d_navies

[JonathanYarwood @JonathanYarwood]

I use this angle a lot in my teaching. You can see so much. Three takeaways you can use are: https://t.co/bNDyE3KZvs and arms get going before body at start (good sequence) 2.Upper and lower body separate as he’s approaching the top (earlier than you think) 3.Tbe pelvis stays out of the way at impact so the right arm has room to operate and stabilise ⛳️👌🏼👍🏼👏🏼(vid @greg_castleman)

[Patrick Collison @patrickc]

I think it's stratified by generation, but here's an attempt. (This isn't the list of books that I think one ought to read -- it's just the list that I think roughly covers the major ideas that are influential here.)

The Tinkerings of Robert Noyce
Seeing Like a State
The Dream Machine
The Sovereign Individual
The Beginning of Infinity
Surely You're Joking, Mr Feynman
Softwar
Ashlee Vance's Elon biography
The Mythical Man-Month
Mindstorms
Masters of Doom
Skunk Works
Structure and Interpretation of Computer Programs
Thinking in Systems
Superintelligence
The Whole Earth Catalog
Zero to One
The Hard Thing about Hard Things
Founders at Work
Showstopper
Dealers of Lightning
The Making of the Atomic Bomb
PG's essays
The Rise and Fall of American Growth
The Big Score
Finite and Infinite Games
A Pattern Language
The Selfish Gene
The Lean Startup
Marginal Revolution (if it has to be a book, Stubborn Attachments)
Revolution in the Valley
Uncanny Valley
LessWrong
Slate Star Codex(/ACT)
The PayPal Wars
The Cathedral and the Bazaar
The Diamond Age
What the Dormouse Said
Zen and the Art of Motorcycle Maintenance
The Rise of Theodore Roosevelt
Titan (on Rockefeller)
The Power Broker
Gödel, Escher, Bach

[The Real Estate God @TheRealEstateG6]

HOW PRIVATE EQUITY FIRMS ANALYZE DEALS:

Most important metrics:

1. Stabilized yield:

Since we focus on value add, the entry cap doesn’t matter, as long as we can service our debt

Stabilized yield matters since it shows the intrinsic cash flow of the deal

Stabilized yield is the post-renovation NOI divided by all the costs in the deal

We typically need to get to at least a 150 bp spread between stabilized yield & market cap rate for a deal to pencil (ex if MCR is 5%, need a minimum 6.5% SY)

Ex: buy for an in-place 4 cap, increase revenue to get to a 6.5, sell for a 5 cap. If you buy for $10MM with an NOI of $400k, put in $2MM in renos & bump the NOI to $780k, you stabilize at a 6.5 yield ($780k/$12MM)

Property is then worth $15.6MM ($780k/5% market cap), for a profit of $3.6MM

Speed matters as well (quicker is better for IRR)

Stabilized yield is more important than IRR because it displays the intrinsic value of the cash flow

Whereas IRR is a bet on the state of the capital markets (debt available) at sale as well as cap rates at sale, which makes it a guess 

2. Basis (you can show us any IRR you want & we’ll toss it if the basis is bad):

What does this mean? It means that you want to look at comps & make sure that in any deal you buy, you’re paying less than market average

So if you take 10 comps & average sale is $100k/unit, you want to be buying for under that

Otherwise (barring the property being markedly better), you’re not getting a good deal, you’re simply paying “market”

Furthermore that means, in order to sell for a profit, next buyer will actually have to pay you “above market”. A dangerous bet to make - you’re essentially betting on a “greater fool”, which brings us to the next metric

3. Exit basis:

Heavily tied to #2 - you don’t want deals where the projected exit basis is significantly above current the market basis

Ex if the current market basis is $100k/key, you’d want to buy for $60k/key & pencil a sale at $80k/key

That gives you a lot of breathing room & allows the next buyer to make money as well

Easier said than done, but this is how disciplined underwriting works

4. Unlevered vs levered returns (IRR):

This is just a gut check to make sure that our leverage isn’t out of control  

You want to check to make sure that the levered returns aren’t drastically different than the levered returns

Otherwise you don’t have a good deal, you just have a lot of leverage

5. Equity Multiple:

Only check this to make sure that they’ll be enough profit for the deal to be worth it (no point in 20% IRR & 1.2x EM - waste of time)

6. Cash-on-cash:

A lot of amateur investors emphasize cash on cash returns but it’s a far less important metric than stabilized yield because it’s reliant on the debt capital markets at any point in time, which isn’t intrinsic to the property

So it’s “downstream” of the yield

It’s also less important for quick flips (what PE firms do) as a lot of units turn over during stabilization, which results in choppier revenue for those years

We essentially ignore this metric & expect cashflow to be low during the hold

7. Components of NOI:

Then you look at the cash flow itself

What’re the components of the rev? What’re the components of the expenses? What risks could cause major fluctuations in either? Are you willing to accept these risks? How do these risks compare to other deals?

Go into each deal with eyes wide open

There’re risks to every deal (unavoidable) need to make sure the deal makes sense on a risk-adjusted basis

So this isn’t really a metric, but the deal needs to be actually viable on a risk-adjusted basis & the property has to be actually good real estate

Investing in only *great* RE has allowed us to outperform

If you’d like to learn how to underwrite & buy deals (even smaller deals, my first deal was $200k & I only used $2,500 of my own capital) apply in the next tweet for the Acquisitions Bootcamp to work 1-on-1 with me

[The Real Estate God @TheRealEstateG6]

What's the relationship between cap rate, return on cost, and stabilized yield?

This is arguably the most important relationship in real estate and most people don’t understand it at all

It’s actually really simple:

Let’s start with the basics

- The cap rate is the NOI divided by the purchase price. When you buy a deal, you buy it for an in-place cap rate

- The return on cost is the NOI increase of a specific action (usually a renovation) divided by the cost of that renovation

- The stabilized yield is the new NOI divided by all the costs in the deal

Stabilized yield is an extension of the cap rate through the duration of the deal by adding the NOI changes to the numerator and by adding the additional costs to the denominator of the formula

For example, if a property was purchased for $1MM and the NOI was $100k, the *cap rate* would be 10% ($100k NOI / $1MM PP)

If you executed a $100k renovation and that increased the rents and therefore the NOI by $20k, the *return on cost* of that specific renovation would be 20%

($20k NOI increase / $100k renovation cost)

Then you add the NOI increase to the numerator ($100k + $20k = $120k) and the cost increase to the denominator ($1MM + $100k = $1.1MM)

Which leads to the *stabilized yield* being 10.9% ($120k new NOI / $1.1MM total costs in the deal)

So you take the initial cap rate and add in each return on cost action (the new revenue gets added to the numerator and the new costs get added to the denominator) to get to the stabilized yield

It’s that simple. People try and complicate RE a lot but it’s literally division

Whole idea is to get your stabilized yield above the market cap rate in order to sell for the market cap rate and get cap rate compression

That means that every action that would result in a return on cost greater than your market cap rate, you do

But any action with return on cost < market cap rate, don’t do

In the example above, if the market cap rate was the same as the entry cap rate (10%), the property would be sold for $120k / 10% = $1.2MM

The total costs were $1.1MM. So your total profit on the deal would be $100k

The reason the profit on the deal is so small is that the spread between your stabilized yield (10.9%) and the market cap rate (10%) is so small (only 90 bps)

Typically you want to shoot for at least a 150-200bps spread between the two if you want to make good money

And that’s basically it. It’s very simple. In place cap rate gets altered by every action you perform at the property (and each action has a return on cost)

The cap rate + all the return on cost actions = stabilized yield

Stabilized yield > market cap rate, you make money

[Ayush Soni @ayushsoni_io]

Here are 10 beautifully designed + well executed websites I found this week:

[PGA Tour @PGATour]

Breaking down the picture-perfect move of @JDayGolf 🏌️‍♂️

https://t.co/OC7aCMuKTA

[to:re @xxmrit]

Quick mental math to see how the promote affects LP returns. Eg. waterfall: 7% pref, 20% promote 7% -15%, 50% from 15-20%.

Use deal level IRR. Let's say 20%.

0-7% = no promote
7-15% = (20% * 8%) = 1.6%
15-20% = (50% * 5%) = 2.5%

LP IRR = 20% - 1.6% - 2.5%
= 15.9% LP IRR

[BuccoCapital Bloke @buccocapital]

Having career convos in the new year. One consistent theme:

Early-career folks are often mad that their careers don't have more "liquidity"

They want a direct and immediate connection btw output and compensation/title. Essentially, they want to be "priced" in real time...

[The Real Estate God @TheRealEstateG6]

In real estate there are $200,000 job opportunities and there are $5MM job opportunities

The key is knowing what to look for

Here are the questions you should be asking:

[Barrett Linburg @DallasAptGP]

Unlevered Yield on Cost

For value add or new construction real estate it is the most important underwriting metric

It is super simple and often misunderstood.

🧵 BELOW

[The Real Estate God @TheRealEstateG6]

The goal in real estate is to make money

You make money when you get the stabilized yield 200bps+ above the market cap rate

So your main criteria in a market (as a beginner) should be to find a market that has deals where you can stabilize 200bps+ above the market cap rate

[Ryan Auger // Industrial CRE @redwood_ryan_a]

Self Storage Development Series, Part 1 of X

Have you ever looked at asking prices for crappy storage facilities and wondered, "why would I pay this crazy price when I could build a class A property, exactly where I want it, for the same price?"

If so, this series is for you!

[The Real Estate God @TheRealEstateG6]

What's the relationship between cap rate, return on cost, and stabilized yield?

This is arguably the most important relationship in real estate and most people don’t understand it at all

It’s actually really simple

// THREAD //

[Multifamily Madness @MultifamilyMad]

Here is the link to the deal analyzer webinar recording if you were unable to attend last evening. Hope you enjoy!

https://t.co/gfHqGcRua7

[Multifamily Madness @MultifamilyMad]

Ask and you should receive!

Here is the link to download my multifamily deal analyzer I made and use to purchase millions of dollars of multifamily properties. Hope you guys enjoy!

https://t.co/ZoGZIgpzrS

[The Real Estate God @TheRealEstateG6]

Question I used to ask every interviewee when I ran recruiting at my old firm:

You have 2 buildings on the same block that appear physically identical

What are some factors (aside from the slightly different location) that would lead the buildings to have different values

[The Real Estate God @TheRealEstateG6]

One of the biggest mistakes I see beginners make is not understanding the market cap rate

If you don’t understand how the market values the property (the market cap rate), you’re going to lose money

Here’s why: