3 Simple Steps to Evaluating Multifamily Deals Fast!

What's up guys? So today I am going to be breaking down the three steps to evaluating any multifamily deal in three minutes or less. Okay. Number one asset an investor has is their time. You've got to steward your time well to be able to grow quickly in this game. And that means evaluating deals, assessing getting the bad deals off your plate quickly so you can get onto the things that are worth your time. So the things we're going to be going over in this video is the data and info that you need to collect on the property first before we can do the assessment. Number two, the exact formula to do the quick assessment and then number three, the decision making framework and formula to be able to know what to do next. Now, there's a few things you need to understand about the types of deals we're doing and how we're structuring it to create the basis for how we are underwriting and how we are assessing it. Okay. Number one, it's a value add strategy that we are typically doing on these properties. Meaning we increase the income, increase the value of the property through different things, whether it's changing management, improving operations, renovating the property, different things like that. However, it is a light to moderate value add that we are focused on, meaning we are not doing a full gut renovation, you know, taking something from 20, 30% occupied and bringing it up. In fact, we are sometimes taking deals down that are already over 90% occupied, meaning stabilized. And, and we are just increasing it further. Okay. Light to moderate value add opportunities. Number two, is stabilize within 18 months, meaning it's over 90% occupied at market rate. Right. So we are going in, we want to make sure the value add play is done within 18 months and we have it at market rate. Number three, forced appreciation. Okay, we're not going in. And depending on market appreciation, we're not typically betting on the market going up. We are focused on how can we force appreciate the property. And these multi family units, the beautiful thing about them, they call them appreciation multipliers. Okay? So you can have a lot of units and if you just increase the income or increase the rents just a little bit, you can see substantial appreciation. Okay? So that is what the play is and that's going to determine how we underwrite it and then acquisition fee. So as the general partner, as the person that is buying the deal, you know, not the people, not the limited partners that are putting the money in, but the person buying the deal can take an acquisition fee. So this is one of the big plays in how we're underwriting these deals and how we're making sense of our time, finding the deal, structuring the deal, getting the capital and closing. We're paying ourselves 3 to 5% of the total cost of the property. Okay, so 3 to 5%, say it's $5 million. Deal. 100, $150,000 is what we would pay ourselves for our team, our time. And lastly, we're doing 10 plus units. Okay. The reason for that is anything over 10 plus units, we're factoring in the cap rate of the property and of the market. And so that's not as relevant when you're talking about less than 10 units. For less than 10 units, I would just take the income minus your expenses, minus your debt, and that's what you have left over for cash flow and to split between you and your investors. Okay, so, so let's move on. All right, so as you can see, I've already filled out the metrics for the property. So let's just go over real quick. The asking price that the seller is wanting is $5.5 million. The unit mix is 50 units. We're not going to go into breaking it down for simplicity's sake. Again, we're just getting an average. There's 50 units. Market rents, the average amongst all the unit mix, 1500 per month. This is market rent. It's not what it's currently renting for. This is what it could rent for. If we implement the value add plan, the expense ratio, obviously, 50%, the cap rate, 6%, that's just the national average currently. Again, this is market cap rate. If the property is fully fixed up, what could it sell for? What are past properties selling for in this current condition and current market? Okay, that's 6% is what I'm going with for this analysis. And then the rental cost is 750k estimated. Okay, now we're going to flip over. I'm going to show you the calculation. I've already fixed the metrics. So unit mix times the market rents times 12 months. So the unit mix is 50 units, times the market rents is 1500 per month. And then that gives you a gross potential rent over a year of $900,000. We're not factoring in other income. That'll be on the next step. Then you take your gross potential rent of $900,000, you subtract your expenses. It's a 50% expense ratio. So we're just going to cut that in half. And our net operating income, the NOI, is 450k. NOI is just your income minus your expenses. Okay? That's a very important number. That's how your property is valued. So we got 450k. And then you take your NOI, that is 450,000 divided by your market cap rate and that gives you the value of, of the future value, the stabilized value or your GROSS Potential value, 7.5 million. Your gross potential value times 80%. What is the 80%? That is your discount. Again, we're buying value add properties. We're going to take an acquisition fee. We need to justify how much we are spending as far as our time. And this is where you can be competitive based on how good the property is. If it's already near market rates, we can increase this and get less of a discount. Or if it needs a lot of work and it's going to be a long time, if it's in really bad condition, we need more of a discount. But for our typical light to moderate value add, we're at 80%. So you take your gross potential value, your stabilized value, 7.5 million times 0.8 or 80%. It gives you your total cost basis, your all in amount of $6 million. Okay? And then your total cost basis minus your rental gives you your maximum allowable offer. Okay? Total cost basis is $6 million. Your renovations estimate is 750k. That gives you a 5.2 million dollar maximum allowable offer that you can give to the seller or the broker. And then we take that number and put it into the next step, which is your decision making framework. So time. That's three minutes. We did it. All right, now it's time for the decision making framework. The decision time. The asking price from the seller was $5.5 million. Our current MAO, or the maximum allowable offer from our assessment was $5.2 million. Okay, that's very close. But again, going back to the beginning of the video, the number one thing you got to protect is your time. Your biggest asset is your time. We've got a lot of deals on our table, we've got a lot to assess, and we got to get the bad ones off quickly and get to the good ones so we can make offers, right? So if we want to scale fast, we got to make more offers. The only way to do it is to set rules of thumb. And the rule of thumb here is, are we within 30% of asking price? Is our Mao within 30%? And in this situation, yes, it is. Okay, it's within 5%. That's a very good situation to be in. That's really exciting. The next steps, if it is within 30%, is to check it out further. Okay, you're going to do a deeper assessment. For our students, we give a deal analyzer tool where you plug in all the numbers and it spits you out what you can offer. And then we have a more realistic understanding of what kind of offer you can make. So the things you want here is the T12 and the rent roll. T12 stands for trailing twelve months. So that's your expenses, your income, your financial data on the property. Then your rent roll tells you what actually came in for each unit. What is the standard? What's the rate on each unit in rent? So once you have those things, you can plug them into a software, plug them in to take a deeper dive, get your actual expense ratio, get your actual income, all these different things so you can understand where the property is. And then if it's a no, if it's not within 30% of the asking price, if you're below that, then you want to move on. Okay, that's one option. You can just move on again. Find the best deals. Spend your time there. Or. And more times than not, I would recommend notifying the seller. Okay. Let the broker or the seller know. Hey, Mr. Broker, Mr. Seller. You know, I don't want to waste your time just letting you know, our team did look at it. We underwrote the deal, and we're not close to where you are wanting to be. We're more like 100k a door. And. And I know you're wanting 110k a door or whatever that is. Okay. So you can just let them know out of courtesy and say, hey, if you have any other deals, please send them our way. We'll definitely do our due diligence and check it out, see if we can get to where you want to be. Okay. And then he can tell you, well, if you're at 100k a door, go ahead and submit the offer. Maybe we can look at it, but just let them know. I don't want to waste your time. You're being courteous, making sure that you've kept that relationship. Okay. So I hope that helps. Let's get to doing some deals. God bless you.