*CRASH!* OH YEAH!
The Kool-Aid man just burst through your wall! And he has a deal for you! But, you only have 10 minutes to get all of the info that you need in order to make an educated offer.
So, what kind of information is most important? What exactly do you need to know? What information can be averaged out?
Find out on this week’s episode of Multifamily Investing Made Simple, In Under 10 Minutes
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“My very first question to somebody would be like, where is this thing?” -Anthony Vicino
“First thing I want is the rent roll.” – Dan Krueger
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10 Minute Deal
[00:00:00] Anthony: All right. What do you say? We do a podcast. Sure. Okay. Welcome. Hey. Hey guys.
[00:00:23] Dan: What’s going on?
[00:00:28] Anthony: I think we just make noises on the, the microphones for 10 minutes. That’s my vote. Nope. Okay. Let’s do a podcast. Ed. Let’s the real one. Let’s do. Let’s do it. Here we go. Hello, dear listener. Welcome to the podcast. This is, uh, Anthony. This is. Dan, Dan, you look confused. The awkward hand motion. I am human.
[00:00:53] Dan: Gotta be on YouTube. See that. So, sorry, listeners.
[00:00:56] Anthony: So that’s a, that’s the immediate play right there. Just YouTube. It’s weird.
[00:00:59] Dan: You [00:01:00] gotta see
[00:01:00] Anthony: it to believe it. I am that weird. Yeah. Yeah. Even if you see me, you won’t believe it, but, uh, we appreciate you guys being here with us today. We’re gonna break down, uh, uh, how to, how to know whether or not you wanna make an offer on a deal in under 10 minutes.
That seems like a pretty valuable skill to have. Time is money and in short supply. So we can’t afford to be like spending hours and days on an offer. The way I think about this is like, and the way I pitched it to you is what if a seller walked in the door right now? And he’s like, okay, I need an offer in 10 minutes go.
And what would you need to know? Mm-hmm what information would you need to analyze? To be able to confidently within that 10 minutes, no matter what offer you made to be like, that’s a good offer. Mm-hmm okay, so go. Yeah. I got a building. What do you want?
[00:01:51] Dan: Oh, geez. Well, first thing I want is the rent roll.
Yep. I gotta have the rent roll. Okay. The rent
[00:01:56] Anthony: roll. Yeah. What are you gonna do with the rent? Roll? What? Okay, so I’m gonna look at 150 unit. [00:02:00] I got 150 units for you. Look at my rent roll.
[00:02:03] Dan: What are you looking for? Okay. Scratch that. If it’s a hundred unit, tell me the average rent.
[00:02:08] Anthony: That’s a big rent roll. Yeah.
At J chat.
[00:02:11] Dan: Well, I mean, a lot of the stuff we’ve done in over the years has been like, you know, 30, 40, 50 units. Yeah. So we get the rent roll and we just sort it and you, we get, we can pull that out pretty quick, but assuming it’s a big one, but inside of 10 minutes,
[00:02:22] Anthony: probably. Yeah. Just gimme averages probably.
Yep. I’d be fine with just knowing. Okay. What are the unit mixes like one bedroom, two bedroom, three bedrooms. I wanna know that what’s the square footage. Give me just gimme a ballpark and gimme, gimme average rents for.
[00:02:36] Dan: Units. Yeah. And the thing we’re trying to pull out there is what’s the Delta between what the rents are at and what they could.
So we’re kind of assuming in this, uh, fake scenario that this is a market we’re already familiar with. Right? So
[00:02:48] Anthony: for us, this would be our market. My very first question to somebody would be like, where is this thing?
[00:02:51] Dan: Yeah. And if you’re gonna try to make an offer in 10 minutes, you’re not gonna do it in a market you’re not familiar with.
So we’re gonna just assume that, you know, the market, you kind of know the, [00:03:00] what the comp should be. So you can kind of take that, that rent data and start to run with it and see if there’s some upside there. Yeah. I
[00:03:05] Anthony: think my first question, where is this thing? I wanna know the. Um, that’s gonna inform me and then unit mixes.
And these are questions that I can just like, you could just fire off, right? Like, okay. What’s the unit mixes, um, of ones, two threes. What’s the average rent in these areas. What’s the square footage. Once we have that information in our minds, because we know our areas, we’re gonna be able to go, okay. That seems low.
That seems average. That seems high mm-hmm . And then from there, once we’ve established, okay. That’s low there’s there’s opportunity there. Then I would probably go to. Okay. Now I need to understand the building mm-hmm and specifically how it’s being run. So next I’d probably ask is like what’s its vac.
and what’s his current, I probably wouldn’t even ask what it’s operating expenses. I’m just gonna, I’m just gonna ballpark 50%.
[00:03:50] Dan: Yeah. Yeah. I mean, that’s the way we do it. Uh, if we’re trying to make quick decisions, mm-hmm, , uh, we’ll get that rent roll data and we can pretty much fill in the rest. Like obviously ask about [00:04:00] occupancy, but I think the next big thing I would wanna know is.
Uh, how old’s the roof, the boiler, the electrical, um, basically trying to figure out without doing a full inspection. Is there any huge CapEx items that we, that might need to be done that we aren’t gonna get paid to do? Mm-hmm right. Uh, we’re fine. Renovating units and putting money into that. But if the roof is incredibly old and the boilers are all original, that’s gonna change the economics of the deal quite a bit.
So we’d wanna try to uncover that pretty quickly if we can.
[00:04:27] Anthony: Mm-hmm yeah. The, the reason I would be asking about the vacancy. Initially is we have our numbers and, and on the operating expense side, we, we usually just plug in on the back of the napkin 50% for expense ratio and say, okay, whatever the revenue is, cut that in half and say, half that’s going to operating expenses.
The other half is gonna go towards our debt service and then whatever’s left. After that taxes, it’s gonna be more or less cash flow. 50. Percent’s a good ratio though, because or 50% wouldn’t include the debt. No, I know I’m saying that’s just the operating expense. 50, like half of it goes towards the operating [00:05:00] expense.
uh, like deducting the revenue and then what’s left after that is then gonna be going towards the debt towards taxes. Taxes would be taxes, I guess, could be our operating expense. Mm-hmm um, but then that’s gonna tell us, okay, how efficiently can we run this building? Maybe closer to 40%, a really bad operator might be closer to 60%, but that’s a good starting point.
Just take whatever the revenue number isn’t divided by half.
[00:05:22] Dan: Um, and that’s gonna give you a ball, the theoretical ballpark purchase price. You know, throw your bucket cap rate on that, that NOI number that you get just got all your income. Take half of. Put your cap rate on it. That’s probably in line with the offer that theoretically could be making.
The next few things I’d wanna do is, uh, start to look at okay. If we got it at that price, what would our debt be? And then what would our cash flow be in year one? And can we get to, uh, hopefully. Uh, you know, 7% cash on cash returns within the first couple of years. Like, I dunno if I can get all that in 10 minutes, but I can at least figure out year one, what’s the cash on cash, theoretically, just kind of ballpark.
[00:06:00] And that should give me a good indication of, you know, whether there’s gonna actually be sufficient cash flow. In addition to the, the Delta on the rent, cuz we’ve looked at deals where there’s good Delta on the rent, good upside there. But year one cashflow is like 1%. and it’s like, okay, well that’s, that’s pretty skinny.
[00:06:15] Anthony: we don’t like those deals. Yeah. Go going back for a second to the vacancy thing, because this isn’t, this is important where when we’re asking initially how many units is this thing, and then like, what’s its average rent that doesn’t necessarily tell us how many people are in there. So I’m trying to like triangulate, what’s its current revenue that it’s getting as it currently is.
And then we also know potentially what it could be if it’s fully occupied, but that occupancy number can be helpful because if they come in and they’re like, oh, it’s only 70%. And it tells us, like there’s gonna be some work to do in that interval to get it to operational. But I actually don’t even know if I would start calculating out to the cash on cash return and taking into consideration the debt.
If I had to make just a, like a pure back of the napkin offer at that point, I think once I [00:07:00] had an understanding of where it’s currently at with revenue and where it could be in the future minus the expenses and like ballparking that pretty conservatively, I think I would then just apply. A conservative cap rate.
Right? So like in our market, that might be a five cap. Like most everything we can get right now is a good deal, would be five cap. I might just be like, you know what? Let’s just unwind that down to like a five and a 5.1, 5.2, and then whatever number that comes back in, I’d be like, that’s gonna be my offer.
So I’d low ball, the cap eight. And just assume that the debt terms are gonna be somewhat decent.
[00:07:36] Dan: well, if you lowball the cap rate that would make the purchase price higher, which probably wouldn’t help things. You probably wanna highball it. Be my
[00:07:41] Anthony: guess, eh, I suppose highball lowball it lowball it. I mean, we’ve looked at deals where I think about lowballing it as in like the ultimate value is gonna be low.
Yeah. You want
[00:07:50] Dan: lowball offer? Yeah, that makes sense. I think, um, I guess the main thing is I’ve looked at a ton of deals where they’re in a great area. Uh, they’ve got the Delta on the rents, but the [00:08:00] cash flow is so measly right out of the gate, even. Efficient occupancy. That just doesn’t make sense. Mm-hmm like if something is significantly below market rent, um, let’s say that there’s like, you know, 30% Delta from, and we, I looked at one of these, uh, I think within the last year here where it was like an older guy, um, he’s way below the market.
And we’re looking at, at this thing because, you know, it looks like there’s this, all this upside, but, you know, fair price for that asset, technically in today’s market in which you could. Going to market would’ve left us with really needs of cash flow. And so it just didn’t work for that reason. So that, one’s an important one for me personally.
[00:08:38] Anthony: but yeah, but that’s kind of like, in my mind, if I have 10 minutes and the guy’s like, I need to know, like, what’s your offer in 10 minutes and that’s why I’m taking the cap rate. I’m gonna highball it so that the value is ultimately low balled. Um, because in that instance that guy’s building really wasn’t worth.
the, say the five cap [00:09:00] that a comparably run property probably would’ve been worth. Yeah. So for him, like the number probably would’ve worked, if we could have gotten it at like, say six cap, right? Yeah. But
[00:09:08] Dan: he wouldn’t sell, someone’s gonna buy it at five cap. So it’s worth whatever the market
[00:09:11] Anthony: pays. That’s fair.
But in this, in this hypothetical situation, somebody busts down the door. um, he just, well, first
[00:09:18] Dan: off, I’m gonna tell ’em they need to pay for a door cuz we’re to a rough start. That’s break my door.
[00:09:23] Anthony: That’s letting all the wind in the raccoons are gonna enter into our Domic hall. We got construction outside, but you could have just opened it.
It was unlocked. Yeah. It’s a place of business. It’s a business hours. Just walk in man. Oh, but in that case, I would, I, with the caveat that in this hypothetical situation, we’re not just gonna low ball and be like, I’ll give you $10, like trying to get like a reasonable offer. That’s why I’m just coming them saying like, ah, I would do, you know, figure out what the top line revenue is minus like whatever it’s currently operating, 50% expense ratio, take the cap rate and then like plug in, like man, maybe a quarter, maybe [00:10:00] 250 basis points higher than what I think the market actually is.
And, and then let roll the dice and be like, oh, that seems . That seems close enough. Maybe, maybe. Yeah, I play, I play hand grenades and. Or shoes with my investing. if I got 10 minutes I’m I’m ball parking.
[00:10:18] Dan: Yeah. But I guess, you know, to recap big things, we wanna look at rent, roll occupancy condition, the building location.
Um, and, uh, yeah, for me, I I’m curious what the cash flow’s gonna look like or cash and cash returns gonna look like. So
[00:10:34] Anthony: yeah, that sounds about right. I just couldn’t calculate the cash on cash yet. Cause I don’t really know what the debt was gonna
[00:10:39] Dan: be. I got ballpark idea, 75% of whatever. Theoretical offer prices.
If you’re interested only just take the interest, you know, four and a half percent of whatever that number is. Would
[00:10:49] Anthony: you, if you were doing it back in the napkin for a newbie investor, would you even factor in the IO or just leave it out?
[00:10:56] Dan: Uh, it depends on if the investor can get it. Um, I know if you’re brand [00:11:00] new and you’re doing your first deal with the brand new bank, um, and it’s a local, regional banking might not have, even that might not even be an option.
I know for us, it’s always there. Mm-hmm um, it’d be the only reason. I can’t even think of a reason that wouldn’t be there, honestly. I mean, unless it’s, uh, yeah, I mean, even on like brand new builds, um, you should be able to get it if they don’t like you, maybe. Yeah. That’s why you gotta be nice people. Yeah.
All our relationships. So don’t
[00:11:23] Anthony: bust down their
[00:11:24] Dan: doors. Yeah. Don’t break down doors and you can get eye out. It’s yeah. It’s
[00:11:28] Anthony: That’s the, that’s the key to getting more. I know it’s always open doors ticket, so that’s how to make an offer in under 10 minutes, probably an under unrealistic scenario where you’re ever gonna have that, uh, aggressive seller, just Kool-Aid Manning his way through your wall and being like, oh yeah, gimme an offer.
But it is helpful to be able to like quickly look at a property and understand like within 10, 15 minutes is something. Worth doing a deeper dive. And I actually got this question from a, a student the other day. Who’s like, how do you guys handle your underwriting at an Invictus? Like, do, do you guys just do [00:12:00] like a deep pass?
Do both of you underwrite? Like, what’s that look like? And I was like, well, we usually do kind of a back of the napkin initially before even thinking about going deeper. That usually kind of, that usually happens independently actually, cuz you and I both have like completely different methodologies, but we all, we don’t even know what you.
I kind of described it. Like, I, I truly am like a lawn darts type of guy where I’m like, I, I assume that with big data, everything eventually regresses to the mean, and it’s like the law of guessing within five to 10% typically gets you pretty in the ballpark. And what’s always been really remarkable to me is that even with that very loose method in your tighter method, on the initial underwriting, we usually land within five to 10% of each other.
And then it’s like, is. We’ll know at that point, if it’s worth going deeper. Yeah. Then Dan will do it deeper. And I think
[00:12:45] Dan: this, this, uh, today’s advice and the stuff we’re talking about this back then app good thing is probably most applicable for, for brokers. Not really sellers it’s when you get that call from the broker and they can give you a couple of these key data points real quick, and then you can quickly tell ’em.
Yes, let’s get a [00:13:00] tour scheduled. Let’s keep talking or no, this is nowhere near what I’d be interested in. Mm-hmm it’s, it’s more of a broker thing. If.
[00:13:06] Anthony: So I just dropped my headphones. I’m sorry for that. It’s it’s
[00:13:09] Dan: cause they’re cheap. Walmart. These are cheap.
[00:13:12] Anthony: Don’t even get me started. All right, listeners. Uh, let me put my head, my ears back in.
I appreciate you guys. Hopefully this gave you a little bit of value if it didn’t well, sorry. Sorry. We’ll try again. Next time. Try get another swing at the swing at the carrot. Take another bite at the, the cherry. Um, these are things people say and not just me. so, uh, if you got any value, make sure to do, go drop a review, uh, make, yeah, do that go do, do the review thing.
[00:13:36] Dan: We’re losing it. We
[00:13:37] Anthony: gotta end this up. Sorry. Start struggling on my words there. So, uh, but yeah. Okay. I’m gonna. We’re gonna let you go now. we’ll see you guys next time.[00:14:00]