The Fastest Way To Build A Six Or Even… Seven Figure Real Estate EMPIRE!
Almost everyone who enrolls in my Forever Passive Income mastermind asks me the same question: “Josh, where do I start?”
This episode is all about answering that question–and you may be surprised to discover that the answer doesn’t just start with buying an apartment building.
I’m talking about the building blocks of every deal: underwriting and business plans. You’ll learn what you need to do to talk to brokers, network, recruit private money, get a great property manager, and recruit debt–all of which will give you the power to achieve real success and create forever passive income in this industry.
Key Takeaways with Josh Cantwell
- Why underwriting and creating business plans are the two most valuable skills in apartment investing.
- How to put together a value-add program and add income to a potential purchase.
- Why being a great underwriter opens doors and creates more opportunities than anything else in multifamily real estate.
Josh Cantwell Tweetables
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Josh Cantwell: Hey, guys, what’s going on? Hey, it’s Josh. Welcome back to Accelerated Investor. Listen, I wanted to answer a question that I’m getting a lot from my mastermind members. We’ve got about 75 members in our mastermind program. It’s called Forever Passive Income. And these are investors that are purely interested in creating, as you guessed it, forever passive income. And one of the questions I always get during our onboarding call, when somebody enrolls in the program and they get started, I always do a one-on-one onboarding call with them. And the question I always get is, “Josh, where do I start?” So, I wanted to answer that. Where do I start? What I told these new members of our mastermind program is the number one skill to be really good at investing in apartments is underwriting. It’s creating the business plan. It’s underwriting the deal today, okay, like what is the property management fee? What are the insurance and the taxes? What are the utilities? What’s the repairs and maintenance? What’s the structural reserve? What’s the cost of Internet or taking the trash? You know, what’s the cost of marketing and advertising, general and administrative?
What is the current seller paying for all those expenses? And then how can you do it better? How can you buy the building? How can you raise the rent, execute your value-add? But how can you get the expenses back in line? The last three deals I bought, the expense ratios, I’m looking at this on my screen, the expense ratios that the seller was experiencing with their own in-place cash flows, the last deal I bought, the expense ratio was 70.59%. The deal before that, the expense ratio was 72.83%. And the deal before that, the expense ratio was 61.35%. So, in all three cases, the seller has a very high expense ratio and very low cash flow. Okay. Cash flow is not nearly what it should be. Also, the rents are very low. So, these were properties that were owned for a long time and the seller wasn’t doing much to push the rents. So, when I underwrite that deal, I have to look and say, “Well, where do I want this to be three-and-a-half years from now? My number when I underwrite deals is I’m looking at three-and-a-half years from now.
I always start with that, where can I be three-and-a-half years from now? Because my investors, all would like to get cashed out and get their principal back within four years or less. Okay. So, I like to do deals where I can buy them, fix them, push the rent, get the expenses in line, execute the CapEx within two years, then give it another two leasing cycles to get the rents even further up, and then refi. 42 months is my number. Sometimes it’s 48 months, sometimes it’s 36 months, but 42 months is where I want to be. Okay. So, when people say, “Josh, where do I start?” I say, look, we’ve got to get really good at knowing how to create a business plan. You’ve got to get really good at knowing and thinking, “Okay. How high can I push the rent? If I execute my value-add program, if I turn the units, improve the amenities, improve the common spaces, where can I push the rent to?” That’s the number one metric when it comes to apartment investing is where can I push the future rents three-and-a-half years from now? It’s the number one thing I care about.
Then I look, okay, well, what other income can I add? Laundry income, pet fee income, and building back some of the utility income. What other income can I add? And then how do I get the expenses in line? So, the expenses are roughly 50% of the income. Okay. So, when new people start in our program, they might be an intermediate to advanced residential investor or they might be a new intermediate multifamily investor, or it might be somebody that has a very high net worth but has never done multifamily. Or it might be like yesterday I met with two doctors who enrolled in our mastermind and they both had big incomes but they don’t know what to do with the extra money. They need to create more passive income instead of being forced to go work on patients all day. They all have the same goal, which is get free with real estate. They have all the same goal, which is replace my current income.
So, I tell them the number one metric is what’s the future rent going to be three-and-a-half years from now? Secondly, how do I get the expenses back in line at 50%? And how do I underwrite the deal including the exterminating, the trash, the electric, the water and sewer? Am I going to be able to save 20%, 30% with the water conservation program? What’s my marketing and advertising expenses going to be, my legal and professional, my general and administrative? What are my taxes going to get tilted up to? Are my taxes going to get reassessed? What’s the manager payroll, the repairs and maintenance payroll? What’s my operating expenses? What’s my property management fee? What is that future expense going to look like? How do we get that in line? And then doing the best job I can to project a future cap rate. Is that cap rate like if deals are trading now, nationwide they’re trading at about a 4.5 to 4.8 cap rate. That’s nationwide. That’s going to go up over time. Okay. Even though cap rates have been compressing for the last 30 years, they’ve been going down. Commercial cap rates used to be 9%, 10% in the 90s. Now, it’s down to an average of 4.5% to 4.8%. I’m buying a lot of deals in the five caps and they’re really pushing up the income so when they’re stabilized, they’re stabilizing out of an 8 or a 9 cap based on future rents and future income divided into my investment is an 8 to 9 cap. It’s a great deal.
Okay. So, this underwriting process of knowing where is the seller at now, what’s our business plan, where can we push the income, how can we get the expenses in line, what’s the future cap rate, that is the number one skill and that’s where you need to start. A lot of people come into my program. We’ve got 75 members. We meet three times a year. We have coaching calls twice a week. And you know, crazy that they’re asking me then, they’re asking me, “What do I need to do? What skill do I need to know?” They want to jump in. A lot of people come in and say, “Well, just I want to immediately go find deals.” I’m like, “You don’t even know how to evaluate a deal yet.” They’re like, “Hey, Josh, I immediately want to go raise capital.” “Well, you don’t know what you’re raising capital for yet.” Okay. I tell our students that multifamily real estate is sixth-grade math. My sixth-grader, Alessandra, could underwrite a commercial apartment deal. She’s in sixth grade. Okay. It’s not some crazy algorithm. There’s no crazy formulas. It’s add, subtract, multiply, divide. It’s sixth-grade math.
So, if you can underwrite a deal using sixth-grade math, you can be successful at creating a business plan then use that business plan to go talk to brokers, network with brokers, recruit private money, recruit property managers, recruit debt. And sure enough if you understand underwriting, you can be very, very successful. Whether you’re an active operator or a passive investor, you can reduce your risk, you can create more security, you create more safety for you and for your investors if you’re really, really good at underwriting. And that’s exactly where I recommend that you start. Understanding how to review and underwrite a deal is the critical skill in multifamily real estate.