Using Financial Analysis in Making Investment Decisions


Buying, selling and investing in real estate involve big decisions and substantial financial commitments. Market knowledge, due diligence, and thorough financial analysis are the keys to successful real estate transactions. Not everybody has the time, the knowledge, or the confidence to invest in real estate on their own. For these people, Kensington Realty Group provides the expertise needed to access the attractive returns available in U.S. real estate successfully.

The starting point is understanding your financial situation, your goals, and your tolerance for risk. Although we focus on real estate investing, we analyze your entire investment portfolio to understand the total risk and return profile before making any recommendations.

Let’s examine the various aspects of the real estate investing process to see how Kensington Realty Group provides value to its clients.

The Investment Process

Nationwide, at any one time, there are thousands of properties for sale that might be good investments. From this universe of potential investments, the goal is to find the best one for you. It takes time and expertise to narrow this down to a manageable number of candidates. Kensington Realty Group helps the client narrow down the field to specific property types and geographic locations. This involves combining our knowledge of the client with our knowledge of various markets within California as well as those in other states with high return potential. We then obtain enough information about properties for sale in our target markets to determine whether they meet certain basic financial benchmarks. For example, we may eliminate all properties priced at gross rent multiples greater than 15x or cap rates below 5%.

Preliminary Due-Diligence
Once we have identified the best overall properties, we perform preliminary due-diligence to firm up our forecasts for financial performance, and in so doing, identify risks and issues that could affect pricing and terms and conditions. Kensington Realty Group does a line-by-line analysis of the pro-forma operating statement and adjusts the numbers to ensure that the results are achievable and realistic. For example our investigation would generally include the following:

  • Local market rents and vacancy rates
  • Projected growth in demand and supply of competitive units
  • Whether earthquake or flood insurance is required and approximate pricing
  • Visit to the property to evaluate condition and location attributes
  • Preliminary loan quotes – both amount available and pricing
  • Estimate impact of local laws and regulations on future rents and expenses

The issues and risks identified in this stage will allow us to structure an offer that can win the deal at an acceptable price while minimizing risks.

Negotiating Price and Terms

In order to win the deal on the best terms possible you need to know as much as possible about the seller’s motivations, the property market in which you’re investing, and how the seller perceives the market. Sometimes price is most important. Sometimes quick cash is needed. Kensington Realty Group can probe the seller to find out what items are most flexible and what items are necessary to get the offer accepted. We understand that there are a lot more elements to a deal than just price and we work creatively to negotiate a complete package so that our client can keep risks low and achieve their desired returns while still offering the seller enough to stike a deal. For example, a seller who stands firm on price may be willing to finance some of the required equity. By negotiating for additional leverage from the seller at a good rate we can boost return on equity by more than enough to make up for price concessions.

Final Due-Diligence

Once the property is in contract there are a number of contingencies to resolve:

      • Title is checked
      • Operating statements may be audited
      • Leases should be reviewed
      • The structure is inspected to determine if repairs are needed
      • The property must be appraised
      • Environmental Inspection
      • Other issues are investigated as deemed necessary to resolve uncertainties

Kensington Realty Group will manage the entire process for the client and help you find the right professionals for the inspections and, if needed, any subsequent estimates of costs to remedy any problems discovered.

Leverage is crucial for achieving high returns on equity. Kensington Realty Group gives this aspect the attention it deserves. Some properties are “commodity” deals that can be financed by a multitude of lenders. In these cases we use the latest technology to seek out competitive bids for the business. Other times, a niche lender who understands that type of property best, may be the most effective financing source for a property. For these, Kensington Realty Group will work with the lenders in the niche to educate them on the earning power and value of the particular property. By working closely with selected lenders and providing maximum information about the property and the strategy for enhancing value, we can obtain the best terms possible for non-standard deals.

Managing the Investment – Operating the Property
Although some owners may wish to manage their own properties, most will find that the money saved is insufficient compensation for the time and nuisance of dealing with tenants. Kensington Realty Group can provide tenant-screening criteria and help select an onsite manager or a professional property management company to handle maintenance, rent collection and vacancy marketing. We also help manage property improvements to take the burden off of owners and ensure that value added exceeds the costs.

Financial Management
Financial management is the core of our expertise. It is our key advantage over other brokers and property managers and it is crucial to maximizing returns. This means:

  • Controlling costs
  • Setting appropriate rent levels.
  • Efficient re-investment of cash flows
  • Optimizing refinancing transactions
  • Forecasting and managing taxable income to avoid unnecessary tax expense
  • Proactive risk management

Kensington Realty Group has extensive experience in financial modeling, far more than any broker or property manager working for institutional and non-institutional clients. We put this sophisticated modeling to use in forecasting taxable income and returns on equity under various scenarios. This helps determine when it is optimal to boost leverage by refinancing or to exchange the property for another. We also provide valuable advice about insurance coverage, lease clauses, legal ownership structures and other strategies for minimizing the risks of owning real estate. Add it all up and you’ve got the best financial management available and the results will show it.

The Difference Factor

Most commercial property brokers are focused on listing property rather than helping you buy it in the first place. The time it takes to attend to all the details of finding a property and performing the due-diligence, combined with the risks of being sued for a bad investment, make this business unattractive relative to the easy money that comes from listing a property. Consequently most commercial brokers focus on building their marketing machine to attract listings. Given their focus on listings, it is far easier and more profitable for them to direct a buyer towards the purchase of one of their own listings than to objectively search for the best investment in the market.

Kensington Realty Group is a different sort of firm because its founder, Michael Kirch, comes from an investment background rather than marketing or sales. Michael's philosophy is to use his competitive advantage in investment analysis to build a niche business focused on institutional and non-institutional investors. With a banker’s attention to details along with an analytical tool kit, Kensington Realty Group can thrive as a pure buyer’s broker by building repeat and referral business through successful investments and excellent service. We apply sophisticated financial modeling techniques to identify opportunities that others may miss and to avoid deals that don’t make fianancial sense. We are confident you will find our services superior to that of the competition.