Welcome to The Accelerated Investor Podcast with Josh Cantwell, if you love entrepreneurship and investing in real estate then you are in the right place. Josh is the CEO of Freeland Ventures Real Estate Private Equity and has personally invested in well over 500 properties all across the country. He’s also made hundreds of private lender loans and owns over 1,000 units of apartments. Josh is an expert at raising private money for deals and he prides himself on never having had a boss in his entire adult life. Josh and his team also mentor investors and entrepreneurs from all over the world. He doesn’t dream about doing deals, he actually does them and so do his listeners and students. Now sit back, listen, learn, and accelerate your business, your life, and your investing with The Accelerated Investor Podcast.
So hey, welcome back to Accelerated Investor. Got a question come in from one of our members and also my acquisitions manager, my VP of business development, Tyler Brummett. He and I had been talking about how do we evaluate a commercial deal, a multi-family deal in seconds? Like what exactly are the questions that we want to ask and the numbers that we need in order to quickly evaluate a deal and do it super fast? Because we get a lot of inquiries, we get a lot of opportunities, a lot of deal flow that comes across our desk and we want to make sure that we can evaluate deals in seconds and be like, Hey, like this is a deal or this is definitely not a deal or this is a deal that we might want to ask more questions about. What we’ve boiled it down to is basically 11 things, 11 questions, 11 numbers that we need to know or at least have a general idea about in order to quickly meaning super fast.
In 30 seconds or last evaluate a multi-family or a commercial deal. So let me walk you through these, write these down. If anybody ever says, Hey, you know I have a multi-family deal for you to invest in. These are the questions that you want to ask yourself. And also if you ever bring me a deal, if you ever want to joint venture on a deal or you need funding for a deal, whether it’s debt or equity or you want to joint venture on a deal we partner, these are the questions that I’m going to ask you on your multi-family deal. So real simple, I’m going to read through these 1 through 11 and then I’m going to go back and I’m going to talk a little bit more about each one in a second. So a real easy number one is what’s the expected purchase or the contracted purchase price?
Number two, what’s the expected rehab or the verified rehab? Number three, what’s your all in number? All in is going to be purchased price plus renovations plus some soft costs. So you know soft costs for title and lender fees. And appraisal fees and stuff like that. Soft costs. What’s the current gross operating income and the current expenses and the current net operating income? I kind of put those all in one question. The current financials, if you will. Current gross current expenses. Current net, that’s number four. Number five. What’s the current cap rate? And to get the current cap rate, all we do is we take our all in number and divide that into the current net operating income, okay. Understand that most of the time we’re going to have an opportunity to do value add and increase the rent. It’s going to increase the net operating income.
So what is the current cap rate is that division of all in into current net operating income. Next number six is the stabilized net operating income? What’s the projected or expected or you know, estimated future stabilized net operating income? Based on better management, lower expenses and higher rents. So what’s the future stabilized net operating income? Number seven, what’s the future stabilized cap rate? Now the future cap rate, if we’re looking to refinance if we’re looking at keep the building and refinance, that cap rate is going to be given to us through comps. It’s going to be given to us by a bank through an appraisal, so the stabilized cap rate, there’s two ways to look at it. There’s your stabilized cap rate, which is your all in number divided into your future stabilized net operating income, okay? That’s the, you’re all in number. Let’s say it’s $10 million divided into your net operating income in the future.
Let’s say it’s $800,000 okay? That’s going to give you a cap rate, all right? That’s a big number that we want to know. Then the second cap rate is what is the bank going to say? Listen, you’re going to be able to refinance this, and let’s say you’re stabilized cap rate is an eight or a nine, but you’re going to be able to refinance it at a six and a half or a six cap. That means that you’re going to be able to get a higher value than what you’re all into it for. So what is the stabilized cap rate of your actual building and then what’s the banks cap rate that they’re going to refinance you at? That’s number seven. Number eight is what’s the stabilized value? Again, that value is going to be determined by net operating income divided by your cap rate. Let’s say 0.06 or 0.065 that’s going to give you a future stabilize value.
That’s number eight. Number nine, how many total units? Number 10 is this an A, B or C market? And number 11 is this A, B or C asset? That’s it, those 11 okay. Purchase price, rehab, all in number, current net operating income, current cap rate, stabilized net operating income, stabilized cap rate of the deal, and the stabilized cap rate that the bank may assign the deal on a refi. Number eight, stabilize value. Number nine, number of units. Number 10 A, B or C market. And number 11 A, B or C asset. Okay, so let me just expand on these a little bit more. Just take an extra minute here. Purchase price, self-explanatory. What do you think you’re going to buy it for? Number two, rehab, self-explanatory. How much improvement do you think you need? And also it’s always nice to know what are the improvements per unit?
So on the lower end, $2,000 or $3,000 of improvements per unit is very low. $10,000 to $12,000 of improvements per unit is very high. So I can know right away if it’s $5,000 of improvements per unit, that’s sort of a middle range between $5,000 And $7,000 some middle range rehab. If it’s only two grand per unit, that’s very light. I know I’m going to be able to get in and out of it. If it’s $12,000 it’s a very heavy rehab. Okay, so whether it’s $2,000 grand, $5,000 to $7,000 grand or $10,000 to $12,000 grand that matters, right? Is total far as total rehab and total rehab per unit.
Number three. You’re all in number. Again, purchase price, rehab and soft costs, self-explanatory, current net operating income, which is basically off of the current financials. What’s the gross, what’s the expenses, and then what’s the current net operating income? Now you’re going to find that when you look at a pro forma, you look at financials from a seller, you’re going to find that they’re going to kind of fudge the numbers a little bit and they’re going to say, Hey, our current pro forma is this. But in all actuality, you know, our current performance, let’s say is 97% occupancy, but in all actuality we have 85% occupancy. But our effective occupancy, our collectible occupancy is maybe 65% because a bunch of people in the building are not paying the rent, okay? So we’re going to have to kick them out. So make sure you look at the last three months and last 12 months of operating statements so that you can actually verify and find who’s paying and who’s not, okay.
Number five, the current cap rate again is the current net operating income divided by your all in price. Pretty self explanatory. Then number six, your stabilized net operating income. This is where your due diligence is going to come in. This is where you and your lender and your operating team is and your contractor’s going to look at, okay, what is it going to cost us to run this building? A good rule of thumb is an expense ratio somewhere between 45% to 50%, okay. 45% to 50% on a larger building, 45% to 50% taxes, insurance, maintenance, you know, general, reserves, insurance, utilities, common spaces, landscaping, all the, you know, regular expenses and utilities, about 45% to 50% of your gross operating income. So your net operating income going to be about 50% to 55% of your gross number seven stabilized cap rate. Again, if I grab my calculator and I said, look on this building, it’s a $21 million building, I’m going to be all in for $15 million and it’s going to generate let’s say $800,000 of net operating income, okay?
Let’s say $800,000, okay divided by $15 million, okay? 5.3%, okay? Very low. But if I was able to generate $800,000 of net operating income and I’m only into the building for $13 million, right? 6.15. So really important to understand your stabilized cap rates, which is basically again, net operating income after expenses divided into your all in price, okay? Again, if you had a $10 million building and you wanted to get an 8% return on your $10 million investment, that’s $800,000, okay? So if I was generating $800,000 of net operating income, okay? And I invested $10 million in the building, that’s an eight cap, that’s an eight cap. But the bank might say, well, we’re going to value this at a six cap. So you take your $800,000 divided by 0.06 and that gives the building $13.3 million valuation, okay? So if you’re able to get $900,000 of net operating income and you’re all into the building for $10 million, that’s a stabilized nine cap, okay?
Which means your future stabilized net operating income of $900,000 divided into your all in number of $10 million. That’s a nine cap. The beautiful thing about it, you take the $900,000 divided by 0.06 which is what the banks cap rate is. The banks comp for value puts it at $15 million means you’re all in for $10 million it’s worth $15 million. You’ve just created $5 million of equity or profit, okay? Number of units, again is important. The unit mix, how many one bedrooms, how many two bedrooms, how many three bedrooms, and what’s the current rent rate? There’s a lot of different tools out there including Rent A Meter, CoStar and a bunch of others where you can get really good comps. We use a program called CoStar. We spent a couple thousand dollars per month using CoStar in order to run comps because not only are we an investor in multi-family, but we’re also an operator and we’re also a lender.
And that again is an A, B or C market. Okay. A being obviously inner city, really high end, really nice area, you know, really expensive incomes are high buildings are nice, A market. Is it a B market in our area? B market would be like Parma, Berea, Brunswick, areas outside the urban downtown in areas where you know, incomes are a little bit lower. A mixture of blue collar and white collar. Not a lot of crime, but a little bit more riffraff. And then a C market is, there’s a lot of riffraff, a lot of crime. Incomes are very low, A, B and C market. Then you have an A, B or C asset. So you can be in an market like let’s say, you know, certain communities outside of Dallas or certain communities outside of Oklahoma city, Chicago, A market, but have a C asset, okay.
Meaning maybe the way it was built, like for example, I looked at a building about two, three weeks ago. It was in an A market, but it was a C asset. It was in Cuyahoga Falls, Ohio, which is a good market. It’s right near, you know, Kent State University, Akron University, Summit County, downtown Akron, Canton. But the asset was, it was a C asset. It was a C property because it was built as wartime housing for people that were working in manufacturing companies in Akron and Kent. So they were all kind of moving into the area to work in the rubber factories and the plastic factories in order to create product for the war. So people didn’t have luxurious apartments. They were basically just big rectangular boxes, kind of ugly, kind of boring. So it was a C class asset in an A type of market, okay.
So again, if you’re looking to evaluate a multifamily deal super quick, those are the 11 things that I look at. Purchase price, rehab, all in, current NOI, current cap rate, stabilized NOI, stabilized cap rate, stabilize bank comp cap rate, makes sense. Stabilized value, number of units A, B or C, market, A, B or C property. Those are the things we look at. If you’ve got a deal, let’s partner. Let’s joint venture on it and if you’re going to bring me a deal, those are the 11 questions I’m going to ask you if you bring a deal to my acquisitions manager, Tyler, if you bring a deal to us to lend on where we need you, you know you need us to fund a deal for you. Those are the 11 questions that we’re going to ask you.
If you’re joint venturing with a private investor, those are the questions we’re going to ask you now. The one question I did not include, which is again one of the most important questions and of course I wanted to save this for last. It’s actually number 12, save this as a bonus question is what is the exit strategy, okay? Many people pay retail for apartments. They syndicate, they plan on holding the apartments for five, seven, 10 years and then sell them and they say, Oh yeah, you’re going to get a 22% internal rate of return, but the primary driver of that return is that the building needs to be sold and you’re banking on appreciation. You’re banking on the building being sold, okay. In the future, I don’t like that strategy. I prefer to buy something at a wholesale price, fix it up, refinance it, keep it for the longterm, and so my investors know we’re going to refinance it and they’re going to stay in it longterm with little or no money into it, okay. What is the exit strategy? That’s bonus question number 12.
You’ve been listening to Josh Cantwell and the Accelerated Investor Podcast. Leave a comment on our iTunes channel and let us know what you want to learn next, or who you’d like Josh to interview. While you’re there, give us some five star rating and make sure to subscribe so you can be the first to hear new episodes. Follow Josh Cantwell and his companies, the Strategic Real Estate Coach and Freeland Ventures on all social media platforms now and stay up to date on new training and investment opportunities to start your journey toward the lifestyle you’ve always dreamed of. Apply for coaching at JoshCantwellCoaching.com.
We get a lot of questions about multi-family deals and how to evaluate them, so I thought it’d be a good idea to dedicate an episode to it. That way we can answer everyone and give you some comprehensive coverage on this topic.
Whether you’re being offered a multi-family deal or you’re considering bringing an investment opportunity to us, it’s important to bring some hard facts and numbers instead of generalities. Even if someone tells you that the property is doing well or that the tenants are paying their rent on time, you need to see some hard evidence to support it. Take anything the seller says with a grain of salt and ask for proof to back up their claims.
Once you’ve established some trust, you can move on to 11 questions that I cover in more detail in the podcast. They are:
- What’s the expected purchase price?
- What’s the expected or verified rehab?
- What’s the all-in number?
- What’s the current financials (gross, expenses, net)?
- What’s the current cap rate?
- What’s the future stabilized net operating income?
- What’s the future stabilized cap rate?
- What’s the stabilized value?
- How many total units?
- Is this an A, B, or C market?
- Is this an A, B, or C asset?
The goal here is to create a short and repeatable questioning process that gives you all the information you need to know. It’s concise, to the point and helps you analyze the deal objectively from afar.
Some of these numbers, such as cap rates and stabilized values, can be a little tricky to determine but we cover all of the calculations in the podcast in much greater deal. I also have a bonus 12th question at the end; what is the exit strategy? You might be concerned about evaluating multi-family deals but what comes after? How do you ensure that the property remains profitable and what is the best way to maximize revenue from it?
If you’ve ever had a question about evaluating multi-family deals, this podcast will have you covered.
- I cover the 11 important questions that help you evaluate a multi-family deal
- I’ll go over how to calculate values such as cap rate and why they’re important
- The importance of calculating financials
- What are A, B, or C markets and assets?
- How do you know if you have a viable exit strategy?