What is a property really worth?

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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.

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What is a property really worth?

  1. 1. The New Normal Maximum Allowable Offer (MAO) & Net Operating Income (NOI) 13 Feb 2010 London Tuesday, 23 February 2010 1
  2. 2. Copyright John B. Corey Jr. Chelsea Private Equity, LLC 2 Tuesday, 23 February 2010 2
  3. 3. Copyright This 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 http://creativecommons.org/licenses/by-nc-sa/2.0/uk/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. This work is licensed under the Creative Commons Attribution-Noncommercial-Share Alike 2.5 UK: Scotland License. To view a copy of this license, visit http:// creativecommons.org/licenses/by-nc-sa/2.5/scotland/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. This work is licensed under the Creative Commons Attribution-Noncommercial-Share Alike 3.0 United States License. To view a copy of this license, visit http:// creativecommons.org/licenses/by-nc-sa/3.0/us/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. This work is licensed under the Creative Commons Attribution-Noncommercial-Share Alike 3.0 New Zealand License. To view a copy of this license, visit http:// creativecommons.org/licenses/by-nc-sa/3.0/nz/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. This work is licensed under the Creative Commons Attribution-Noncommercial-Share Alike 2.5 Australia License. To view a copy of this license, visit http:// creativecommons.org/licenses/by-nc-sa/2.5/au/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. This work is licensed under the Creative Commons Attribution-Noncommercial-Share Alike 2.5 Israel License. To view a copy of this license, visit http:// creativecommons.org/licenses/by-nc-sa/2.5/il/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. This work is licensed under the Creative Commons Attribution-Noncommercial-Share Alike 2.5 India License. To view a copy of this license, visit http:// creativecommons.org/licenses/by-nc-sa/2.5/in/ or send a letter to Creative Commons, 171 Second Street, Suite 300, San Francisco, California, 94105, USA. John B. Corey Jr. Chelsea Private Equity, LLC 2 Tuesday, 23 February 2010 2
  4. 4. Introduction 3 Tuesday, 23 February 2010 3
  5. 5. Introduction John 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 3 Tuesday, 23 February 2010 3
  6. 6. What I Will Not Cover Today 4 Tuesday, 23 February 2010 4
  7. 7. 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 4 Tuesday, 23 February 2010 4
  8. 8. Multiple Exit Strategies 5 Tuesday, 23 February 2010 5
  9. 9. 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? 5 Tuesday, 23 February 2010 5
  10. 10. 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 5 Tuesday, 23 February 2010 5
  11. 11. 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 5 Tuesday, 23 February 2010 5
  12. 12. Two Formulas Today 6 Tuesday, 23 February 2010 6
  13. 13. 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 6 Tuesday, 23 February 2010 6
  14. 14. 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 ser vice a loan? (NOI) 6 Tuesday, 23 February 2010 6
  15. 15. For Buy To Sell — MAO 7 Tuesday, 23 February 2010 7
  16. 16. For Buy To Sell — MAO The Maximum Allowable Offer you might present to a seller 7 Tuesday, 23 February 2010 7
  17. 17. For Buy To Sell — MAO The Maximum Allowable Offer you might present to a seller Not the offer you expect to start at if you want room to negotiate 7 Tuesday, 23 February 2010 7
  18. 18. For Buy To Sell — MAO The 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 7 Tuesday, 23 February 2010 7
  19. 19. For Buy To Sell — MAO The 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 7 Tuesday, 23 February 2010 7
  20. 20. MAO Formula 8 Tuesday, 23 February 2010 8
  21. 21. MAO Formula MAO = ((OMV * 70%*) - (repairs + holding costs + transaction costs for buying & selling + profit margin + contingencies)) 8 Tuesday, 23 February 2010 8
  22. 22. 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 8 Tuesday, 23 February 2010 8
  23. 23. 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 8 Tuesday, 23 February 2010 8
  24. 24. Why MAO for BTS 9 Tuesday, 23 February 2010 9
  25. 25. Why MAO for BTS Time is not on your side 9 Tuesday, 23 February 2010 9
  26. 26. 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 9 Tuesday, 23 February 2010 9
  27. 27. 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 9 Tuesday, 23 February 2010 9
  28. 28. 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 9 Tuesday, 23 February 2010 9
  29. 29. For Buy To Hold - NOI 10 Tuesday, 23 February 2010 10
  30. 30. For Buy To Hold - NOI Net Operating Income is the income the asset produces before debt ser vice, taxes & depreciation. (No capital improvements) 10 Tuesday, 23 February 2010 10
  31. 31. For Buy To Hold - NOI Net Operating Income is the income the asset produces before debt ser vice, taxes & depreciation. (No capital improvements) Gross income minus operating expenses (OE) 10 Tuesday, 23 February 2010 10
  32. 32. For Buy To Hold - NOI Net Operating Income is the income the asset produces before debt ser vice, taxes & depreciation. (No capital improvements) Gross income minus operating expenses (OE) Operating expenses are the costs to keep the lights on 10 Tuesday, 23 February 2010 10
  33. 33. For Buy To Hold - NOI Net Operating Income is the income the asset produces before debt ser vice, 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 10 Tuesday, 23 February 2010 10
  34. 34. For Buy To Hold - NOI Net Operating Income is the income the asset produces before debt ser vice, 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 10 Tuesday, 23 February 2010 10
  35. 35. NOI Formula 11 Tuesday, 23 February 2010 11
  36. 36. NOI Formula NOI = 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 11 Tuesday, 23 February 2010 11
  37. 37. NOI Formula NOI = 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 11 Tuesday, 23 February 2010 11
  38. 38. Think of NOI This Way 12 Tuesday, 23 February 2010 12
  39. 39. 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% 12 Tuesday, 23 February 2010 12
  40. 40. 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 12 Tuesday, 23 February 2010 12
  41. 41. Examples 13 Tuesday, 23 February 2010 13
  42. 42. Examples Flat for sale - £249,950 13 Tuesday, 23 February 2010 13
  43. 43. Examples Flat for sale - £249,950 Rental income - £1,000 pcm 13 Tuesday, 23 February 2010 13
  44. 44. Examples Flat for sale - £249,950 Rental income - £1,000 pcm Service charges and ground rent - £600 / yr 13 Tuesday, 23 February 2010 13
  45. 45. Examples Flat for sale - £249,950 Rental income - £1,000 pcm Service charges and ground rent - £600 / yr Gross yield is _______ 13 Tuesday, 23 February 2010 13
  46. 46. Examples Flat for sale - £249,950 Rental income - £1,000 pcm Service charges and ground rent - £600 / yr Gross yield is _______ NOI is _______ 13 Tuesday, 23 February 2010 13
  47. 47. 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 ser vice with this NOI? 13 Tuesday, 23 February 2010 13
  48. 48. Examples 14 Tuesday, 23 February 2010 14
  49. 49. Examples HMO available for £249,950 14 Tuesday, 23 February 2010 14
  50. 50. Examples HMO available for £249,950 £8,000 for improvements to get it up to HMO standards 14 Tuesday, 23 February 2010 14
  51. 51. Examples HMO available for £249,950 £8,000 for improvements to get it up to HMO standards Gross yield is 12% 14 Tuesday, 23 February 2010 14
  52. 52. 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 _______ 14 Tuesday, 23 February 2010 14
  53. 53. 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 _______ 14 Tuesday, 23 February 2010 14
  54. 54. 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 _______ 14 Tuesday, 23 February 2010 14
  55. 55. Examples 15 Tuesday, 23 February 2010 15
  56. 56. Examples BMV lead, 30% off RICS 15 Tuesday, 23 February 2010 15
  57. 57. Examples BMV lead, 30% off RICS Light refurbishment is needed. Budget of _______ 15 Tuesday, 23 February 2010 15
  58. 58. Examples BMV lead, 30% off RICS Light refurbishment is needed. Budget of _______ MAO is _______ 15 Tuesday, 23 February 2010 15
  59. 59. Examples BMV lead, 30% off RICS Light refurbishment is needed. Budget of _______ MAO is _______ The project is scheduled to take _______ weeks 15 Tuesday, 23 February 2010 15
  60. 60. Examples BMV lead, 30% off RICS Light refurbishment is needed. Budget of _______ MAO is _______ The project is scheduled to take _______ weeks Contingency of _______ 15 Tuesday, 23 February 2010 15
  61. 61. 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 _______ 15 Tuesday, 23 February 2010 15
  62. 62. Examples 16 Tuesday, 23 February 2010 16
  63. 63. Examples HMO for sale. £600,000 16 Tuesday, 23 February 2010 16
  64. 64. Examples HMO for sale. £600,000 10 bedrooms, all at 105 / wk 16 Tuesday, 23 February 2010 16
  65. 65. Examples HMO for sale. £600,000 10 bedrooms, all at 105 / wk £50,000 needed for refurbishment before open for business 16 Tuesday, 23 February 2010 16
  66. 66. Examples HMO for sale. £600,000 10 bedrooms, all at 105 / wk £50,000 needed for refurbishment before open for business MAO is _______ 16 Tuesday, 23 February 2010 16
  67. 67. 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 _______ 16 Tuesday, 23 February 2010 16
  68. 68. 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? 16 Tuesday, 23 February 2010 16
  69. 69. F.U.D. 17 Tuesday, 23 February 2010 17
  70. 70. 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. 17 Tuesday, 23 February 2010 17
  71. 71. 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 17 Tuesday, 23 February 2010 17
  72. 72. 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 17 Tuesday, 23 February 2010 17
  73. 73. 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 17 Tuesday, 23 February 2010 17

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