August 17, 2018

JF1445: Top 10 Tips for Underwriting a Value-Add Apartment Community

Joe and Theo are breaking down their best 10 tips for underwriting, starting with 5 in this episode, and followed by the other 5 in a couple weeks. I don’t think I need to explain how important underwriting is to multifamily deals, or any deal for that matter! So listen in as we hear from two of the best on what they do when they approach underwriting. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

We’ve got a very practical episode that will help any listener who is looking to underwrite a value-add apartment community. We’re gonna talk about the thought process, and specifically the steps that you go through to do so. There are ten steps. We will be discussing steps one through five on today’s episode, and then steps six through ten on a future episode. So this is part one of two, so if you are listening to this for the first time, then great, you caught the first part; make sure you listen to the second one to get the full picture.

We broke it out — we were originally gonna do all ten, but it’s just a whole lot of information in one conversation, so we thought it would be best for sanity purposes to break it out into two episodes.

Additionally, Theo’s got some updates on a property, and it totally relates to underwriting, so we’re gonna talk about that. He’s working on putting together his first syndication, and he’ll talk through what he’s learned on a particular deal, and underwriting, and things like that.

And we’ve got a new book coming out – Best Ever Apartment Syndication Book. It is going to be available for pre-order in a couple days… So not right now, but pretty soon, and it is officially going to be launching and being published (which I guess is the same thing) on the week of September 10th… Most likely September 12th, but the week of September 10th is when it’s gonna be published. It’s gonna be available on Amazon, and when you pre-order – and you can pre-order by going to (how easy is that?).

The reason why you pre-order is because you get a bunch of goodies for doing so. One specific thing you’ll get is Gene Trowbridge’s book on apartment syndication. His book is called “Syndication: It’s a Whole New Business!” I personally have read this book. You’re gonna get this eBook version of Gene Trowbridge’s book, “Syndication: It’s a Whole New Business!” when you pre-order the Best Ever Apartment Syndication Book… And you’ll get a bunch of other things.

When you go to you’ll be able to do that… Not immediately, because that page is not up as of this moment, however it should be up within 48 hours… So whenever this episode goes live, which will be August 17th… Give us until August 20th and then go back to that page and you’ll be able to pre-order the book and get that stuff. We’re only offering these extra goodies for anyone who pre-orders the book or purchases the book during the first week, and how we know you do that is you simply e-mail us the receipt to

So there we go, that’s the good stuff. It will be very valuable to you, and let’s get into the underwriting of an apartment community, steps one through five.

Theo Hicks: As Joe mentioned, today we’re gonna be talking about top five tips for underwriting a value-add apartment community. Some little context – these tips are from me personally, going from buying a duplex, to buying fourplexes, to now looking at apartment syndications… And also based off of having conversations with people in your consulting program, Joe, as well as people at my meetup, my friends – just anyone I’ve seen underwrite a deal that has more than one unit… And I know everyone has a different way to underwrite the deals, but once you’re underwriting apartments, you realize how detailed you can get compared to how not detailed I was before.

All of these tips are things that you might not have thought about when you were underwriting a deal… And of course, we’re talking about this in the context of value-add apartment communities, but if you use a little bit of creative thinking, most of these are gonna apply to really any type of long-term rental you’re doing; these tips will help you create a better underwriting model in the beginning, which will help you create a better business plan and create a more competitive offer.

On that note, the first tip is about setting an offer price. Let’s talk about what you’re not supposed to do first… So you don’t wanna just look at how the property is currently operating, determine what the net operating income is, and then base your purchase price off of that, because that’s not how you’re gonna be operating the property.

Joe Fairless: So many people do that too when they’re starting out… They say, “Well, this property is an 8,5 cap, so I guess it’s a good deal”, but they’re not looking at how they would actually run the property and the business plan, right?

Theo Hicks: Exactly. When I first started out, I could never find a deal because I was saying, “Well, the purchase price needs to be based on how it’s currently operating”, so that purchase price is always gonna be lower than people who underwrite it differently, which is what I’ll explain in a second.

What you also don’t wanna do – you don’t wanna just offer a price based off of what it’s gonna be once it’s stabilized. You’re obviously gonna use that, but you don’t wanna just be like “Okay, well, I’m gonna raise the rents by $100 day one, and that’s what the property’s gonna be operating at, so I’m gonna buy at that price.”

Instead, what you wanna do is you wanna do a combination of those two. You wanna take how the property is currently operating – that’s how it’s gonna operate day one – you wanna determine what your business plan is gonna be to stabilize the property and how long that’s going to take; that will be how the property operates at month 12, month 18, month 24… However long it’s gonna take to do your value-add renovation plan. Then you wanna know how long you’re planning on holding the property for – five years, seven years, ten years – and then breaking out all those five, seven, ten years into each month, and then adding up all those months for the ten years to determine what the annualized cash-on-cash return and what the IRR is gonna be based on that exit.

Essentially, you’re creating five, seven, ten-year projections going from how it’s currently operating, to stabilized, and then continuing to operate at the stabilization, with the annual rent increases and expense increases, and then also determining when you’re gonna sell, how much you’re gonna make when you sell, because that’s also a big chunk of profit you’re gonna make, and then from that point you can determine what the cash-on-cash return is gonna be… And then you can go back and be like, alright, so right now the offer price that they want is a million dollars, but if I put a million dollars into my cashflow calculator, the cash-on-cash return is only 5%. I want 10%, so [unintelligible [00:07:23].08] you’ve figured out what the purchase price needs to be for you to meet the return goals of either you, or in this case, your investors.

That’s a big thing, because if you don’t do that, then you’re not gonna be able to create a competitive offer, because you’re either going to submit an offer that’s too low, because you’re just basing it off of what it’s currently operating at, which you shouldn’t do, because it’s gonna be doing better, or it’s gonna be too high, because you’re not accounting for that time in between of working up to stabilizing the property, and your returns aren’t gonna be accurate once you actually purchase the asset.

So when you’re making your model, or when you’re buying a model, or when you’re using a friend’s model, you wanna make sure it’s not just one year of data is being used, and you’re basing your price off of that… And a lot of cashflow calculators I’ve seen, that’s how they’re set up – you input what the property is gonna operate at either currently, or when you buy it, and then you just assume that’s how it’s gonna be the entire time you hold the property… And you’re not really accounting for the sales proceeds at all. So it’s gonna be inaccurate, and if you’re using other people’s money to buy these assets, they’re gonna wanna know what their returns are gonna be going into it, or at least an idea, and they’re not gonna be happy when that’s not the case, because the initial financial model was incorrect.

I wanted to lead with that one, because I think that’s the biggest thing that I’ve seen a difference between underwriting a value-add apartment community with a really good cashflow calculator, as opposed to having a poor cashflow calculator, or how people underwrite deals for really small multifamilies.

Joe Fairless: Yeah, and you talked about making sure that it has the right number of year projections, whether it’s a five-year projection, or shorter, or maybe longer… That’s something I just want to reiterate, because there might be a deal that makes more sense on a 7-10 year projection, and if we get accustomed to always plugging in five years for our projections, then we might be missing out on opportunities. That’s something that we’re also looking at with our company, Ashcroft Capital – looking at, okay, what makes the most sense for this particular deal? Deals that are not as heavy as value-add deals, but they have healthy cashflow, and they’re in really good areas… But they do have some value-add component to it, they’re just not as heavy as a property that isn’t in as a desirable area, and has a lot of work to do. The former can be a seven-year, or maybe even a ten-year, versus the latter, which could be a five-year.

When you look at the initial projections from the brokers, of “Okay, this is the cap rate”, you’ll want to take that into consideration, because as you said, we look at how it’s currently operating, but we also look at the business plan… And this is just a friendly reminder to just take a peek at what the business plan would look like and what the projected returns would look like at five, at seven and at ten years, and make sure you’re in lockstep with your mortgage broker, because the loan terms can be much more favorable the longer you have the property because the longer-term loan you have on the deal, and that can be a big influence on what you end up doing.

Theo Hicks: Exactly. And one more note is that when you’re in the cashflow calculator, when you’re doing these projections, make sure you’re breaking it out by month; this is especially important during the improvement period. Because if you break it out by year, then you’re assuming you’re going from the current rents to the stabilized rents in one fell swoop. If you do it by month, it’ll break out over time.

For example, let’s say you have an 18-month renovation period. Instead of it going from day zero, current rents, to month 12, stabilized rents – over that 18-month period you incrementally have the rents being raised, because in reality, that’s closer to what’s actually going to happen. You’re not gonna buy the property, kick everyone out day one, have brand new tenants, brand new rents, brand new units after a week. You need to determine how long it’s gonna take, and then make sure you’re accounting for that timeline in your calculator.

For all these things we’ve talked about – as Joe mentioned, adjusting the business plan length, adjusting the renovation period, adjusting the financing years versus months… When you’re underwriting deals, after listening to this, just see how big of a difference this makes for the returns; see how big of a difference it makes by having the renovations broken out by month, instead of year, or by not just underwriting based off of once the property is stabilized. It will be multiple percentage points difference for the return projections.

Okay, so that’s number one. Number two is particularly for deals that are represented by real estate brokers, and there is an offering memorandum. This tip is don’t take the offering memorandum at face value. At the end of the day, the offering memorandum is a marketing package created by the listing broker, who wants to sell the property at the highest price possible… So in the offering memorandum it’ll have the broker’s proforma, so what they are saying the property is going to operate at… But of course, that is based off of, again, their goal of selling the property at the highest price possible. So while it could be a good guide, you don’t wanna just look at the OM, take those numbers, plug them into your cashflow calculator, or simply take their net operating income and base the purchase price off of that. Instead, what you wanna do is you want to use the T-12, which is the Trailing 12 month expenses – these are the actual trailing 12 months of profit and loss of the property – and you wanna use the current rent roll, and then you want to use your own stabilized assumptions based off of how you plan on operating the property.

Again, the broker is not buying this deal, the broker is not operating the property; their goal is to sell the property for as much as possible… So do not trust the offering memorandum in regards to the proforma. At the same time, you also don’t wanna trust the rental comps that they have on there, which I’ll get into in a second.

So before I get into the rental comps, I wanna talk about number three, which is about the rental premiums. When you’re buying a value-add apartment deal and questions to ask when buying an apartment, your plan is to renovate the units, to add amenities, upgrade amenities, pretty up the outside, with the purpose of raising the rents, and the question is “How much can you raise the rents?” and that is what a rental premium is… It’s the difference between what you are going to get versus what the property is actually at currently.

To calculate the rental premiums – sometimes they’ll be listed in the offering memorandum, in the proforma. The broker will say “Oh, this is what it will be, based off of either our rental comps, or based off of the previous rental premiums that the current owner has already received.” The latter one is actually something that you can use.

If you look at the rent roll — but again, don’t just trust them; look at the rent roll and see, did they actually get those rental premiums? If they’ve already renovated 10% of the units and they’re able to achieve a certain rental premium, making sure that it wasn’t spread out over a 36-month period, making sure that they were recent – then you can use that as a rental premium assumption, as long as you confirm it with your property management company and with your rental comps.

If the current owner has not done any renovations, don’t just plug in the rental premiums offered by the broker in the offering memorandum; instead, you wanna perform your own rental comparable analysis, have your property management company do the same thing, and then use the results of that to determine your rental premiums. That’s step three – it’s kind of in tandem with step two, which is don’t trust  the rental premiums in the offering memorandum either.

Now, step four is some tips on rental comps. There’s two parts to this tip. Number one, as I’ve mentioned before, is you don’t wanna trust the rental comps at face value from the brokers; you want to look at the actual properties first, just to make sure that they actually are similar enough to the property you’re looking at.

So there are three things in particular that the brokers might do with the rental comps. These are things that you need to look for when you’re analyzing the offering memorandum.

Number one is the distance to the subject property. This is why it’s so important to understand the market on a neighborhood, street by street basis, because sometimes you’ll look at an offering memorandum and it’ll have a map where the properties are, and it’ll have a subject property that’s starred, and then it’ll have the rental comps scattered all over the place… And some of them may be multiple miles away; in certain markets, that could be fine, but in other markets, where one street over it’s a C neighborhood, and the other street over is an A neighborhood, that could be an issue… Because you need to have a property that’s in an alike market, as long as it’s a property that’s similar to the subject property. Even if it is very close to the subject property, that could still be a different type of market. So that’s one – look at the distance to the property and look at the market the property is located in and make sure that it’s similar to the neighborhood that the subject property is in.

Number two, and I’ve kind of already touched on this, is looking at the renovation timeline. If the current owners have already done renovations, you wanna see how many renovations they did, over what period of time. For example, if they did 20 renovations in the last 12 months, that’s a lot different than them doing 5 renovations in the last 24 months, because the rental premiums that they’re receiving are going to be different, or the rental premiums that you can assume you’re gonna achieve are gonna be different in both of those scenarios.

You want the one where they are renovating the units in a shorter period of time, closer to when you’re buying the property, as opposed to less units over a longer period of time.

Joe Fairless: Yeah, exactly, and that’s something that is likely a question that is not asked by 70% of apartment investors whenever they look at a deal. Now I hope that everyone listening who is buying a value-add apartment community asks that question. If the broker or the owner is touting that they have achieved the rental premiums, ask over what period of time and how many have you renovated… Because we’ve looked at deals where everything looked great – the area, the rent premiums, the year of construction… Except when we asked what period of time did they achieve these rent premiums, it was over 2,5 years. That’s an indicator — there’s many things that could be, but what we looked into further was “Is that an indication that the market doesn’t have the demand that’s required in order to renovate within a 24-month period the entire property?” …and instead they’re cherry-picking certain residents as they come in and putting them in, and the majority of people cannot pay or choose not to pay that rent premium for the upgraded apartments. That could just destroy the value-add business plan if you’re not able to do it within a certain period of time.

Now, certainly, if your projections say you’re going to do the renovations over a five-year period of time, then more power to you. You likely will be able to. But it’s likely that your projections are gonna show a shorter period of time, so make sure that you ask that question.

Theo Hicks: Exactly. And the third thing to look out for when reviewing the rental comps on the offering memorandum are the property operations. What I mean by this is look at your property and see who pays for utilities? Do you pay for utilities, or the residents pay for utilities? Are there various fees involved with moving in there? Applications fees, pet fees, things like that. Are there fees associated with certain amenities at the property? Storage, lockers, fitness center fees, sauna fees… Any extra fees on top of just the rents that the residents have to pay need to match. Because if you have your property and the residents don’t pay utilities, but you’re looking at the comps where they do pay utilities, the rents demanded are gonna be different… Typically, if utilities are included in the rents, then the rents are gonna be a little bit higher, and it’s kind of cheating if you’re using those rents at your property if the tenants themselves are gonna have to pay for the utilities, so the rents aren’t gonna match up. So make sure that the property operations match.

This is something that is a little bit more difficult, because it’s not gonna be listed somewhere online, and that’s where calling in to the actual competitors or visiting the competitors and asking these questions is something that you’re going to need to do in order to determine if it’s a fair rental comp or not.

So those are the three main things to look out for when reviewing rental comps. Number one, distance from the property. Number two, the renovations timeline, and number three, the property operations… And then just quickly, in general, to determine what a good rental comp is based off of those three things, as well as a couple other factors, you wanna make sure that the construction date is similar, you wanna make sure that, again, the distance is similar, the number of units are similar… It doesn’t have to be the exact count, but a 50-unit apartment community is a lot different than a 300-unit apartment community, in regards to amenities and things available to the residents.

You also wanna look at the unit type and size. This is big. What I mean by unit type is the floor plan – number of bedrooms and bathrooms, and also square footage… Because a 900 square foot 2-bed 2-bath is gonna have a different rent than a 1,200 foot 2-bed 2-bath unit. So when you’re doing the rental comps, you actually wanna determine the price per square unit of the competitors, and then use that to determine what the rents could be for your units based off of that square footage, using the like unit types. What’s also important is the interior upgrades.

Something I didn’t mention about the rental premiums is make sure that when you’re doing your rental comp analysis, make sure that you’re looking at units that are gonna be similar to your upgraded unit, and not the current unit, for obvious reasons… It might have been something you didn’t think about, but the units could be upgraded, so you wanna know what similar upgraded units are going for on the market.

Then lastly you wanna create a checklist of the amenities offer at the community, to make sure that those match up with the amenities offer at your community. So is there a fitness center, is there a sauna, certain ceiling heights, certain types of amenities in the units, things like that. So create a checklist and make sure that those match up. And if not, then you’re gonna need to adjust your rents based off of that.

Joe Fairless: And there’s some amenities that matter more than others; you’ll just have to have some market knowledge and use some common sense. Is the pool the same thing as having laundry? Could be… But is that the same thing as having a picnic table area? Probably not. So just talk to your local management company and have an idea there.

One addition to what you mentioned about good rental comps in looking at the year built, or the year of construction – it is possible to have a rental comp that is 15, 20, even 30 years older than your subject property if that other property has done recent renovations. So take a look at not only the year built, but if they have done recent renovations, because we’re thinking about this — it’s a rental comp, so we’re thinking about this from a potential resident standpoint… And when the potential resident walks in, are they wowed by the three million dollars’ worth of renovations in this 1960’s apartment community, because they don’t know it was built in 1960? Or they don’t care; they just wanna see what the aesthetics are and what it would be like to live there… So it is possible that you could have a wide range of year built with your rental comps if they recently renovated.

Theo Hicks: That’s a great point. So that was the rental comps tip number four. Number five – the last one that we’re gonna go over in this episode – has to do with just kind of the overall model. Make sure that you are confirming all of your stabilized assumptions – those are the rents, your other revenue line items, like vacancy and loss to lease, as well as the expenses. Make sure that your property management company confirms that they are accurate, which means first when you are hiring your property management company you need to make sure you have that conversation with them upfront, and ask them if that’s a service they’re willing to provide. Ask them “If I were to find a deal, are you willing to review my 5-year projections?” You want them to say yes, because they’re the ones that are gonna be operating the property, so they should be looking at this, because if they can’t meet these numbers, then they shouldn’t be recommending that you buy the deal, or they shouldn’t be managing it in the first place. So this is something that they should do, but some might not do that, or some of you might not think to confirm those assumptions with your management company… So once you’re finished with your model, and when you’re reviewing the Trailing-12 month expenses and the rent roll, you can create a list of questions to ask your property management company and the broker.

Then once you have your finalized model, you can send it to your property management company and ask them, “Hey, can you take a look at this and let me know if this is something that you believe you’ll be able to do?” And of course, they’re going to go in a lot more detail during the due diligence period, but you wanna have at least a general understanding that they can operate the property at your stabilized assumptions before submitting the offer.

Joe Fairless: It’s a huge mistake a lot of investors make, and it’s mind-boggling, because… I think the reason why the mistake is made of not sharing your projections and your underwriting with the management company prior to getting an accepted offer is because there’s so much focus in books and in conversations and on podcasts on closing a deal. There’s so much focus on closing a deal, but the number one risk is in the execution of the business plan, and one main thing we can do to protect against having a flawed business plan is sharing the business plan with your management partner prior to having an accepted offer, to make sure that they agree that they can deliver on the assumptions that you have in your underwriting… And by the way, you should more aggressive assumptions in the version that you share with the management company, and you should keep in your back pocket more conservative assumptions. That way, if they agree to the more aggressive assumptions, then you’ve got some wiggle room should they not achieve those assumptions, because you still have that difference there. It is something that a lot of people don’t do, and it’s a big mistake.

With the syndication book that we’ve got coming out, we have it broken out into four sections. One is experience, two is money, three is deal, and four is execution. And the reason why we have the fourth part in there is because it’s not talked about a whole lot, because it’s not sexy… But it’s what makes you money or what loses you a lot of money.

Theo Hicks: Exactly. And kind of leaning on your management company and your team is extremely important, especially when you’re first starting out, because you aren’t gonna have the experience with the market to know what good assumptions are. I mean, you can have an idea, but you’re not gonna know how much it costs per year for payroll on your first deal, yourself personally… Or you’re gonna have trouble coming up with — you’re going to a property and looking at it, and you’re like “Oh, it’s gonna cost $500,000 to renovate this property…” You’re not gonna know that, so you have to lean on your team in the beginning, before you gain that knowledge yourself through experience of doing these deals.

So those are the five tips. The next part that we do, we’re gonna focus more on the actual assumptions that you’re inputting in the cashflow calculator, and kind of some of the things that I’ve seen that people miss out or that I’ve missed in the past. So the next one is gonna be a lot more detailed, and kind of digging into the numbers.

Joe Fairless: And we actually give away a version of our cashflow calculator when you pre-order the book, the Best Ever Apartment Syndication Book. You can go to – not today if you’re listening to it when we’re doing this episode, but by August the 20th you’ll be able to go there and pre-order the book, and just forward your receipt once the book goes live to us, at and you’ll have a template or a calculator that will help you with your assumptions.

Speaking of underwriting, underwriting killed a deal recently for you…

Theo Hicks: It did. It was a combination of underwriting and actually going to visit the property in person. A quick story – I’m gonna start syndicating deals down here in Tampa. I’ve got a business partner who’s a mini-Joe, so he’s a capital raiser, and I guess I’m like a mini-Frank right now, because I’ll be doing the underwriting and the asset management… And we’ve got our real estate broker, we’ve got our mortgage broker, we’ve got our property management company… So we’ve got our team together, and in fact, when we met with the property management company and the real estate broker, they were kind of a team… And when we were trying to qualify them, they brought us a deal. So we had to use them. And they were the best out of everyone we talked to… But they brought us a deal.

It was a 120-unit building down here in a suburb of Tampa. They sent me the offering memorandum and the rent roll, and I plotted that data in the cashflow calculator… And all I had at the time was the broker’s proforma, so I used that, and the deal looked great, even at the extremely high purchase price that they wanted, which was 7.5 million dollars… It still made sense. It had an 18% IRR to the limited partners, so I was like “Oh, we’re gonna buy the first deal that we look at.” But of course, you’ve got to do more than just looking at the OM, as I mentioned in this podcast, so we went to visit the property, and it was way more distressed than the pictures let on, and what Google Earth let on. It was a mess.

Joe Fairless: What were the main differences, and how are you defining a mess, between pictures and actually being there?

Theo Hicks: The pictures were a lot different, but in my underwriting model based off of the offering memorandum the only exterior renovations were to replace the roofs and to install new A/C units in the windows. Those were the only two exterior renovations. That would have been around 300k-400k, just for the roofs and the A/C units. It’s 120 units, but it’s 60 buildings with two units per building, so there’s 60 roofs…

Then I go to visit the property and I realize “Okay, well, we’re gonna have to paint all these units.” Not only do we need to replace the roofs, but — I don’t know the exact terminology of it, but the siding that connects the roof to the actual building, on probably 20% of the properties, that would have to be completely replaced. All the exteriors need to be painted, all the windows were really old, so we’d have to replace all the windows… And windows are so expensive.

We’d have to do a complete landscaping overhaul. There were dumpsters sitting in the parking lot, so we’d wanna put fences around those dumpsters… And then there was also a really big green space by the clubhouse, and if you’re listening, I’m doing air quotes for the clubhouse, because it was just a unit that was converted into a clubhouse that wasn’t very nice… So we would put a playground; we’d have to put a playground there, because it’s just this big, empty green space in there [unintelligible [00:31:05].02] basketball court… So that’d be a big value-add play.

We’d have to redo the laundry facility, as well as the clubhouse… So the exterior renovation budget — these would have to be done, because it was so distressed; it’s not like we’re doing this just because we want to. It’d have to be done in order to demand the rents we wanted… And just that alone brought the exterior renovations to 1.5 million dollars, which was almost three times as much as what it would have cost to renovate the interiors, which is where most of the money’s gonna come from… So we’re not gonna recapture most of that 1.5 million dollars.

Another problem is that the current owner purchased this property a couple of months ago during a pre-foreclosure process, so there is no T-12 for the property.

Joe Fairless: So they were looking to flip it?

Theo Hicks: Yeah, basically… Flip it without renovating it.

Joe Fairless: Right, yeah.

Theo Hicks: So when I talked with my mortgage broker, he essentially said that it’s gonna be difficult to get good financing on a property if we don’t have the T-12, if we don’t know what the historicals are. So I’m still kind of confused on that, because I talked to my real estate broker and he was saying that he had a lender who qualified the deal for financing, but the financing was really expensive… So when I put that into my cashflow calculator, the deal would only make sense at a purchase price below six million dollars, which I don’t think the owner is gonna go for, because when they purchased it a couple of months ago, they bought it for 5.2 million dollars; I’m pretty sure they’ve purchased it with cash, and I think the lowest they’re willing to go is 6.5, and it just doesn’t make sense. Plus, we’d have to raise a lot of money because the financing that we got from the real estate broker is not gonna include renovations, and we’re kind of leaning away from doing a bridge loan, just because the bridge loan length will be too short, and when we’re talking to our investors, a selling point, so to speak, would be long-term debt. So if we can’t get debt that’s at least as long as the business plan, we’re just not gonna be confident selling that to our investors.

All of that is the reason why for now the deal is essentially disqualified. I do have a call with my mortgage broker and real estate broker today to talk about it more, because I’m kind of confused as to, number one, for my real estate broker, how he thinks we’re gonna be able to qualify for financing on a deal that doesn’t have a T-12. And then I wanna talk to my mortgage broker to see how they approach those types of deals, because he said that it’s possible, but it has to be a really good deal, and the story has to make sense.

So I’ll know more today after those two conversations, but overall, we still probably won’t do it just because it’s a lot more distressed than we would like. Now, the silver lining in all of this is that when we went to visit the property, we drove around the area and directly across the street there is a property that is a little bit smaller – it’s only 44 units – but from looking at it from the outside, it’s the exact type of deal we wanna do.

Something else I forgot to mention, Joe, is that we would want to put central A/C in all of those units too, so that would have been insanely expensive… But this building across the street, they already have central A/C, the roofs are fine, and there’s more units under each roof… And just overall it’s in much better condition than this property, and you can tell the resident base is a lot better than on this property, too.

Joe Fairless: I thought you mentioned you had budgeted for window units.

Theo Hicks: We did. We had two scenarios. One was window units, one was central A/C, and we didn’t see any other apartments in the area that had window units except for ours, so we figured we’d have to put central A/C in there, which would have been 6k-7k per unit. So we’re gonna contact the owner across the street, even if just for practice purposes, because I looked it up and they bought the property a year ago at about 60k/unit, and it’s still not in that good of a condition, so maybe they would be interested in selling it after a year… But I don’t know if they’ve really done much to it since then. But just looking at it from the outside, it’s exactly the kind of value-add deal we wanna do, so we’re gonna reach out to the owner…

At the same time, I told my real estate broker why I didn’t wanna buy the deal he sent us, but also “Hey, across the street we’ve found this deal… Here’s a link to the listing, here’s a link to the appraisals site. This is the exact kind of deal we’re looking for. Do you know the owner? If not, that’s fine, but looking at this deal, this will give you an idea of what we’re looking for, so if you come across deals, you can send them to us…” We don’t wanna be distressed investors, we wanna be value-add, so we wanna have that 5-7 year hold, whereas this deal, we’d have to sell it after a couple years in order for it to make sense because of how much money we were investing in it… And if we just hold it for three additional years, the IRR would be too low. It was an amazing learning experience, for sure.

Joe Fairless: That’s awesome. I’m glad you told that story, and I know a lot of people are as well, and looking forward to hearing next week how it continues to evolve.

Theo Hicks: Alrighty. So just to wrap up here, make sure everyone goes to the Best Ever Community on Facebook ( in order to answer the question of the week, where we will take your responses and create a blog post with them.

This week’s question is “Which year was your best year in real estate, and why?” I’ve read some of your stories on the community so far, and I think this is gonna be a very inspiring blog post. I was thinking about what my best year is, and I’m gonna say my best year is gonna be 2018, because I’m gonna put an apartment under contract by the end of the year… So it’s gonna be an amazing year, and when I look back in five years, I’ve got a massive portfolio of apartments and realize that this was one of the launching points.

I think my second-best year is probably the year that I met Joe and started working for Joe, because if I didn’t work for Joe, I would have never done this, because I would have been way too afraid.

Joe Fairless: You’re the man! Well, it’s mutually beneficial, that’s for sure. I’d say this year has been my best year in real estate. We sold two properties for very good returns to our investors; we’re under contract to sell one more in about — well, actually seven days from now… And we’ve purchased some, too.

Most importantly, all roads lead back to performance, and executing the business plan, and that’s what gets looked over a lot of the times during conversations, and that’s what makes us money or loses us  money. We have performed very well, and our team has performed very well this year in particular… So certainly this year would be the best year for me.

Theo Hicks: Absolutely. Alright, and then lastly, guys and girls listening, please go to iTunes and subscribe to the podcast, as well as leave a review for your opportunity to be the review of the week, which we will read aloud on Follow Along Friday. This week’s review is from — I’m not necessarily sure what this name is, but…

Joe Fairless: Spell it out.

Theo Hicks: Tsavoca203. They said “Joe and his team have really created a winner with this podcast. The guests represent a huge cross-section of all real estate-related topics, which brings value to all listeners. You can truly get a comprehensive education on the real estate biz from this show, and quickly level-up from entry-level investor to a seasoned pro, just by listening to the advice and then executing on it every day. This show plus real-life progress and dedication equals real estate investing success. Thanks to Joe and the team. Keep up the great work!”

Joe Fairless: Wow, very thoughtful and thorough review, and great advice, too. Thank you for taking time out of your day to share your review about the podcast, and for everyone else, please do the same, if you haven’t already. It helps us attract quality guests, and it ultimately helps you; you write the review, and then other potential guests see that and we’ll continue to attract high-quality guests, and then you benefit as a result of writing the reviews… So thanks for doing that, I really appreciate it.

Everyone, I enjoyed our conversation. Next week we will be talking about the execution in apartment syndication, and we’ll follow up with the second part to this conversation, on underwriting tips, in about a month or so, because we’ve got the Best Ever Apartment Syndication Book launch that we’re gonna be focused on for the next four weeks on Follow Along Friday; we’re gonna help you in the experience of finding money, finding deals, and the execution. So we’re gonna have a theme for each of the next four weeks: experience, money, deals, execution… We’ll give you tips on it, and also just talk a little bit about the benefits of getting the book, and all that good stuff… But it won’t be salesy, it will be value-add. We don’t do salesy stuff; it’s all about you and helping you move forward with valuable stuff.

I enjoyed our conversation. We’ll talk to you tomorrow.


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