March 5, 2004.
Usually, my articles on databases appear in geek publications like DB2 Magazine, but let's see how we use this technology in our brokerage.
If you ask a hundred people what is most important in investment real estate, you'll get a lot of answers. If you ask us, we'll tell you that the real estate business doesn't involve land and buildings so much as it does data. Ownership data. Sales data. Financing data. Rents. Expenses. All sorts of data from multiple, disparate sources.
Everybody sees little pieces of the data. Very few can put the pieces together and develop an actionable plan to act on that data.
For example, one of our agents or clients may have a theory that says that owners who own multiple small buildings, have owned some of them for more than 5 years, and who saw a greater than 20% rise in taxes last year might have good reasons to sell. Or that someone who has sold a property every year for the last five years and has not sold anything this year might be in the market.
We use proprietary database systems that reach out ("federate", in geek-speak) to extract and integrate data from many sources. Based on this federated data, we then apply sophisticated data mining techniques to pull the best five or ten prospects out of the tens of thousands in the database.
Don't be like Pavlov's dog, responding only to what's placed in front of you. To buy right, you've got to be proactive and pursue what YOU want, not what just happens to be available for purchase at the time.
Let us show you how this data mining approach can help you zero in on makeable deals.
Frequently Asked Questions (FAQ)
About the IPAS 2.0 Property Analysis system:
Q: First, under the expenses, nothing is really expensed out there is just a total amount given at the bottom. How have you calculated that amount?
A: Those are average numbers, based upon survey numbers published annually by the Dallas Apartment Association. Look on the page that has the unit breakdown and you'll see a section underneath titled "Est. Expenses". For master-metered buildings (owner pays utilities) the average I use is around $5.50/sf. For separate-metered buildings, I usually use about $2.50/sf.
Q: I want to see ACTUAL expense numbers, not estimates.
A: In commercial deals, a seller never wants to
allow a "casual" tire-kicker too deep into his business affairs. Rather,
the deals usually have a "feasibility" or "inspection" contingency in
which, after the buyer signs a contract and begins his due-diligence, THEN
the seller opens up his books to the buyer. Every time I've gone through
this "prove up" process, my expense estimates have either come in right on
the money, or higher than the actual expenditures. Different
people have different ways of running properties, so such things a
maintenance expenses and replacement reserves will differ from operator to
Q: What does "Percentage of price to depreciate as improvements" mean?
A: How much of the total price of the property is land (which does not generate a depreciation deduction) and how much is improvements (which can be depreciated). This is used in figuring the amount of income the building shows for tax purposes, and the amount of tax payable/refunded based on the building's numbers.
Q: What is the Capitalization Rate (CAP Rate)?
A: Capitalization rate is the net operating income divided by the sales price. Net operating income or NOI=(income minus vacancy minus expenses )(expenses do not include the payment on the note). eg. A property has $150,000 scheduled income, 10% vacancy or $15,000, and expenses of $35,000 annually. Thus NOI is $100,000. If the property sells for one million dollars, the Capitalization Rate (Cap Rate, CAP) is $100,000/$1,000,000 = .10 = 10%. It's used as a financial measure of the rate of return on the property, sort of like an interest rate is the measure of the rate of return you receive on a savings account. It's a quick-and-dirty way in which investors calculate the profitability of a potential investment. The higher, the better. For example, something really high-end like a free-standing store leased to a top credit tenant might show a CAP rate of 8%. The risk is low and it's almost like a bond to the owner, so he's willing to accept a lesser return. On the other hand, a slum property might sell at a CAP rate of 15-20%, reflecting the increased risk and hassle of running the property. Right now the market for blue-collar apartments is somewhere in the 9.5-12.5% range in Dallas.
Q: What is the GRM, or Gross Rent Multiple?
A: Another quick-and-dirty way of calculating value is the GRM, or Gross Rent Multiple. GRM=Price/GrossIncome. If a property has a gross annual income of $100,000 (not including expenses) and sells for $500,000, the GRM is 5.0. Here, a higher GRM means a higher price for the property. Dallas blue-collar property averages run from 3.5 to 5.5. Higher-end stuff might bring 6.5 or so. California property may be 10+.
Q: What is Annual Debt Service?
A: The yearly total of all the mortgage payments.
Q: What is Debt Coverage Ratio?
A: Debt Coverage Ratio (DCR) is a number that
bankers look at in making income property loans. It is Net Operating
Income (NOI) divided by the Annual Debt Service. For example, If you
have $50,000 NOI and the Annual Debt Service is $25,000, your DCR is 2.0.
That means that for every dollar you have to pay the bank each month, you
have two dollars of net income to cover the payment. Bankers usually
demand a minimum of 1.25-1.45 DCR on loans they write. The higher
the number, the safer deal it is for the lender.
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