BPI Episode #16: Smart Questions, Safe Investments: How to Assess Deals Effectively

Welcome to Building Passive Income, the podcast for professionals, entrepreneurs and investors who want to build wealth, diversify beyond Wall street, and create financial freedom through passive commercial real estate investing. Your host is Wayne Courageous iii, a seasoned investor and founder of CREI Partners, a leading commercial real estate investment company. He spent nearly two decades navigating and educating others on the commercial real estate, from multifamily to storage to retail. Each episode is under 15 minutes, intentionally short, easy to understand, and packed with insights that help you grow your income and protect your capital without becoming a landlord or sacrificing your time. If you're ready to learn fast and invest smarter, you're in the right place. Let's get started.

Welcome back to Building Passive Income podcast. I'm your host, Wayne Courageous iii. Really pumped today to talk to y' all in regards to how to evaluate a deal from a standpoint of making sure it is not too good to be true. Right? So what makes a deal too good to be true? And one of the things that I really find myself doing as an investor, and I think it's worked really well for me, is I'm always trying to convince myself out of a deal. I'm always trying to find things that may be wrong with it. Maybe it's too aggressive too, whatever. And when I find opportunities where it's hard for me to convince myself otherwise, then I'm like, okay, we are comfortable on the underwriting. I like the location, I like the capital stack, whatever it is, I'm feeling good about it. And it's because I've gone through my mind of all the different things that could go wrong and all the risk. And it's almost similar to what a passive investor should be doing is looking at it and be like, hey, is this too good to be true? What is, you know, what are, what are the assumptions and going through it. So when we go through this, as you're going through your review and your underwriting as a passive investor or a limited partner, these are things to look out for to make sure it's not too good to be true. So first and foremost, promised returns without support. So we talked about this on our previous podcast, but there's no guaranteed return, there's no promised return. There are projections based on the assumptions and the underwriting and the, the experience and the quality of the on site team to execute the deal. But they really need to understand, or you need to understand is when you look at those assumptions or those returns, are they providing the support, the backup, the underwriting, the analysis that helps support where they're getting their returns from. So we've talked a lot about this on prior shows. I definitely recommend checking out those other shows when I talk about the underwriting. How the business mindset of this, of investing in real estate, where it's like a business revenue minus expenses is net operating income. But when you're looking at the returns, which is really the bottom line, it's. It's what's left over after all the debt service and expenses have been paid. Those are the returns. So looking at the support, and if you're not seeing the support or you're questioning those assumptions or they're not being transparent in the underwriting, which boggles my mind, it almost upsets me that there are people out there, sponsors out there, who don't feel comfortable giving out their model, their underwriting. Like that is just opposite of what we with CRI partners. Like, I'm happy or my team is happy to go through the underwriting line by line and even give you our model. Like it's not even. It shouldn't have this secrecy behind it. So definitely check that promise returns without support and the essence of, you know, the backup that gets them to where they think the returns will be, or even if they're not even willing to do it, it may be too good to be true because they're not comfortable or confident enough to share behind the scenes of what the underwriting is. The other thing to for where a deal could be too good to be true is when they're looking at their comp set, so their neighborhoods and their performance, it may not align. So if a property is already at the top of the market, it may not align. If they're looking at growing revenue, a lot more. And I'll give you an example. This one of the deals that we have under contract that I really like, it is actually above market. And you know, it's been like 98, 100% leased. And you're like, well, why would you buy a property that is over market? Well, it's really well managed. Cash flows extremely well. And we've put in, you know, where we'll have, you know, higher vacancy than what the sellers expected, bad debts. We have different, I don't say tendencies for potentially less revenue than previously because if the market declines or things adjust, but where we're really focusing on is other income. So we may not be getting 3, 5% rent bumps, but we are seeing the opportunity to push other income. And we feel comfortable with that because our comps allow us to do that type of other income, the pet fees or admin fees, the Internet, maybe it's an amenity fee, parking fee. There's all these different things that you could, if it's market, pass on to your residents. And residents don't like to be line items, every single one. So what we've done is just do like a $50amenity fee and it includes all those little miscellaneous charges. So they just see base rent and they see amenity fee. So my point is, is like looking at the comps, the neighborhood and seeing what the performance are looking at it maybe even more from a per square foot basis is better. Because if an apartment has a larger unit and say it's $1,200 and you're charging $1,000 but have a smaller unit, if you're not looking at a per square foot basis, you could be like, well, they have their $200 difference for one bedroom, so I have room to grow. Well, that's not the case because you have a smaller unit than those guys over there. So looking at a per square foot basis, but understanding the comps, the performance, just making sure that they make sense. And really the sponsors should be sharing this during the webinar. They should be very open and transparent about like where the comps are and what, where the business plan is. And in my case, at one of these properties that have under contract, you know, we're not pushing rents because we're already at the market, but what can we do on reducing expenses and what can we do on other income that is supported by the comps? So looking at that from a too good to be true standpoint, are they providing the comps and does the Performa tie into with the comps for it to make sense? Another thing we're looking at is does the sponsor invest their own capital in the deal? So our general partnership team, when we go invest in a deal, we typically do 5% of the total capital stack. So easily 500 $600,000 that goes into these investments. And so we are all aligned on the general partner team that we have vetted the deal. We like the deal and we're excited about the deal. And oh, by the way, we are investing our own capital to align our interests with our limited partners. You as an investor. And so if you have a sponsor who is not investing in the deal, it's a question to ask, like if they don't believe in the deal or none of their people are investing in the deal, why would I invest in the deal? And you know, you will have to make that decision for yourself. If it's okay for you to invest and that the sponsor is not investing. There's no right or wrong in this. It's just these are things to be thinking of. Especially when the deal looks too good to be true. If it's too good to be true and that sponsor isn't backing it up with their capital, it may be something that could bring a red flag, right? The other thing you want to look at and make sure that they're doing again to check the box off if it's too good to be true is that there's third party reports and due diligence. The management company, if it's third party managed, is going to have their own performa, their own underwriting. In our case, we do not share our underwriting with the management company. We do our own underwriting and then we have the management company do their own underwriting based on what they know of the market, of the sub market, etc. And then we compare. We rarely ever change our underwriting to match the management company underwriting because we always want our buffer. And so when the management company is growing, you know, their retail, their projections and such, I love that because we're able to, to be really mindful of pushing them on where they think the deal can be. Other things to look for is limited downside or stress test scenarios. Let's should be looking at sensitivity analysis. Not everything goes exactly as planned. So looking at the different, like what if rents are 2% versus 3%, what if cap rates are, you know, six and a half percent versus the 6% projected. Look at that limit, the stress test and the sensitivity analysis really just to see like hey, you know, if it does seem too good to be true, like what are these adjustments? What happens when we, when we adjust it? Are you still happy with those returns? And the last one I want to mention here, it's really feeling rushed to during Q and A or signing and wiring the funds. There is a time period, right? And it does go quick. But you shouldn't feel like you're rushed. You shouldn't feel like you're being pressured or saying like hey there is, you know, you have like two hours to decide. I mean maybe a few days should be plenty of time to review and look at it it because these do go quick. But if you're feeling like these rushed deadlines for you to make a decision are occurring, it's something to step back and just make sure like hey, am I, am I going in without full knowledge? And does this seem to be good to be true. I encourage you all to check out our Passive Investor Coaching program. I mean these are all bite sized information. I hope it's adding value, making you think as you start your day or you end your day. You're just thinking about, you know, how do you can become a better limited partner, a better passive investor, and how to grow and diversify your wealth. But check out passive investor coaching.com It's a lot of free content and it goes through how to underwrite a deal from a passive investor standpoint, how to analyze it, how to look at a market, et cetera. So check that out. I just love adding value and I hope that you're getting a lot out of these podcasts. If you haven't checked out the previous podcast episodes, please do go ahead and like and subscribe and share to your friends and family. I hope this adds value to you as a as an investor. Whether you're just starting or you're an experienced investor and excited to just continue growing and building partnerships along the way. Hope everyone is doing well and hope everyone has a great day.

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