Jamison Manwaring – Cofounder at Neighborhood Ventures / Mr. ROI

I love playing flag football. I love the comradery with my team and, even more, understanding and executing the plays that allow us to run the football down the field most effectively.  Could I go out there and, as quarterback, just throw to whoever gets open and hope for the best? Sure, I could do that. But to give myself and, more importantly, my team, the best chance of success, I have to understand the plays and patterns well enough to know when to take a risk with a deep throw downfield and when not to take the risk and to throw the ball out of bounds.

Some comparison can be made to investing in commercial real estate. It is important to understand the fundamentals behind the investment in order to determine what opportunities have the best chance of success.

One of the reasons why I like apartment buildings is because they are relatively straight forward investments. Revenue comes from the rent generated by each unit. The costs include operating expenses, maintenance, property management, debt payments, insurance, taxes and any other cost incurred to manage the property. After taking the revenue and paying the expenses, whatever is left is the profit.

With Neighborhood Ventures projects, we act as quarterback in identifying the properties that, once renovated, can see an increase in the rent that can be generated from each unit. By doing this, we increase the value of the property. We use years of experience and discipline in only pursuing projects that fit our strategy. We simply pass on the many other possible projects that don’t fit that criteria. Simply put, we execute only the plays that will get the ball down the field.

I wanted to share with you the key factors that we look at when we are assessing a potential project. I’ve broken down these key factors into 4 points:

1. Compare the upfront cost per unit with expeced sales price per unit

This starts with finding the right deal. For us, we are looking for properties in up-and-coming areas where rents and property values are increasing. Once we find the right deal, we put together our renovation budget. Our total upfront cost is the purchase price + renovation. We then compare this with what we believe we can sell the building for after the renovation is complete.

2. Compare the current per unit rent vs post renovation expected per unit rent 

We are looking for projects that currently generate below market rents. Once these projects are renovated, the rent will be increased so it matches the market rent. We want to see a good increase in the rent to justify the renovation expense, typically 20% or more.

3. Calculate the expected cash flow

Now that we know what the expected rent will be, we can see what revenue will be generated from the project. We compare this with the operating expenses. We know many of these, including taxes, insurance and interest. Others need to be estimated. The profit that is left over is the cash flow.

4. Calculate the expected total return

The total return for our projects includes the increase in value of the property now that it has been renovated and is stabilized with new higher paying tenants. This return will be realized when the building is sold to the next buyer.

A good project will perform well in each of these 4 key areas. As we continue to bring new projects online, we hope you will look at each of these 4 key areas so that you can grow understanding of why we believe the project will be a success.

We will continue to share the key information and values that shape our decisions so that you as a part of the Neighborhood Ventures team, can be as educated as possible. This makes our team different. This makes our team special. And we are glad you’re with us.

Watch the full video here.