Multifamily Underwriting

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Learn KEY concepts on how to underwrite multifamily real estate investment opportunities!

Monday Monday$ hosts: Ben Suttles & Feras Moussa

VIDEO TRANSCRIPTION

00:00
we are live monday monday monday monday
00:02
mondays
00:05
we are live here at disrupt tv studios
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right
00:08
now hey i say that i say that that’s
00:11
fine
00:12
we’ll figure out our routine you know if
00:13
it was any other day but monday so we
00:15
would
00:15
figure it out but mondays are uh not the
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simplest days so how’s everyone doing
00:20
good man good good good weekend you know
00:22
relaxed we got some work done we did get
00:24
some work done again
00:25
so it’s nice to kind of do a little bit
00:27
of empire building like you like to say
00:29
ah that’s my favorite term man you kind
00:30
of learn from the tech world i guess or
00:32
maybe i made that up i don’t know
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yeah you got to work on your business
00:35
folks not in your business all the time
00:37
this is true we’ll be in the weeds as an
00:39
entrepreneur sometimes but you don’t
00:41
want to have
00:41
all the time this is very true so what’s
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our topic today ben
00:45
talking underwriting the numbers the
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most important thing
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because numbers do not lie yeah i think
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i think we’ve
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we’ve written underwritten a few deals
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or two
00:55
so for those watching right just to kind
00:57
of recap the goal is really doing
00:59
you know essentially one different topic
01:02
every week right we’re going to start to
01:03
be better about announcing the topic
01:05
earlier on so on tuesday
01:06
and giving people a chance to submit
01:08
questions beforehand and basically 3 30
01:11
central on mondays we’ll do money
01:12
mondays and we’ll you know basically
01:14
start talking through the topic do a
01:15
little bit of a presentation then q a
01:17
so the real value is q and a so folks so
01:19
please go ahead and leave your questions
01:20
right now
01:21
we’re happy to answer them here live and
01:23
go through it and you know maybe you
01:24
have a follow-up question to the
01:25
question
01:26
so definitely let us know you know it’s
01:28
on our facebook page
01:29
and you know we’ll go live there every
01:30
monday so definitely feel free to reach
01:32
out people
01:33
so i’m just gonna be hanging on this
01:34
laptop while ben does all the talking no
01:35
and one thing to talk about too right is
01:37
we’re open to you our audience you know
01:41
uh submitting topics as well right we
01:43
don’t always want to just assume what
01:44
everybody wants to hear right
01:46
come out and it doesn’t doesn’t have to
01:47
necessarily be multi-family right we’re
01:49
entrepreneurs we’re business people
01:50
we’re
01:51
investors and other things too so you
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know we can talk about a myriad of
01:55
things
01:55
let’s you know kind of get into it what
01:57
do you think let’s do it let’s make it
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happen man
01:59
all right let’s go through our
02:00
presentation so
02:02
we’re talking underwriting why don’t you
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start off what is underwriting
02:06
underwriting so basically you have a lot
02:09
of writing you do
02:10
and you try to get under it no i got
02:12
that wrong so
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underwriting essentially really
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simplifying it’s the art of an analyzing
02:17
a deal
02:17
right and you know and we underwrite
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deals for acquisitions but lenders
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underwrite a deal for
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lending just like you know anyone else
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is underwriting a deal for something
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else so it’s really
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you i think really i’m not curious what
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the official definition is but i think
02:30
it’s
02:30
really just you know taking an
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analytical approach
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to something with with some sort of goal
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so our goal
02:37
is acquisitions right so how do we start
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to analyze a deal
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dig into the financials dig into what it
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might have going on
02:44
figure out what projections what
02:46
assumptions we might make right
02:47
to underwrite that deal and figure out
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hey can we get the returns that we want
02:51
to get on this deal
02:52
or not or maybe we can but we have to
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change our assumptions right maybe we
02:55
need
02:56
two million dollars of rehab because we
02:57
want to go higher end finishes versus a
02:59
million dollars right so
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that’s in a nutshell what you it is
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box right what is a good deal is
03:06
different right so i think
03:07
before you can even underwrite a deal
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you have to determine what is your box
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right
03:12
what are you and your investors willing
03:13
to say that’s a good deal that’s
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something that i want to pursue right
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once you know that box it’s going to
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make it easier for you to quickly
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weed out good and bad deals very very
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quickly right
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so that’s kind of what it is you’re
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trying to determine is this deal good or
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is this bad
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right and if it’s good how good is it
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right yeah so
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yeah i mean that’s really it so we’re
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gonna go through maybe some of
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some things that we look at underwriting
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how do you quickly underwrite how what
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assumptions do we make et cetera right
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so but really you know maybe the first
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step of underwriting then
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what maybe what are the most common
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things you need to know upfront
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up front you have to have the numbers
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right you can’t just go in there blindly
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making assumptions about every little
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salient point right
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you need to have something from the
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seller of the property that’s going to
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give you some kind of guidelines as to
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how they’re operating it currently and
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how they’ve operated in the past right
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now on smaller deals even on bigger
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deals we’ve seen stuff that’s been
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handwritten
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we’ve seen stuff that’s you know um does
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it look official
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right so that makes your underwriting a
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little bit more challenging
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right but you need financials you need
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past financials
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if you can get a current rent roll
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that’s even better right because then
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you kind of get a an understanding of
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where they’re at on occupancy and rents
04:26
right and then you can kind of start
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building out your model
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yeah from there so that’s kind of what
04:30
you need to kind of get started yeah i
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mean you’re
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really you’re trying to analyze what is
04:34
the deal been doing so far yeah
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right and then you know including what
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expenses have been then doing and what
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assumptions can we make it to improve
04:41
those expenses for example
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right including what rents have they
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been getting and what can we do to maybe
04:45
get better rents right or
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maybe it’s an operational play and so
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all of that is being factored into the
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model
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there’s a lot of different models out
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there so for those of you looking for
04:53
one i mean feel free to reach out to us
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we’re happy to share the ones that we’ve
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used and which ones we like or maybe
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don’t like
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you know feel free to chat to us guys
04:59
but you know with that said just to kind
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of recap for the people that are just
05:02
now hopping on right
05:04
money mondays we’re doing basically live
05:05
every monday going over different topics
05:07
today’s topic is underwriting and kind
05:09
of talking to those
05:10
please submit your questions we already
05:11
got some questions from people earlier
05:13
on
05:13
you know and any questions that we get
05:15
on our facebook page we will go answer
05:17
it live right so
05:18
uh maybe to kind of go through a few
05:20
people uh ronnie says what’s up
05:22
gentlemen plaid mondays of course
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we kind of i guess manage that up what’s
05:26
up david
05:27
uh mark chapel says he’s having trouble
05:29
hearing you ben mark i think that’s
05:30
probably for the better
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but we’ll try to get that fixed here
05:34
but i’ll stop shuffling around sometimes
05:37
my beard gets in the way
05:38
yeah so um but all right so you need to
05:41
know your metrics man so what do we
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you know what’s the most important
05:45
things that you’re looking at so say you
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get
05:48
the financials from the seller which is
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going to be in the trailing 12 right
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which is just
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the past 12 months and and a profit and
05:54
loss
05:55
maybe you get the rent roll right what
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are you what are you looking for what
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are you extrapolating from that
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to put into these yeah so no i’ll tell
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you so for me
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i mean like you know this kind of goes
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to i know this is one of the questions
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that we got but really kind of how do
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you quickly analyze right
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so for me i’m looking at a rent roll to
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see a couple things i’m trying to see is
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this deal
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already occupied and stabilized right so
06:15
stabilized for those who
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don’t know 90 occupancy or more the past
06:18
three months so i’m trying to see is
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this deal already stabilized and
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therefore
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it’s not a big lease up i don’t have to
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account for that type of situation
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and really i’m looking me personally my
06:27
very first thing i look at on on the
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rent roll
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is seeing you know outside of looking at
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the occupancy i want to see what is the
06:32
total build out
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right and compare that to what they’re
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collecting to figure out kind of that
06:37
spread right the loss to lease
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and at the same time right i mean if
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they’re hovering at 99 occupancy that
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means i can probably push friends
06:45
so the very first things i’m looking at
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is really
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trying to get a sense of okay now this
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deal you know if i’m
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bill’s out annually you know two million
06:53
dollars right okay well then
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you can kind of back in the napkin the
06:56
expense side too right i say okay assume
06:58
55 60 percent is going to go to expenses
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so that leaves me
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40 to 60 40 50 class c b minus
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yeah with a class properties you can
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probably get away with 45 on the expense
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side again every market’s different
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taxes are different atlanta taxes are
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very different than our texas taxes
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unfortunately
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i wish they were more like atlanta um
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texas be more like atlanta
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uh but really back of the napkin you
07:21
know a c-class
07:22
in texas you’re kind of looking at 55 60
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expenses right
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and so then i quickly kind of back into
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that right so
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what does that do to my deal right i can
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quickly get a sense just kind of from
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really like taking a whiff of the deal
07:34
right of what that looks like
07:35
another one is very common i’ll think of
07:37
the residential side people look at that
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one percent rule
07:39
right so if you’re you know with with
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apartments it’s more like a 1.4
07:43
1.5 percent rule really right but what
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it means is that you’re looking for
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essentially one percent of the unit
07:51
sorry that one percent of the purchase
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price right per unit
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should be at least the least and so to
07:56
kind of drive that home right
07:58
if you’re buying a property for a
07:59
hundred thousand dollars a unit
08:01
right you better be able to get at least
08:03
one percent of that right annualized so
08:06
you know you know i mean or 1.5 is real
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sorry i’m saying the one percent rule
08:09
now with apartments we’re
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looking at 1.5 and so very quickly if
08:12
someone wants a hundred thousand a door
08:14
i mean i need to make sure my rent on
08:16
that deal is about thirteen hundred
08:17
dollars right it needs to be there or i
08:18
need to be able to get it there thirteen
08:19
fourteen fifteen hundred dollars
08:21
and so kind of looking at those things
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really quickly just to see what might
08:24
make sense and then from that we start
08:26
to analyze right really dig into it
08:28
we’ve been able to just dismiss deals
08:30
almost like based on two metrics right
08:32
that metric one being one and then where
08:33
is it located at right like
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there’s just certain i think the other
08:36
thing that you have to determine in your
08:38
box folks is
08:39
not only the returns that you and your
08:40
investors want but where do you want to
08:41
invest
08:42
in right you know do you want to be in
08:44
georgia you want to be in florida
08:45
do you want to do a c class lease up
08:48
right yeah do you want to be in a class
08:49
c or do you want to be in a class b
08:50
you need to determine that too right
08:52
because you can quickly weed through
08:54
because once once acquisitions kind of
08:56
ramp back up and it’s going to happen it
08:58
might be another three to six months and
08:59
we might see
09:00
just a deluge of deals you’re going to
09:02
have to quickly
09:04
churn through some deals and you can’t
09:05
underwrite every single one of them
09:06
right
09:07
so you’re gonna have to say okay does it
09:09
does it hit the one
09:10
1.25 1.5 rule and is it in texas
09:13
if so boom i’m looking at it right then
09:16
you can more do a deep dive with the
09:18
financials right
09:19
one thing i also want to kind of point
09:20
out too is this is not me and fair’s
09:22
thumb in the air
09:24
you know trying to just wing what we can
09:26
get and rents
09:27
and what we can even get on expenses
09:28
right what ferris said was very
09:30
very very kind of ballpark right 55 to
09:34
65
09:35
is usually where you’re at but it could
09:36
be a little bit less it could be trying
09:38
to filter out the stuff that you know is
09:39
not going to go anywhere yeah
09:40
you know but i mean i just want my point
09:43
being here is that you need to work with
09:45
your property management companies to
09:46
determine
09:47
what is likely to be the expenses what
09:49
is likely to be the rent in that pro
09:51
for that property in that sub market
09:53
right and you should be working with
09:54
property management companies that are
09:57
have a whole lot of experience in those
09:58
markets right so they’re going to know
09:59
these types of things right they are the
10:01
experts
10:02
so i don’t want you to just assume oh i
10:04
think i can get a thousand dollars and
10:06
you’re at 800 right now
10:07
why do you think that right you know and
10:09
even if you said well i called around a
10:11
little bit well i guess that’s a good
10:12
that’s that’s fine right but you’re
10:14
probably not doing a deep dive even if
10:16
when you’re calling around because
10:17
what you might not know about your comps
10:19
that you just called is that
10:20
they’re all upgraded they have all these
10:22
you know these these upgrades that’s the
10:24
reason why they’re getting a thousand
10:25
bucks right yeah
10:26
and or they all have washer and dryers
10:27
in the units and you have a laundromat
10:29
right there all these things play into
10:32
the types of rents that you can get on a
10:34
unit and so
10:35
your property management company usually
10:36
will the ones that we’ve worked with and
10:38
now obviously we have our own right
10:40
you know they know these areas so well
10:42
they’re like oh yeah i used to manage at
10:43
this and
10:44
this is the deal with that and i i
10:45
remember this deal over here
10:47
they’ve literally been in the business
10:48
for so long that they they know what’s
10:50
happening in these little pockets right
10:53
whereas if you’re new to the business or
10:54
even if you’re experienced you might not
10:56
know all these pockets as well
10:58
yeah i agree so you need to have you
11:01
need to have your team in place too to
11:02
really
11:03
flesh out that more deeper dive you know
11:05
yeah and so so
11:06
the question so what do you do on the
11:07
dead side right so debt is a big piece
11:09
of it right
11:10
income is kind of irrelevant without
11:12
factoring in what the debt was you
11:13
brought up a good point too right they
11:14
want to see your underwriting
11:16
so if you’re getting if you’re getting
11:17
into the big boy big girl game and
11:19
you’re syndicating these deals and
11:20
you’re buying some bigger properties
11:22
they want to see what your pro forma is
11:23
just for future efforts big leagues big
11:25
leagues
11:26
more general terms but but really the
11:29
question then
11:30
really at what point in time do you loop
11:32
in your mortgage broker
11:34
your you know who you know kind of what
11:36
time do you start to get
11:37
what i you know we kind of transition
11:38
from from no quotes to soft quotes to
11:41
hard quotes right what’s that timeline
11:42
like you know obviously we got a good
11:43
relationship with
11:45
with our mortgage broker but you know
11:47
you have to be cognizant of people’s
11:48
time right
11:49
if you’re looking at a hundred deals and
11:52
you know that really you’re only gonna
11:53
make an offer on
11:54
you know maybe five of those don’t send
11:56
100 deals to your guy or gal your
11:57
mortgage broker or even your lender
11:59
they’re just gonna get burned out
12:00
they’re ultimately gonna say
12:01
you know i just don’t have time for this
12:02
person right so be aware of people’s
12:04
time
12:05
right we usually would get people
12:07
involved involved if we’re in a best and
12:08
final situation right
12:10
we would definitely not sign on the
12:12
dotted line on a psa without having
12:14
a confirmed but a lot of that we’re
12:16
willing to wait it out because we’ve
12:17
done enough to be able to
12:18
ballpark and so for newer people you
12:21
know maybe
12:22
get a term sheet or two or three right
12:24
but you start to get a sense of what
12:26
what it looks like in that market and
12:27
then you can try to maybe make some
12:29
assumptions right
12:30
i know that in certain markets i can
12:32
maybe get
12:33
75 plus ltv with five years i o versus
12:36
other markets we know we can’t get more
12:38
than one
12:38
right and so you start to figure out the
12:40
different options there and how that
12:41
applies to it comes with experience
12:42
folks right so that’s actually a great
12:44
point right so but you have to
12:45
once you kind of have that that rule of
12:47
thumb then you can start kind of
12:48
underwriting a little bit more
12:49
effectively because then you’re gonna
12:51
have more real world numbers to kind of
12:52
plug in on the debt side right because
12:54
the operational numbers are one the debt
12:56
side of things is something else right
12:58
so
12:58
we usually would get our our mortgage
13:00
broker involved usually on a best and
13:02
final situation or before we get into
13:03
psa right
13:04
the other thing i want to point out too
13:06
is that the lender and by default your
13:08
mortgage broker they also underwrite the
13:10
deal too
13:10
they might have to write it a little bit
13:12
differently right so
13:14
you’re you haven’t have a mortgage
13:16
broker that knows with how the lender is
13:17
going to underwrite it so they can
13:18
position things in the best light right
13:20
because they might say you know what
13:22
your pro forma is so high in the sky
13:24
when it comes to x y or z
13:26
right there’s no way that we’re going to
13:27
sign off on your
13:29
taxes being at this number right it’s
13:31
going to be this it’s going to be this
13:32
this much higher and therefore your loan
13:34
proceeds are going to be this much lower
13:36
right
13:36
because the more you have on the expense
13:38
side the less that you’re obviously
13:39
going to get on
13:40
on the leverage so you have to take that
13:42
into consideration too that that might
13:44
fundamentally change is this a good deal
13:47
or not yeah right
13:48
you know so take they’re both very very
13:50
important components of underwriting
13:52
yeah one other important so let’s talk
13:54
about actually escalators
13:55
right so we know with performer the
13:58
really the ultimate goal is
13:59
doing a five sevens you know whatever
14:02
your timeline is p
14:03
l right and you’re trying to figure out
14:05
over the life of this deal what do my
14:06
returns look like each step of the way
14:08
right and so one of those things that
14:10
you look at is escalators right meaning
14:11
you know
14:12
annually we expect rents to increase and
14:15
expenses to increase
14:16
right maybe right now with a virus
14:17
situation maybe you have to be less
14:19
aggressive right
14:20
but really you know again as you’re
14:22
modeling it out and this is where having
14:23
a pre you know sheet that someone else
14:24
made
14:25
it’s already kind of helping you account
14:26
for all these things but you need to be
14:28
aware that hey over the life of that
14:30
deal
14:31
the market the world is changing right
14:32
hopefully for the better
14:34
but just being cognizant of okay we know
14:36
expenses are going to go up because tax
14:37
uncle sam’s always collecting right
14:39
you know every year it seems i don’t
14:41
remember the last time my taxes went
14:42
down on any property
14:44
right never so you know we have to
14:45
account for that while you’re modeling
14:47
and so again
14:48
that’s what the escalators are usually
14:50
very very
14:51
ballpark but you know you’re looking at
14:53
one and a half to three percent
14:54
increases both in income and expenses
14:56
right
14:56
and again those are very proper specific
14:58
very location specific but it’s just
15:00
another metric to think about
15:02
and one caveat for that too folks they
15:04
kind of touched on this
15:05
so koben is obviously going to water
15:07
down on
15:08
rent pops right now so you just have to
15:10
be less aggressive
15:12
on what you’re going to underwrite right
15:13
now with some caveats even to that right
15:16
there might be a clear cut everybody in
15:18
the market is a thousand
15:20
and you’ve got you’re down at 700 so
15:22
there’s obviously even if you’re doing a
15:24
limited
15:25
rehab you can get you can push rents
15:27
there right because everybody else is
15:29
it’s proven out that it’s there
15:30
but don’t just assume that the market is
15:32
going to carry you anymore right for the
15:34
next year or two you have to be very
15:36
very conservative when it comes to rent
15:37
increases
15:38
but on the flip side expenses are going
15:40
up right so
15:41
you know just to continue to assume that
15:43
one and a half to three percent
15:44
increases in your expenses is going to
15:46
continue that’s not going to go down
15:48
unfortunately yeah
15:49
you know you wish that would flatline
15:50
along with the rights that doesn’t seem
15:52
to happen right
15:54
and so you know that’s a that’s a great
15:55
that’s a great point right we have to
15:57
take that into consideration when you’re
15:58
underwriting because
15:59
that’s going to skew a deal really to
16:02
the red or to the green right or to the
16:04
black excuse me
16:05
you know it’s going to be it’s either a
16:06
good deal or it’s a bad deal the other
16:07
thing that i wanted to point out too
16:09
that can really
16:10
play around with the numbers there’s two
16:11
more points right your vacancy
16:14
wait we don’t need so many points man
16:15
geez now i’m okay people people love
16:17
hearing this no
16:18
keep going so right i just wanted to
16:20
throw ben off his game a little bit
16:22
vacancy right you play around with that
16:25
that can really swing a deal to the good
16:26
or yeah
16:28
what is economic vacancy for those who
16:29
don’t know so you’re going to have a
16:30
combination of a couple different things
16:32
right
16:32
everybody knows physical right you’ve
16:33
got 100 units and 10 of them are
16:35
vacant so you’ve got 90 occupancy right
16:37
so economic is kind of the more
16:39
economic components of that right you’ve
16:42
got bad debt and write off
16:44
you’ve got loss to lease which is what
16:45
ferris kind of talked about what’s the
16:46
delta between
16:48
what they want to get and what they’re
16:49
actually getting right and then you’ve
16:51
got
16:51
you know things like concessions right
16:53
you know do you have to
16:55
you know on that thousand dollar a month
16:56
rent you have to give them the first 500
16:59
off for the first three months right
17:00
that’s real money that you’re not taking
17:02
in
17:03
all of that waters down that gross
17:05
potential rent that you might get
17:06
right so you have to take that into
17:08
consideration so those two components
17:09
are really gonna
17:10
they can swing a deal right the the
17:12
other part of this
17:13
is gonna be your reversion cap rate you
17:16
really have to play
17:18
conservatively now especially but even
17:20
in the past you had to you you didn’t
17:23
want to buy a deal at a six cap
17:25
right and then say in five years that
17:26
you’re gonna sell it at a five cap
17:28
and my book and we invest passively too
17:30
so we see other people’s deals
17:32
we’ve seen deals like that you know what
17:33
that is that’s a big red flag to me as
17:35
being aggressive
17:36
right because they’re saying that cap
17:38
rates are going to continue to compress
17:40
for the next five years nobody knows
17:42
that nobody really knows what’s gonna
17:44
happen in five years so it’s better to
17:45
err on the side of being conservative
17:47
and say that six cap is now going to be
17:49
six and a half or seven k
17:50
if you do know what’s gonna happen next
17:52
five years come talk to us we’d love to
17:53
see that crystal ball fortune you know
17:56
come talk to me and show me your your
17:57
crystal ball right but ultimately nobody
17:59
really has one of those right so
18:01
the the rule of thumb is that you have
18:03
to go in the opposite direction right
18:04
and guess what if if cap rates are at
18:07
five and five years guess what that’s
18:08
just gravy
18:09
yeah right don’t you don’t bet on it but
18:11
if you get it wrong
18:13
though right you know so better to under
18:16
promise and over deliver than try to
18:18
over promise and under
18:20
under deliver because a lot of deals can
18:22
swing way
18:23
into the good if you have too low over a
18:26
version cap
18:27
you know and so those are some of the
18:29
things you got to look out for so maybe
18:30
those are some key things to think about
18:31
with underwriting right
18:33
for those of you that newly tuning in
18:34
please drop your questions about
18:36
underwriting we have a few we’re going
18:37
to go through
18:38
and we will be happy to answer them
18:39
right ask us you know what our
18:41
assumptions are
18:42
how do we look at things when do we do
18:43
things ask us about our shirts
18:45
you know we’ve got plaid shirts they’re
18:46
really nice shirts we like them the blue
18:48
is a good blue is a good call i don’t
18:49
know
18:50
ronnie said that was plaid ronnie maybe
18:53
that’s it
18:54
mine is definitely plaid you know ben i
18:56
thought i thought twice because he
18:58
called me out on it last week man so
18:59
yeah it’s like all right i’m not going
19:00
to do the plaid this week
19:01
yeah so let’s keep going then so these
19:04
are some q a these are questions that we
19:06
got online
19:06
right for anyone else that has questions
19:08
to go ahead and drop them we’ll answer
19:09
them so
19:10
um that includes you mark and david i
19:12
know you guys have plenty of questions
19:14
so first question how do you better deal
19:16
quickly right i know i touched on
19:17
earlier you want to go through your
19:19
kind of yeah maybe some more of your
19:20
assumptions i think you know i mean
19:22
first turn you know pointed out some
19:24
really good points right you know you
19:26
have to you have to know
19:27
i got the best best answers you always
19:29
do buddy you always do you have to know
19:30
your box first and foremost and that’s
19:31
gonna that’s going to vent a lot of
19:33
deals right
19:34
and then you just you can do some back
19:35
of the napkin right you can determine
19:37
okay hey
19:37
55 on expenses this is what the gross
19:40
potential rent is you can start kind of
19:42
backing into a number within five
19:44
minutes
19:45
to see if it’s going to be within range
19:46
now the rule of thumb you know
19:48
is that if it’s within about 90 of the
19:50
ask that you should pursue it right
19:53
now in some markets that might be 95 in
19:55
some markets that might be 100 right
19:56
it just depends on how how uh
19:58
competitive it is
20:00
right but if you’re within 90 of what
20:01
the broker is telling you the price is
20:03
so give you a round answer 10 million is
20:06
what they ask
20:07
and you’re at 9 million you should you
20:08
should dig in a little bit more and see
20:10
if you can make that deal work because
20:12
more likely tonight you might still be
20:13
in the running yeah and still submit an
20:15
offer man you know the brokers hold
20:16
their cards tight
20:17
they’re trying to obviously get maximum
20:18
dollar if you’re within 10 even 15
20:20
percent i would submit they’re gonna
20:21
make it they’re going to
20:22
you lose very little from submitting an
20:24
offer if you’ve already done the
20:25
homework analyze the deal you’ll come
20:26
for the price submit
20:28
sometimes you know things happen maybe
20:30
you know kovac shows up and the buyer
20:31
backs out and the seller’s desperate to
20:33
sell guess what it’s yours to
20:34
win so absolutely or you’re still loose
20:36
i guess how you look at it so
20:38
so how to determine if a deal is good we
20:40
kind of talked about that a little bit
20:42
right it’s a good property let us know
20:44
happy to talk to you about it we’re
20:45
happy to buy that off of your partner
20:47
with you if it’s a bad property you can
20:49
you know
20:49
share it to other people but no i mean i
20:51
don’t know what are the characteristics
20:52
you look for in a good property bank
20:54
right you know because there’s deals
20:56
that me and ferris are like
20:57
heck no we’re not going after that and
20:59
then somebody buys it because they
21:00
thought that that was a good deal
21:02
right and then there’s deals that we’ve
21:03
passed on that
21:05
you know whatever i mean there they go
21:07
to me ultimately a good
21:09
deal yeah it’s in the eye of the holder
21:11
but it’s a deal that we can
21:13
line up a clear we can articulate a
21:16
clear
21:17
business plan to hit the metrics and
21:19
numbers that we’re looking for right
21:20
that’s in a nutshell what i look for to
21:22
do
21:22
so i’m okay with doing a bigger deeper
21:24
value-add but i need to be able to
21:26
put in less assumptions right be able to
21:29
be more conservative and be able to make
21:31
more money on that
21:32
first is a nicer cleaner deal i’m okay
21:34
with paying up a little bit right i’m
21:36
but
21:36
you know again it’s got to be the right
21:38
tenant base the right locations
21:39
the right market and so but really the
21:42
fundamentally it’s both options
21:44
both can be good deals they’re very
21:45
different business plans it needs to be
21:46
a business plan that aligns with what
21:48
we’re comfortable doing
21:49
right and you know i don’t know if i
21:51
want to go do a 300 unit deal that’s
21:53
completely vacant off in
21:54
topeka kansas as ben likes to say right
21:57
versus
21:58
you know other markets but you know
22:01
as an example right some random market
22:02
300 units completely vacant
22:04
that’s a lot of work right it’s not
22:05
really something that we’re set up for
22:07
and you know if i can get it close to
22:09
free like would i say no probably not
22:11
but
22:11
it needs to make sense right i need a
22:13
pricing discount versus if i take that
22:14
same deal and drop that in atlanta i’d
22:16
be a lot more willing to do that deal
22:18
right so you know that’s ultimately to
22:20
me what a good deal is right
22:21
i can put together a business plan that
22:23
matches what we we i
22:24
we’re capable of and the returns that i
22:26
need to get for that and i can see that
22:28
pathway there
22:29
right can i pitch it to somebody it’s
22:30
really maybe one way to look at it
22:31
ultimately it has to make sense for your
22:33
investors too right if you’re
22:34
syndicating it
22:35
not everybody that follows us in the
22:36
case deals and that’s fine right
22:38
then you ultimately have to have a gut
22:39
check is this enough money for me to
22:41
pursue this deal right but
22:42
investors you need to even almost have a
22:45
bigger hurdle for them right because
22:47
you know things do go wrong right the
22:49
market you know nobody was talking about
22:50
coven
22:51
eight months ago here we are right you
22:53
know it’s completely changed
22:55
you didn’t get the memo i didn’t get the
22:56
memo we missed out back but you know the
22:57
other thing i want to point out to
22:59
people there’s still like a lot there’s
23:00
a lot of price discovery that’s
23:01
happening in the market right now
23:03
right you know we’re seeing decreased in
23:05
collections right usually five to ten
23:06
percent
23:07
is what we’re seeing from from our
23:09
portfolio and our friends
23:10
right but we’re not necessarily seeing a
23:12
five to ten percent decrease in
23:14
in the asset prices right
23:17
you know and i’m not saying nor are we
23:18
saying getting the expenses either well
23:20
more people living in an apartment means
23:22
more utilities go up right because your
23:24
utilities are going to go up there’s
23:25
just there’s a lot more wear and tear on
23:26
the on the units because people are
23:28
there more
23:29
right so you’re not seeing the one for
23:31
one correlation where you would think
23:32
okay we’re going to get at least a
23:33
little bit of a discount just from that
23:34
one thing right
23:35
so i would just be very conservative on
23:39
what you think is a good deal right now
23:40
because there’s still a lot of flux in
23:42
the market right
23:43
yeah so that kind of goes into you know
23:44
the last question before we go to the
23:46
last question
23:46
if anyone new tuning in right money
23:48
mondays mondays 3 30 central
23:51
you know the goal is really talking
23:52
about different topics and answering
23:53
questions live so if you have questions
23:55
go ahead and drop them we’ll answer them
23:56
right here right now
23:58
and you know if we need to stick around
24:00
later and get another cup of coffee we’d
24:01
be happy to do that right so
24:03
all right ben next question what are
24:04
some red flags in the writing process
24:06
so i mean big gaps in expenses
24:10
what we’ve seen a lot of that i always i
24:12
always say is a big
24:13
big red flag well two things right
24:15
goosing up your gross potential rent
24:17
this is where ferris was saying i always
24:19
look at the rent roll right and see
24:21
what are they thinking they can get for
24:22
the unit versus what is everybody
24:24
actually paying for the unit
24:25
if there’s a gigantic delta between that
24:28
that means they’re just trying to goose
24:29
it up for some stupid buyer
24:31
that thinks that they can actually get
24:32
that but in reality the market says
24:35
well yeah no wonder nobody’s paying for
24:36
that because nobody can actually get
24:38
those rents
24:39
right but they’re they’re hoping that
24:40
they can lay that on some sucker that
24:42
doesn’t know any better and thinks that
24:43
that’s the potential of the rents right
24:45
that’s that’s
24:46
big one uh a big red flag for me another
24:49
one is gaps in the expenses right
24:51
you’ll see things where it’s
24:52
consistently consistently and then
24:54
there’s one month where you don’t see
24:55
any payroll
24:56
what the heck happened to the payroll we
24:57
know that they didn’t let everybody off
24:59
and then rehire them the next month
25:00
ppp man besides that right
25:04
thank you that’s a that’s an outlier
25:07
we’re not talking about that right but
25:09
in the past right if you saw that you’d
25:11
say well what’s going on here and
25:14
some people believe it or not not
25:16
everybody’s honest
25:17
right you can you can fudge around with
25:19
those spreadsheets you can fudge around
25:20
with the numbers
25:21
just to make that noi number or those
25:23
expenses look
25:24
look less than they really are right so
25:26
you need to look for inconsistencies
25:29
in the t12 especially on the expense
25:32
side
25:32
right those are going to be some big red
25:34
flags that i see you know
25:36
lack of transparency on the financials
25:38
in general is a big red flag for me
25:39
right you know i love i love the the
25:41
wholesale online where
25:42
you know submit an offer and then we’ll
25:44
give you financial i don’t play that
25:45
game anymore
25:46
but when i first started off there was a
25:48
lot of that crap going on
25:50
and unfortunately that still goes on i
25:51
see it in a lot of these facebook groups
25:53
but the the seller if he’s really
25:55
wanting and
25:56
he or she is really serious about
25:58
selling they need to disclose the
25:59
financials yeah and then they need to
26:01
disclose the rent roll
26:02
right because otherwise how can i make
26:04
an effective offer
26:06
that’s going to get to closing versus
26:08
just shooting you know
26:09
a dart into the air in the dark right
26:12
you know how am i going to actually make
26:13
something work right because
26:14
i could be wildly off right you know
26:18
and to the good or to the bad right and
26:20
then we’re just wasting everybody’s time
26:21
so
26:21
that’s a big red flag for me from a
26:23
buyer or from a seller’s standpoint
26:24
absolutely so let’s see any more
26:26
questions if you have questions please
26:27
go ahead and drop them right now we did
26:28
get one more question
26:30
what do you do with assumptions when
26:31
modeling it just it depends on what it
26:33
is you want to explain what an
26:34
assumption has been so assumption is you
26:36
know
26:37
once again you’re taking you’re making
26:39
an assumption on what’s going to happen
26:40
in the future
26:41
right you know we talked about our rent
26:43
escalators we talked about our expense
26:45
escalators right
26:46
i think you also make assumptions on
26:48
what is the physical vacancy going to be
26:50
and what is the economic vacancy going
26:51
to be
26:52
you know those are going to be and then
26:53
you make assumptions on what your
26:54
reversion cap is going to be so some of
26:56
the metrics that i talked about earlier
26:58
in the program are some things some
26:59
major things that you can make
27:00
assumptions on
27:01
you can make them very aggressively or
27:03
you can make them very conservatively
27:05
well let’s start from you know from the
27:07
economic physical vacancy side right
27:09
and the and the rent and the and the
27:11
expense escalators right
27:13
work with your property management
27:14
company work with your mortgage broker
27:17
find out what is you know customary in
27:20
that sub market right what has been
27:21
happening last
27:22
three to five years in say houston texas
27:25
you know might not be a hundred percent
27:27
reality what’s gonna happen the next
27:28
three to five years
27:29
but it’s at least gonna give you some
27:31
better idea than just once again you’re
27:33
thumbing in the air
27:34
trying to figure out a number right yeah
27:36
same thing goes with the physical and
27:38
the economic same goes with the rent and
27:40
the um
27:41
the rent and the uh the expense at
27:43
spence escalators
27:45
and then let’s go let’s talk about
27:46
reversion cap once again
27:48
it needs to be usually 10 to 15 basis
27:51
points
27:52
more each year that you own the property
27:54
right
27:55
not 10 to 15 basis points less that’s
27:57
what i was talking about earlier there’s
27:59
gonna be people that will buy it in six
28:00
cap and say they’re gonna sell it at a
28:01
five
28:02
they’re being aggressive yeah absolutely
28:04
no way that i would ever underwrite a
28:05
deal like that because
28:06
that’s the only way they’re making the
28:07
deal work it needs to be
28:09
on the other side of things it needs to
28:11
be very true all right let’s keep going
28:13
one more last uh well actually i
28:16
interpret the question is like what is
28:18
an assumption on the lending side
28:20
you know so basically that’s how uh so
28:22
an assumption on the lending side means
28:24
there’s an existing loan that you’re
28:25
stepping into
28:26
right don’t look at that any differently
28:28
than a term sheet it’s just another term
28:30
sheet
28:30
right it just happens to be tied to the
28:33
actual loan on the property
28:34
but whenever you’re underwriting it
28:36
right you look at it the same it’s got a
28:38
might have some io interest only might
28:40
not has an interest rate it has a
28:42
time box right that you need to make
28:44
sure you meet and you know the one the
28:45
only
28:46
thing that might be different is that
28:47
you can maybe do a supplemental refi
28:49
right again depending on the term
28:50
but other than that i mean look at it
28:52
more like it’s a term sheet yeah yeah
28:54
the assumption is all about the
28:55
supplemental and how much more you can
28:56
yeah it doesn’t make sense but you need
28:58
to work with your mortgage broker to
29:00
determine
29:00
is it possible how painful is the
29:02
process and how much can i actually get
29:04
a supplemental proceeds because
29:05
most of the time assumption just
29:07
straight in walking into an assumption
29:08
doesn’t make a lot of sense because you
29:10
have to bring a ton more equity to the
29:11
table yeah usually your leverage is like
29:13
65
29:14
60 percent 50 i mean it depends on the
29:17
deal and so you’re
29:17
you know on a 10 million dollar deal you
29:19
might be bringing five million dollars
29:20
to the table right really on a 10
29:22
million
29:22
deal how much should you really be
29:23
taking 2.5 to 3 million so you’re
29:26
bringing a lot more equity to the table
29:27
so that’s going to water down your
29:28
return so
29:29
work with your mortgage broker on
29:31
assumptions if that’s what that question
29:32
is about
29:32
all right and last but not least so if
29:34
anyone else has any questions let us
29:35
know but
29:36
one more uh simple question where’d that
29:38
question go
29:40
oh it was uh do you account for splits
29:43
in your underwriting and the answer is
29:45
yes because yeah your returns two
29:46
investors are all tied to the split
29:48
so be sure you are accounting for that
29:51
so if you have a press
29:52
i prefer to turn make sure you have that
29:54
modeled in where your investors are
29:55
going to get that
29:56
right usually the numbers you’re
29:57
presenting to investors are not the
29:58
returns of the deal
30:00
itself it’s the returns that they’re
30:01
going to get meaning it’s net of all
30:03
splits
30:04
all sponsor compensation etcetera so
30:06
yeah we usually simple question but it’s
30:08
important that’s gonna be
30:09
what’s the split gonna be usually for us
30:11
it’s just so everybody kind of knows but
30:13
this can change right you know just
30:15
depends on the deal an eight prep with a
30:16
75 25 split
30:18
right and so we underwrite all deals
30:20
based on those metrics
30:21
yeah and then whatever it spits out the
30:23
number at the back end right
30:24
if that hits the box that we want to be
30:26
in then
30:28
then we pursue the deal right we take a
30:29
deeper dive so that’s kind of
30:31
that’s the last question so if anyone
30:33
else has any more questions
30:34
you know feel free to put them in you
30:36
know we’re about to wrap it up
30:38
but otherwise you learned something
30:40
today ben
30:41
i try i try man i’ll learn it i’ll learn
30:43
i got plenty to teach you ben it just
30:44
never ends so
30:45
i learned something new every day i know
30:47
but no we want it to be interactive
30:48
folks please submit your questions we’ll
30:50
get the
30:51
get the next topic out the next day or
30:52
so i don’t see any more questions
30:54
across the different things so if anyone
30:56
has questions going once
30:58
going twice going two and a half
31:02
times 2.5 times all right let’s give it
31:04
a wrap all right well that’s money
31:06
mondays everyone thank you very much
31:07
ferris moosa ben suttles and uh we’ll
31:09
see you guys next monday
31:18
you

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