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Analyzing data - next level?

Discussion in 'General Entrepreneur Discussion' started by Sid23, Dec 3, 2007.

  1. Sid23
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    Sid23 Bronze Contributor

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    I'm good at analyzing numbers and data to do the "first level" of analyzation.

    For example, this bldg sold at this cap, this bldg sold at this cap, interest rates have moved a point today, apartment vacancies are up, etc. I can handle this level fine.

    My issue is the next level of intrepretation. My boss, for example, can read data and see that "Cap rates are moving up, interest rates are stable, home prices are going down, employment is up" and immediately say, "Great, let's go buy some apartment buildings." (NOTE: THIS IS JUST AN EXAMPLE OF TERMS. IT MIGHT NOT AN 100% ACCURATE SCENARIO)

    How does one learn to connect the dots like that? Simply through repetition?

    We had a deal discussion today and we own a great piece of land on the SF Bay that we've just got approved for 84 condos, townhomes and cottages. We discussed access to capital, interest rates and immediately my boss's knew they would have a hard time unloading this site. I sat there thinking, "Okay, I understand why it's hard to get capital partners right now, why interest rates are where they are..." But then was lost on how they got the next level.

    Any advice how to improve with this? :iamwithstupid:
     
  2. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    This type of thing is common in many types of industries, and unfortunately there is no magic formula for being able to do this sort of thing. Some general advice though:

    - It's important to *fully* understand the basics. Take cap rates for example -- I can define cap rate to someone in about 10 seconds. I could give them an overview of what cap rates are and how they work in about 3 minutes. I could tell a whole bunch about cap rates in about 20 minutes. But until they spend some time really thinking about what cap rate means (not just the definition, but the *MEANING*), they won't fully internalize it. You need to really understand all the basics in your field before you can really start to understand relationships.

    - Once you have the basics down, you can start thinking about relationships. For example, what is the relationship between property income and cap rates. If you can increase income by 5%, how much does the cap rate increase by? Someone new at this can break out a spreadsheet, play with the numbers for an hour and start to get a feel for how income is related to cap rate for various types of properties. Someone who has thought about this for a few hours and has actually owned apartments (and therefore has dealt with this in real life) fully internalizes the relationship. So, the next step is to think about relationships, and do your best to get as much real world experience as possible.

    - The next level is understanding lots of interdependencies among lots of variables. For example, your boss being able to look at interest rate, cap rate, local demographics, etc, and determine that he has a deal on his hands. Part of his expertise came from thinking about the relationships of all the variables at some point in the past, but much of it has come from experience.

    - I would highly recommend that the next time you're in a situation where your boss does this, you gather all the data he has, and you think about all the relationships of the pieces relatively to his decision. If he thinks there's a good deal, and one of the pieces of information he had was that job rates were up, try to figure out the relationship between those two pieces of information -- why do high employment rates make for a good deal? If you think about it enough, you'll start to internalize it, at which point you'll be able to put the pieces together much more quickly in the future.

    - There will be times when you'll think about the relationship between two things and come to a completely different conclusion than someone you trust did. For example, maybe you believe that high employment should indicate a bad deal. If that's the case, ask your boss about the relationship of those two variables. Explain your reasoning, and ask him to correct it. Perhaps you made a mistake in your reasoning. Perhaps there were other factors that contributed that you didn't think about. Perhaps it's just something that you can't really figure out without experience.

    I realize most of the above was probably not very coherent... :) This is actually a very complicated subject, and while I've read a lot about the concepts behind "how people learn complex reasoning," it's very difficult for me to verbalize.

    I'll try to dig up some resources, and post them...
     
  3. Sid23
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    Sid23 Bronze Contributor

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    Jscott, thanks for the reply! I appreciate the answers.
     
  4. Poudda
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    Poudda New Contributor

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    I used to work with a guy (credit manager) - whenever I pitched a deal to him, I would only get as far as telling him a few very general things, and a couple of lines on the income statement, and he would tell me the rest of the story (including more specific details on the financial data) without actually having a copy of the fianancial statements or any other data in front of him. I'm pretty confident at reading financial statements and pulling all the data from them and analyzing the particulars, but what this guy did blew me away every time. It comes down to a solid understanding and experience IMO.

    Just like cap rates. I know how to calculate them, and I've been reading Burges book, but I'm still going in the back of my mind, "this doesn't make sense, why does it work like that? what's the difference between a cap rate of 7%, 10% and 15% - which is better and why?" It will come to me eventually after I research more and play with numbers on my own spreadsheets and compare them to market. Sorry, I'm rambling.

    Cheers!
    Dave
     
  5. JScott
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    JScott Legendary Contributor FASTLANE INSIDER Speedway Pass LEGENDARY CONTRIBUTOR

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    Poudda -

    With respect to cap rates, here's something to think about...

    Almost all measures of the return on investment (ROI) of a property are relative to the buyer and the financing. For example, you cash-on-cash return is relative to your interest rate and down-payment amount. As you adjust the interest rate (and amortization schedule) on your loan, and as you adjust your down payment, your cash-on-cash return is going to change (even though the property is completely the same!). Likewise, you're total ROI is going to depend on things like your interest rate, your tax bracket, etc. Again, every investor will likely see a different personal return on investment, even though the property is exactly the same!

    So, how do you judge the value of a property *independent* of the specific investor? How do we have a common view of a property for two investors who may have completely different credit backgrounds, financing mechanisms, down-payment amounts, tax situations, etc?

    That's what the Cap Rate is. It's the key ROI value that is also independent of the buyer and the details of the financing.

    Because the Cap Rate is independent of the buyer and the financing, it is the most pure indication of the return a property will generate. Another way to think about Cap Rate is that it is the ROI you would receive if you paid all-cash for a property.

    Keep in mind that the Cap Rate is *not* necessarily the highest return you’ll get on a property. This is because Cap Rate assumes that the investment amount is the maximum (the full price of the property), and in general, the value of ROI calculations goes up as the investment amount goes down.

    Hope that helps...
     
  6. Poudda
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    Poudda New Contributor

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    Thanks JScot. That makes sense. I probably just read too much too fast, as I do remember it being explained in the book (now that you mention it) as compared to ROI. Also ran a couple of numbers on one of my properties so I think I get it now. Just have to find some comparibles in my market to see what the normal cap rate is.

    Dave
     

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