November 9, 2018

JF1529: Five-Step Apartment Syndication Underwriting Process #FollowAlongFriday with Joe and Theo

Theo has been underwriting multiple apartment deals each week and as a result, he shares the 5 step process he created to quickly analyze income apartment deals. Joe is closing on another deal next week and talks about how they were able to benefit by locking in an interest rate early on in the due diligence process. 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 Follow Along Friday today, we’ve got a lot to talk about as it relates to what we’ve got going on, and most importantly, how that can help you in what you’ve got going on. With us today, as usual, is Theo Hicks. How are you doing, Theo?

Theo Hicks: I’m doing great, Joe. How are you doing?

Joe Fairless: I’m doing well, and looking forward to it. We’ve got some improvements, some enhancements to this show, and quite frankly, the reason why is to continue to optimize the show as we go… Because that’s the name of the game – you jump in, then you do it, and then you figure out how to enhance what you’re doing. We’ve got two additions to the Follow Along Friday episodes. One addition is a Best Ever Trivia Question. We’re gonna start off with that question, and then we will end with a Best Ever Quote at the end of our conversation.

Here’s the trivia question – we’ll kick this off with a trivia question and then we’ll go into our update. When you know the answer to this trivia question, you can respond in a couple ways, and the first person to respond with the correct answer will get a signed copy of the first book that we wrote, “Best Real Estate Investing Advice Ever Vol.1” So you’ll get a signed copy of the first book, we’ll mail it to you, “Best Real Estate Investing Advice Ever Vol.1”

Here’s the question – a study recently came out, and this study has the housing markets with the biggest increase in million-dollar homes year-over-year, the year ending in October. Four out of five markets were in what state? You know what state is it, Theo?

Theo Hicks: California?

Joe Fairless: California. Number one, San Jose – they had a percent change of 14.3%. Number two, San Francisco; number three, Oakland, and number five, Orange County. So these four markets that I’ve just mentioned have the highest increase in million-dollar homes. Well, one market is not in California. What is that city? So there’s your question. Clearly, I know, you can just google this; I get that, but it’s a fun question to think about. Four out of five cities are all in California… And in fact, looking at the list, seven out of ten of the top 10 cities are in California… But number four is holding strong, not in California – what city is it that has the number four at housing markets with the biggest increase in million-dollar homes? E-mail with your answer, or if you’re watching this on YouTube or on our Facebook page, then simply reply below, underneath the video. It will be a race between whoever e-mails or comments below, whoever sends us a reply first, then you will receive a signed copy of the Best Real Estate Investing Advice Ever Vol.1 book, and we’ll mail it out to you.

Theo Hicks: Am I allowed to guess, Joe? [laughs] I’m just kidding…

Joe Fairless: You’re allowed to guess, but I’m not gonna say if you’re right or wrong.

Theo Hicks: Okay. Because I have no idea; I’m just gonna throw a guess. I’m thinking it’s gonna be…

Joe Fairless: And I’m not gonna give you a response. So you just guess, and then I can’t comment, because I wanna make sure I’m not tipping my hand. So what’s your guess?

Theo Hicks: My first guess is Denver.

Joe Fairless: I can’t respond.

Theo Hicks: Perfect. Maybe each week I’ll guess too, and then we’ll see how tapped in I am to the real estate market, or whatever the question is about.

Joe Fairless: You should have some sort of negative consequence for if you get it wrong. We should do something like that. You’ll get punished for getting it wrong.

Theo Hicks: You can make up my punishment, Joe, and we’ll go over it…

Joe Fairless: Alright, something to think about. Okay, what happened this week and what did you learn?

Theo Hicks: So I’ve been underwriting a few deals a week; nothing I pulled a trigger on. I’m starting to get a better grasp of how to optimize the approach. Of course, it’s gonna get way better over time. I wanted to kind of just discuss in detail exactly what I do when I go about underwriting deals… Not necessarily “I input this number, and this number”, but more of the overall process [unintelligible [00:07:29].24]

The first thing that I do every Monday is I go to my web browser, and I favorited all of the listing websites for all the brokers that I’m working with. Of course, whenever they have a new listing, it typically gets sent to my e-mail, but not every single time; I’m not really sure why, but not every single one goes there, so… I think for me it’s a better process, because I can get them all at once.

So I’ll check and I will look for deals that meet my investment criteria. Obviously, I’ll search for Tampa, and then I wanna see deals that are over 100 units, and then typically, for most of them there’s a small description describing what the opportunity is, and I wanna see something about value-add. Not all of them are true value-adds, but some of them are turnkey, or super-luxurious properties, and I don’t wanna do those.

So I’ll do that, and I’ll sign all the confidentiality agreements and download all the documents on Monday; that way I’ve got a list of properties to underwrite for that week. This week there’s only one. Last week there were two, and we’ll see how many are next week. I do know that things are slowing down now that we’re getting towards the end of the year. So that’s step one.

Number two is I will obviously have my schedule, so once the time comes, I will pull up the rent rolls and the T-12’s. Probably the most tedious aspect is taking those rent rolls and T-12’s in PDF form and converting them to Excel.

Joe Fairless: What’s the best to do that?

Theo Hicks: You have to understand the If functions pretty well, because what will happen is on the rent roll in particular — because the T-12 is not that hard; you just unmerge the Merge Cells and that’s really it. But for the rent roll, the problem is they’ll have the different rent codes — so it’ll have the market rent, but then it’ll have Rent, Pet or Parking, and the rent is not necessarily directly next to the name; it might be a couple cells below… So you have to do an If function — you have to organize everything and then do an If function that allows you to put the actual rental amount in line with the rest of the information. That way, once you do that you’re gonna sort it and then delete everything else. I just did it one time, and then I just copy and paste my formula in there… But it’s still frustrating to do, because usually when you unmerge it from PDF, you have to reorganize the entire thing, because all the cells are merged, so it’ll explode out to 20-30 columns, and you only really need like five.

It probably takes about an hour to just reorganize that rent roll, so my first hire ever in my syndication business will literally be someone to just help with underwriting, and obviously right away they won’t know how to do rental comps, how to determine the rental premiums, and how to figure out what the assumptions — or really much of anything… But they definitely will be able to figure out how to do that part of the process, which is just inputting all the data into the cashflow calculator and then sending it out to me, so I can cut my time in half. So that’s the first thing that I do.

Joe Fairless: Would that really cut it in half? Is that how much time you spend on it relative to other things?

Theo Hicks: Just the inputting aspect of it.

Joe Fairless: Okay, okay.

Theo Hicks: And it’s handling the actual financial model, not the in-person visits, and talking to brokers, but just the actual financial model. I think it would cut the time in half, and most of my time would be just doing in-person, boots on the ground stuff, and talking to brokers to better the assumptions on there… But it is really annoying to do the rent roll and T-12, just so everyone knows that. And you’ll have to get actually a paid version of PDF to do the conversion, or else you’ll have to copy and paste it from PDF to Excel, which will probably take even longer. Ideally, they already have an Excel for you, but I’ll probably say it’s 50/50, Excel vs. PDF.

Now, one of the challenges that I was facing was “How do I determine the renovation assumptions and the rental premiums without having to do a full rental comp analysis and without having to visit the property in person?”, because if the deal doesn’t make sense, or at least potentially make sense, I don’t want to spend all that time doing all the extra work. So right now what I do is I just input the proven rents that they’re currently getting, and I input the cost of the rehabs that they spent to get that rental premiums. If they don’t have that, I will go look at their rental comps that they have, and make sure they calculated everything properly, use that rental premium, and then for the renovation assumption I kind of just do it based off of my experience.

Again, I know that this is not going to be the final number that I use. The reason I’m doing that is because I don’t want to be like, okay, I’ve got all the rent roll and T-12 data in there; now I’m gonna go drive to the property, drive to all the comps, schedule a tour, and then realize that the numbers were pretty similar to the proforma and the deal wasn’t making any sense… Because then I wasted all that time.

Right now it’s not that big of a deal, because I’m not underwriting that many deals, we don’t have any deals under contract or under management, and I’m trying to learn the markets… So there is benefits from going through that process, but I’m trying to think down the line, long-term – I’m not gonna be able to do full underwriting on every single deal; I need to find some ways to have steps where it’s like, “Okay, let’s do this, and then if it passes this step, I’ll go onto the next phase.” I figured that that’s the fastest way to make ballpark assumptions, just to see if you’re even close to meeting the returns that you want.

Joe Fairless: What numbers are you looking for?

Theo Hicks: For this process, if I see a 15%-16% IRR or higher, I will pursue it; I assume these are like best-case numbers, and it’s probably gonna go down. If I see a 15%-16% IRR and then an 8% cash-on-cash return annualized over those five years, not including the sales proceeds, I’ll move forward. But if it’s a single-digit IRR and the cash-on-cash return is 5%, then I will not move forward, because it’s only gonna go down after I do my further investigations.

For example, the property that I talked about last week – it had a 18%-19% IRR, and like a 9%-10% cash-on-cash return based off of these ballpark assumptions, but then when I went to the property obviously the exterior renovation budget quadrupled, or I guess went up by 6, whatever that term is. So that obviously radically changed the entire model. But that was something that would have been impossible to know without actually visiting the property in person… So that’s something that really can’t cut corners on. So those are the criteria that I’m working with now.

So if it passes that step, the next step would be to visit the property in person informally, so not with the actual broker… So I’ll drive to the property, drive around on Saturday, drive around the grounds, and then I will go visit all the comps in person, do the same thing… And as I mentioned in the previous episode, what I do is I look at the subject property first, and then I’ll go to the comps  and ask myself “What would I need to do to the subject property to make it look like this?” Then I’ll go back and be like “Okay, ballpark, it would cost X to get it to this rental comp. Here’s how much it’s renting for, so here’s what the new rental premium would be.”

Based off of those tours, I’ll have a more accurate exterior renovation cost, as well as a more clear understanding of whether or not the rental comps were accurate. If they were accurate, great; if they weren’t, then I will go out and find my own on… Or while I’m driving, I also kind of make notes of “Oh, this apartment looks like it could be a comp.” And I also make a mental note in my head that this broker might in the future have comps that aren’t correct. [unintelligible [00:15:00].27] if it’s a one-off thing, or if this is  a consistent thing where they’re kind of just picking comps out of thin air and not really doing their due diligence on them.

So if it passes that phase, which the property that I toured last week did, then I will schedule a formal tour with my property management company. My first tour only the president was able to come, but they have a VP who is like their construction guy…

Joe Fairless: Do you verify the assumptions in the first stage with the management company?

Theo Hicks: No. I don’t verify them until they actually see it in person.

Joe Fairless: Okay.

Theo Hicks: On one of the deals I went and visited myself, and I kind of explained my ballpark renovation assumptions, and they helped me say “Okay, this one looks good/This one doesn’t look good”, but they were actually listing the property, or at least they knew the owner or the broker, so they had a good understanding of it… But maybe that would be something I should add to — before I schedule a formal tour, after visiting it myself and I have my budget, sending it to them… Because I’m sure they know the deal is listed for sale, they know the area, so at least they’ll be able to help me with stabilized expense assumptions, as well as if I mentioned “Hey, I plan on replacing the roofs and redoing the parking lot and adding in a playground. I think it’s going to cost this much. What are your thoughts on this? Is it accurate, is it not accurate?” That’s probably something I’ll actually add, because that will be helpful.

So I’ll visit the property in person with the management company and their construction guy, to get a look inside the units, so we can confirm the accuracy of the information in the OM about what the current conditions are and what the upgraded units look like. And once I’ve seen that, as well as done a more detailed tour of the exterior — we’re not gonna have, obviously, the perfect cost for the interior and exterior, but it’s gonna be the best we’re going to get before actually putting the property under contract and doing due diligence.

At that point, I will go back and update my model again, and if the return projections are in line with what our investor want – 16% IRR, 8% cash-on-cash return – then we will submit an LOI. Which we haven’t done yet. So we’ve been through the first four steps, but we’ve not gotten to step five yet… So I’m looking forward to my first LOI and having more details on that process to discuss on Follow Along Friday.

The main reason I wanted to talk about that is because I’m on Bigger Pockets a lot, and a lot of people ask “What’s the quickest way to underwrite a deal?” My answer is always “There really is no quick way; there’s no 2% or 1% rule for apartments, because it varies so much.” This is the most efficient way that I’ve discovered so far, and I think as time goes on it’s gonna be even more efficient. So if I have certain changes  or tweaks, I’ll definitely make sure I bring those up on future episodes.

Joe Fairless: Awesome. Very helpful, especially since you’ve been on the ground in Bigger Pockets, participating in the conversation, and that’s come up a lot, as you’ve seen, so I’m glad that you addressed it here, because I’m sure a lot of Best Ever listeners have that same question.

Theo Hicks: Exactly. And then as I’ve mentioned before, my first hire is definitely gonna be someone to help me out underwriting. Right now I can pretty easily underwrite two deals a week, and right now the deals that are coming in aren’t exceeding that. I could probably maximally do four a week, without — I won’t say going insane, but… I could probably do four a week right now without making Marcella go crazy with me being in my office all night, underwriting deals. But I think once I have more than four a week, I’m going to work on finding someone. I’m not necessarily sure how I’ll do it right now, but I wanna approach that kind of an entertaining; on Bigger Pockets I see a lot of people saying, “Hey, I’m new to multifamily” and they just want a mentor, or they want to help out some investor to get experience… So I might reach out to one of them and see if that’s something they’re capable of doing. Obviously, I’ll pay them, but — if they wanna get paid, I guess; if they wanna do it for free, even better, but… I think that’ll probably be my first approach.

I know you guys posted a job listing on the college job listing site… So we’ve got UCF right around the corner, so if it doesn’t work out with the Bigger Pockets people, I will definitely post a listing to there.

Joe Fairless: Yeah, we’re hiring an asset manager right now. Is that the job posting that you saw?

Theo Hicks: No, I was talking about when you hired underwriters initially… Way back in the day.

Joe Fairless: Oh, yeah. Got it.

Theo Hicks: [unintelligible [00:19:24].10]

Joe Fairless: Yeah, cool. Good stuff. Very helpful.

Theo Hicks: So those are my updates. What have you got going on, Joe?

Joe Fairless: Let’s see, we’re closing on a property next week; scheduled to close next week, at least. And something interesting is we have a fixed interest rate on that property, and we locked it in about a month ago… It’s at 4.5%, so we have a 4.5% fixed interest rate. If we were to lock it in two days ago, it would be 5%. So 4.5% versus 5% might now seem like a lot, but it’s around $160,000 a year savings. $160,000 a year savings with just half a percentage point.

So what’s the takeaway there? Well, the takeaway is make sure that your crystal ball is nice and polished before you go into a transaction, and… What’s the real takeaway on that? Well, sometimes you’ve got to use your best judgment based on where you think the market is gonna go. The Fed had announced that they were gonna continue to increase interest rates about a month ago, so we decided to lock it in at 4.5%. It was higher than what it had been previously, and we thought interest rates are gonna continue to go up, they did, and boom, we got very fortunate, because now we’ve got an incredibly desirable loan, that can be assumed by a future buyer when we decide it’s the best time to sell…

And that’s the other takeaway – when you lock it in at a fixed interest rate, and interest rates continue to rise, I’ve had some investor ask me, “Well, with interest rates rising, what does that look like for our exit?” Well, it decreases the buying power of buyers who want to buy from us in the future, if the interest rates continue to rise. However, a couple things – one is it’s more desirable to assume our loan, and that actually increases the marketability of our project when we go to sell it, if interest rates are higher than they are at 4.5%… Because then we’ve got a nice loan that can be assumed for a 1% assumption fee.

Then also when interest rates continue to rise, then it decreases the purchasing power of people who are buying a home, and therefore increases the likelihood that you’re going to have renters. And there’s many things that are happening right now… I read something today that said the mortgage applications are the lowest that they have been in four years, since December of 2014, and it’s due to a variety of factors, but one of them is home prices have been going up until recently – that’s one, and two, interest rates are higher than they have been. So what does that do to someone on their mortgage? Well, they’re not gonna be buying right now… So that helps the cause for cashflow from an apartment community standpoint. It does not help the exit, because the buying power isn’t as great, but it helps the operations and the ongoing ownership, and what that looks like from a cashflow standpoint. So if that’s the case, then what’s the plan? Well, the plan is to have longer-term debt on properties, that way you aren’t forced into an exit whenever it’s an inopportune time, and you can hold on to it and cash-flow some pretty good numbers, if you’ve got that fixed interest rate debt and you’re in an environment where interest rates have increased and so people aren’t buying as much, and they’re renting more. It’s something I wanted to mention, because there’s many different things to unpack there, and there’s a lot of different things to think about.

Theo Hicks: What’s the length of the loan?

Joe Fairless: Twelve years.

Theo Hicks: So if someone assumes that at the end of your business plan, would they have to raise the difference between that loan and the purchase price, or would they have to secure a second loan?

Joe Fairless: If someone assumes it, they’re gonna have to pay whatever principal has been paid down up until that point… But with this loan, we have six years of interest-only, so it’s incredible.

Theo Hicks: It’s even better.

Joe Fairless: Yeah, exactly. So there won’t be a difference up through six years.

Theo Hicks: Nice. That’s a great thing to think about, getting that fixed interest rate, kind of locking it in… Does that cost, to lock that in, or do you just say “Hey, let’s lock it in now”, like you [unintelligible [00:24:05].19]

Joe Fairless: You always have a fee that you pay to the lender… So when you do lock it in, you have to pay that fee, whether you lock it in earlier or later.

Theo Hicks: Okay, so I figured.

Joe Fairless: And then completely separate for that, just really quick, an observation – while I was scrolling through my LinkedIn feed the other day, I saw someone who had a screenshot of him being interviewed on a television station… And I forget who was being interviewed by a television station, but it made me think of — and it’s not a knock on this person, because again, I don’t even remember who the person was, but it made me think that when I saw that picture and I saw him being interviewed by the TV station, I thought “Oh, he must be a subject expert in whatever he’s talking about”, and I thought how much on autopilot I was with that thought process, whereas I actually shouldn’t be on autopilot when I initially see someone being interviewed on TV; I shouldn’t initially think “Oh wow, they’re a big-time expert in whatever they’re talking about”, because the television stations aren’t necessarily looking for someone who has deep knowledge in a certain topic. They’re looking for someone who has something that is interesting to their audience and has a way to position that topic so that it brings more clicks to their website.

So I’m going to stop myself from thinking “Okay, this person is automatically an expert” when I see someone on TV or see someone being interviewed somewhere else. I’m gonna just take it with a grain of salt and know that our interests are not aligned; my interests are not aligned with the television station. They have a certain objective, and that is to increase viewership, and I have an objective, which is to increase myself and my personal development and my business… And perhaps sometimes they overlap, because their “increase viewership” angle will align with what I’m interested in, but then other times it might not align. So it’s just something that I thought of and I wanted to mention.

Theo Hicks: And the more you become an expert on a specific topic, you realize how long it takes to become an expert on that topic, and if someone at a news station is very good at news, but when they bring on an expert, how do they know if this person’s actually an expert or not, because they themselves aren’t an expert. So that’s a good point.

Joe Fairless: Yeah. We’ll end with the quote at the — I’ll just say it now, why not…? Oh, one other thing about the trivia question – Theo, if you can help us put this in our notes for future episodes… Next week we will tell you the answer to today’s trivia question; so we won’t leave you hanging, in case you don’t wanna do that Google search or do the legwork, but you’re still curious what city we’re talking about, then next week we’ll state the answer.

Theo Hicks: And you’ll definitely wanna come back to learn about my punishment if I was wrong, too.

Joe Fairless: [laughs] Yeah, I’ve gotta think of that. And with the quote to think about, the Best Ever quote – I’m studying chess right now. I’ve now beat my wife, Colleen, five or six times in a row, after losing a couple times to her, because I’ve been watching YouTube videos and going a little bit vain on it… So this is a quote from Emanuel Lasker – he was a world chess champion for 27 years back in the late 1800’s, early 1900’s. He says “When you see a good move, look for a better one.” It certainly applies to us as real estate entrepreneurs, so think about that one – “When you see a good move, look for a better one.” We’ll roll into the next segment.

Theo Hicks: Great. So the last two things – number one, the Best Ever Conference ( in Denver, at the end of February. The third one. We’ve so far got 18 confirmed speakers on the website, so make sure you check that out to see the returning and new speakers. One of the speakers we’re going to talk about today is Mark Mascia. He was a speaker at the first conference, and he was actually one of the features chapters in the first Best Ever book, which we’re giving away to the winner of the trivia question. I believe the chapter was about developing over a billion dollars in real estate, so he’s got a lot of experience.

He actually raises money for his deals, and I remember when I spoke to him last he was either just beginning or had already started — he was in the beginning phases of raising money through 506(c), so he was publicly advertising… And he will use that money to develop commercial real estate, specifically retail and medical. So at the conference he will likely be talking about development strategies, as well as raising money specifically for that 506(c), so strategies for advertising to raise capital… So you’ll definitely want to listen to him talk, as well as pick his brain during the networking sessions if you have any interest in raising capital for any types of deals, and if you’re specifically interested in development or wanted to learn more about development, or how to manage retail medical – I know that they continue to hold on to them after development – Mark Mascia is going to be your go-to guy.

Joe Fairless: He’s a great guy, I’ve had dinner with him multiple times. Adjunct professor at NYU – or he was, I’m not sure if he still is – and experienced commercial real estate investor. You’ll want to hear what he says at the conference.

Theo Hicks: And then lastly, make sure you pick up the Best Ever Apartment Syndication Book on Amazon. If you buy the book, leave a review and send us a screenshot to We will send you some free syndication goodies and we will read your review on the podcast.

This week’s review of the week comes from Gimlet. They said:

“This is my fourth read on how to get started in syndications, and this is worth EVERY penny. Joe and Theo walk you through all the details on how to get your business started. Pair this with the tools that are referenced and you have everything you need to lay the groundwork to launch. Just get it!”

Joe Fairless: Well, thank you, Gimlet, and thanks for taking the time to do that review; I really appreciate it. It helps us continue to grow the community.

Thanks again for everyone hanging out with us, I hope you learned a lot. Have a best ever weekend, and we’ll talk to you tomorrow.


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