Last issue I explained how I find deals. This one is about what happens after a listing catches my eye.
I'll walk through a real example — same numbers I use in the playbook — so you can see the full thought process from first look to decision.
The listing
A 6,000 square foot industrial building. Asking price: $480,000. That's $80 per square foot.
In the markets I target, $80/sqft is on the lower end but not obviously cheap. The first question is whether the income supports the price.
Step 1: Model in-place NOI
The listing shows one tenant paying $2,200/month. Let me check if the property is actually worth what they're asking at that income level.
NOI = Gross Rent - Operating Expenses
$26,400 gross - operating expenses ($8,780) = $17,620 in-place NOI
At a 7% cap rate (market rate for this type of property in this area):
$17,620 / 0.07 = $251,714 implied value
The market is telling me this property is worth $251k based on its current income. They're asking $480k. That gap is why I'm still interested, it means the seller is pricing on something other than current income, which is common in value-add real estate. There’s probably some vacancy or below market rents.
Step 2: Model the pro-forma
The building is 6,000 square feet and currently has one tenant. If I convert it to four 1,500-square-foot units, I can lease each one to a different small business at market rates.
Market rent for small industrial in this area: $0.80/sqft/month.
4 units x 1,500 sqft x $0.80 x 12 months = $57,600 gross
After operating expenses:
$57,600 - $22,080 expenses = $35,520 pro-forma NOI
Stabilized value: $35,520 / 0.07 = $507,000
Now I can see the upside. At full stabilization, the property should be worth roughly $507k. That's the destination. The question is whether I can get there at a price that makes sense.
Step 3: Back into the price I need
I'm targeting a minimum Unlevered Yield on Cost (UYOC) of 9% (a 2-point spread over the 7% market cap rate). That's my margin for error.
Renovation budget to convert to four units and update the space: $60,000.
Total cost = purchase price + $60,000
To hit 9% UYOC: $35,500 / 9% = $394,000 total cost maximum.
$394,000 - $60,000 = $334,000 maximum purchase price
I'd make an offer around $310,000 to $320,000.
Step 4: Does this deal make sense?
At $320k purchase + $60k renovations, total cost = $380,000.
UYOC: $35,500 / $380,000 = 9.3% — clears the hurdle.
Equity created at stabilization: $507,000 - $380,000 = $127,000.
That's not paper equity either. A lender will appraise the property at stabilized income and lend against it. At 70% LTV on a $507k property, I can borrow $355k, almost enough to pay back the entire $380k cost basis and then some. I recover most of my capital and still own the building.
Step 5: The call
I make the offer. Whether the seller accepts a 33% discount on their asking price depends entirely on their situation. Owners who've held for 20 or 30 years, especially inherited properties, often have a cost basis that makes $320k perfectly attractive. Others won't budge. Either way, the math has to work before I engage. I never negotiate up from a price that doesn't pencil.
What makes a deal worth pursuing
It comes down to three things:
Can I buy it at a price where UYOC clears the hurdle rate?
Is the value-add path clear and achievable with the budget I've modeled?
Does the stabilized value support a refinance that recovers my capital?
If all three answers are yes, it's a deal worth pursuing. If any one of them is shaky, I pass and wait for the next one.
Doing this math is a lot easier in a spreadsheet and I have a couple of templates I use over and over. The Quick Screen and BOE templates I use to run this analysis are included in the Concrete Returns value-add playbook
Next issue: financing: how to actually get a deal done when you don't have a track record yet.
Javi