Purchasing real estate boils down to how accurately one can predict:

• Net Operating Income; and
• Construction Costs

This sounds very simple conceptually, but I’m learning (slowly) how complex these predictions really are.

Net operating income - On a street by street basis how confident are you in achieving X rate? How confident are you that you can operate efficiently, while maintaining X occupancy? How confident are you in maintaining X occupancy at Y operating cost?

Construction costs - What are labor costs for X work? What does plumbing and roofing replacement cost you on a 7,500 SF property? What are the ranges of outcomes in X work? What does the worst case scenario cost you and do the returns still make sense if this occurs?

The next part (not mentioned) is even more difficult. Once you have the confidence to answer the above questions you have to make a risk-to-return decision. At what yield does it make sense to take on X risk?

If you’re buying deals in today's environment--where margins are tight--you must be extremely accurate in these predictions.