Real Estate Financial Modeling’s

Seven Elements Of Successful Real Estate Investment

Foreword

Welcome to REFM’s Seven Elements of Successful Real Estate

Investment e-book! The Seven Elements framework is intended to
give structure to and increase the potential for success of your real
estate investment pursuits. The Seven Elements can be seen as
steps to be executed in order, but when we are pursuing more than
one investment at a time, we will naturally be performing more
than one step simultaneously. When it gets busy, it is helpful to
have a framework to follow to keep things straight from one
transaction to another.

I wish you all the best in your real estate endeavors.

Bruce Kirsch
Founder
Real Estate Financial Modeling, LLC
GetREFM.com
Table of
Contents

Element 1: Define your goal ................................................................. 4

Element 2: Identify your value add ..................................................... 6
Element 3: Form criteria and gather opportunities ......................... 8
Element 4: Determine attractiveness ............................................... 10
Element 5: Control the deal and capital .......................................... 12
Element 6: Execute on your plan ....................................................... 14
Element 7: Track and improve .......................................................... 16
Conclusion / Additional resources ................................................... 18

Copyright © 2013 Real Estate Financial Modeling, LLC. All rights reserved.

getREFM.com 3
Element Define your investment goal and strategy in detail
and put it down on paper

4 getREFM.com
 If you don’t know what your goal is, you don’t know if you are moving towards it or
away from it. Defining and describing your goal in writing assists you in refining and
crystallizing the thoughts that lie behind the goal setting process. You may find

t
during the course of writing and re-writing that the goal is actually something
slightly different than what you originally thought it was when it was just an idea
floating around in your head.

Writing your goal down also enables you to create a list of relevant investment
criteria that are necessary for you to achieve your goal (maximum investment amount,
time to return of capital, etc.), as well as requires you to identify your intended
strategy for value creation.

If you have ever had what you thought was a brilliant business idea and it kept a hold
of you long enough for you to commit it to paper, you probably remember that what
ended up on paper was at least slightly different from what had first bounced into
your head. The reason for the differences were that drafting and re-drafting the idea
forced you to define and flesh out details that you were probably too excited to bother
with when it was just a manic, relatively shapeless notion.

It is the drafting and editing process that requires you to not only define the what,
but also the when, why, how, and who.

For example, if you want to acquire a value-add multi-family property, you need to
begin to ask and answer dozens of questions, such as:

What is the property worth? What is the current NOI?

What is my strategy with respect to the unit renovation program?

Who will perform the work? What will it cost?

Why should I acquire this property and not another one in the same neighborhood?

How much debt financing could I get to acquire the property?

What will the interest rate be?

Who will I get to co-invest? What level of control will they require?

How long will I hold the property?

As you can see, once you become more serious about the thought of the proposed
investment, you have a lot of work to do, and putting thoughts down on paper helps
you to organize that work, as well as to stress test the attractiveness of the investment
opportunity. If you like what you see after doing your homework, you can move
forward with confidence.

getREFM.com 5
Element Identify your individual strengths and weaknesses,
and that of your team as a whole, and address them

6 getREFM.com
 Performing a candid inventory of your and your team’s core competencies with
respect to knowledge and analytical and technical skills is critical to setting yourself
up for success.

t
You can never be too strong in any area, and it will benefit you to improve on your
weak areas. Educate and train yourself and your team members to be equipped and
ready for top performance, especially in times of high pressure and chaos.

You can accomplish compiling a skills and strengths inventory by performing a

360-degree team feedback session. This is a great technique in which every member
of the team anonymously (thus candidly) evaluates in writing every other member
of the team, and then presents each team member with the completed questionnaires
from their fellow team members.

The questions that are on the questionnaire can be something like this:

1. What are [ Name of colleague ]’s most valuable attributes as a team member?

2. What is his/her greatest weakness as a team member?

3. In what areas is he/she strongest with respect to individual knowledge and

technical skills?

4. In what areas is he/she weakest with respect to individual knowledge and

technical skills?

5. If you could change one thing about the way he/she interacts with you,
what would it be?

Admittedly, answering these questions frankly about your colleagues can be difficult
or awkward, but it is in the best interest of the team for everyone to be honest in their
responses.

My business school training included one of these 360-degree inventories with our
learning team, and it was not easy to hear some of the things that were said of me.
In retrospect, the things that hurt the most were the most valuable to my future
development because I really took them to heart. All feedback, by definition, is valid.
It is what you decide to do with it that determines your professional growth.

The beautiful thing is that once you come to understand where you are perceived to
be weakest, you can address those areas head on. If you are a great financial modeler
but don’t have a deep knowledge of construction basics, you can bone up on
construction knowledge, and vice versa. The more valuable you become to your team,
the better off you are, and the better off the team is as well.

getREFM.com 7
Element Formulate your investment criteria and gather
your transaction opportunity set

8 getREFM.com
 Deciding on your investment criteria is a critical step in the investment process, and
likely requires a lot of thought and discussion. The criteria are simply the characteristics
that will make the investment eligible for consideration by you and your partners.

t
Investment criteria for a transaction can include the following items, among others:

Amount of equity capital required

Level of risk perceived

Nature and complexity of transaction

Number of land owners involved

Property type and location

Community challenges

Speed to market

Yield on cost required

Overall return on capital required

Overall internal rate of return required.

Once you have figured out what your criteria are, you need to know what deals are
out there that meet your investment criteria. You will find them through all of the
channels available to you: brokerages, public records, driving and walking submarkets,
online listing services, and your personal and professional networks.

There are really two approaches to gathering your set of potential opportunities.
The first is to find out what is currently on the market, and also what is being
circulated “off market” (the latter is harder to do if you are not wired in to the real
estate community in which you are seeking to invest). The second is to identify what
types of transactions are of interest and then go out and find specific properties that
fit that description. Both approaches are valid.

Regardless of approach, at this stage we are casting a wide net to ensure that we are
not missing anything. Potential transactions can be tracked with a simple spreadsheet
like the one available in the Free Tools section of our website. Keeping a running tally
of the number of days that have elapsed since you first identified the transaction is
helpful to remind you that you must act swiftly to take advantage of opportunities.

There is no real magic nor are there any real secrets involved this element. It is
accomplished by beating the bushes and being inquisitive and persistent and
well-organized.

getREFM.com 9
Element Determine which deals seem promising enough
to warrant the time and energy involved in taking
a close look

10 getREFM.com
 Ask yourself the following: which transactions of those gathered are likely achievable
at my desired target yield on cost or profit margin, and why? Under what assumptions
are you drawing this conclusion? Is capital readily available for this type of deal?

t
To determine if the investment and your desired returns are reasonably realistic,
run a quantitative analysis to better understand its potential. First, run a quick
60-second back of the envelope analysis, with sensitivities on the key variables
(price, income, expenses).

You can use the Back of the Envelope Model Free Tools from REFM to run these
analyses.

If the deal looks good there and you want to get more serious about it, proceed to a
monthly pro-forma (future projection) analysis. We most often fund our liabilities
monthly rather than annually, and you eventually want and need to see this level of
granularity in your investment analysis.

REFM offers dozen of products to help you perform this more rigorous analysis,
which will eventually be required by lenders and equity investors to whom you
present the transaction.

getREFM.com 11
Element Control the opportunity and secure capital
commitments

12 getREFM.com
 If you are going forward with pursuing the deal, you want to have the exclusive right
(option) to the property purchase opportunity for a finite period of time. This is
known as “controlling” the property. Control does not mean that you are the owner of

t
the property (and at this point, you don’t yet want to be the owner). You can achieve
this exclusive right through signing an Option Agreement with the seller. This right
will ideally cost you nothing more than the lawyer’s fees required to draw up the
document (but will likely require some consideration to the seller up front, and
possible option extension fees down the line).

Simultaneously with pursuing control of the property, and once you have been
granted control, you will need to secure capital commitments for consummating
the purchase of the property and any planned development or redevelopment costs.
Naturally this capital will typically come in the form of both equity and debt.

You will need to go out into the financing markets and tell the story of the transaction
in terms of big picture and the nitty gritty of the financials. This is where your monthly
financial model comes in. A sound and thorough financial analysis speaks volumes
about your level of attention to detail and your seriousness about the transaction.

If the transaction is well-received by capital sources, you should be able to collect

multiple term sheets from both lenders and equity investors. The more options you
can have for financing the transaction, the better.

getREFM.com 13
Element Execute on your value creation strategy

14 getREFM.com
 Next you will close on and take title to the property, and implement your strategy,
whether it is a repositioning and re-tenanting of an existing retail strip center, the
ground-up development of a housing subdivision, or the renovation of an existing

t
apartment building.

There are many books and resources on the thousands of nuanced steps involved in
executing property closings, construction, project management and marketing of real
estate, and I will not endeavor to summarize them here. Surround yourself with the best
team members you can afford (not your friends) — execution is fraught with dozens
of pitfalls, and there are additional unperceived risks in the fact that “you don’t know
what you don’t know.”

getREFM.com 15
Element Track project variances, perform critique,
adopt best practices

16 getREFM.com
 While carrying out your strategy, compare your projections from your pro-forma as
committed to by your capital providers to the project actuals. Track variances closely
and critique yourself as needed. Also compare your actual strategy execution practices

t
and techniques to those originally envisioned. Learn from your mistakes and adopt
best practices for the next investment. There is no magic here, either. It is a painstaking
process of comparing actuals to projections each month.

Here is a simple set up for doing so for the Investor’s capital account:

[ A ] Pro-Forma Beginning of Period Balance

[ B ] Pro-Forma Investment Injection

[ C ] Pro-Forma Accrual Distribution

[ D ] Pro-Forma End of Period Balance

[ E ] Actual Beginning of Period Balance

[ F ] Actual Investment Injection

[ G ] Actual Accrual Distribution

[ H ] Actual End of Period Balance

[ J ] Variance: Investment Injection ( [ B ] – [ F ] )

[ K ] Variance: Accrual Distribution ( [ C ] – [ G ] )

getREFM.com 17
Conclusion
If you devoured this brief guide, you’re a real estate junkie!
Welcome to the club. Best of luck and be sure to visit GetREFM.com
and our Model for Success blog for all of your financial analysis needs.

Additional
Resources
Financial Modeling Solutions and Training
Real Estate Financial Modeling : GetREFM.com

Glossary
Institutional Real Estate Inc. Commercial Real Estate Lingo :
irei.com/terms/terms.html

Periodicals
Knowledge at Wharton :
knowledge.wharton.upenn.edu/index.cfm?fa=viewCat&CID=8
Globe Street : globest.com
Commercial Property News : cpexecutive.com
Real Estate Alert : realert.com
Realty Stock Review : reri.org
National Real Estate Investor : nreionline.com
The Real Deal : therealdeal.com
Wall Street Journal (Wednesday edition) : online.wsj.com/public/us
New York Times : nytimes.com/pages/realestate/index.html
Crain’s New York Business : crainsnewyork.com

Real Estate Organizations

CCIM Institute : ccim.com
Urban Land Institute : uli.org
National Association of Office and Industrial Properties : naiop.com
National Association of Real Estate Investment Trusts : nareit.com
International Council of Shopping Centers : icsc.org
Appraisal Foundation : appraisalfoundation.org
National Multi-Housing Council : nmhc.org
The Institute of Real Estate Management : irem.org
Offices:
2000 Clarendon Boulevard, Suite B1 226 Fifth Avenue, Third Floor GetREFM.com
Arlington, VA 22201 New York, NY 10001 Tel 646-580-7051