AI in Real Estate

AI is the cool kid on the block – how do you take advantage?

Mohit Asthana
October 10, 2023

Hey there, Mo here 👋!

Today, we’re going to be talking about AI in real estate and more specifically, how do you take advantage of AI?

I absolutely love technology and am trying to be ahead of the curve before it replaces me.

Today, I’ll walk through a live example of how I use AI in my commercial real estate investment business. We’re going to be using AI to look at an investment memorandum and figure out if it’s a good or bad investment that’s worth our time to analyze and create a financial statement.

ChatGPT is one of the most powerful AI tools out there, but it’s not the only one. I use Claude.AI (not affiliated at all) because it has live access to the internet and can read files like PDF’s and PPTX formats.

Today’s case study is an offering memorandum for an 18 unit apartment building in Cleveland.

Note: this file from my email is 18 mb – Claude only allows for 10MB per upload (max 5 uploads). To circumvent this, I use PDF Compressor from Adobe.

Here is a copy + paste of what it spits out

Based on the 3 PDF file attachments provided, here are some highlights I can summarize:

- Offering Memorandum for Harwood Apartments - 18 unit apartment building in Cleveland, OH built in 1977. Located in Opportunity Zone. 100% occupied with below market rents around $748/unit. Proforma NOI of $100,932 and proposed sale price of $1.194 million (8.45% cap rate).

- Rent Roll - 18 units total with 9 1-bedroom and 9 2-bedroom units. Current total monthly rent of $13,570. Average rents around $687 for 1-bedroom and $800 for 2-bedroom.

- 2022 P&L - Shows total income of $142,868 from rents and laundry. Expenses of $67,800 for net operating income of $75,068. Major expenses are property taxes ($24,157), utilities ($28,289) and insurance ($6,026).

In summary, the highlights are:

- 18 unit multifamily building in Cleveland with strong fundamentals (100% occupied, below market rents)

- Proposed sale at $1.194 million with good cap rate of 8.45%

- Current rents averaging $743/unit with opportunity to increase rents to market

- 2022 NOI of $75,068 on total revenue of $142,868

Let me know if you need any clarification or have additional questions!

PDF’s for reference…

The magic of AI is the quality of prompts you give it.

Off the top – it tells you a goldmine of information of the investment package overall.

I want more specific information about the rent roll (doc 2), so I ask “I want existing numbers in a table format”. This is what it spit out.

This is a table of all of the units with number of bedrooms and total rent.

I want it "grouped by number of bedrooms and give me the total”

Sure, here is a summary of the monthly rent roll for 1 bedroom and 2 bedroom units at Harwood Apartments:

| Unit Type | Number of Units | Total Monthly Rent |

|-|-|-|

| 1 Bedroom | 9 | $6,245 |

| 2 Bedroom | 9 | $7,215 |

| Total | 18 | $13,460 |

Key details:

- There are 9 x 1 bedroom units with total monthly rent of $6,245

- There are 9 x 2 bedroom units with total monthly rent of $7,215

- In total there are 18 units with a total monthly rent roll of $13,460

Let me know if you need any other summary or breakdown of the monthly rents by unit type!

Now, based on my research, I know the totals for 1 and 2 bed and total rent roll. Imagine I want a weighted average… I ask AI that.

This is the answer it spit out.

Based on the rent roll provided for Harwood Apartments:

- The average rent for the 9 x 1 bedroom units is $694

- This is calculated by taking the total monthly rent for 1 beds ($6,245) and dividing by the number of 1 bed units (9)

- The average rent for the 9 x 2 bedroom units is $802

- This is calculated by taking the total monthly rent for 2 beds ($7,215) and dividing by the number of 2 bed units (9)

In summary:

- Average 1 bedroom rent: $694

- Average 2 bedroom rent: $802

Let me know if you need any clarification or have additional questions!

My response:

“Now, market rent for a 1 bed in that area is $800/month and 2 bedroom is closer to $900. Can you do the math for what a pro forma rent roll would look like?”

Okay, here is a pro forma rent roll using the market rate rents you provided:

| 1 Bedroom | 9 | $800 | $7,200 |

| 2 Bedroom | 9 | $900 | $8,100 |

| Total | 18 | | $15,300 |

Assumptions:

- Market rent for 1 bedroom units is $800/month

- Market rent for 2 bedroom units is $900/month

Calculations:

- For the 9 x 1 bedroom units, total monthly rent at $800 per unit is 9 * $800 = $7,200

- For the 9 x 2 bedroom units, total monthly rent at $900 per unit is 9 * $900 = $8,100

- Total monthly market rent roll for the 18 units is $7,200 + $8,100 = $15,300

Let me know if you need any clarification or have additional questions on the pro forma market rent analysis!

My response:

“Assume a 50% expense ratio to calculate Net Operating Income. Give me a pro forma for the market rent.”

AI:

Here is a pro forma for the 18 unit property using the market rents and a 50% expense ratio:

Pro Forma (Market Rents)

- Gross Potential Rent (18 units): $15,300

- Vacancy Rate (5%): $765

- Effective Gross Income: $14,535

- Operating Expenses (50% of EGI): $7,268

- Net Operating Income: $7,267

Assumptions:

- Market rent roll of $15,300 per month

- 5% vacancy rate

- Expenses at 50% of effective gross income

Let me know if you need me to modify any assumptions or have any other questions!

Great… now we need to factor in debt.

My response:

“Take those assumptions above and factor in my debt payment. Say I'm borrowing 65% LTV at the asking price at 6.5% interest with 30 year amortization, interest only.”

AI:

Okay, here is the pro forma with debt service added based on the assumptions provided:

Pro Forma With Debt

- Asking Price: $1,194,000

- Down Payment (35%): $417,900

- Loan Amount (65%): $776,100

- Interest Rate: 6.5%

- Loan Payment (IO): $4,245 per month

Pro Forma

- Gross Potential Rent: $15,300

- Vacancy (5%): $765

- Effective Gross Income: $14,535

- Expenses (50%): $7,268

- Net Operating Income: $7,267

- Debt Service: $4,245

- Cash Flow: $3,022

Let me know if you need me to modify any of the assumptions or numbers in this pro forma analysis.

Great…. let’s benchmark this against the S&P 500 and get AI’s opinion if this is a good deal or not…

Okay, here is an analysis of the return on equity for this investment compared to a bank deposit:

- Down Payment (Equity): $417,900

- Cash Flow: $3,022 per month

- Annual Cash Flow: $3,022 * 12 = $36,264

- Return on Equity = Annual Cash Flow / Equity

= $36,264 / $417,900

= 8.7%

In comparison:

- Bank Deposit Interest: 5.5%

So the return on equity of 8.7% is higher than the 5.5% interest from a bank deposit.

Overall, this looks like a solid investment with good cash flow and return on equity of 8.7%, which is well above the bank deposit rate. The leverage helps boost the ROE.

Given the positive cash flow, in a growing market with potential upside and tax benefits, this seems like a good investment opportunity compared to simply earning interest at a bank. Let me know if you need any clarification or have additional questions!

This makes it a great “back of the napkin” analyzer in <5 minutes. I can try to export it to excel, but it’s usually wrong formatting with cells.

You may need to adjust the reference columns when you put it into Excel, otherwise you’ll end up with this…

All in all – this is a great introduction to AI in commercial real estate. Eventually, these models will become better.

Alternatively, you could use a python script to extract all of the data from an OM into a pandas dataframe, then export it to an excel spreadsheet or have python do calculations immediately with amortization schedules, LTV calculations, and exit cap rate scales.

Hope you enjoyed this week’s edition!

If you like this, subscribe for more and email me if you have any topics you want to cover!