Due Diligence Training - Part 1

All right, guys, let's get started. We're going to jump into due diligence today. Typically, step one, when we're out looking at a property, at least in our estimation of offer process, so the way that we conceptualize making an offer on a property and going about this strategically. So where does it start? Well, typically it starts from the initial conversation, the initial contacts, number one, is going to be just the initial conversation. Now the reason that I include this in the discussion is when we're doing syndication, when we're doing wholesaling, when we're doing creative financing, anything that involves something other than just going in and buying it and closing on it, right? Something that involves pulling in multiple investors, times of the essence. So when I make an initial contact with a property owner, ideally I've already got some things in motion, right? Ideally, I've already got some prep work that's happening and I'm already putting in the effort to set myself up so that once I do have a deal, I'm going to be successful with that deal. So when I'm making initial contact with property owners, especially those of you who are very early on in the process, you should have basic property information, you should have demographic data and you should have your investor partners buy boxes, right? And so if you know what your investor partners are looking for, you've been doing your networking, you've been networking with people in our community, school and slack, et cetera, and your local community. Remember, we always have two lists. So, so we have our property list and we have our investor list. You want to make sure that when you're, when you're reaching out and making your initial contacts that you have these three things. Now, you would, you should have your demographic data because if you determine what your buy box is, you should know, is this market growing? Is it shrinking? Is it, what's the average income? Right? What's the typical occupancy rate? What's the typical vacancy rate? Then property information. We're talking about comps, we're talking about what is a two bedroom rent for? What is a one bedroom rent for? What's the typical expense ratio in this area? Something that Larry and I mention all the time when we're out looking at properties. Oh, those are going for 45,000 unit, those are going for 100,000 a unit. That one 75,000 unit. It's a quick, simple way in order to compare one property to another. So these are the kinds of things that, that you should know. Now, all things considered, I would rather you start making Initial contact with property owners immediately. And then as you're making this initial contact with property owners, you're doing a lot of this legwork simultaneously. So this is not, I don't want to give the impression that anything we're talking about today until we get to the contract is like, do this, then this, then this, then this. That's not the way that it works. A lot of these things should be done simultaneously. So for those of you who were at the live event you remember me talking about, 80% of our time should be spent on prospecting. 80% of our time should be spent on reaching out to property owners and generating deals. Nobody's expecting you to be an expert at underwriting. Nobody's expecting you to be an expert in analytics. The value that you bring as a new investor is finding deals. That's the value that you bring, finding a deal somebody else couldn't find on their own. That does not mean going on to LoopNet, clicking around and seeing what pops up. It does mean prospecting, generating contacts, networking with people, finding off market deals. So especially for those of you who are beginners, you're not expected to come to, whether it's me or other investors in our community who are looking for properties, you're not expected to come to me and be like, oh, I know everything there is to know about underwriting and analytics and I'm an expert at all this. Really, the value that you bring is if you bring me a deal, you're my new best friend. That's what I'm looking for. And so you're putting in the time, effort and energy that I don't have, drive for dollars to write letters to property owners, cold call property owners, whatever the case may be in generating deals. But while you're making those initial contacts, you're researching the individual properties. You do know comps well enough to know is this a good deal, is this bad deal? And if you're struggling with that concept of what a desirable deal looks like, I uploaded last week's training, I think it was last week or the week before what a good deal actually looks like. What's a compelling deal for a loan sponsor? What's a compelling deal for a limited partner? And then demographic data and then, you know, having your investor partners list so that when you're going out and looking for properties, you know that your loan sponsor. If you know that an investor in your community, in your network is looking for this specific kind of a deal, you can go out and look for deals with a high degree of confidence Knowing that once you find that deal, you've got a place to put it. So we have a question. What is a healthy growth rate of a particular community? Is any type of projected good or is there a threshold that should be paid attention to with so many of these things, I pay attention to everything, but I don't focus on anything. So there's always a way to correct for any particular component of analytics. So when I'm going in, looking at a community and I see that it's not growing, that doesn't necessarily mean that I walk away. Those of you who are beginners, we recommend that you look in the market where you live. All things considered, for your first deal, it's typically preferable to buy a property that's within an hour or two of where you live. It just makes it easier to get there and back. You make less mistakes, you can physically go see it. All of you don't live in a growing market. Right. So does that mean that there are no good deals unless it's a growing market? Not at all. So if I go in and look at a market and it's not growing, I was just talking to some folks yesterday who brought me a deal, and we're looking at a market. It's a very much ancillary market. The price of this deal was cheap. It was like $35,000 a door, something like that. Super cheap. We looked at the demographics, and the market's not growing and the income's not going up, population's not increasing. So that doesn't mean that we walk away. It means that in our underwriting, we compensate for that. And so when we go into the underwriting, we're using a higher vacancy rate, we're using a higher loss to lease, something like that. So I say that whenever you find out something like that, it's not growing, I'm not going to go in and underwrite that deal at 100% occupancy. Maybe I go in and underwrite it at 85% occupancy. And so just being aware, when you're underwriting in their deal analyzer, those analytics that we're putting in there aren't just pulled out of thin air. You want to know the demographic data. You want to know enough about the market that you're looking in where you're making intelligent assumptions based off of real data. Yeah, it's a good question. Any growth rate is good. Anything above 3 to 5% is great. But it doesn't necessarily mean that based on that one piece of information, I either go into a market or don't go into market. If a market has 8 to 10% growth rate, maybe I do use 90%, 95%, 100% occupancy rate. If it's more stagnant, I'm more conservative both on how much I can raise the rents and what the occupancy rate is going to look like. So. Good question. When I'm making the initial contact with property owners, I've done a lot of homework. I have property information, I have demographic data, I connected with my partners. And then finally, if you're a syndicator, you're planning on syndicating, there are a couple of things when you're out there making initial contact that you should be preparing. One of them. Your PPM M stands for Private Placement Memorandum. This is the document that you use when you're raising funds for a deal. So you don't need to have it done, but you should have connected with our attorneys about it. You should have thought through it, you should have educated yourself on what it is. And you should start putting those pieces together now. If you're, if you're planning to wholesale, if you're planning to flip, if you're bringing in a loan sponsor who's very experienced, they may have their own PPM that they want to use. But if you're looking at syndicating, then it's a good idea to start thinking about this before you go under contract. In addition to the ppm, you should have your pitch deck. We have example pitch decks in school. Pitch deck is a presentation. It could be a page, it could be 10 pages about your investment opportunity. It presents your investment opportunity to raise funds for that opportunity. So the PPM is the legal document, the private placement memorandum. It's written by attorneys, got a lot of legalese. The pitch deck is the marketing element. And so you can go in now you're planning on syndicating and you can start preparing your pitch deck. You can put your picture in there, you could write your bio, you could sort of format it. Now, I'm going to caution you though, this is the type of thing, this pitch deck is the type of thing that somebody who has 10 hours a week to get into multifamily real estate investing or commercial real estate investing, whatever your target is, the somebody who has 10 hours a week should not spend five of those hours making a pitch deck. So I'm cautioning you that what I'm saying here does not cancel out the importance of making that initial contact. You're spending 80% of your time doing that. You're spending 20% of your time networking and connecting with people while you're doing those things. Any sort of extra time you have on a particular week, that's where we're going to start thinking about these things.