Red Door Equities Deep Dive Podcast

Red Door Equities
  • 5.0 (1)
  • Investing

This podcast series is set to answer FAQ's from investors as well as provide informational content on our investing model. We take the time to explain expectations investors can have, market specific points, steps for risk mitigation, how we identify opportunities and more.

  1. 12/26/2021

    General Partner Roles

    Finding the opportunity through multiple marketing efforts  Conducting physical and financial due diligence to screen the deal  Creating and testing the business plans with several vendors  Investor capital alignment and signing and closing with lender and seller  Executing the business plan  Managing the asset and driving the bottom line  Preparing for refinance and sale

  2. 12/26/2021

    The Cap Rate

    The cap rate comes up a few times within our analysis. To start we can determine our "going in" cap rate by taking the NOI (Net Operating Income) and dividing by the purchase price of the property. Ex. 100,000 NOI / 2,000,000 purchase price = .05 or a 5 cap. We underwrite the market going in cap rate as a basis for projecting future cap rates such as the one at year 1-3 when we refinance and years 5-10 when we sell. We add 10 - 15 basis points annually in our projections to create a conservative picture of outcomes. By adding 10 - 15 basis points we are essentially betting against the market and saying the properties cash flows will be worth less every year. Market and property specific factors determine a fair market cap rate for different asset classes within locations.

  3. 12/26/2021

    Physical and Economic Vacancy

    Physical vacancy is the amount of units that aren't physically occupied divided by the total number of units. If 2 units are physically vacant at our 20 unit the vacancy rate is 2 / 20 = 10%   Economic vacancy is the amount of tenants that are actually paying. If 2 units are physically vacant at our 20 unit the vacancy rate is 2 / 20 = 10%.  If 1 of the other 18 units tenants is not currently paying our total vacancy is now 3 / 20 which is 15%.

  4. 12/26/2021

    Some Common Terms

    Gross potential income- 100% occupancy (the most the property could bring in)  Operating expenses- Day to day operations    Non operating expenses- Interest on debt , non core related activities/ restructuring of the property  NOI- Net operating Income = Gross income - Expenses (Annualized)  COC- Cash on cash return = annual return / cash in deal  IRR- Internal rate of return takes the time value of money into account and weighs heavily on getting money back sooner

  5. 12/26/2021

    Some Of The Risks

    Some of the risks include a market downturn resulting in non paying tenants and a disruption of the execution of the business plan. Lending terms could tighten off setting the refinance terms or sale terms a potential buyer would pay to achieve their desired returns. Our overall projections can be overly or underly conservative as it's very hard to predict several years into the future, therefore, we try and build a not so attractive model to stress test the deal.

  6. 12/26/2021

    Risk Mitigation

    A few ways we mitigate risk are by analyzing the specific locations economics and demographics of which the property is located. Is there a value add component we can exploit? Is our underwriting conservative? Does our project manager and property manager deem the plan feasible? Do our mentors and advisors agree with the business plan once finalized? Under promising and over delivering is more attractive then the other way around. We aim to remain conservative and realistic with our projections.

  7. 12/26/2021

    Limited Partner Deal Expectations

    Deal by deal return expectations vary greatly by the specific property and the business plan. Stabile properties may yield an attractive quarterly distribution yet return less on a sale or refinance vs. a heavy value add deal may return slim quarterly distributions until the refinance returns capital and boosts those returns as the property may have increased vacancies during the renovation period.  We target 7-8% quarterly preferred returns and a targeted internal rate of return of 12% or greater. Cash out refinance vs sale as loans aren't taxed because it's a loan not income. Sales trigger capital gain taxes.

  8. 12/26/2021

    Identifying Opportunities

    Location Age and Construction Asset Class Value add components?  Investor returns?

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This podcast series is set to answer FAQ's from investors as well as provide informational content on our investing model. We take the time to explain expectations investors can have, market specific points, steps for risk mitigation, how we identify opportunities and more.

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