rent, the expenses, the market cap rate and the best/worst submarkets in the city You have everything you need to start buying deals