When building wealth in real estate is it critical to understand your real investment risk. Too often individuals will accept information from a seller or Broker as fact. After all, surely they wouldn’t lie about the property would they? I am not suggesting that anyone would intentionally provide fraudulent figures to you in order to induce you to purchase a property. I am however suggesting that a seller or Broker will spin the information to make a property appear as attractive as possible. After all, wouldn’t you if you were selling? Of course.
Just recognizing that you are being fed what the seller wants you to eat should make you a little wary. Still, you have to start somewhere in your analysis of a property, and the place to start is with the Seller’s or Broker’s information. Just remember, this is the start! Now you need to finish.
Once you have the seller’s/Broker’s offering information review it carefully. Look for obvious gaps in the data. For example, expenses are frequently left out of offering information. Management fees are a great example or those often excluded from expenses quoted in offering materials. By excluding management fees from property expenses the noted NOI will be arbitrarily high and therefore create a higher value based on prevailing market capitalization rates. The argument will be made that since you probably plan to manage the property yourself, you won’t have to pay this expense. I disagree. The fact that you are going to manage a property does not mean that you will not have to pay this fee; it only means that you should pay the fee to yourself. Remember, when your portfolio is big enough you will have management personnel, so treat your early investments like you will those down the line.
Once you have a firm grasp on the seller’s numbers, verify them all. Request operating statements, copies of invoices, tax returns, audited statements or anything else you can use to verify the numbers given. Chances are you won’t get everything you ask for. Be willing to sign a non-disclosure form to gain access to available sensitive information. Even if you don’t buy the property you are looking at, every time you get to the bottom line on an operating property you will have a deeper understanding of both your specific market and the exact property type you are considering.
If necessary, you will have to reconstruct a property’s operations according to your management style and philosophies. If you are unwilling to crunch the numbers, don’t expect for your purchases and operations to go smoothly. The biggest money is lost in investments where the buyers did not do their homework. Take the time to control the nickels and the dollars will take care of themselves.
To recap: collect the necessary numbers, consider all incomes and all expenses then run the reports and projections. Only buy real estate that will be profitable once you own it. That’s the only guaranteed recipe for long-term real estate success.
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