September 6, 2020

JF2196: Underwriting Multifamily Acquisitions With Robert Beardsley

Robert is the author of The Definitive Guide to Underwriting Multifamily Acquisitions and today he will be sharing the process of underwriting so you will be able to take away some ideas to implement into your underwriting process. 

Rob Beardsley Real Estate Background: #SkillsetSunday 

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“On a larger property, a $100,000 additional expense on your cap-ex budget isn’t really going to make or break the numbers, but missing your rent pro forma by $25 can make or break your deal” – Robert Beardsley


Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever; we don’t get into any of that fluffy stuff. Well, first off, I hope you’re having a best ever weekend because today is Sunday, got a special segment for you – you know what it is – Skillset Sunday. Today on Skillset Sunday, you’re going to learn the process for underwriting multifamily acquisitions, and well, I figured we should interview the author of The Definitive Guide to Underwriting Multifamily Acquisitions, Rob Beardsley. How you doing, Rob?

Rob Beardsley: Doing very well. Thanks so much for having me on.

Joe Fairless: Well, my pleasure, and looking forward to our conversation. A little bit about Rob – he’s a principal at Lone Star Capital Group. In the past three years, he’s led over 100 million of multifamily acquisitions, based in New York, New York. With that being said Rob, first, do you want to give the Best Ever listeners a little bit more about your background just for some context, and then let’s go right into how to underwrite multifamily acquisitions?

Rob Beardsley: Absolutely. So the quick background in terms of real estate is I grew up in a real estate family. Both my parents worked at home, and I heard them on the phone all the time making deals, running a real estate brokerage firm in Silicon Valley. So I really absorbed a lot of real estate that I didn’t even realize until I actually got in the business later on… Because initially, growing up in Silicon Valley, my parents pushed me to go into tech and learn to program and go to school for computer science, and that’s what I did. Of course, eventually, I had to come back to my family’s passion and business, which is real estate, and the path I chose was multifamily. And shortly thereafter, I was very fortunate to meet my business partner at none other than the Best Ever conference.

Joe Fairless: I know what conference that is. I recognize that name.

Rob Beardsley: Yeah. So that’s been a very fortunate thing for us. Kevin and I founded Lone Star, as you said, and we’ve been enjoying the process.

Joe Fairless: Well, let’s talk about the underwriting process. So first off, why write a book about underwriting acquisitions for multifamily?

Rob Beardsley: It’s not the sexiest topic. It has gotten a little more interesting over time, but most people don’t write a book that’s pretty much a how how-to manual. So that’s something that I really wanted when I first started in the business, because there was just really no one resource that you could turn to and learn this. You could maybe take a $2,000 weekend workshop or find some other mentor who would maybe help you out, but there was no book, and I love consuming content through a book. So I started having a lot of people also ask me, “How did you learn and what book did you read?”, and I had nothing really to offer to them. So I told myself very early on that I would compile my thoughts and write a book on this, just because I felt that it was something that I’m passionate about, people are asking me a lot about it.

And then the additional point is the passive investor side. I think passive investors – they don’t even know that they don’t know this, and they should endeavor to get proficient at underwriting and evaluating deals if they want to actually be in the game long term, as a passive or active investor. So that’s something that I’m hoping to address which is a big need in the market.

Joe Fairless: So let’s talk about the way you structured the book, and then we’ll get into some specifics. So how did you structure the book?

Rob Beardsley: I tried to keep the book as short as possible. It’s not a memoir or anything like that. Like I said, it’s a very straightforward how-to manual. So I start out with just a quick introduction about what is underwriting, why is it important, and why should you learn it, and how should you go about learning it. As far as learning it, you can choose to build your own underwriting model, and whether that’s in Google Sheets or Excel or some other program, I recommend and say, “That’s perfectly fine. You’ll learn a lot doing that.” But if you don’t have the time, definitely just pick one that you trust. There’s many out there that you can get your hands on. I recommend getting all of them. So that’s the start of your journey. And then the actual process that I go through the book really starts from getting the information that you need, whether that’s directly from the seller or from the broker that you’re working with all the way through what data do you need in terms of websites and what should you be looking for, for key metrics, and then plugging that in. Every single input of my personal spreadsheet, I actually go over and give you guidelines on how to input it. So it really– it leaves nothing left out. Every single input is addressed, which I think would have been really helpful when I was first starting.

Joe Fairless: Every input addressed – is that every input for the spreadsheet that you use?

Rob Beardsley: Yeah.

Joe Fairless: Okay. And you mentioned earlier that you recommend getting all the versions of the underwriting spreadsheets that you can come across. How do you determine who’s right and which aspects you should include in yours and which ones you should not?

Rob Beardsley: That’s a great question, because not many people would think that there is deviations. You would think, “Well, this is math and this is cut and dry,” but it’s really not. There’s a lot of art and science and subjectivity, and I think why I recommend going out there and looking at all the different spreadsheets that you can get your hands on is because it will expose you to the different ways that people are handling certain assumptions and forecasts, and you can evaluate all of them and say, “I really like this. I don’t really like this.” One of the reasonings that I personally use in developing my assumptions and forecasts is  what’s the easiest to explain and what’s just the least complicated? Because if someone’s going to evaluate my deal or check my work essentially, I don’t want to have to come up with some crazy explanation about, “Well, I got to this number because I used the trailing three income, but then I also use the trailing 12 expenses, but then I adjusted the taxes.” So I favor simplicity.

Joe Fairless: So let’s talk about some things – and perhaps you mentioned them. Let’s talk about some things that you don’t like about other underwriting models that you’ve come across.

Rob Beardsley: I think a simple one that some people may overlook is your pro forma should be built on a monthly basis, because annually is just not granular enough and it’s more prone to make mistakes. As you’ll find, once you’re getting more involved with more deals and looking at different situations that are more unique, you’re going to want to have the control on a monthly basis, and having that monthly basis will allow you to tweak certain things such as renovation schedules and stabilization timelines. A big mistake people make is just being too aggressive with assuming they’ve got a 200-unit property on their hands, and they’re going to renovate all 200 units in the first year and the rents are gonna be up 20% in year one. That almost never happens. So on an annual basis, it may push you to make that assumption or push you to make the two-year assumption, so having a monthly can really let you be more accurate and potentially more conservative.

Joe Fairless: You mentioned earlier you go into what information you need to run your analysis. What information do you need to run the analysis?

Rob Beardsley: So the bare bones starting point is always a trailing 12-month profit and loss statement and a rent-roll. Both of those are very important and they’re different in their own ways. So quickly just to go over that if people aren’t familiar, a trailing 12-month profit and loss is also known as just a T12, and that shows the trailing 12 months of historical operations for the property, all the revenue, all the expenses to essentially come to a net operating income. So that’s a 12-month snapshot, whereas the rent roll is just one day, one snapshot in time. They complement each other, because the rent roll will tell you potentially what’s going on today or on a more recent basis, whereas the T12 gives that historical context, which is really important.

I was actually talking with a 30-year veteran in the business who said, “Yeah, I’ve probably forgotten more about evaluation than you know.” He said that “Back in the day, we would always look for the trailing 36.” They didn’t even call it a T12 back then. He’s like, “I don’t even know what you mean when you say a T12.” So they would look at the trailing three years, and he said, “Yeah, if you went that third-year back, you’d always see what the seller was potentially hiding.” I thought that was really interesting, because a lot of people these days aren’t even looking so much at the T12, and lenders and investors alike are willing to discount the later months in a T12. And really focus on the T3 or even T1, which – there’s some truth to that, but it is an interesting take.

Joe Fairless: So that’s the minimum… What’s the best-case scenario? You have a good friend who is selling you the property. They don’t care about money. They just want to make sure you make all the money that you possibly can by evaluating this property in its entirety, so they give you everything you could possibly wish for. What is that?

Rob Beardsley: That’s a really interesting question, because that’s starting to get into more of due diligence, which, obviously, we all know due diligence is hugely important. But in terms of underwriting, what I would potentially want to see is color to help inform my assumptions. For example, understanding the tenant base. Where do they work, and obviously, how much money do they make, and understanding the average tenancy, because if I know the average tenancy, I can calculate the turnover rate which will help me pin down my repairs and maintenance costs. If I know how much they make and where they work, I can better evaluate the risk of the income, and I can understand how far we can potentially push rents before we get into territory where there’s just unaffordability. So those would be helpful.

Looking at their maintenance log and seeing– this is actually very interesting, more on the due diligence side… But evaluating the maintenance log and seeing what are the most common maintenance requests, that might inform you of deferred maintenance and potential opportunities to cure deferred maintenance or potentially even create savings somewhere. So I would say, from the seller, those would be extremely helpful. Do you get them prior to executing a PSA often? No. But those would be helpful.

And then aside from what the seller can offer, there’s great public information and data services as you know, like CoStar and Yardi, that will provide a lot of that information. But we look at free information online as well, like Justice Map – highly recommend that resource – to really look at the incomes and the demographics on an extremely granular level.

Joe Fairless: CoStar is one resource to use. What paid subscription services do you use right now?

Rob Beardsley: CoStar and Yardi.

Joe Fairless: Why do you use both and not just one?

Rob Beardsley: Well, the simple answer is because we have the luxury of both. But really, they do the same thing. What I will say though if anybody’s considering them right now, Yardi does a little better job with sales and loan data and CoStar does not. This is specific mostly to Texas, so I can’t speak for all across the country, but that has been my experience. But CoStar does other things well.

Joe Fairless: You mentioned Justice Map as a free resource. What are some other websites you know you’re gonna go to, to check out a property’s area whenever you’re looking at a deal, that are free?

Rob Beardsley: I forget the exact domain, but it’s, I believe.

Joe Fairless: Yeah, Greater Schools or something, yeah.

Rob Beardsley: Right. So schools are hugely important, especially if you’re looking at a property that has larger floor plans like three bedrooms, schools are very important.

Joe Fairless: You’re actually right. It is

Rob Beardsley: You were quick on that.

Joe Fairless: So, final answer. Alright, move on.

Rob Beardsley: So schools are important. Other places I like– I forget. I’ve got a bunch of links that I’ve just have copied and pasted into my underwriting model, so I can just click on them quickly from there. If I want to reference crime, I think it’s or something like that. So crime, schools, and then this is something that I actually heard you say on a podcast just the other day, which is looking at Reddit to understand where the hipsters get their coffee. I thought that was super interesting.

Joe Fairless: Yeah. I think someone I interviewed mentioned that. I don’t remember but yeah, I agree. That is very interesting. They really get the flavor of the community by going to Reddit, and take it with a grain of salt, certain profile people are on Reddit, but it’s just interesting. You mentioned that every input that you have in your underwriting model, you address it in the book. What are some inputs that you added to the spreadsheet that perhaps others might not have?

Rob Beardsley: That’s very interesting. So I’ll talk about the core model itself, and then maybe branch out to the sensitivity analyses and things that are more add ons. But I’ll talk about the core, which is one interesting component is the stabilization timeline, which in terms of value add, this is where models all start to deviate and they aren’t all the same. In terms of income and expenses, it’s pretty straightforward. Everyone’s pretty much the same. But the way that somebody projects how their value-add plan takes place over the first one, two, three years is very unique. So some people choose to input how many units they’re going to renovate per month, and then they have some schedule that they run, and then they calculate how many units are renovated and multiply that by the certain rent.

Rob Beardsley: So everybody’s got their own way, and again, going back to simplicity, the way that I have chosen to build that out is to simply have a stabilization timeline calculated with months. So you’d input a 12-month stabilization timeline, for example, and you would have your in-place rents and your pro forma rents. So right off the bat, you’re in-place rents would grow to your pro forma rents linearly over your stabilization timeline. So if you had, let’s say, $900 rents and your pro forma was $1,000 and your stabilization timeline was ten months, well, the model would just slowly build that rent up by $10 per month over those ten months, until it achieved the $1,000. Similarly, with your loss to lease, your vacancy, bad debt, concessions. The way that the model works is it all starts with the in-place numbers. So what’s currently happening at the property, and then it slowly linearly changes just like the rent to what our stabilized assumption.

So if we have 3% bad debt, but we think we can clean it up to one point, we’re not just going to go to 1% in the first month of ownership. The way we would do it is over our stabilization timeline, we would slowly linearly trickle it down. So that’s something I think is unique and really keeps it simple. But actually, if you compare it to some other ways, it’s quite a bit more conservative, just given the timeline. Obviously, you can use a faster timeline, but I think construction and project things typically take longer than you’d expect. So that’s one really important thing to address, because it actually has a lot of impact on the results of your underwriting more so than you’d expect. You wouldn’t expect that “Well, if I finished my renovations in 12 months versus 18 months–“, you wouldn’t expect that you’d get potentially a 2% bump in your IRR.

Joe Fairless: Yep, that’s substantial. One aspect that you mentioned was make sure that you’re factoring in monthly and not annual in your calculations, which yes, definitely, and I’m glad that you mentioned that. One thing it made me think of is, if you are doing monthly and you are getting granular with your assumptions, do you factor in the leasing period? For example the summer, you lease more units most likely than December?

Rob Beardsley: No, the simple answer is no.

Joe Fairless: How come?

Rob Beardsley: Well, again, coming back to simplicity. So one thing I like to say– and I could be wrong. There’s plenty of people much smarter than me. But one thing I like to say is my underwriting really isn’t trying to precisely forecast the future, including the depths of the winter and the booms of the summer. Similarly, if I think rent growth — obviously we all know rent growth isn’t just going to simply be 3% or 2% every year for eternity. But we use some more general assumptions like that to keep things simple and to just have a general understanding, and to — again, coming back to simplicity, I can easily compare apples to apples of different deals when I use more general assumptions and try to keep things as simple as possible. When I start really getting in the weeds and trying to get too specific, then it’s harder to compare to another property because you’re making so many assumptions. So my goal is to be as accurate as possible with as few inputs and assumptions as possible.

Joe Fairless: How do you know how to walk that line? And what is too granular, versus what is “You know what? I probably should go granular on this thing”?

Rob Beardsley: That’s a tough one, but I think the answer is understanding what is most sensitive to your outputs and your results. So an interesting example I give is people would be surprised to know that on a larger property that we’re used to dealing with, a $100,000 additional expense on your cap-ex budget isn’t really going to make or break the numbers. But missing your rent pro forma by $25, that could make or break your deal. So a $25 difference in your rents is a far greater impact than the $100,000 difference in your capital expenditures budget. So understanding what actually moves the model can tell you, “Okay, this is what I really need to focus on and make sure I get it right.” So we’re very, very focused on our rents and making sure that we’ve got our rents right, and that they’re defensible via comparables. That’s the next chapter of the book is once I tell you how to input every single input and say, “Okay, well, how do I prove that I’m right?”, and you need to do that with most importantly, rent and sales comps.

Joe Fairless: Rob, I enjoyed this conversation, and I know a lot of the Best Ever listeners have as well. How can they learn more about what you’re doing and get in touch with you?

Rob Beardsley: So the best way to check us out is at There, you can check out our articles, newsletter and most importantly, click the link at the top on the homepage and you’ll get a copy of my underwriting model that we talked about today emailed directly to you.

Joe Fairless: Rob, I enjoyed, as I mentioned, our conversation. I hope you have a best ever weekend and talk to you again soon.

Rob Beardsley: Thanks so much.

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