Multifamily Real Estate Underwriting Part 2

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This Money Monday$, Ben Suttles and Feras Moussa will be walking through how to underwrite multifamily properties!

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VIDEO TRANSCRIPTION

00:00
holidays software give you this time i
00:01
know where are we we need to have some
00:03
hats we didn’t have any problems
00:05
i specifically got us hats for that for
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the gifts last week so we’d have
00:08
something we totally botched it
00:10
it’s all good it’s all good but it’s a
00:11
holiday week right
00:13
short week for everybody so thanks for
00:14
tuning in what are we doing we’re
00:16
talking about
00:17
real estate what show is this we talk
00:19
about all the time so
00:20
welcome to money mondays everybody yes
00:22
every monday 3 30 p.m central
00:24
we are nothing if not persistent we are
00:26
going to do this on the holiday week
00:28
uh-huh every monday i try to go home
00:31
today ben will let me go home no
00:32
absolutely not you got to work buddy
00:33
somebody’s got to plan some time around
00:35
here all right so money mondays what are
00:36
we talking about today folks we’re
00:38
talking about underwriting part two so i
00:40
think we’re gonna do a couple
00:41
more of these too so i don’t want
00:42
anybody to to feel like hey if you
00:44
missed this one or tell me a part
00:45
two three four five we might need to
00:47
underwriting seems to be a
00:48
important time well it’s important you
00:50
know um you know it’s popular
00:52
and it’s a you know i would say that you
00:54
know there are two things to real estate
00:56
right we talk about this all the time
00:57
right
00:58
it’s a numbers game and it’s a
00:59
relationship game so we’re going to try
01:01
to
01:01
we ultimately can’t make you more
01:03
personable person
01:05
but maybe we can we can help you on the
01:07
underwriting side get a little bit more
01:08
familiar with the
01:09
with the numbers and the concepts and
01:11
kind of the terminology right so you can
01:13
determine
01:13
even as a passive investor what’s a good
01:15
deal or if you’re going to buy a deal
01:17
right what’s a good investment
01:19
but for those that are new new what does
01:21
underwriting mean let’s start with the
01:22
basics right so yeah i mean i i throw
01:24
around
01:24
wait before we do that actually so
01:26
monday monday every monday 3 30 central
01:28
right if you have questions comments as
01:29
we go through this definitely ask them
01:31
we will go through them at the end
01:32
typically we’ll spend about 15 20
01:33
minutes presenting and then we will
01:35
basically do q a at the end so if you
01:37
have questions do not hesitate to ask
01:39
them so underwriting
01:41
analysis analyzing a deal they’re all
01:43
synonymous right so what are we talking
01:44
about when we say stuff like that right
01:46
it means that you are taking
01:48
the historical financials the past
01:50
financials
01:51
you are then putting them into you know
01:53
a spreadsheet that maybe you’ve
01:54
developed or maybe you bought from
01:55
somebody else
01:56
and then doing projections from there
01:58
those projections are going to determine
02:01
is this deal going to be a good deal
02:03
right so really underwriting is a fancy
02:04
way to say
02:05
and analyzing returns yeah right the
02:08
projections of their actually you’re
02:09
analyzing
02:10
risk as i think is really because really
02:11
think about lenders do underwriting we
02:13
do underwriting so it’s probably
02:14
i wonder what actually i’m gonna look
02:15
this up right now define underwriting
02:18
for those in our audience that are too
02:20
busy not lazy too busy to go search for
02:22
the term underwriting
02:23
it means sign and accept liability under
02:26
thus guaranteeing payment in case loss
02:28
or damage occurs
02:29
that’s way too sophisticated of a
02:31
definition but
02:33
i think everybody gets it right you’re
02:34
looking at past performance to determine
02:36
is there something that you can do yeah
02:38
basically you’re you’re really looking
02:39
at you’re
02:40
you’re looking at assessing risk so we
02:41
assess risk in terms of returns
02:43
other people send risk in terms of loss
02:45
right so all right so before we
02:47
move on to the slides right so basically
02:50
we have kind of two slides to put
02:51
together
02:52
we ran numbers on a deal that we
02:53
recently looked at right
02:55
the name of the deal is irrelevant even
02:57
the numbers that we’re showing are
02:58
relevant right what we’re trying to do
02:59
is show people
03:00
kind of how do you go from financials
03:02
that you may be given
03:04
into something that you can make sense
03:05
of right and then on top of that how do
03:07
you evaluate so basically what are some
03:08
of the gotchas you need to look at
03:09
absolutely and then how can you evaluate
03:11
some of that but before you hop into
03:13
that
03:13
right let’s go through a few comments uh
03:15
ronnie says what’s up guys what’s up
03:16
ronnie what’s up buddy
03:17
amanda says commitment love it we are
03:19
absolutely committed
03:21
ronnie says uh this is the most casual
03:22
i’ve seen ferris thanks i’ll take it
03:24
i told that it was sweater weather he
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didn’t wear a sweater man so
03:29
this guy trevor says thanks for sharing
03:31
you’re welcome and ronnie says for
03:32
underwriting how to mitigate the
03:33
prepayment penalty for agency debt
03:35
oh boy that’s okay that’s a loaded
03:36
question we’ll go to that one maybe
03:37
later we’ll get to we’ll get to the
03:39
particulars right folks once again
03:41
you’re not going to learn how to
03:42
underwrite a deal from this from this
03:44
30-minute show right
03:45
you know there’s a lot that goes into
03:47
this but we’re going to try to give you
03:48
the high-level
03:49
how we look at deals what the
03:51
assumptions that we make some of the
03:53
terms that we use right terminology in
03:55
the business i think that that’s
03:55
important right because
03:57
even if you’re a passive investor you’re
03:58
just looking to to invest in somebody
04:00
else’s deal
04:00
they’re going to throw around things
04:02
right you know what are cash on cash
04:04
returns and
04:04
irr and total returns you need to
04:06
understand what the stuff is and how
04:08
they’re calculating it right so
04:09
we’ll get into a little bit of it right
04:11
so as far as said the deals are relevant
04:13
it was a deal that we did
04:14
we ultimately passed on because you’ll
04:16
see why um
04:18
you know and this was our some of our
04:20
you know a little bit of our
04:22
underwriting right you know this is like
04:24
one little snippet of yeah so if we take
04:26
a look at 13.
04:28
so t12 basically it stands for trailing
04:31
12.
04:32
right it’s what the financials that we
04:34
were giving we sum up all the past 12
04:35
months right one years of
04:37
financials what that looks like and so
04:40
you can see
04:40
you know what just kind of maybe go
04:42
through this right the that’s the left
04:43
column the right column is basically
04:45
modeling and okay if you’re purchasing
04:46
at a 44 million dollar purchase price
04:48
our assumptions and that’s actually what
04:50
the brokers wanted yes so normalized
04:52
expenses
04:52
at a 44 million dollar price price what
04:54
that looks like so let’s go through this
04:55
really quickly right
04:56
average monthly income right you know we
04:58
did believe that there was some
05:00
opportunity to push rents right and so
05:02
that’s where you know you can see we did
05:03
a little bit of a pop right
05:05
now the one thing i want to point out to
05:06
people this was a newer asset
05:08
right that basically brand new so it was
05:11
in lisa
05:12
so the t12 financials right they’re
05:14
exaggerated intentionally it showcases
05:16
people right
05:17
you know what to look for right but
05:18
obviously they’re not indicative because
05:20
a property that had one percent occupied
05:22
versus 100 percent occupied very
05:23
differently
05:24
i mean so that’s where if you look at
05:25
this the vacancy right that’s crazy
05:27
that’s it so you know only ben was
05:28
running a deal would be 65
05:30
occupancy right so you know i mean only
05:32
in a lease up or
05:33
only in a situation where you have a lot
05:35
of down units will you ever see
05:37
vacancy that high right just we’ll give
05:39
you some rules of thumb right
05:40
i’d say cb assets right you’re anywhere
05:43
from
05:43
five to ten is where you’re wanting to
05:45
try to run your vacancy right
05:47
you know obviously this is 65 and then
05:49
we were
05:50
we were saying hey we’re going to
05:51
continue to lease up right because it’s
05:53
not 100 percent there
05:54
so we will have some vacancy going into
05:56
our year one that’s why it’s a 25
05:58
percent yeah so
05:59
exactly and so you know this deal was
06:01
basically stabilizing right that’s why
06:03
it was for sale because they got it back
06:04
to
06:04
90 percent for those of you that
06:06
remember right whenever we buy a debt to
06:07
get the best debt fannie freddie yep
06:09
right you want it stabilized that means
06:11
ninety percent occupancy or more for 90
06:12
days so this deal had just reached that
06:14
but eight months ago whenever they’re on
06:15
lease up it wasn’t there right and so if
06:17
you look at what we’re doing right we’re
06:18
modeling essentially you know
06:20
burning off the loss to lease right and
06:23
we’re still planning to have
06:24
you know really if you look at a 25 6 31
06:27
economic vacancy right we’ll probably be
06:29
able to do better but again you’re still
06:30
burning it all off right because again a
06:32
property that was 60
06:34
vacant versus 10 vacant are very
06:37
different characteristics right
06:38
but that’s on the income side i don’t
06:39
want to spend too much time on that i
06:40
don’t know if you had anything else to
06:41
add to that but really
06:42
i want people to understand the expense
06:43
side because i think expense is more of
06:45
the
06:46
let me let me point out two things right
06:48
so you know
06:49
you take your gross and then you’re
06:51
going to deduct
06:52
your vacancy and your economic vacancy
06:54
right then you’re going to get that
06:55
effective
06:57
rental income and in this case we call
06:58
it effective gross income egi
07:00
right then you’re going to add in other
07:02
income people always say what’s other
07:04
income well it’s fees right it could be
07:06
you know you’re charging for covered
07:07
parking or there’s pet rent or like
07:09
there’s late fees
07:10
right application fees anything that is
07:13
not
07:13
rental income but the property charges
07:17
for is going to be considered other
07:18
income right
07:19
the reason that we popped it from 140 to
07:21
300
07:22
once again it had to it was a direct
07:24
correlation between where it was at
07:26
in the t12 which was you know vacancy
07:29
was at 65 percent
07:31
down to 25 right so we’re going to just
07:33
have more people that are going to be
07:34
paying fees
07:35
right so then you get the total net
07:37
income from that absolutely one more
07:38
thing to point out right
07:40
is you know in this case we model the
07:42
t12 right just to kind of really
07:43
showcase to people how yeah hey the t12
07:46
is almost
07:46
you know it’s a guiding principle it’s
07:47
not like it applies one to one
07:50
right and this kind of deal you would
07:51
have probably looked at a t1 or t2
07:53
right to be a little bit more indicative
07:55
of the true thing because again the
07:56
property eight months ago is very
07:57
different than the property today
07:58
and brokers will usually do that you
08:00
have to kind of read the fine print when
08:02
they’re doing their deals
08:03
or when they’re doing their oms they’ll
08:05
usually say we’re taking t1
08:08
whatever’s going to make the deal look
08:09
the best they’ll take t1 income and t3
08:12
expenses right because
08:13
they’re taking t1 income with t5 other
08:15
income with t12
08:17
and then three years ago as it were
08:19
taxes just know that most of the time
08:21
you might be able to get away with t1 or
08:23
t3 on the income side but they’re always
08:25
going to take t12 expenses
08:27
so you know if if the broker has done
08:28
something else or you’re trying to
08:30
underwrite to t3 expenses
08:31
just know that your lender especially on
08:33
fannie and freddie deals is not going to
08:34
go with that
08:34
so you want to talk about expenses
08:36
because i’d say it’s pretty important
08:38
yeah so let’s go through the expenses
08:39
right so let’s just talk about this one
08:41
night at a time right
08:42
first one real estate taxes now real
08:44
estate taxes if you notice we did a big
08:46
pop right right
08:46
again big pop sales taxes are probably
08:48
based on land value or something you
08:50
know it’s a huge huge difference right
08:51
between
08:52
an asset that just got built and that
08:54
but again typically you’re looking at
08:55
and again this is all of this expenses
08:57
is market driven right so market
08:59
specific area so keep that in mind
09:01
right but we have some rules of thumb
09:02
there on the right and even though those
09:04
are rules i think you know
09:05
they’re very very i ignore that one for
09:06
the taxes because obviously my taxes
09:08
really market driven you want to usually
09:09
model
09:10
anywhere from 80 to 95 to 100 percent of
09:12
your purchase price
09:13
times the millard trade the tax rate
09:15
right so taxes are very unequivocal
09:18
that’s an area a lot of people skimp out
09:19
on and then they get burned on it
09:20
even us we model it high and then you
09:22
know you have a year where you actually
09:24
don’t get you know you don’t get nuked
09:26
which is good you almost forget about it
09:28
and then
09:28
next year you’re riding high you’re like
09:30
oh shoot you know but
09:31
our taxes just tripled right we’ve had
09:33
that but luckily we had modeled it i
09:35
guess the previous year it just went
09:36
well
09:37
mechanisms in place to obviously protest
09:38
it too right yeah so it’s not like it’s
09:40
a total loss right
09:41
you know between georgia and texas there
09:43
are there is a way to get it down too
09:45
right
09:46
yeah and so let’s keep going so
09:47
insurance right this is another one
09:48
where
09:49
you know again you see the on the t12
09:51
with 36 000 right
09:53
that that’s that’s meaningless right it
09:54
was that’s not accurate yeah right this
09:56
is a big property and so again
09:57
we modeled it much higher and typically
09:59
for insurance right you’re modeling in
10:01
400 to 600 and again you know some
10:03
places like phoenix is cheaper
10:05
some places like houston’s more
10:06
expensive and so it’s marker driven
10:08
but again you’re looking at the rule of
10:10
thumb as a rule of thumb it’s not the
10:12
requirement
10:13
right so you can see that exp you know
10:14
the insurance that we were given from
10:15
the t12 was really light
10:17
right continuing on contract services
10:19
right that was really light
10:21
and you can see you know again new
10:23
property
10:24
right maybe they didn’t have landscaping
10:26
the first couple of years the first
10:27
couple of months until they got the
10:29
grass and et cetera right but again
10:30
contract services let’s talk about
10:31
contract services really what is it
10:33
so yeah what is it so contract services
10:35
like you said it’s gonna be landscaping
10:37
it’s gonna be pest control it’s gonna be
10:38
pool company
10:40
maybe it’s gonna be alarm or security
10:42
company right it’s gonna be anything
10:43
that’s a contract folks right that’s
10:45
that’s why that’s why it’s called
10:46
contract services
10:47
and you know on a newer property like
10:49
this one right you’re going to probably
10:51
it’s going to be maintained fairly well
10:53
right so you might have
10:54
a little bit more high-end landscaping
10:56
than a c-class property is going to have
10:58
right but you may not need security
11:00
patrol
11:00
you might not need security but you’re
11:01
always you’re good but your pool is
11:03
going to be a selling feature too so
11:04
you’re going to make sure you keep that
11:05
pool nice and clean too so
11:06
it’s a trade-off but there are rules of
11:08
thumb once again that you can kind of
11:09
use we send been out to every pool every
11:11
property basically once a month so make
11:13
sure you know
11:14
ben’s out there we get him basically a
11:15
truck full of
11:17
uh that’s about chlorine my fourth job
11:18
is being a pool guy all right
11:20
you know all right all right so what
11:22
else we got we got start over expense
11:23
and
11:24
so you know and again contract services
11:25
that one’s very that you know in terms
11:27
of rule of thumb that’s not a great rule
11:28
of thumb because it’s very
11:29
market and deal specific but again very
11:31
high level rule of thumb
11:32
right utilities no no no no no we
11:35
skipped we skipped let’s talk about this
11:37
tournament so what does turnover expense
11:38
of anyone expect people so turnover
11:40
right whenever you’re whenever you’re
11:41
turning a unit
11:42
right when you’re gonna you’re gonna
11:43
hear that quite a bit it’s when somebody
11:45
moves out right maybe they’re
11:46
forced to move out through some kind of
11:47
an eviction or they skipped out in the
11:49
middle of the night or in this case
11:50
right this is a nicer property right
11:52
somebody just moved out and moved to
11:53
another property somewhere else or maybe
11:55
they bought a house right
11:56
you know you are going to have expense
11:59
to actually get that unit ready
12:01
for the next tenant right and maybe even
12:03
on a newer property maybe you don’t have
12:04
to do a lot of updates
12:05
but guess what you’re at least still
12:06
doing clean you’re most likely doing
12:08
paint
12:09
you’re probably gonna have to clean the
12:10
floors maybe even replace the floors
12:12
there’s gonna be something that’s gonna
12:14
happen there right and so it was a big
12:15
red flag that they had zero in there
12:17
so obviously we took and said hey you
12:19
know that’s obviously not correct or
12:20
maybe they’re
12:21
they’re booking it somewhere else on the
12:23
t12 which sometimes happens right
12:24
they’ll try to
12:25
they’ll try to capitalize a lot of that
12:26
which means they’re going to put it
12:27
below
12:28
the net operating income i don’t want to
12:30
you know get into anything too crazy
12:32
here on this
12:33
show but you know bottom line that’s
12:35
what a lot of people will try to do just
12:36
to make their nli look higher
12:38
but we said no that’s not correct we
12:40
have to spend at least 49
12:41
thousand dollars to actually turn you
12:43
know units moving forward so we plugged
12:45
a number in there
12:46
yeah and again you know because again
12:47
brand new property there’s no one
12:49
no one’s moved out yet yeah turnover was
12:51
zero yeah but there will be turnovers so
12:53
you know keep going down so electric gas
12:54
and water right you know again
12:57
those don’t usually change i think what
12:58
we did actually on this one is we did do
13:00
a t3 because
13:01
again the property empty doesn’t use
13:02
much water yeah you know fast forward it
13:04
does so
13:04
and the only thing the only thing that i
13:06
would point at or i would point out
13:08
on utilities right is that if you know
13:11
it’s an older property and maybe
13:13
there’s a reason why the the water is
13:16
higher right maybe there’s plumbing
13:18
issues right so
13:19
but once again this is a newer property
13:21
and so they probably are what they are
13:23
just in this case right you know
13:25
um there’s a little bit of vacancy you
13:27
say you
13:28
are i don’t know soon you gotta watch
13:31
out for this guy
13:32
all right all right so you know we
13:34
talked about utilities you know
13:36
usually utilities trash might be lumped
13:37
in there as well trash could also be a
13:39
contract service
13:40
so you just have to know that each
13:42
person’s t12
13:43
we always have a miscellaneous line
13:45
because the way that we code stuff on
13:47
our expenses might be different than how
13:49
somebody else is doing it on there so
13:50
that’s kind of a catch-all of things
13:52
that maybe they had a category for but
13:54
we don’t so we put that in there that’s
13:56
what miscellaneous is and i would
13:57
suggest that you do everybody do that in
13:58
their sheet too
13:59
because it happens almost every single
14:01
time right you got a management fee
14:03
right you know um usually that’s pretty
14:05
straightforward it’s based off of the
14:06
total income that the property
14:07
takes in and this is the management
14:09
company is taking yeah in this case
14:11
they’re high right you know if we were
14:13
having disrupt management our property
14:15
management company do it we would
14:16
we would run it for three percent right
14:17
so there’s a little bit of there’s a
14:19
little bit of a um
14:20
a savings there right you know um and
14:23
then
14:24
uh let’s see repairs and maintenance
14:26
right what is that that is going to be
14:28
typical things that might break down
14:29
yeah right
14:30
you know i thought let’s see an hvac
14:31
here or there and again that’s where it
14:33
gets kind of
14:33
goes out you gotta understand if it’s
14:35
cap capital expense or not right but
14:37
let’s just leave it you know
14:38
replacing a door knob on a turn is that
14:41
a turnover or not there’s some
14:42
so a lot of times some great there’s a
14:44
lot of greater so a lot of times what we
14:45
like to do is basically look at
14:46
contracts uh look at turnover plus rnm
14:49
yep right add those together and then
14:50
look at that holistically right because
14:52
you know absolutely
14:53
ben may think a doorknob is turnover and
14:55
i’m like nah that’s that’s repairs and
14:57
maintenance right yeah
14:58
or you know sheetrock repair that you’re
14:59
fixing during the turnover right it’s
15:01
literally a cheat rock repair but it’s a
15:02
turnover or not so you know that’s kind
15:04
of loose
15:05
um but again there’s the rule of thumb
15:07
for that is actually pretty good one
15:08
that one we do look at a lot
15:09
you know in terms of dna general and
15:11
admin right that’s
15:12
administrative costs they you know you
15:14
got a postal
15:16
or postage to mail things out right
15:17
that’s an admin cost you’ve got
15:19
uh copier lease that you have to pay
15:22
right software costs
15:23
software costs right so that’s going to
15:25
be another kind of catch-all bucket
15:27
right where you’re going to have some of
15:28
those other costs that that are related
15:29
just to running a business folks
15:31
right that’s what gna is or general
15:33
slash admin
15:34
payroll what is payroll then pretty
15:36
straightforward right you got to pay
15:37
people
15:38
right um you know that’s kind of come up
15:40
in the in the news lately right
15:41
and this is a good one because this is
15:42
this is usually a big item and it’s easy
15:44
to
15:45
identify if someone’s running a property
15:46
fat or not from this right that’s true
15:48
that’s true
15:49
again the rule of thumb works pretty
15:50
well right 1200 1240 is about the lowest
15:52
you’re going to get but if you see a
15:53
deal
15:54
and we’ve seen these deals 1700 payroll
15:56
i guess that might be there
15:58
are 200 or we see the deals that are 800
16:00
payroll you’re like that’s running too
16:01
skinny yeah you’re going to probably
16:02
need it a little higher so that’s a good
16:03
one to kind of keep
16:04
and there’ll be rules of thumb on you
16:05
know how many people you should have
16:07
inside how many people you should have
16:08
outside you need to talk with your
16:09
property management company and once
16:10
again some of this is market driven it’s
16:12
also asset class driven too right you
16:14
know you might want to have a
16:16
maybe an extra person on that class a
16:17
property because you’re wanting to have
16:19
high touch
16:20
high customer service right whereas on a
16:22
class c you might be running a little
16:23
bit tighter
16:24
you know or vice versa there could be
16:26
all kinds of different variations you’ve
16:27
got to work with your property
16:28
management company to determine what
16:29
payroll is
16:30
right but like you said there is some
16:32
soft rules of thumb there
16:33
marketing right so again this is a
16:35
property that was in lease up right
16:36
so it was a ton of marketing they’re
16:37
doing all they can because they got they
16:39
got 300 empty units and they need to get
16:41
those things filled
16:42
and so marketing is crazy at first right
16:44
then you taper back because instead of
16:45
trying to fill up 300 you might
16:47
fill up 20 percent of property because
16:48
you’re having 20 people
16:50
leave right yep and so you know
16:52
marketing again that’s a pretty good
16:53
rule of thumb right you can see you know
16:54
we’re even modeling 300
16:56
right so it’s kind of you know versus i
16:58
don’t know what the math is for theirs i
16:59
guess it’s probably more than double so
17:01
you know they’re probably at 700 right
17:04
and so it’s a good one to kind of again
17:05
get a good sense of it and last but not
17:06
least
17:07
deposit placement reserves right they
17:09
don’t have this is and this is something
17:10
that you’re
17:11
you’re rarely ever going to see you’re
17:12
almost always going to be required yeah
17:14
you’re always going to have to pop this
17:15
in right and what is this this is an
17:17
escrow that at least on fannie and
17:19
freddie deals we’ve seen a couple bridge
17:20
loans that they don’t require this but
17:22
most of the time they’re gonna they’re
17:23
gonna make you escrow
17:24
250 to upwards of 350 per unit per year
17:28
into an escrow each year to pay for
17:30
capital items that might
17:32
go out throughout what is the capital
17:33
item so you know i consider this so
17:36
there’s r
17:36
m like we talked about earlier right and
17:38
then there’s capital things right a
17:39
capital item would be
17:41
the replacement of the roof right
17:43
whereas an r m could be
17:44
you’re repairing a couple shingles up on
17:46
the roof right and you got to buy the
17:48
shingles and you got to buy the nails to
17:49
put the shingle in there right yeah
17:51
that’s r m versus capital so it’s a one
17:53
time thing that you’re not going to be
17:54
doing on a monthly or even on a yearly
17:56
basis
17:57
and in that case you can draw from your
17:59
replacement reserve account through your
18:01
lender
18:01
basically yeah the lender assumes you
18:03
know some stoves are going to go bad
18:04
some roofs are going to go bad
18:05
some everything goes bad you you’re
18:07
going to spend that money regardless so
18:09
it’s kind of a wash so you kind of
18:10
assume
18:11
you know it’s an expense item right and
18:12
now you’re going to spend and get it
18:14
back maybe you don’t spend it all in
18:15
year one but you’re too you’d have twice
18:16
as much to spend who knows
18:17
one thing that i wanted to i want to
18:19
point out too right you know this is a
18:20
newer deal but on some deals we do a
18:22
very very big
18:23
rehab right so you’re going to have a
18:25
capital bucket too right that’s going to
18:27
on top of your replacement reserve
18:29
escrow you’re also going to have
18:30
you know just maybe one or two million
18:32
dollars worth of uh
18:33
of capex funds that you can tap into
18:35
right so you know you’ve got to bake
18:37
that into usually year one or maybe even
18:39
into year two right
18:40
yeah so what does this all equate to man
18:42
yeah so continuing on right look at
18:43
total expenses
18:44
you know 1.7 million right what i care
18:46
about is that percentage next to it
18:48
56 that’s healthy for a brand new asset
18:50
it could probably be lower
18:52
but this is this is in a market where
18:53
taxes are just naturally high
18:55
and so you know that feels good versus
18:57
if that was 45
18:59
or if that was 75 i’d be concerned right
19:01
maybe too high and expensive is too low
19:03
so overall it feels about right and so
19:05
again this is what we call
19:06
this whole thing that we just talked
19:07
about the past 20 minutes is what we
19:08
call normalizing the expenses
19:10
right absolutely you’re normalizing them
19:12
you’re bringing them to average maybe
19:13
someone’s running it piss poor
19:15
right you’re using what they’re running
19:16
as guidance but you’re tying it to kind
19:18
of you know industry norms
19:20
and so with this deal the way the broker
19:22
whisper was right 44 million dollars
19:24
you know there it’s a 4.3 percent cash
19:26
on cash 6.58
19:28
irr do you want to buy this deal ben so
19:30
it’s a garbage deal whoa whoa whoa whoa
19:32
whoa whoa
19:33
i mean yeah so it’s not a very good deal
19:34
that’s why we’re not with us i would say
19:36
you’re not making much money on this
19:37
deal no we would not this is way too
19:39
interesting
19:39
and also maybe one other thing too this
19:41
is modeled i know we modeled it with
19:42
your
19:43
two and three burning off for that you
19:45
know that lost lease and getting you
19:46
know stabilized occupancy
19:48
but yeah even with all that it still
19:49
doesn’t work out very well so so then
19:52
you know the next question is all right
19:53
well what price does a workout at right
19:55
so that’s where you just start dropping
19:57
your price
19:57
which changes your debt service which
19:59
improves your cash flow so again
20:01
changing the price the income stays the
20:03
same the expenses will stay the same too
20:05
right minus the tax piece
20:07
but ultimately right for this deal that
20:08
they wanted 44 million
20:10
35 million dollars is probably the price
20:12
that works right that gets you to an
20:13
eight
20:14
you know above an eight percent cash on
20:15
cash that gets you to thirteen percent
20:17
irr which is for a new asset
20:21
that’s definitely doable right but you
20:22
can see folks right they were wanting 44
20:25
million
20:26
we’re we’re we’re kind of buyers at 35
20:28
right so that’s
20:29
that’s a cheapo man this is quite a bit
20:31
off right and and
20:32
we see this more often than not this is
20:35
not the this is not the
20:36
the exception this is pretty much what’s
20:38
happening you know across 80 or 90
20:41
of the deals that we see right and so
20:43
and the rule of thumb really is is if
20:44
you’re within 90 95
20:46
of the ask we should probably make an
20:48
offer right obviously we’re going to be
20:49
a little bit off on this
20:50
this deal didn’t offer on but we did not
20:53
we underwrote it no no
20:54
so but you have to see where where we
20:56
had to kind of you know adjust a few
20:58
things too
20:58
right just to make it make it work at
21:00
the end of the day right
21:02
and so 35 million versus 44. yeah it’s
21:05
pretty far off
21:06
yeah but so that said money monday’s
21:08
reduce every monday 3 30 central
21:09
today we’re talking about multi-family
21:11
underwriting part two there is a part
21:12
one go find it on youtube or facebook
21:14
yep and you know basically we’ll spend
21:16
20 minutes talking about different
21:17
topics
21:18
that’s what we’re talking about today
21:19
and you know we’re kind of really got
21:20
about five more minutes left so we’ll
21:22
kind of open up the q a
21:23
if you have questions comments let us
21:24
know or otherwise we’ll wrap up and kind
21:26
of go through a few more things
21:27
yeah i know um let’s see the
21:30
uh ronnie says uh property taxes
21:33
insurance have gone through the roof
21:34
these past years absolutely
21:35
but for insurance reasons you don’t want
21:37
things going through your roof uh
21:39
jefferson says how are you doing ferris
21:41
and ben i love it doing good
21:43
hey ronnie says uh rule of thumb changes
21:45
by the properties the type is that
21:47
market absolutely
21:48
amir says hey guys when you are trying
21:50
to underwrite a deal on the fly
21:51
what rule of thumb percentage wise do
21:53
you use for the goi
21:55
uh gross income i’m guessing
21:58
um to attain the noi for a class c deal
22:02
okay so what do you use um i don’t quite
22:06
understand the question
22:06
what role of them do you use for the
22:09
gross
22:11
operating income yeah i guess yeah gross
22:13
operating income
22:15
to attain so i mean long story short
22:16
you’re looking at you’re looking at the
22:18
deal
22:19
where you think you could pop to right
22:21
and maybe you can
22:22
and then you know slap off 55 60 of that
22:25
for expenses
22:26
market specific right that’s your income
22:28
and then look where your debt service
22:29
lands after that right and that’s kind
22:30
of ties to your returns
22:32
yeah there’s there’s and there’s back in
22:33
a napkin analysis right you know i mean
22:36
where people
22:36
you know you use what’s what’s your rent
22:39
minus usually at least 10 percent
22:42
and then you know whatever that comes
22:43
into and then you take 55 percent of
22:45
that and that’s what your noise is going
22:46
to be right you know
22:47
the mirror says percentages boys 50 40
22:50
of the gross i mean i guess ultimately
22:52
if we’re saying 55
22:53
on the expenses that would leave 45 on
22:55
the the income right so maybe that’s the
22:57
answer you’re looking for
22:57
so 40 to 45 depending on even newer
23:00
asset
23:01
i’d get to 52 right so 48 on the income
23:03
side
23:04
but you know i i i don’t like looking at
23:07
it that way as much as i do like looking
23:09
at the average rents
23:10
where i could take rents to and what
23:12
price am i buying it per door yeah start
23:13
there
23:13
the one easiest rule don’t go into it
23:16
from the other direction always start
23:18
with your income first guys that’s the
23:19
easiest way to look at this and
23:21
and i not also i i’d caution the 55 to
23:24
60
23:25
or whatever there’s we’ve seen deals in
23:27
other in other states phoenix being one
23:29
where expenses are a lot lower than
23:31
than they are here in texas right and so
23:34
that kind of throws out sometimes the 55
23:37
yeah you know
23:38
who knew not having hurricanes around
23:39
reduces your expenses yeah
23:41
just because you’re well and then
23:42
there’s the taxes aren’t they’re not as
23:44
aggressive
23:44
as either right so you know um so
23:47
there’s there’s just
23:48
different rules of thumb it just depends
23:49
on where where you’re wanting to buy a
23:50
deal and you really need to talk
23:52
with the property management companies
23:53
in that that sub market to understand
23:55
those expenses
23:56
um yeah you know because georgia when we
23:58
went into georgia was different than
23:59
texas yeah
24:00
georgia pays taxes 40 of the appraised
24:02
price that’s good so that’s great at
24:04
least you can underwrite to what it’s
24:05
going to be
24:06
right you’re not you know it’s not just
24:07
this mythical thing like
24:09
ronnie asks what sales process on
24:10
verifying rent comps co-star calling
24:12
columns etc
24:13
apartments.com and last but not least we
24:15
have a team that will literally call
24:17
properties nearby
24:18
and new deals we’re going and shopping
24:20
the comps too yeah so that that’s
24:21
literally me and ferris we do that along
24:23
with our team
24:24
because i want to see not only what
24:26
rents are they charging
24:27
but what’s the condition of the of the
24:29
comps too right you know what amenities
24:30
do they have versus us
24:32
right maybe there’s a reason why they’re
24:33
getting a hundred dollars more right
24:34
yeah we walk in and pretend like we’re
24:36
gonna rent right we’ll say
24:37
we literally did that then the new
24:39
hairstyle hair model moving into the
24:40
property
24:41
you know it’s not weird
24:45
we’re just all friends right you know no
24:47
and ultimately you just ask questions
24:49
right and and most of the time the
24:51
leasing agents they’re gonna
24:52
be happy to talk to you you know and
24:55
they’re gonna tell you everything you
24:55
need to know about the property yeah
24:57
right so that’s the way to verify that
24:59
co-star is
25:01
very loose yeah yeah absolutely if
25:02
anyone has any more comments questions
25:04
let us know
25:05
we’re happy to kind of answer them uh
25:07
keep going so
25:08
open q a all right so we do have a
25:10
course here yeah so for those of you
25:11
know we have investoracademy.net that we
25:13
launched right
25:14
shamelessly plug-in something um yeah
25:16
it’s really more about
25:17
we spent a lot of time just putting
25:18
these videos together just because we
25:20
get asked the stuff a lot so we figured
25:21
we’d put it together in a nice
25:23
collection for people to go watch so so
25:24
you’re gonna you’re gonna say the url on
25:26
this one so uh www.investoracademy.net
25:28
slash products multifamily dash real
25:30
dash
25:31
estate dash underwriting dash master
25:33
class all right
25:34
uh but next time we’re gonna simplify
25:36
that one it’s gonna future it’ll be a
25:37
lot simpler shanna gave us a thumbs up
25:39
so we’re gonna make that so what’s the
25:40
discount code
25:40
go to investoracademy.net and you can
25:42
find it it’s only a handful of courses
25:44
on there
25:45
uh discount code disrupt right maybe 30
25:48
off
25:48
so this is we we poured hours into this
25:50
folks we really took a deeper dive into
25:52
all of these concepts and went through
25:54
some some mock deals so you really can
25:56
get a better sense for it like i said
25:57
we’re not going to be able to go through
25:58
it all on this 30-minute show right
26:00
you know but we will have some more we
26:02
like many hours yeah now and last but
26:04
not least we have our big conference
26:05
coming up
26:06
t-minus two months ben
26:11
a little bit more than two we’ve had a
26:12
lot of demand for these tickets i was
26:14
actually i was pleasantly surprised no
26:15
we’re quite sure
26:16
we’re selling out much more quickly than
26:17
expected so if you are interested check
26:19
it out sooner than later so what’s the
26:20
deal we got a buy one get 150 bucks off
26:24
we make any money on this thing we don’t
26:25
make money on this thing
26:27
this is a breakthrough so uh but we
26:30
might be losing money on this it’s more
26:31
about putting people together
26:32
building environment right that’s where
26:34
we find people we find partners you find
26:36
everything
26:36
yeah who did we have tell me more about
26:38
who we have at the last one what was the
26:39
last one
26:40
we had the mayor of houston mr sylvester
26:42
turner came out and who else did we have
26:44
out there
26:44
we had mr neil balwa we had you know we
26:46
had rod
26:47
out there we had a whole shebang so it’s
26:49
a you know it’s basically a one-day
26:51
crash course with who’s who of
26:52
multi-family
26:54
no sales pitch no nothing it’s purely
26:56
about content and networking that’s
26:58
really the pitch
26:58
yeah and we we really do it for the
27:00
networking component too so we
27:02
we try to introduce that throughout the
27:03
day and obviously we’re pretty laid back
27:05
guys
27:05
yeah no salesman ben needs more people
27:07
to talk to so we’ll go to this whole
27:08
conference you know just drinking my
27:10
coffee
27:10
the what we literally have the starbucks
27:12
on right next to the to the conference
27:14
so
27:14
it’s a requirement because they’re
27:15
talking about moving us to a bigger room
27:16
because last week 400 people that’s good
27:17
but talk about putting us in a bigger
27:18
room and i’m like are you guys going to
27:19
move the starbucks to our floor and
27:21
she didn’t like that comment at the
27:22
hotel i don’t have that then um the
27:24
deal’s off
27:24
yeah right so go check us out
27:27
mfinvestornetwork.com
27:28
put in the you know uh or go through the
27:30
holiday sale buy one get 150. i think i
27:32
guess you don’t have to have any coupon
27:33
code right shanna you just go ahead and
27:35
nope
27:35
just go through it and it’ll
27:36
automatically deduct it so awesome
27:38
you’re good to go
27:39
but we’re gonna with that said for enjoy
27:41
enjoy
27:42
the holiday week everybody be safe enjoy
27:45
it with your friends and family if you
27:46
want any more comments questions next as
27:48
well
27:48
well no before we go so because of the
27:51
holidays
27:51
we’re going to come back to you on
27:52
january 4th we’re going to put our
27:54
whichever one has been viewed the most
27:57
we’ll put on next week because it’s
27:58
obviously popular right
27:59
put it on what do you mean we’ll just
28:01
re-stream it right maybe maybe you’ll
28:03
see why not
28:04
why not a few people they’ll be like why
28:06
aren’t you talking about the holidays
28:07
you’re talking about halloween and that
28:08
was two months ago who knows
28:09
come on we’re not going to do the ones
28:10
at halloween ben wants it wants to take
28:12
some time off
28:13
i’m like we should do it he’s like i
28:15
thought we’re going to take some time
28:15
off
28:16
we figured it you know people can be
28:18
busy we don’t want people dropping you
28:19
know and
28:20
stop spending time with their families
28:21
just to watch us we know people would
28:23
but we figured you know people should
28:24
spend time with families instead so
28:27
with that said we’ll skip next week but
28:28
we’ll be back the week after so we’ll
28:30
see you back january 4th everybody we
28:32
appreciate it
28:32
all right let’s call it a wrap

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