what is a property really worth?
DESCRIPTION
How to compute the Net Operating Income/ How to use the NOI to determine the maximum price you can pay. What is net yield as used in the UK? Presented at a meeting organized by Brendan Quinn in the Spring of 2010.TRANSCRIPT
The New NormalMaximum Allowable Offer (MAO) &
Net Operating Income (NOI)13 Feb 2010
London
1Tuesday, 23 February 2010
Copyright
2
John B. Corey Jr.Chelsea Private Equity, LLC
2Tuesday, 23 February 2010
CopyrightThis work is licensed under the Creative Commons Attribution-Noncommercial-Share Alike 2.0 UK: England & Wales License. To view a copy of this license, visit
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2
John B. Corey Jr.Chelsea Private Equity, LLC
2Tuesday, 23 February 2010
Introduction
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3Tuesday, 23 February 2010
IntroductionJohn B. Corey Jr.
BS in Computer Science
www.LinkedIn.com/in/JohnCorey
Follow me on Twitter -> www.Twitter.com/John_Corey
25+ years of real estate investing ; UK resident since 1994
UK, US - spanning 11 time zones
www.ChelseaPrivateEquity.com/blog
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3Tuesday, 23 February 2010
What I Will Not Cover Today
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4Tuesday, 23 February 2010
What I Will Not Cover Today
No focus on why you invest
No focus on being a landlord
No focus on refurbishment issues or ideas
No focus on traditional lender financing tips & tricks
No focus of lease options or others forms of seller financing
No focus on the tax or legal aspects
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4Tuesday, 23 February 2010
Multiple Exit Strategies
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5Tuesday, 23 February 2010
Multiple Exit Strategies
Before you enter think about how you expect to exit
If an exit becomes blocked what is plan B, plan C, etc?
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5Tuesday, 23 February 2010
Multiple Exit Strategies
Before you enter think about how you expect to exit
If an exit becomes blocked what is plan B, plan C, etc?
You create your profit when you buy. You realize the cash when you sell or refinance
You are not buying based on a guess that appreciation will happen. Build in the profit when you buy
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5Tuesday, 23 February 2010
Multiple Exit Strategies
Before you enter think about how you expect to exit
If an exit becomes blocked what is plan B, plan C, etc?
You create your profit when you buy. You realize the cash when you sell or refinance
You are not buying based on a guess that appreciation will happen. Build in the profit when you buy
Be prepared to switch plans knowing you have alternatives
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5Tuesday, 23 February 2010
Two Formulas Today
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6Tuesday, 23 February 2010
Two Formulas Today
You want to look at the opportunity from multiple viewpoints. Buy to hold, buy to sell, joint venture, HMO vs. single let
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6Tuesday, 23 February 2010
Two Formulas Today
You want to look at the opportunity from multiple viewpoints. Buy to hold, buy to sell, joint venture, HMO vs. single let
Two formulas for establishing what you can afford to offer a seller
What is the maximum the property is worth to you? (MAO)
If property has an ability to produce cashflow, what is maximum cashflow available to service a loan? (NOI)
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6Tuesday, 23 February 2010
For Buy To Sell — MAO
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7Tuesday, 23 February 2010
For Buy To Sell — MAOThe Maximum Allowable Offer you might present to a seller
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7Tuesday, 23 February 2010
For Buy To Sell — MAOThe Maximum Allowable Offer you might present to a seller
Not the offer you expect to start at if you want room to negotiate
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7Tuesday, 23 February 2010
For Buy To Sell — MAOThe Maximum Allowable Offer you might present to a seller
Not the offer you expect to start at if you want room to negotiate
Similar to the maximum amount you would bid at an auction
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7Tuesday, 23 February 2010
For Buy To Sell — MAOThe Maximum Allowable Offer you might present to a seller
Not the offer you expect to start at if you want room to negotiate
Similar to the maximum amount you would bid at an auction
Two keys
Work backwards from the OMV (ARV would be the US term)
Include all costs, fees, contingencies & profit expected
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7Tuesday, 23 February 2010
MAO Formula
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8Tuesday, 23 February 2010
MAO Formula
MAO = ((OMV * 70%*) - (repairs + holding costs + transaction costs for buying & selling + profit margin + contingencies))
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8Tuesday, 23 February 2010
MAO Formula
MAO = ((OMV * 70%*) - (repairs + holding costs + transaction costs for buying & selling + profit margin + contingencies))
You will end up with a ridiculously low number
It is still the right number
It just shows you how many deals are not really deals
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8Tuesday, 23 February 2010
MAO Formula
MAO = ((OMV * 70%*) - (repairs + holding costs + transaction costs for buying & selling + profit margin + contingencies))
You will end up with a ridiculously low number
It is still the right number
It just shows you how many deals are not really deals
If you stick to MAO you have lots of room to maneuver
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8Tuesday, 23 February 2010
Why MAO for BTS
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9Tuesday, 23 February 2010
Why MAO for BTS
Time is not on your side
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9Tuesday, 23 February 2010
Why MAO for BTS
Time is not on your side
Very likely you will have to flip deals. The next person needs to be able to make a profit or see a good deal. Sell to an investor or sell retail
DO NOT get greedy. Get the deal completed end-to-end
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9Tuesday, 23 February 2010
Why MAO for BTS
Time is not on your side
Very likely you will have to flip deals. The next person needs to be able to make a profit or see a good deal. Sell to an investor or sell retail
DO NOT get greedy. Get the deal completed end-to-end
Focus on volume rather than a killing on any one deal
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9Tuesday, 23 February 2010
Why MAO for BTS
Time is not on your side
Very likely you will have to flip deals. The next person needs to be able to make a profit or see a good deal. Sell to an investor or sell retail
DO NOT get greedy. Get the deal completed end-to-end
Focus on volume rather than a killing on any one deal
Leave money on the table for the next person
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9Tuesday, 23 February 2010
For Buy To Hold - NOI
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10Tuesday, 23 February 2010
For Buy To Hold - NOI
Net Operating Income is the income the asset produces before debt service, taxes & depreciation. (No capital improvements)
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10Tuesday, 23 February 2010
For Buy To Hold - NOI
Net Operating Income is the income the asset produces before debt service, taxes & depreciation. (No capital improvements)
Gross income minus operating expenses (OE)
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10Tuesday, 23 February 2010
For Buy To Hold - NOI
Net Operating Income is the income the asset produces before debt service, taxes & depreciation. (No capital improvements)
Gross income minus operating expenses (OE)
Operating expenses are the costs to keep the lights on
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10Tuesday, 23 February 2010
For Buy To Hold - NOI
Net Operating Income is the income the asset produces before debt service, taxes & depreciation. (No capital improvements)
Gross income minus operating expenses (OE)
Operating expenses are the costs to keep the lights on
Debt is a tool for how someone might buy. Debt is optional. The use of debt is based on the investor, not the property
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10Tuesday, 23 February 2010
For Buy To Hold - NOI
Net Operating Income is the income the asset produces before debt service, taxes & depreciation. (No capital improvements)
Gross income minus operating expenses (OE)
Operating expenses are the costs to keep the lights on
Debt is a tool for how someone might buy. Debt is optional. The use of debt is based on the investor, not the property
NOI = ‘free cashflow’. Cashflow still available after OE
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10Tuesday, 23 February 2010
NOI Formula
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11Tuesday, 23 February 2010
NOI FormulaNOI = Gross scheduled income - (utilities + advertising + bad debt + pro-rated legal and accounting costs + voids + property management, etc.)
The running costs associated with the specific property
Not capital improvements; just expense items that are directly associated with the property
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11Tuesday, 23 February 2010
NOI FormulaNOI = Gross scheduled income - (utilities + advertising + bad debt + pro-rated legal and accounting costs + voids + property management, etc.)
The running costs associated with the specific property
Not capital improvements; just expense items that are directly associated with the property
The income the asset produces after the costs associated with keeping the lights on
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11Tuesday, 23 February 2010
Think of NOI This Way
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12Tuesday, 23 February 2010
Think of NOI This Way
If you buy a bond that produces 4% income then we are receiving after expenses (there are none) will be the 4%
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12Tuesday, 23 February 2010
Think of NOI This Way
If you buy a bond that produces 4% income then we are receiving after expenses (there are none) will be the 4%
If you ran a business & the business produced an income after the costs associated with keeping the doors open then we are talking about that income
How you fund the acquisition or capital costs (paid all cash, use debt, did a JV with a cash rich investor) does not change what the business operating income
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12Tuesday, 23 February 2010
Examples
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13Tuesday, 23 February 2010
Examples
Flat for sale - £249,950
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13Tuesday, 23 February 2010
Examples
Flat for sale - £249,950
Rental income - £1,000 pcm
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13Tuesday, 23 February 2010
Examples
Flat for sale - £249,950
Rental income - £1,000 pcm
Service charges and ground rent - £600 / yr
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13Tuesday, 23 February 2010
Examples
Flat for sale - £249,950
Rental income - £1,000 pcm
Service charges and ground rent - £600 / yr
Gross yield is _______
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13Tuesday, 23 February 2010
Examples
Flat for sale - £249,950
Rental income - £1,000 pcm
Service charges and ground rent - £600 / yr
Gross yield is _______
NOI is _______
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13Tuesday, 23 February 2010
Examples
Flat for sale - £249,950
Rental income - £1,000 pcm
Service charges and ground rent - £600 / yr
Gross yield is _______
NOI is _______
How much debt can you service with this NOI?
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13Tuesday, 23 February 2010
Examples
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14Tuesday, 23 February 2010
Examples
HMO available for £249,950
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14Tuesday, 23 February 2010
Examples
HMO available for £249,950
£8,000 for improvements to get it up to HMO standards
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14Tuesday, 23 February 2010
Examples
HMO available for £249,950
£8,000 for improvements to get it up to HMO standards
Gross yield is 12%
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14Tuesday, 23 February 2010
Examples
HMO available for £249,950
£8,000 for improvements to get it up to HMO standards
Gross yield is 12%
The implied gross income is _______
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14Tuesday, 23 February 2010
Examples
HMO available for £249,950
£8,000 for improvements to get it up to HMO standards
Gross yield is 12%
The implied gross income is _______
The expenses are _______
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14Tuesday, 23 February 2010
Examples
HMO available for £249,950
£8,000 for improvements to get it up to HMO standards
Gross yield is 12%
The implied gross income is _______
The expenses are _______
NOI (estimated) is _______
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14Tuesday, 23 February 2010
Examples
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15Tuesday, 23 February 2010
Examples
BMV lead, 30% off RICS
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15Tuesday, 23 February 2010
Examples
BMV lead, 30% off RICS
Light refurbishment is needed. Budget of _______
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15Tuesday, 23 February 2010
Examples
BMV lead, 30% off RICS
Light refurbishment is needed. Budget of _______
MAO is _______
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15Tuesday, 23 February 2010
Examples
BMV lead, 30% off RICS
Light refurbishment is needed. Budget of _______
MAO is _______
The project is scheduled to take _______ weeks
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15Tuesday, 23 February 2010
Examples
BMV lead, 30% off RICS
Light refurbishment is needed. Budget of _______
MAO is _______
The project is scheduled to take _______ weeks
Contingency of _______
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15Tuesday, 23 February 2010
Examples
BMV lead, 30% off RICS
Light refurbishment is needed. Budget of _______
MAO is _______
The project is scheduled to take _______ weeks
Contingency of _______
Exit plan _______. Profit projection _______
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15Tuesday, 23 February 2010
Examples
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16Tuesday, 23 February 2010
Examples
HMO for sale. £600,000
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16Tuesday, 23 February 2010
Examples
HMO for sale. £600,000
10 bedrooms, all at 105 / wk
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16Tuesday, 23 February 2010
Examples
HMO for sale. £600,000
10 bedrooms, all at 105 / wk
£50,000 needed for refurbishment before open for business
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16Tuesday, 23 February 2010
Examples
HMO for sale. £600,000
10 bedrooms, all at 105 / wk
£50,000 needed for refurbishment before open for business
MAO is _______
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16Tuesday, 23 February 2010
Examples
HMO for sale. £600,000
10 bedrooms, all at 105 / wk
£50,000 needed for refurbishment before open for business
MAO is _______
NOI is _______
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16Tuesday, 23 February 2010
Examples
HMO for sale. £600,000
10 bedrooms, all at 105 / wk
£50,000 needed for refurbishment before open for business
MAO is _______
NOI is _______
BTS or long term rental?
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16Tuesday, 23 February 2010
F.U.D.
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17Tuesday, 23 February 2010
F.U.D.Fear, Uncertainity & Doubt are the three horseman that will kill many a deal. Sometimes you have it and sometimes the counterparty has it.
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17Tuesday, 23 February 2010
F.U.D.Fear, Uncertainity & Doubt are the three horseman that will kill many a deal. Sometimes you have it and sometimes the counterparty has it.
Break down the issues. Smaller issues are easier to handle
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17Tuesday, 23 February 2010
F.U.D.Fear, Uncertainity & Doubt are the three horseman that will kill many a deal. Sometimes you have it and sometimes the counterparty has it.
Break down the issues. Smaller issues are easier to handle
Use checklists so you do not miss things
Share the checklists so the counterparty knows you have them covered and your competition is not equally prepared
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17Tuesday, 23 February 2010
F.U.D.Fear, Uncertainity & Doubt are the three horseman that will kill many a deal. Sometimes you have it and sometimes the counterparty has it.
Break down the issues. Smaller issues are easier to handle
Use checklists so you do not miss things
Share the checklists so the counterparty knows you have them covered and your competition is not equally prepared
Reduce F.U.D. by reviewing so many deals you know the checklist by heart
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17Tuesday, 23 February 2010