Before the real estate investor the micro analysis, they should first decide whether or not they like the results of the macro analysis. In this video we explore macro vs micro analysis.

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Transcript:   We get caught up in the numbers so much. I recently talked about all the various incomes and expenses and what this and that means and how you get to cash flow. I want to just make a quick note that when I’m doing analysis for a client, yeah, we show them the pictures of the buildings, and here’s the spreadsheets and these line items are vetted down to the dollar when it’s able to be done. When it has to be estimated, it’s always estimated high rather than low, but here’s what happens. We end up with an NOI that reflects about a 40% vacancy and operating expense on brand new property which leaves an NOI reflecting therefore about 60% of the gross scheduled income for the year. That’s all well and good. Murphy knows where we live. You will get visited, sooner or later by him, and you’ll have your turn in his barrel. Just take that gross scheduled income, cast the spreadsheet aside, divide that GSI by 2, and just say, that’s the NOI. That’s going to be a lower figure than the real spreadsheet said. If your NOI is lower than the Murphy NOI, what I call the Murphy spreadsheet, where you just divide into gross scheduled income by 2, something went horribly wrong. On the other hand, if it actually adheres to the spreadsheet that you vetted, you’re not unhappy. You made more money. That’s all I’m saying. As an aside, if you still have decent cash flow using Murphy’s spreadsheet, smile. You should be happy. Now, macro analysis is doing the cash flow analysis. You’re finding out how does this property perform. You’re doing all of it. You’re doing it for maybe 5 years. Some people want to do it 10 or more. You’re finding out what the expenses are. Did you buy an older property, so you’re going to impute more expenses. Is it a younger property? Is it in a higher or a lower vacancy rate, location, relatively speaking? What kind of property is it? Is it office, retail? I do residential income. I prefer that. That will affect the micro analysis. The micro analysis then expands to the local market. We want to talk about that. Then I make it a macro. I don’t just look at the local market. That’s easy. If I’m in San Diego, my local market is first the county, and then the state of California. I say, well, we have an opportunity cost, and we have a choice. I can invest in Texas, or Idaho, or I can go to Tennessee or 1 of the Carolinas, whatever floats your boat, or I can stay in California and keep local because it’s always best to be able to drive by, bleh. Here’s the thing. The macro analysis tells you if you even want to mess with the micro. Here’s why. You go to California, that’s the best example of a crummy place for your investment capital. They tax everything to death, sometimes more than once. They regulate it within an inch of its life. You almost can’t breathe in business here. Businesses are fleeing California. The highly educated and the big earners are fleeing California. Why? Because of high taxation, high regulation. You can’t breathe. If you look at the rent price ratios, and let’s get it right down to the 2 to 4 unit level, a mile, 3 miles from my own office, in La Mesa, California which is about 20 minutes due East of the gas lamp downtown San Diego. You will pay over 400,000 dollars for a half century old, completely functionally obsolescent duplex with a floor plan that even grandma would laugh at. The income would be 30, to 32,000, gross scheduled income, and yet you’re paying 4, 450.