How to Evaluate a Real Estate Deal Like the Pros

Taking an institutional investor approach to personal real estate investment opportunities

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Have you ever gotten an email from a friend to invest in a real estate deal?

The friend attaches a 40-page deck, validates the relationship (“this is my buddy from college who’s made a fortune buying apartment buildings in Boston”), and then ask you if you “want in”.

Do you? The answer might be yes, but how can you know?

This letter from Jeff Carswell—an investor who has acquired $20 billion of multifamily, hotel and office buildings over the past 20 years—discusses how to assess a personal real estate investment like an institutional investor, including:

• Getting in the mindset of a conservative investor

• Identifying your personal investment profile and time horizon

• Understanding deal terms, asset, market and seller situation

• 5 questions to answer in the financial model (or to ask the sponsor)

• Property tours & avoiding emotional investment decisions

By the end of this letter you should be able to utilize a basic framework to objectively assess a commercial investment opportunity and how it aligns with your personal investing goals.

Getting in the mindset of a conservative investor

Underwriting is an attempt to predict the future using information from the present and the past. As Morgan Housel said:

Every investment price, every market valuation, is just a number from today multiplied by a story about tomorrow.

With that in mind, when reading financial projections for a real estate project, you need to remember you’re reading a story, and it’s your job to decide whether that story is realistic.

To do that, you need to approach the story through the lens of a conservative lender – like a risk averse, glass half empty bank employee who sees looming disaster at every turn.

Why? The lender gets all the downside and none of the upside associated with each property they lend against, so you should follow their lead and be intently focused on the project’s assumptions and how they are wrong (and not might be wrong).  

So think about your underwriting process as a series of “If / Then” statements.  

If net effective rents rise at least 2.5%, then I will have enough cash flow to perform renovations on X units.  

You need to look at the entire project through this lens, and try to disprove all if/then assumptions made in the model by gathering as many facts as possible until you are comfortable with the predictions.

Identifying your personal investment profile and time horizon