So, What Makes A Deal Attractive?
Beauty is in the eye of the beholder. One man’s trash is another man’s treasure. (Insert another cliché here.) We all have varying perspectives around what holds value. What remains constant amongst the majority is that we all want to feel that we got a good deal. The meaning of “a good deal” is specific to each individual, but most attribute coming out ahead to getting a discount.
Ultimately, price discounts are a cherry on top. There are more important deal factors that classify an investment as attractive.
TGG sticks to buying properties that fit our investment strategy, incorporating general real estate factors like location, income and appreciation as well as an executable business plan of upside potential and downside protection.
It does help when we buy investments at nice discounts, but for TGG, the deal’s attractiveness means that it fits our strategy and we have confidence in our ability to perform.
So what really makes a property attractive?
1. Personal Appetite
In order to determine if a deal is attractive or not, we must first determine what we are
looking for. As mentioned before, everybody has differing measures to quantify what they
want versus what they will pass on. Some investors look for annual cash flow while others
look for long term appreciation. An 8% return may be enough for one group while another
looks for 20% plus. Buying a property that is in line with our metrics or supersedes them should signal an attractive deal is on hand.
2. Going in Cost Basis
Sales comps are the biggest tool in real estate, where you look at what similar properties
have sold. We use specific metrics like gross rent multiplier (GRM), cap rate, price per
square foot (ppsf), price per unit (ppu) among others to compare a property to others like it
within its submarket. Usually a lower cost basis, if a property beats out the averages across
the metric board in a neighborhood, puts an investment on the attractive side. Make sure
there aren’t inherent defects or problems that are driving down the price.
3. Income and Appreciation
The 2 ways real estate makes money is through income, or cash flow, and appreciation, or
building equity. Similar to cost basis, if a property generates higher cash flow than another
or it is in an area that will appreciate more over time, it proves to be an attractive asset.
4. Upside Potential
What is the property worth today and what will it be worth in 1 year, 5 years, or 20 years?
Most properties are bought as investments so they tend to trade on income because people look for returns on their money. The biggest factor in this is current income versus future
income. There are 2 ways to analyze this. First, are the current rents below the market? This means that off the bat the property can be worth more by getting the rents to market. Usually there is an associated cost, renovation and capital improvements, otherwise the rents would be at market. Second, what is the area’s projected rent growth? Over time, if the rents increase, the property value will increase accordingly. TGG focuses on acquiring assets that are well below market standards. We stabilize our properties by thoroughly renovating it and leasing them to new market tenants. By increasing the income, we increase the value of the property.
5. Downside Protection
It is easy to demonstrate upside potential and how much money you can make on a
property. What most people avoid is the potential risks if the business plan isn’t executed.
Questions to ask:
1. What are the potential risks of the deal?
2. Can you lose money, if so, how much?
3. Does current income cover the expenses and loan payment?
4. Are you over leveraged?
TGG focuses on these. We ensure that if we are unable to implement our stabilization
strategy, worst case we are breaking even, typically 2-4% cash-on-cash, on the current low
income.
An attractive deal does not necessarily mean a price discount. What is more important is establishing investment criteria and finding assets that either meet or exceed the criteria. That is the true discount.