How to Analyze a Multifamily Property & What Could Kill a Deal

this is the bigger pockets podcast show 5.86 do not fall for the temptation of actual cash value insurance policies in most cases a lender will not let you do that but if you're buying a property for cash or you're doing some kind of you know non-traditional debt structure don't fall for the trap of cool i can save a little bit of my premiums because the minute you have a loss that will come back to bite you big time what's going on everyone it is david green your host of the bigger pockets podcast the show where we show you just how powerful real estate investing can be our guests include food servers and firefighters counselors and corporate execs people with a wide range of backgrounds with one thing in common they got the real estate bug they got educated and they took action now it's our job to help you do the same now we are going to do that today by bringing in my personal friend and multi-family investing partner andrew cushman andrew cushman has been on this podcast several times i believe this is his fourth appearance and he is a multi-family investing specialist on episode 571 we dug into what he calls phase one of his underwriting where he looks at would this property possibly work if everything went great in today's episode we get into phase two where we verify is everything actually great and could this deal work now this is a very very detailed practical sort of information episode where you could take the information and literally create the same system that andrew runs and i hope that many of you do if you've ever learned what goes into analyzing multi-family property this might be the most important episode or a piece of information that you watch ever this will teach you more about investing in multi-family property than you've probably ever heard in your life and that doesn't mean that you need to actually go do everything we talked about but this will give you amazing insight into what goes on that will give you confidence in your own investing and maybe help you understand if multi-family is a niche that could work for you there's all kinds of different strengths and weaknesses associated with each asset class of real estate and today we dig in pretty deep on what goes into multi-family investing now there's eight steps that i'm going to want you to follow and at the end andrew when i talk about a deal that we're going to be putting together that you can get more information on so make sure you listen all the way to the end to learn about that and if this is your first time hearing about andrew or multi-family investing please go back and listen to episode 571 after you finish this so you can see what led up to it now if you end up liking this episode and you're like man i like learning about something new that i didn't see coming today's quick tip is going to be to go to biggerpockets.comstore and check out the books that they have there's books on all kinds of topics and it's good to read them just to get a feel for if you would like investing in that type of asset class and if that's really where you want to put your focus and attention and learning to grow the other thing you can do is get on the bigger pockets forums and ask questions and see how many other people are thinking the exact same things as you and trying to figure out the same questions that you're trying to figure out so many of us think that we're on this journey on our own and we're really not everyone else is taking it with us so get hooked up with some people on this hike in this journey to the top of the mountain that we're all taking it will be very encouraging for you without further ado let's get into it with andrew cushman andrew cushman welcome back to the bigger pockets podcast hey good to see you again it's going out very much i think it's going to be a great day i uh put the left earbud in my left ear on the first try that's always a good sign is that your barometer to tell how things are going to go yes it's very predictive yeah i like it people are getting a behind-the-scenes look on just how to be successful in real estate investing that's the key right there yeah now today's show is going to be a master class on underwriting multi-family property so heads up if you're not into multi-family this is one that is definitely going to be focused on that specifically but i think that there's value that you'll get out of this anyways because we're going to go into really the fundamentals of real estate investing the specifics of how to evaluate multi-family are going to be covered but there's always a why behind what we're doing now we had andrew on episode 571 where we went over what uh andrew first was phase one of his underwriting when it comes to multi-family properties can you give us a a brief summary of what those six things were yeah so the the phase the phase one underwriting was just and we won't go through all the different steps but the phase one underwriting was just the quick and dirty like you've got you've got 10 10 properties in your inbox you did the screening that we talked about way back in episode 271 i think it was or 279 and uh yeah 279 and you said okay well these three look interesting but you don't want to spend eight hours underwriting them so you just go through and make some fairly positive assumptions about rent growth expenses your debt all that and look at it say well okay you know i spent 30 minutes 15 minutes underwriting this under the best case scenario these rosy assumptions the deal doesn't work trash it right but if under those rosy assumptions it does look like a great deal that's when you move to phase two right because you've done the screening you've done phase one the cream rises to the top but turds float there too and phase two is where you're gonna figure out that if the property in question which one of those it is the turd test the turd test yeah brandon is not here so that's probably the best that i can do coming up with names all right well we'll take it okay so we also talked about the four levers that really really make a deal work can you go over those briefly yes and and there are other levers but you know as we discussed these are four of probably some of the four of the most powerful ones one are your rent growth assumptions so did you assume two percent rent growth or three and over a five year time frame that that's cumulative and it has a huge effect the second one was what are your cap rate assumptions did you assume cap rates stay flat did you assume they go up you know 100 basis points or 50 voices points over your whole time that changes things significantly especially if you're looking at irr the third one is the time of sale are you planning on uh underwriting for a three year sale a five year ten year what if you're going to hold it indefinitely moving that endpoint significantly affects how you underwrite and you know are you looking at irr or cash on cash so that's another huge lever and then the final lever we talked about was leverage itself are you going in with 65 percent ltv debt loan to value or are you trying to max it out at 80 are you getting with like a bridge debt bridge loan are you trying to put preferred equity on top of that to get to 90. so those are the four levers that we went in a lot more in depth and that can very significantly affect your underwriting and you really want to understand those levers because if you're going to invest as a limited partner in somebody's syndication they might have fudged the numbers by putting these levers in places that aren't natural so for example we mentioned cap rate assumptions if you're not super into multi-family all that means is a cap rate is a measure of how desirable an asset is in any specific market the lower the cap rate is the more people want it and the lower a return an investor will accept to get into that market if the a general partner or this indicator is assuming that demand is going to go up meaning cap rates are going to go lower they can make the deal look a lot better on paper than it's actually going to be when andrew does deals and when we do deals we assume the opposite we assume cap rates are going to go higher which means that there will be less demand and it's a more conservative approach if the deal still works under those conditions it's much less likely to fail so that was some really good stuff just understanding how easy it is for somebody to sort of manipulate numbers when they're making an offering as well as you can talk yourself into a deal being a good deal by kind of playing with those levers yeah you're 100 right it applies both ways if you're looking to invest as an lp you want to understand the impact that those things have so that you can dive into their underwriting and make sure that either they are not intentionally pulling a lever they shouldn't or just unknowingly pulling it or maybe you just don't agree with their assumptions and then yeah if you're doing your own uh it's it's you know you're you can make a spreadsheet tell you anything you want and so you've got to be cognizant that you're not doing that well you know if i just assume the cap rate doesn't move this is a great deal real world is often different than spreadsheets so be careful and we've all been there that's exactly right so phase one like you mentioned is just hey if we assume the best does the deal work because if it doesn't work under best circumstances don't look at it at all and it doesn't really take that much time and another thing i really love about the sister manager has here is this can be leveraged to other people so andrew you have two people on your team that for the majority of these deals they're actually working phase one underwriting and they're only coming to you or putting more time into it if it passes phase one underwriting so anytime you can create something like what you've done here it makes it easier on yourself to leverage anything you want to add on what things have been like since you made that change yeah so like you mentioned we've got so it used to be me looking at everything and doing every step um and it was it was brutal and it kind of i started to get burned out on it where a deal would come to my inbox and i'd be like oh geez another deal i got to underwrite um i lost the excitement right whereas now we have a virtual assistant that's worked with us for a couple years now who does that screening process that we talked about way back on 279 then i have an acquisitions person who does that phase one underwriting that we talked about in our last episode uh if a property looks like it's cream and not a turd then he says that to me we talk a little bit he then goes into phase two and then we proceed from there so when you go to phase two is it screened well it passed phase 1 underwriting and it looks like a property that you want to own and or you think is at least worth putting an offer on and that's a whole nother topic to get into another time but there's a lot of different reasons you'd want to put an loi on a property even if you might not necessarily want to win the deal on the first bet this is the process phase 2 that helps you decide what under what price and terms that you would consider doing that and so you know this is definitely more time intensive so you don't want to do it on every deal only deals that have high potential and are you know properties that you think you'd really want to own all right everybody so buckle your seatbelts because you're about to get some high level practical information that you can actually take away from the podcast and apply the minute that you leave into evaluating a deal there's going to be eight steps to underwriting phase two anything you want to add before we get into those yeah i say if you're if you're used to listening to podcasts on 2x speed don't do that because i'm already gonna be talking fast that's a great point all right so what is step number one step number one rent increases and so there's there's a number of components to this there's market rent growth over time there's hopefully you're found a value-add deal so there's a component of bringing the property up to where rent should be today and then we're going to talk about actually step two is loss to lease and they're they're they both factor into rent increases but we'll save loss to lease for just a minute so as far as um regular rent increases first we're going to talk about we talked actually in phase one about market rent growth over time that's where you're assuming okay you know market's going to keep going up two and a half percent or three percent a year but how you determine where uh market rent should be today is we use what's called a scatter chart in excel and i'm going to pull up a visual here so um if anyone uh is just listening uh and you're not on youtube work will try to explain this so you can so it's understandable but best thing to do is go to youtube and take a look at the chart that we're showing so what you're seeing now is a one bedroom rent comp analysis and by the way these are real we didn't make this up these are from deals that we actually have offered on we did take out the name of the actual property uh so we don't have a hundred thousand people going to look at it uh but these this is real data and in this example here we're looking at one bedroom uh rent comparables and you'll see on here there's uh oceanside east park laurel creek west view whispering pines these are all comparable properties to the one that we're looking at and on the chart there's a a a bar that's labeled in red called one by one on renovated that is an unrenovated unit at the property that we are doing our phase two underwriting on and how the chart works is the the bottom axis is the square footage right so as you move from left to right that means a smaller unit to bigger unit the vertical axis is rent so on on the low end this chart starts to 800 and goes up to 1200 and so what we do is you take all these you know when you get a bunch of data from axio or costar wherever and all these different floor plans and different sizes and rents it's kind of hard to just look at it look at all that and figure out okay where's my rent right so you make it visual and so you what we do is we take all those data points we put it into excel and we create this scatter chart and then if you look there's a blue dotted line that kind of goes from bottom left to upper right called the regression line basically there's a there's a nasty statistical definition of what that means but basically it's just a visual line that shows how the different data relate to each other and what you'll see is the line the reason the line goes from up from left to right is because rent tends to increase in that market as the unit size goes as the property gets yeah as the units get bigger people generally are willing to pay more money for larger units and the steepness of this line kind of tells you how much that sub market values a bigger unit but the most important thing that we're trying to show here is if you look at our one by one unrenovated unit it is sitting at 900 a month in rent every other property is a thousand dollars or higher right so by plotting these you can immediately look at this and go well okay i should be able to do a light renovation and at least get the rent from 900 to a thousand all right and if you look at the chart you'll see that we actually have the one by one renovated the one that's in green at um a thousand and twenty five say well okay andrew you know why is it which is slightly above two of the other data points well all right andrew why is that one higher right um if the regret the regression line's right at a thousand why do you have it as a thousand twenty five because part of our analysis is we looked at those other comparables and saw what the interiors were like and said okay well if we spend six thousand dollars or whatever the number was we can meet or exceed those plus our you know our professional management with a lot of experience in that market we have high confidence that we can get to a thousand and twenty five so that's that is what we found to be the most effective way to quickly and accurately at the same time determine how much rent bump you can get right again there's there's more like if you're buying a property you're going to go visit these property tour you know and actually tour these comps and all that but when you're sitting at your desk doing phase two underwriting saying okay i assumed in my phase one that i can raise rents a hundred bucks a month or 150 is that true this is where you're verifying if that rosie assumption was true and based on this chart these units should pretty easily get to about 125. now i see you have several different complexes it looks like all the different names of them how did you go about gathering the data that you put into this chart for what whispering pines gets westview laurel creek et cetera good point so we try to get get it from as many data sources as possible so we'll get it from axiometrics co-star we'll ask in anyone who's tried to sign up for co-stars like andrew that's like that cost an arm and a leg you're right so we don't pay for it we go to brokers and property management companies that do and say could you please send us report for the submarket or for this for this you know for this property um nice yeah and then we also aln is another source of data but also what we do we perform our own surveys we will get online and look up every property just using google apartments.com rent.com and find get every property in the area call them get it off the internet get all our own data and then ideally we have two or three sources of for the same data set we compare them and you know try to get them to line up as much as possible and then plot them on this chart wonderful okay so tell me how you would let's say that you had a rosy assumption and then you pulled up this chart what would let you know hey stop right there we're not gonna be able to get the rent bump that we're gonna need yeah right on so if it's one of those things where you know we had a call with the broker and they're like oh yeah you can easily you can easily get these things to twelve hundred dollars a month you know the you know the the seller the seller renovated one unit and he he leased it for twelve hundred dollars a month and you should be able to do the same so okay cool and phase one boom twelve hundred dollars a month oh this property looks great we do this um sorry no it's only going to be 125 maybe 150 best case scenario so we go back change the underwriting and it might kill the deal so then that's what you again you look just like in phase one you're looking for reasons to say no there you go this is the verified part of trust but verify exactly yes okay anything else you want to cover before we move on to the next step yeah you know what just uh to get it all in let's go ahead and uh and keep on moving so the next part of this that i want uh i want to talk about um is number two is loss to the lease and can't mean to be to be fully transparent i was in the business for several years before i even fully understood what that actually meant all right um so here's what loss to lease is let's say you've got a 10 unit apartment complex and you are advertising that your rent is a thousand dollars a month but when people walk in the door for whatever reason maybe you're asking too much maybe you didn't hire the right leasing person whatever when people walk in the door you're actually leasing it for 950 right you're the you know they're you're marketing it for a thousand but when that lease is signed it's 950. so how that's treated is you are losing fifty dollars a month to that lease right so market's a thousand but your lease is fifty nine fifty so your loss to lease is fifty dollars a month right so okay let me see if i can make sure that we understand here what you're saying is if you're being told that the unit will rent for a thousand dollars a month you're putting it into your rent estimator at a thousand dollars a month right but recognizing that's not accurate you looked and see well what is it actually renting for only only 9.50 so you have to subtract that 50 from somewhere and you create the category called lost elise to do it it sounds very similar to how vacancy is used when i was new at investing i just took i would say well it's going to rent for a thousand dollars a month but i have a 10 vacancy rate so i'll just put 900 a month in for rent that's actually not the right way to do it you should put in the full thousand and create a separate category for vacancy where you take off a hundred is that the same principle working here yes it is and it's so it's so what happens is lost at least sounds like a negative thing and it is if you're an owner but if you're a buyer it's an opportunity that you're looking for and candidly loss to lease is my favorite value add because it has the lowest execution risk all right so you know we talked about the situation where you know your market you know you got 10 units you're marketing them for a thousand but you're actually signing leases for 9.50 can i interrupt you again real fast what's it what's a reason why somebody would put a tenant in at 950 when they're marketing it at a thousand uh we saw this a lot during covid uh people were just nervous and like dude if i can get someone that's actually gonna show up and pay i'll give them a discount okay yeah so maybe for whatever reason they had a special running that month where they said hey get x amount off your rent or something that they don't have to do all the time but they were trying to lease it up so they gave that person a discount off of what they normally would get for market rent is that accurate exactly and sometimes you'll see where the entire tenant base in a property has it other times you'll see just a couple of exceptions because it was a friend or they felt bad or they were nervous because of covet or maybe it was december and traffic was slow and there's all kinds of reasons okay thank you go ahead and continue so my i'm going to pull up another visual and this is another scatter chart like looks somewhat similar to the one that we had um in the previous slide and this is another one where you're you're looking you're you're looking for a visual to give you a quick reading of what the data is saying so i said i meant starting to mention before that lost at least sounds like a negative thing but in this up in an uptrending market like we've had for the last 10 years as a buyer lost to least is a huge opportunity and again probably your easiest value add so what we what we have here on the screen this is for a property that we actually purchased back in march of 2021 so again this is real data real property and what we did is on the horizontal axis which if i remember from high school is the x x axis um we have the date uh of every lease on the rent roll right and then on the vertical axis again is the rent starting at 11.50 going up to 1400 in this case so you say all right well andrew why would you you know organize the data like this right so the old so all the older dates are on the left the newest dates are on the right and then again rent goes up from bottom to top so what we did is we were taking the actual rent roll from the property that has the lease rates and the date that that leak was leased was signed and what happens when you plot that on this chart so that you can see the date and the amount that the resident is paying what you it becomes very clear when you look at this chart hey wait a second every lease that was signed in the last six months like i'm sorry every lease that was signed in the last six weeks they're getting 1350 but the older leases all average 1264. so clearly now you need to dig into it a little bit to find out well did they do renovations or not in this case and i can tell you this because we bought this property in this case they had not done any renovations they were just finally starting to catch up with the market and you know and i mentioned before you might see like one lease that's kind of high that doesn't prove a trend but when you have six weeks consistently of every lease that was signed is always is significantly higher that's a sign that you can probably buy that property and take all of those other leases which are represented by very low dots on this chart and get them up to that 13.50 so what you're looking at so what you're looking for are two numbers you take the rent roll and you average again do this by bedroom by by floor plan so this is a one bedroom if we take every dot on this chart the average in place rent meaning people are actually paying it is 1264. but the last eight to ten dots on here were all 13.50 so what that tells us is we can almost do nothing just buy the property and manage it well and then get the rent up from 1264 to 1350. that's an 86 dollar increase just for managing it and catching it up to market now the reality was now that we've owned this property for nine months and the market has continued upward we are multiples above this level but this right here will not only gives you a huge insight into the opportunity at the property but it also gives you kind of a backdoor insight into how the overall market is trending and we have found this chart to be one of the most powerful tools in our underwriting analysis yeah this is brilliant let's talk about a couple reasons why this is something that should be focused on a lot but often isn't the first thing is like you mentioned los lease is the easiest thing to correct it's the least expensive and the and the fastest it's you can walk in there and immediately see well we should be getting this rent so we can bump it up to this before we do anything and you always want to take care of your easiest things first so if you're buying a unit that has a very small loss to lease or like it's insignificant in order to increase the rents it's going to take a lot more work you're going to have to do something like add amenities or upgrade your units you have to spend some money and some time to get there looking for something with lost elise if you were going to compare this to single family properties would be like you're getting it significantly under market value there's a lot of room to get up to the arv even before you do a rehab another thing is like when you mentioned this shows you what's going on in the market what you're referring to is that the higher the loss to lease across an entire market the faster rents have been rising and the the leases haven't expired fast enough to catch up with it yes and that's where you you want to be if you're assuming that that trend is going to continue which in most cases it is go ahead yeah i was going to say for those of for those listening who are afraid to buy right now there is a window of opportunity i'd say for probably the next six to 12 months there are so many property owners especially in the i'd say under 50 unit space where because of covid fear whatever they have not kept up with the rent increases of the last year and we keep seeing property after property where rents haven't been raised in two or three years and they are like 20 below market now i don't think that's gonna last forever uh so again this this this reveals a huge huge opportunity yeah you and i are still finding those deals if you know what to look for and this is the big red flag that shines it says hey come look at me i there is i am worthy there is something here where people are not taking advantage of me it kind of reminds me of that old movie she's all that where you have that like the nerd that no one's paying attention to but really they're the beautiful princess underneath it this is one of those things that you can see man this deal would clean up pretty nice so and uh understandably so that's why you have it so early in your underwriting process because if there's not a lot here there's got to be something else about that deal that makes it really appealing that makes you think that you could improve it this is definitely the best to look for and i can't highlight enough that that metrics like this help you understand what's trending in a market in general so just imagine that if it take if most leases are signed for 12 months and rent goes up over a 12-month period let's say it goes up a hundred dollars over the year many of those units that signed you know 10 11 12 months ago are going to be at rents that could be going up and sometimes the apartment complex just extends them on the same lease that they have right they're afraid of vacancy or whatever is going on so this is how you can identify that there's something juicy here anything you want to add before we move on to the next step uh two things one if you're looking for low-hanging fruit this is like picked in a basket sitting under the tree waiting for you um and then like you know well okay well how do you use this so you take and in this case there's 86 dollar loss to lease right that's no renovations so if you're going if you're going to renovate the unit and and bring it up to a higher level you take your loss to lease you add your renovation bump to that that gets you your total rent increase that you're putting into your underwriting and ideally your underwriting model should have these as two separate items loss to lease and renovation increase and you want to be able to toggle and adjust those independently so that's a very good point this goes down to the principle of levers in real estate which i don't know if anyone else talks about but when you get into investing pretty significantly you start to recognize like andrew you mentioned the four levers that make a property worth more cap rates going down might be the biggest lever of all you can improve your net operating income to make the value of a property goes up but that pills in comparison to the power of cap rates significantly going down it's just a bigger lever that moves things more i say the same thing with the burr method if you're looking at roi you want to get a higher roi well you could improve your cash flow that's one way but if you can decrease the amount of capital you put in the deal that lever is way bigger and it makes your roi skyrocket so the deeper you get into investing the more you're learning on where do i get the most bang for my buck what lever do i want to pull on the rehab bump versus loss to lease are both levers that make your rent go up but lost to lease is the bigger lever that's much easier to pull on and you'd rather find properties that that have that kind of opportunity so there's always going to be both but this your this is ideal you want it to be on the loss to least side as opposed to having to manage an entire rehab to get the same result yep again it's all you know it's all risk reward this loss to lease generally carries the lowest execution risk of any value-add strategy love it okay number three what do you have for all right let's jump on to debt quotes and i have another uh another example here and this is again this is real life um this is a debt uh debt quote that we received uh actually on a property that we are under contract uh to purchase i did i did redact some of the specific information for the asset but you know when you're when you're looking at debt quotes what you don't want to do is just get you know go or i shouldn't say you don't want to do but in generally what we have found to yield the best results and the highest chance of you being able to perform and close on the deal is to work with a competent and trusted loan broker who will take all the stuff that you gather on this property package package it together really well and put it out to multiple lenders to help hunt you down the the best deal right now you're not going to do this you're not going to actually send this to a broke loan broker every time you kind of get interested in the deal this again this this is a i'd say a deep phase 2 where you're actually going to send it to them but i want to i want to have an example to actually show people some of the key terms that to watch out for but when you're when you when you're doing the i'd say an initial phase two you wanna at least have if you don't if you don't feel like you already have a really good grasp of what what current debt terms are then you want to at least run the deal by a competent loan broker and say hey i'm looking at buying this for 5 million i want to get a loan for you know 70 of the purchase price and here's the you know here's the p l and i think i can get rents up this much could you just give me a rough idea of what we might expect for loan options right that's what you want to do in the beginning because again you want you don't want to waste your time but you definitely don't want to waste anybody else's time you know you want your team members to know that if you send them something odds are it's going to go through and and you know everyone is going to get paid so again so the the initial phase 2 is either you already have a sense of what your debt terms can be or you do a quick email or phone call but if you're if you've done a phase two and now okay this thing looks good and i'm gonna go and we're negotiating an loi or we really want to strengthen our offer that's when you might have your loan broker send you what i'm about to go over so again this you know so you know once you get into kind of what the terms are going to be so if you look on the visual and again if you're you know make sure you go to youtube the you know bigger pockets youtube channel so you can actually see this but you'll see there you see three different options on here i'm not sure why it's labeled one two four but it should be one two three so the first is an agency fixed rate agency floating and then debt fund floating so agency that means fannie mae and freddie mac which are your government sponsored agencies debt fund that's kind of everybody else that's bridge lenders life companies actual debt funds etc and we know we could we could do a whole we could do an entire episode on just structuring your debt properly but the main things you'll see here or the main things you're going to you're going to want to take into uh consideration when you're doing your underwriting is number one the term right so if you look on this you'll see agency is 10-year and the debt fund is three-year especially right now i won't say don't do bridge because there are appropriate times to do that but be very careful with loans that have short maturities right long-term multi-family is i strongly believe is going to continue to do phenomenal but what you don't want to do is get a loan that is completely due in two years or three years and you have no other option other than refinancing or selling because what if the debt markets you know aren't favorable at that time right you always want to give yourself a little bit of exit so you so what you're saying is that the shorter that the loan term period is the less time you have to get things squared away where you're safe and the less things are able to go wrong before you get hurt exactly the the longer the loan term the more flexibility you have to adapt to and overcome any adverse scenarios that pop up in general that is a it's a safety feature to have a longer term loan and i think one of the mistakes that newer people make is they always assume well everything's going to go right and on that timetable this is where we are and that is never the case nothing ever goes right yeah you you will never ever exactly hit a pro forma you will always be a little below or hopefully a lot above but you will never ever exactly hit it well the reason that you come out ahead a lot of times is you give yourself this runway all of your assumptions are always negative you're like well this is going to go wrong and this is going to go wrong and if all that goes wrong i'm still okay under these circumstances i think when the market gets hotter it gets harder to stick to that sort of a disciplined approach that we take when we're buying yeah i've definitely missed a lot of good deals over the years because of that but i also sleep well so i to me it's an acceptable trade-off but nice um so so the next big thing you're looking for is loan amount uh you know different lenders size things in different ways uh and but you know you want to know am i go and so on this particular deal they were giving us a range of okay with agency you're going to get anywhere between 13.7 and 13.9 million can you define what agency debt is briefly yeah that's the um the government sponsored agencies freddie mac and fannie mae fannie mae which are fantastic commercial lenders in fact they kept the market alive in march of 2020 when when kovitz shut down all the bridge lenders uh i'm glad you say that because we rarely ever say anything positive about the government but that doesn't mean that nothing positive ever happens we just tend to not give credit today and it's more fun and easier to complain right so than it is than it is to give yeah give credit but no they well that's the thing so bridge loans are great but that you know since especially since you brought it up that is another risk right when and this is going to sound negative but i you know i love bridge lenders we do use them occasionally but bridge lenders are like roaches when you flip on the kitchen light at night they scatter as soon as danger arises right if you look back at 2008 you could not get a bridge loan anywhere march of 2020 bridge lenders com every single one of them left the market if you were going to get debt it was going to be fannie or freddie that was basically it right so they tend to come and go and what you you want to be careful of okay i'm gonna great this get this great bridge loan or i'm gonna refinance into one and if something happens like march of 2020 or 2008 those bridge loans may not be there um so again just just something to be aware of that's that's an additional risk so um i should think of a better analogy because i don't like to call our bridge lenders roaches because they're they're they're great partners but yeah this is the idea of scattering into their fair weather there you go fairweather friends there yeah there you are there you go um so again if anyone is on youtube you're gonna see there's probably 15 terms on here so you know we'll hit the hit the really high ones or most important ones so the next one is implied rate and basically what that is saying is is you know what what all the lenders do is they take a some kind of index might be the 10-year treasury might be so far used to be the libor and they're going to add what's called a spread on top of that so it might be two percent or they're gonna have a number and they're gonna say well okay the interest rate that we're implying you're gonna get is x right so if we look at this it says okay fixed agency is between three and a quarter and three point three five if we go floating rate agency which means the rate can go up and down as the rate as the mar you know market interest rates go up and down because that protects them from getting locked into a low interest rate loan they will give you a lower interest rate to start so that's between 2.8 and 2.9 and then the debt fund is three three two three six so you can see depending on which route you go significantly affects the interest rate so that's something you're going to want to know what those rates are the next one is max as is loan to value uh this is one of the downsides of agency right now uh if you look on here the agencies are only going to give us 63 of the of the loan to value so if you're buying a 10 million dollar deal they're only going to give you a loan for 6.3 million whereas the bridge lenders are willing to give 75 or on a 10 million deal 10 million deal 7.5 million in today's highly competitive market where everyone's fighting to get the returns that are needed that extra 12 leverage can be huge in in whether or not your deal is appealing to investors or not or whether it hits a certain irr but just be aware higher leverage generally speaking means higher risk so again which route you go depends on your source of capital your tolerance for risk and your business model but these are all terms that you want to know i have heard many horror stories of somebody assuming they were going to get 75 percent or 80 if they get down close to closing the lender comes back and says oh sorry it's actually 63 or 62 right you need to know that up front because that if you're planning on 80 and you get 63 your deal just blew up so you got to know the stuff in advance and properly underwrite it another key one to help prevent that is to know what's called your dscr that stands for debt service coverage ratio so if your property makes ten thousand dollars in net operating income a month and your mortgage payment is ten thousand dollars a month that means your ratio is one right ten thousand net ten thousand divided by ten thousand you won't get a loan on that from the agency what they want to see generally speaking is a minimum of 1.25 and again that changes based on market and property size and that's the number you want to know you want to ask your loan broker or whoever you're working with what is that ratio need to be so if they say it's 1.25 and you're estimating your mortgage payment it's gonna be ten thousand then that means your property seven property needs to have a net operating income of twelve thousand five hundred twelve thousand five hundred divided by ten thousand one point two five right that's the number basically that means a lender's looking to see can you repay the debt we're about to give you can you cover the debt certainly exactly and they wanna make sure you have a minimum of twenty five percent cushion except case something goes wrong yeah you want to know something crazy in the residential space there's such a demand for lenders that want to be investing in there that our loan company can do a 0.8 debt service coverage and it's a 30-year fixed-rate loan it's that's how much that's how much money is floating around there in the residential world that needs to find a home that they're basically saying hey if the property brings in eight thousand dollars a month and your uh your inc it's gonna cost you ten thousand dollars to get this loan we'll still give it to you now that doesn't mean that you should ever operate it where that is the case but they're looking at it saying hey they can make up the rest of it with their income so these standards are definitely i've noticed they're tighter in the commercial space but that's okay because nobody is buying commercial property assuming it's not going to make money the reason you're buying it is because it makes money a lot of residential properties purchased for different reasons you use it to vacation use it to live in you you can kind of make it work as an investment but residential real estate was never intended to be income producing property like commercial property is yeah right so um well yeah and yeah we could jeez we could probably do like i said a whole whole podcast or a whole q a on this but um just keep it moving i'm just gonna hit the next ones really quick the uh you know the next one you want to know is how many years of interest only right is it three is it five is it ten most bridge loans are interest only for almost usually the full term so the first three years the next one is um what's the amortization schedule look like after it's no longer interest only so you mentioned residential loans are typically 30 years fannie mae and freddie mac are often the same thing 30 years a lot of bridge loans don't amortize it's just stays interest only some bank loans might be 20 25 years so you need to know what the amortization looks like because it doesn't sound like much but the difference between a 25 year and a 30-year amortization could have a significant hit on your cash flow because you're paying more principal right it doesn't it it bill it builds equity so that's good but it's it's not lose cash flow that you can use okay uh so let's let's clarify that very quickly if we're talking about an interest-only loan basically they're gonna you're only paying the interest on the money you borrowed you're not paying down any of the principal so the downside is that if it's interest only you're not building equity by paying the loan down the upside is you're actually keeping more money in your pocket is that a great way to summarize it perfect good enough got it so it can make you this is why i want to highlight it it can make you feel wealthier than you are when your cash flow is very high but your loan isn't being paid down right it's usually better for you and less risky because cash flow in the bank can be used to get you out of tough times rather than paying the loan down if you're disciplined with your money and that's why i want to bring this up is everyone's always excited about interest only loans but it can create this false sense of security that you have more wealth than you actually do because that balloon payment is still building and you're not creating equity as you're paying down the loan exactly so yeah if you're if you save the if you save it it's an advantage if you spend it might not be the case and the reason most of these loans are structured with interest only first is they're trying to give you that cushion right to build up your reserves to handle things that could go wrong that you didn't foresee they're making it easier for you in that kind of like training wheels for the first little bit and then after the three or five years whatever it is that's when the amortization schedule kicks in and your payment goes up because you're also paying down the principal yeah and also especially if you're doing value-add they know that yeah cash flow might not maximize until three years down the road so another huge one is prepayment penalty and this has caught a lot of very experienced operators off guard the last five years because we all thought rates were going to go up and they never did they went down so prepayment prepayment penalty means you know if you buy a house you can pay off your mortgage basically anytime you want right david i mean six months 12 months doesn't matter and you just pay it off you're done in the commercial world the lenders say well i know they're taking that loan they're selling it on the secondary market and they're promising investors that those investors are going to get a return so if you want to pay off your loan early fannie or freddie will say okay mr green you can pay off your loan early but by the way we promised our investors a certain yield so you have to pay us all that extra interest we are no longer going to receive so that we can keep our investors happy and that's an oversimplification it doesn't quite work that way it gets into like calculus like i mean if it really is nasty stuff like all these symbols that i don't that i haven't seen since my advanced engineering classes but basically the sum of the idea of it is if you pay off that loan early you're going to have a large fee or payment or prepayment penalty that you are going to have to pay so if you're going to sell a property in three years don't get 10-year fixed debt because you're gonna have a huge payment prepayment penalty they also call it yield maintenance um you know there's always fancy words to describe very simple things when you're dealing with multi-family you and i should make like an article right like yield maintenance dutch interest uh even agency debt sounds much cooler than fannie mae loan uh lost to lease is a cool thing to say there's a lot of it like when you get into the space there's definitely words that get thrown around and you're like what does that mean you know like like even cap rate like oh that's just the return you'd get if you didn't take down yeah if you bought it for cash so and the the other the other two things are are what kind of lender fees are you going to have is the broker going to charge you a point is the lender going to charge you a point is there an exit fee most most bridge loans while they don't have prepayment penalty they will have an exit fee meaning like when you repay it off or refinance oh we're going to charge you a point on the back end right or a half a point or something like that again nothing wrong with it you just need to be aware of it and make sure that you had to write for it so um all right next one is insurance quote and uh don't have a visual on this just because it uh it gets pretty dense but i'm just gonna touch on a couple of things number one never ever ever use the seller's number for insurance right i can't tell you how many times we find sellers that are either underinsured or improperly insured or they you know their brother sister's cousin has given him a discount that you're not gonna get uh there's all kinds of reasons not to use the um the seller's number the another reason um is many a lot of times you can come across for a situation where someone is insuring based on acv which stands for actual cash value you want to always insure for replacement value right i made this mistake in my first deal fortunately it worked out okay because we didn't have any claims but if you have replacement value it's going to cost you more upfront because what the insurance company is going to do is they're going to say okay if your building burns down it's going to cost 100 a square foot for us to rebuild it right and if your building does burn down basically that's how much they'll they'll pay you again we're simplifying if you do actual cash value saying oh geez you know i can cut my premiums in half if i'd go for actual cash value then what the insurance company is going to do when you're building burns now is they're going to come in and say well yeah you know what this was built in the 80s and the roof was 10 years old and this was five years old so they're going to apply depreciation to it and they say well the actual cash value of this is 50 so here your 5 million dollar building here's uh 2.5 million good luck right so you now you got to come up with the extra 2.5 so do not fall for the temptation of actual cash value insurance policies and and i in most cases a lender will not let you do that but if you're buying a property for cash or you're doing some kind of you know non-traditional debt structure don't fall for the trap of cool i can save a little bit of my premiums because the minute you have a loss that will come back to bite you big time well by calling it cash value they sort of that's misleading it is probably gonna get the cash well and that's why all that means is we're gonna go ahead yeah that's why i did it the first time like wait my premiums are like half and uh it's cash value i'm like okay cool and then like you know a little bit down the road i figured out what that actually meant you know again this was ten years ago we know this stuff now um i said oh you know what let's go ahead and make this replacement value thank you and um again i got my one year premium savings and considered myself lucky and moved on never did that exactly that's one of those things that in multi-family there's big words that can be used that can be misleading i i've said this before i have like a general rule that if anybody says finance instead of finance i have to look very closely at everything they say because i assume they're going to try to pull the wool over my eyes so don't be that person at the cocktail party that tries to sound smart by saying finance we all know what it's actually yeah so i'll try i'll try to so we'll speed through a handful of these other things because they're a little more self-explanatory the two main things you are going to need to get an insurance quote are the total rentable square footage and the annual revenue right if there's any that those are the two main things you're going to get and you send that to your insurance brokerage he should be able to give you a good rough ballpark idea of what you know what that's going to be some other things you're going to want to know the next biggest thing is are there is there a history of claims right if they've got three other insurance claims it's called uh you're gonna it's called it's called a loss run which is the history of losses your rates are going to be higher because the insurers and understandably nervous about that building you also want to find out have there been any shootings or assaults right so if you go on google maps grab the little yellow man drop them on the property and he runs away you should run away too because what what that means is if you've got if there's been shootings or assaults or any kind of violent crime you're going to have an extremely difficult time getting insurance in the first place if you do you're going to pay more for it and they're probably going to exclude um incidents of violence which means if someone gets shot in your property it's not covered by your insurance company and they go to sue for 10 million because you know the shooting is of course your fault as the landlord the insurance companies and say well good luck david that one's on you we excluded that so you you want to know you know that's part of your screening too right hopefully you've already screened for this and you're not looking at a property with shootings but you again you're going to really at this point you want to make absolutely certain quad now some other questions does the property of aluminum wiring if it was built especially 60s or 70s is it sprinklered that doesn't mean it has nice irrigation for the landscaping that means does it have those little little sprinkler heads inside the units and is it in a flood zone or not flood zone is a completely separate policy and if you go back to our screening we don't buy in flood zones for a host of reasons doesn't mean you can't that's a business decision for us but we don't and here here's a tip david what what do you think is one thing that flood insurance does not cover flooding from in the commercial world uh maybe your own fire sprinklers when they go on actually that we've had that happen that's covered rain flood insurance doesn't cover flooding from rain and you say well okay uh where else would flooding come from damn breaking yeah right so and here's the thing so we we learned this a few years ago unfortunately not the hard way just by asking enough questions so when you're getting a flood and so what flood insurance covers it covers flooding from a body of water the the lake overflows the river overflows the ocean comes in on storm surge with a hurricane if it just rains 12 inches and the water piles up in your parking lot because it can't get away fast enough and floods units that often does not count and often will not be covered in many most cases you have to specifically get that written into the policy that that is covered and that saved our butts this year we had a we had a property in florida we bought we specifically made sure that was written in there one month after we closed on it tropical storm came through 17 inches of water in the parking lot because of rain not tied to a body of water if we hadn't had that clause inserted into the insurance again not in the flood zone it's not in a flood zone it's just rain too much um then we would have been out of luck some big bucks so that's uh that's that's a really big one all right so moving on to property taxes number five yes number five this one's actually uh absolutely critical this is another one where um sellers and occasionally some brokers will try to get this past newbies and say oh you know taxes are are really low especially in a again in markets that we're seeing now where prices have been trending up significantly the property taxes are lagging right um and this is something that is very unique to each county and state so you know we're going to go over some general processes for estimating property taxes but you've got to dig in and find out how your local municipality handles this yeah everyone everyone is different so i'm going to go ahead and pull up a an actual tax statement to show this but basically the gist of it is you want to doubt you want to go to your county assessor's website download the current statement right and then use that to determine how and when they're calculating reassessments and then estimate your taxes future taxes based on your purchase price and how they're um how they're doing that so i'm gonna go ahead and pull up uh this is an actual uh property tax bill this is from uh the valdosta area are exactly lowndes county in georgia and what you're going to see here in in this area they they do a fair market value so they they estimate a value for the land and a value of the pro other buildings they add that together and then they use that value to determine the taxes now something it's not that simple though for some reason nobody's been able to explain this to me and if a listener hears this and knows the answer i'd love to reach out and let me know they don't just work from that fair market value they take that fair market value they multiply it by 40 percent then they take what's called a millage rate and a millage rate is again just another one of those fancy terms for a number that they're multiplying by to come up with whatever number they want right so that's how they they they there's two levers that the that the municipalities pull to change your taxes one is the value two is the millage rate um so what they'll do in this county is they take your fair market value they multiply it by 40 because i think it's i guess it's fun then they multiply that new value by the millage rate and that gives you your taxes so in this example um again go to youtube i've highlighted these numbers in yellow so it's a little bit easier to see the fair market value for this parcel was two million four hundred seventy six thousand the multiply that by forty percent the taxable value is nine hundred and ninety thousand um the millet they have they haven't broken out there's actually multiple millage rates you know one for the cast school one for parks and recreation great show by the way um one for the industrial authority you know whatever and so the total millage rate is 34.77 um again it would be makes sense you would think well just multiply by 34.77 no millage rate i think stands for um mills which means you divide by a thousand first so you take your taxable value multiply it by .034 that gets you your net tax on the bottom right highlighted yellow of 34439. you say okay that's great andrew that just tells me what today's taxes are right so how do you use that you use now this tells you how they are currently calculating taxes so you take that formula fair market value times 40 percent times the millage rate equals taxes you go in and you put your purchase price in there right so now take your new purchase price times 40 to get your new taxable value times the millage rate equals your future taxes now what that does is that's actually telling you your absolute worst case scenario that's telling you if the county comes in says you bought it for this we're assessing you for that for that same price in most cases that doesn't actually happen what we do is we take our purchase price cut it to 80 percent and then put that number into this equation right and again there's a lot of other factors some some areas do this every five years some areas do it as soon as you buy it it's different by state by county but the gist of it is go pull a tax statement number one understand how they're calculating it and then use their method of calculating with your new purchase price to figure out what your future taxes are going to be and in many cases yes your taxes may double or triple when you get reassessed and if you don't factor that in your deal just blew up two years down the road very good and if this isn't making sense because you're listening on the podcast check it out on youtube there's a visual aid you can see exactly what andrew's walking through it actually makes a lot more sense when you can look and see it looks like the millage rate is basically how the county is splitting up the property tax amongst the different uh like municipalities or whatever like organizations that are that need the money yeah and generally speaking you don't need to worry about how they're splitting it up you're just looking for the total um i did highlight parks and rec on there just as an example uh but um you know really all you care about at is the total so you know again yeah so you you use that total number in your calculations and you know if you're interested in where it's going that's fine but it doesn't it doesn't affect your underwriting okay that wraps up property taxes moving on to number six yeah number six is property management manager's opinion and this is exactly what it sounds like if you know you should already at this point on your team have a well-qualified property management company that is you know again part of your team that you can get their opinion and you're not calling them on every deal that you look at but this is phase two you're getting serious right so what we do is anytime we're at this point in a um with a property we will email our property management company say hey are you familiar with this property and are you familiar with the sub market and could you please give us your opinion right and typically what they'll do is and once in a while in the in the beginning before we knew our markets and before we were screening they'd say no run away stay out of there we don't want to manage that you know you don't want to you don't want to own it but you know now with the screening that doesn't happen anymore so many cases they know the property a good property management company is going to know the property and they're going to be able to give you feedback and ideally they'll send someone over there to drive it for you and be like oh yeah you know we drove over there and you know it's a great property and a great location but there's trash everywhere which you know that's an opportunity that's really easy to fix doesn't look like anyone anyone cares they have no marketing but you know but it's on this great high traffic corner and you know you can put a playground in a dog park and if you change you know if you added some landscaping you know based on you know and by the way we manage a property quarter mile down the street that's getting 400 dollars more a month you know this one not quite as nice so you could probably get 200 200. that's the kind of feedback you're looking for someone who's already an expert in that that market to give you feedback on the market and on that asset and give and give you their opinion of it what you don't do is you don't send them a budget and say can we make this happen because you don't want to taint their their feedback you want them to come back to you with a blank slate and again if you're screening right most of the time that should be at least somewhat positive every once in a while you might miss something but you know that's exactly what you want a property manager's opinion of of the asset and then once they do that you might go back to them and say well geez you know i'm planning on my loss to lease says i can get 125 rent increases do you guys think we can do that and they'll either confirm it or say nah it might be 80 or not geez you can get 150 no problem right so that's exactly what it is you want to get a qualified property manager's opinion of the asset the location the sub market and do they want to manage that for you yeah and be careful that you don't do what you mentioned when you start to fudge things on a spreadsheet to make it work sometimes you feed them the information you want them to give back and they of course want the revenue that's going to come from managing it so they regurgitate that back to you and now you've tricked yourself into thinking that they are capable of exactly don't feed them anything just blank slate ask them there very good okay number seven yeah renovation budget so you know um if you remember from the phase one underwriting you we basically just did kind of a quick guess like yeah you know i think we can spend 8 000 a unit renovating this and we'll do 200 grand on the outside or whatever the number is right and you know because the broker said you can spend this much and it'll be great so you do that on the first shot phase two you know ideally somebody on your team either you or the property manager has toured this property and you've walked through and you've identified things like um and again this is this is an example from an actual actual property that we purchased and uh this this is you know we've walked through and we've said okay well uh you know we're gonna spend and we don't have time to go into the details of you know how we came up with this but we're going to spend 600 000 on renovating interiors and let's see um we need to do about 25 000 in landscaping upgrades parking lot needs to be resealed and re-striped uh that's going to we're estimating that at 63 000 new signage 31 000 fencing 35 so basically if you go on youtube and you look at this what we've done in phase 2 is rather than just a guess of a few hundred grand inside and a few hundred grand outside now it's really coming down to it and we're now we're again we're just underwriting we're not under contract so we're not having contractors go out and give us bids we are leaning either on our a combination of our own knowledge or if you don't have that knowledge yet go to the property managers and say hey you know i've looked at pictures i've toured this i think these are the eight projects that we need to do what would be your range of how much this would cost how much should i plan for redoing the parking lot how much should i plan for putting in a nice pretty monument sign right all of those things so you know again phase one you're just throwing in some high level numbers phase two you're breaking it down by project right so again these aren't hard bids they're just getting a lot more granular so that you aren't going because you don't want to underestimate and run short but you also don't want to overestimate and lose a deal that otherwise would have could have worked right and two other two other things i'd really want to highlight on here you look at the bottom you'll see contingency 126 000 and long-term capex reserve two very important things that i often see people leave off if things go great it'll you'll be get away with it if they don't you're gonna be in trouble contingency is exactly what it sounds that is oh geez you know what appliances just cost of appliances just went up 10 it's gonna cost me more right or uh oh man we we find that we just found a bunch of windows that are cracked and fogged we got to replace them well that's not cheap it's just adding in some room for finding stuff that is that that goes wrong or you might discover well geez if we do this additional thing we can bump rents even further you want to have brought the money in up front to be able to do that and maximize the value of your investment the second is long-term capex reserve we just for us this is the number we're comfortable with it might be different for you we just do a thousand a unit right because we know we're typically going to hold for five years things happen uh you know maybe the roof gets damaged and you have a 200 000 deductible on your insurance policy well guess what either that's either coming out of your pocket uh from your investors which you never ever want to have to ask for or your long-term reserve that you started this out with in the first place so that's what that long-term capex reserve is something happens year three or four or five or if you're holding a long-term maybe even your 10 um so that when that comes up you're like no problem i got this uh you know your investment's safe your investors are good um so you know that is that's an absolute key key line item so uh but yeah lots more we could jump into but i know uh uh i know we've been talking for a bit so uh that's kind of the the gist of what you're doing phase two renovating a renovation budget and there's almost always going to be a renovation budget of some sort because you're usually looking to buy something that has meat on the bone and if there's meat on the bone then there's work you're gonna have to do to get there so this is something that like i know a lot of people have questions about how do i know what the rehab is going to cost it's kind of something you got to look at a lot speak with different contractors get a feel for a baseline of what that's going to look like but you definitely want to be comfortable with it because anytime you're buying an asset of this size there's going to be some kind of renovation that needs to happen yeah absolutely and i said there's two types there's i would say required renovation like deferred maintenance and then there's opportunistic right like hey if we do this we can attract better quality residents and bump the rents right and then there's two categories okay so all right the final one number eight yes number eight for today final one for today is follow up on p l items um on the t12 which stands for trailing 12. that's a profit and loss statement that is broken that shows you an entire year snapshot by month right so it'll show the income and the expenses for each month 12 months lined up in columns right next to each other property p ls are like you know fingerprints snowflakes and penguin mating calls right no two are the same like every you'll see stuff from handwritten on pieces of paper to beautiful you know yardy printouts with every single account perfectly lined up and and everything in between um and you will see stuff on p l's that's sketchier than a photo of ozzy osbourne at church right and that this is where phase two you ask questions about that kind of stuff so um you know in general and i think we'll we'll you know we didn't want to do this on on youtube because those 12-month p l's are so dense but we will provide one in the show notes for you for everyone to go go look at after the fact but some examples of things you're looking for is anything that's unusually high or unusually low right if you expect insurance to be 300 a unit and it's 450 a unit that's a red flag you want to find out why maybe they just have a bad insurance broker or maybe they've had three fires in a shooting right and again some of this stuff gets redundant but that's on purpose right you want so that something important gets stepped gets missed on one step you'll catch it on another um and it all it all ties together uh so missing payments i can't tell you how many times we see the landscaping bill suddenly doesn't get paid for two months well where did that go what happened why um or the utilities go way up and go way down does that mean they're having underground water leaks all the time uh you know do does a residence you know leave water on i mean what what's going on there um oftentimes you'll see strange accounts large credits are another big one right you look you'll look at oh wow the repairs and maintenance on this property looks you know you know is really good it must be a great property but then you look closely at the p l and wait a second there's a 30 000 credit like where did that come from because that if you just look at the end number you're gonna it's going to be wrong because somehow they they reduce that expense by 30 000 and there's lots of legitimate reasons for that but this is where you go ask right um you're looking for opportunities and traps so again if their insurance is 450 a unit because they maybe have a not a great loan broker and you can get it for 350 legitimately that's an opportunity if it's 450 because they had three shootings that could be a trap especially if you assumed you could get 350 on in phase one these are the things you're asking question for other things that you might run across are things like hoa fees uh i we've actually owned an apartment complex that had hoa fees uh it's not a problem as long as you underwrote for it in the first place right that's usually you're not going to assume that uh you're not gonna automatically underwrite for because most don't have it but if you're on the hook for twenty thousand dollars a year for hoa fees you don't put that in your underwriting all of a sudden you're behind the eight ball when it comes to hitting your pro forma um we actually saw a t12 one time that was a t-13 meaning they had 13 months of data in 12 months which mean which means all the income and expense numbers were inflated yeah artificially inflated i don't know if it was intentional or not but it was not accurate um stuff like cell phone tower income i should probably say when we say t12 we're talking about the trailing 12 months of uh profit yeah and so they had put 13 months on there for some reason you'll see stuff like cell phone tower income billboard income um you know people leasing out units corporately things like that all good stuff but yeah okay well does that transfer to you um does that stay with you does that terminate when does that lease expire you know again things to look into because you know we have a property with a billboard it's great income but we had to make sure that when we bought the property that that transferred to us right um we found one it was called we had a contra account on it and then at that i'm like what the heck is a contra account basically my understanding of the the accounting definition or the the the in english definition a contra account is an account that you use to adjust another account up or down to make it look like how you want to make it look right so need to say that was something that we dug deeply like okay why are you guys just putting in why do you have a contra account and why are you trying to use it to adjust these other accounts right that's it was definitely a red flag um and actually we never got a clear explanation and we didn't end up buying that property um so you know again those are just some examples of you know the things that we've come across and you know we could you could probably list a hundred i'm sure everyone's listening is like oh my gosh you should have seen this thing on here that i found one time um but that's what you're doing anything weird or different on that p l and phase two you want to ask questions of either the broker or the seller to clarify what that is and find out is it an opportunity or is it a trap beautiful okay that was really good like i promise everybody you're getting a master class and evaluating multi-family property can you give us a brief rundown andrew of the eight steps in underwriting phase two yeah so underwriting phase two the quick recap number one rent increases uh there's two components of that market rent growth we we talked about last time and then we uh we talked then this time we talked about rent of you know renovation increases bringing it up to market number two was lost to lease meaning uh hey you know what the last five leases were signed for a hundred dollars more if i buy this my research indicates that i should be able to at least get the remaining leases up to a hundred dollars and then by eliminating that loss to lease i effectively bring my rents up a hundred dollars so that can be a huge opportunity third one is debt quote you know when you're doing phase two you're getting serious about hopefully making an offer um and you want to you don't want to just be guessing at your debt anymore because that's one of the big levers you want to at least get a quick verbal uh or if you're getting deeper into it get an actual kind of like quote matrix like we showed where they're saying yeah if you go this route it's this and if you go this route it's this number four was insurance uh where again you're not having everyone go through the full like full process of getting an entire quote but you're going to give them the total square footage and the annual revenue at a minimum and say hey ballpark what's the cost is it 300 a unit is it 400 a unit number five is property taxes you want to find out how does that municipality currently determine property taxes and using that method after you buy the property what does that mean for how much your reassessed taxes are going to be um that has a huge huge impact um on your p l that's for all real estate don't look at what a proper property taxes currently are unless the values are going down i suppose when i bought my first property now that i think about it it had sold for 565 i bought it two years later for 195 i paid property taxes i in my impound account up front on the higher value and i got a a refund check but we haven't seen that in a long time it's usually the other way where you're going to get another check at close after closing that says hey you owe us more money so it doesn't matter what the person is paying right now it matters what the value is going to be based on which is usually your purchase price when you buy it exactly number six was the property managed opinion get you know get someone who just knows that market inside and out get their thoughts on it with and don't don't feed them right you're you're hoping for good feedback and so it's tempting to give them something to hand back to you don't do that just ask him blank slate number seven is renovation budget uh again you're not having contractors go out there you're just trying to break it down and get a little more granular say okay well here's the list of projects and here's how much i think those are going to be and that totals up to this because you don't you as best as possible you don't want to overestimate but you also don't definitely don't want to underestimate and the final one is just following up on p l items that either don't make sense or that could be an opportunity or could that could could be a trap and you know there's it's so those are those are the eight things that we covered and there's lots of other little sub pieces and and different parts you could dive into but those are those are you know kind of eight key ones that are that are part of phase two and you know determining you know is this is this cream or is this a turd and if it's hopefully cream then that's where you decide okay am i gonna put an offer on this and then then get into well how do i write that offer how do i decide the terms what's going to be appealing and go from there well thank you i actually get to brag a little bit you may be very proud everyone this is why this is my multi-family partner right here because he's this good so thank you for sharing how you put this system together you know i i'm happy i got to play a small role in encouraging you to leverage some of this stuff out to these other people because that's grown into this incredibly detailed very very accurate way of analyzing properties that is leading to success so do you mind sharing a little bit about what you're up to right now what properties are you looking at like what does your your week look like and what success are you having yeah we're um we're actually you know like i said with this going back to the loss to lease that's been created by this the you know the last year and a half two years there's a lot of opportunity out there we um we're gonna uh we're under contract on a couple hundred units right now um and then we actually just got a uh offer accepted we're not fully under contract so i can't i don't want to give out any specifics we got but we got an offer accepted uh in the prop in a market where it's one of the strongest fastest growing markets in the country we already own multiple properties in that market so we know it well uh so we're super super excited about that one and that is actually going to be our first ever 506 c um i think we've done 16 or 17 506 b's where uh we never talk about it basically you have to already know us just to find out about it but this one is going to be 506 c and we're going to do that we're doing that one with you david so if that's if that property if we do get it fully under contract uh is something that you might be interested in it's uh investmentdavidgreen.com right david yeah if they go to investmentdavidgreen.com you can fill out a form that will uh basically end up putting us in touch with you or we can share more details about this deal if this is something you want to invest with andrew and i on can you break down what 506 c means oh yeah sorry about it so fibo so that that gets down to the the sec regulations so 506 b means if you're raising money um for a deal you can't solicit and solicit basically means anything right you can't talk about it on a podcast you can't post about on facebook and linkedin you know you have to you have to have a pre-existing relationship with anyone that's investing 506 c means you are allowed to talk about it but anybody that says hey i want to invest has to be accredited and verify that they're accredited so that's the difference it's it's just a different set of regulations and rules that the sec puts out for for syndicating now if you don't know what that means that's okay you can still go to that website you can register we will let you know if this deal would work for you and the status you're in or if a different situation with me would make more sense but um andrew's being a little bit humble here he found this deal off market it's a great area the property that we bought just before this one has exceeded everyone's expectations times 10. this is the best part about andrew was he's always super conservative as underwriting he's like you're when he underwrites but he's like tinder when he performs it's perfect right so we always uh over pro or under promises and over delivers that's why i partner with them so if you would like to partner with us please go there now the last stage in the entire underwriting system we've gone through phase one which is would this work phase two is this cream or is this a turd phase three would actually be when you send the letter of intent and you actually go through the process of putting it in contract can you share andrew if they want to learn more about what to do at the last phase where can they go yeah um go to davidgreenwebinar.com and i think what we're going to do is david and i are going to do a webinar on uh how you put together an loi so yeah i said you've been through all these steps it's a lot of work fortunately you found one that looks really good you want to own it and we're going to we'll talk about you know you know what kind of terms do you put in the loi how do you determine what can you say do you put in references do you not put in references what if your offer seems kind of low do you still do it do you not do it how do you communicate that with a broker how do you communicate with that the seller yeah we'll go through and talk about crafting the best offer that gets you gives you the highest chance of getting the deal but at a minimum gives you credibility and builds your reputation in the market now we know not everyone listening to this podcast is going to go buy a 50 million dollar apartment complex you might not even buy a 5 million one but you do now have the information that you would need if you wanted to do it so our goal here was to basically show you every step phase one phase two and then a webinar where we can talk with you with it with more length basically we can answer more questions and we can actually get out in a podcast about what to do when you want to write an loi and how you put a property in contract i can personally vouch for andrew he's a great dude he's super smart he's very good at investing we've made a lot of money investing together and i feel comfortable telling other people this is the person that i invest with because that means a lot to me so i would highly encourage you to go there and register there's other webinars too i do other stuff on lending practices or short-term rentals there's a lot of stuff where i try to get back to the bigger pockets audience um so i highly recommend everybody listening to this to do that as well as if you would like to invest with us that's a great uh place to start any last words you want to leave people with andrew um yeah i'll just say you know i know that was uh i guess again hope hopefully everyone's still awake um i know that was a bit dense but that's that's i mean that's the reality of what what underwriting even a five or 500 unit property is in order to do it right you have to get down and dirty into into the weeds of these numbers and these pnls and if you don't if you're saying oh my gosh andrew i i couldn't i couldn't i could do this for 30 minutes and i'd i'd i'd run away screaming go partner with somebody that loves it or hire somebody that loves it but in order to properly underwrite this is the type of thing that you need to do and yes there's other ways of doing it there's other ways of looking at the data this is just what we have found to work exceptionally well for us but as long as you use the principles that we talked about then you should be able to hunt down some really good deals for yourself that is wonderful you reminded me of something when i was first in the field training officer program as a police officer i worked for an agency that covered five counties so when we were training they would drive us through every county and go to the main areas that they thought we would need to know in an emergency this is the hospitals in these areas these are the local police departments that if you ever need like backup or you're trying to figure out like what can i do in emergency here's places that you can go here's places where the county stores equipment that we might need in the case of a flood or something like that and they knew that we would never remember all of these places that way it's impossible to remember that much information but the thing is they also understood when i was trying to find that place three years down the road i would remember little landmarks that i saw or i would spot the building and say that's the one that i'm looking for it sits in the back of your head now i couldn't walk you through turn right here turn left here but when i got close i recognize i'm on the right path that's what a podcast like this is you are never going to remember all eight steps plus the four levers we talked about before plus the six steps in phase one underwriting you don't need to this no one is going to learn it like that it's getting the concepts in your head and as you take this journey those will stick out like milestones just like when you're in the woods on a hike and you're not sure exactly where you are but you remember a certain mountain peak or you remember a tree that's in a certain place and it's like oh yeah i'm going the right way that's what information like this functions so don't beat yourself up if you're listening to this and you're thinking i'm an idiot i don't get it i'm never going to understand this andrew didn't understand this when he was first putting this together i don't understand this stuff like it's something you have to do over and over and over like everything else in life so don't beat yourself up if just instead think if you thought that was interesting that was fascinating that's a good thing that's your fire add wood to that fire build that fire pour into that fire invest into that fire build up that that desire to learn more and as you stick with it and you stay in this world long enough this stuff will start to make sense and you'll start to get confident yeah that was an excellent recap um this doesn't come on the first time i this was built and honed looking through literally thousands of deals and properties it's not something that that i or anyone else starts off with well i'm really glad that you shared that thousands of properties expertise and experience with us here today and i hope people join us on our webinar where we can talk about it more and consider investing with us and getting some experience and making some money in the process uh anything you want to say before we get out of here no it was uh you know like i said in the beginning i put uh put put the earbud in the right ear first and so far that's working it's been a good day and good good good talking with you and uh hopefully we do it again here soon so how can people uh get in touch with you easiest way is i was linkedin i am that's probably the only social media platform where i am somewhat active and then our website vantagepointacquisitions.com there's a couple of different tabs on there if you want to connect uh fill out the little form and that comes to my inbox all right you can follow him there you can follow me at davidgreen24 on social media i also have a brand new spanking website up davidgreen24.com and i will be or maybe by the time this releases already have released a free text letter that kind of explains what i'm doing what i'm up to what kind of properties i'm buying where i'll be speaking and how we here at bigger pockets can help you to grow in your own education to achieve your goals so please consider following me there and if you like this episode go back and make sure you listen to episode 571 where we break down phase one of this process and then do you remember your other episodes you're on andrew was it wednesday it was 170 and 279. so this is your fourth time on the podcast that's how good you are that was i guess that that's a pretty small group i feel honored yeah you're on the mount rushmore but [Laughter] well thanks i have a really funny meme that says the canadian side of mount rushmore and it has like a bunch of the butts of the presidents as they're like sticking their head oh that's awesome the reverse side oh i thought that was funny all right i'm gonna let you get out of here this is david green for the bigger pockets podcast signing off [Music] bye

Channel: BiggerPockets

Views: 51,364

Keywords: biggerpockets, real estate, real estate investing, investing, rentals, rental property, investing in real estate, income property, bigger pockets, passive income, how to analyze a multifamily property, multifamily property, how to analyze a multifamily, multifamily investing, multifamily real estate, investing in multifamily properties, apartment investing, analyzing real estate deals, analyzing real estate, how to analyze real estate deals, how to analyze a rental property

Id: Shyno3hqSVk

Length: 85min 55sec (5155 seconds)

Published: Tue Mar 22 2022