EP1: Underwriting Gangsters
Mundo Sanchez and Becko walk through the underwriting of a real estate deal, analyzing the numbers to figure out if the property makes money and what could go wrong.
Welcome to episode one of Underwriting Gangsters. Today we are going to underwrite a property, and this is what this podcast is actually going to do. We're going to be underwriting properties with these gangsters. These are my special underwriting assistants. Today's guest that we have here is.
What's your name.
Big Boy. That's his stage name is Big Boy. What's your name in your microphones? His name is Becko, and I'm Mundo, your official underwriting gangster. They have two and a half years of experience, and he's got four years of experience. He was underwriting when he came out of the womb. He's got a ton of experience, and you're going to be able to see all of that today. All right, you got to be quiet on the podcast. Wait, wait. When I talk? Yep. Wait when I talk to you. Okay.
Why?
Because it does. You have to hold it.
It's special.
Okay, so let's check out this property that we got. We got a mortgage statement sent to us. This looks like a sub two deal. And the outstanding principal balance is 211 68650. Okay, so we know the purchase price is $270,000. So we're going to type in $270,000. We know that the seller owes approximately $211,000. So 211, 686, the mortgage statement. If we just pop right over, we can see that it's $212,000 owed. And so that's what we're going to underwrite today. So we see a difference of 270 to 211 owed. That means the seller's equity is 58,313. Okay, well, V has a really busy podcast schedule, and we actually double booked him today, so he's going to have to run. Thank you so much, Big Boy, for joining us today on Underwriting Gangsters as we'll continue after this.
Get down.
Come here. Are you staying here?
What?
Are you still staying here? We're underwriting the property first.
No, that couple first.
We have to underwrite it.
Big old puppies.
Yeah. We have to determine if it's a good deal or not. I understand, but we got to figure out if it's a good deal. Do you think it's a good deal?
Yes.
Well, we got to look at the numbers. You ready to look at the numbers? Okay, cool. Awesome. All right, so we have a purchase price of $270,000. And the mortgage statement is 211 686. So that means they have $58,000 of equity. Now that doesn't mean that they should get all $58,000 of equity because it's pretty customary that they pay closing costs, they pay the agent. Right. So, like, there's things there that we can go back and negotiate. If I was going to do this deal myself. But for the time being, let's just go with this $58,000 and just assume that the cash to seller is right here. It looks like my other guest, he was also double booked today, so I, I think he had to run to his next podcast. But don't worry, you're in good hands. We'll keep on rolling. So we're gonna bump up this assignment fee to about 10,000. I'm gonna leave that in there. So let's put our rent comps at 2100. Okay. So we need to determine what is our PITI. So we're going to look at the mortgage statement. Why try to reinvent the wheel? We already know what it is. Right. It tells us right here. 1650, 94. 1650, 94. So I'm going to put that in there. I'm gonna put in some property management. Maybe we can get away with knocking this down to 5%. I would probably leave CapEx at 8%, but actually, let's just keep this at 8%. I don't think we're gonna need any home warranty or anything like that. So I'm gonna zero that out. All right, so we have a total of $3,000 in expenses. Fences coming out, 2100 coming in. That's a problem. Right. Okay, so what can we do about this deal? Let's first look at our assumptions. Do we have anything that we can eliminate? Well, we don't have a connector on this. Right. So let's get rid of that. That lowers our cost of capital. Closing cost. It's probably going to be around that. That might actually be a little light, to be honest. Let's see, we'll leave that in there. You might be able to get a sub two deal done for under six grand. It'd be pretty close, but that's, that's generally pretty close to where you're going to be, let's say cash reserves. I think the cash reserves here is going to be a little light. I probably honestly want to have at least three months. So I'm gonna add that to this model here, make this little adjustment. So that way for future versions we'll be able to figure that out easily. Okay. Honestly, I feel like it should be more of six months. So let's Just put six months in there. That's a really good safe number to use. Okay, what can we shave off of this right now? It looks pretty tight. The only thing we have to play with is the cash to seller. Right? So let's look at this. Their original equity was at $58,000. That doesn't mean we have to pay out all the equity. And it also assumes that we're paying the full agen commission. Right. So first thing right off the bat, I'm gonna take their agent commission off of this equity number. They, in my opinion, they shouldn't be getting that. Right. That should not be included. So we're lowering our cost of capital as far as what we need to borrow from. So if you are not familiar with what I'm doing, you should check out my very, very basic underwriting loi. That kind of gives a walkthrough of this basic underwriting calculator. We're not doing that today. In these episodes, we're just going through and underwriting properties, getting you familiar with how to underwrite properties. But we're not covering the super basics. So when I look at this, this is taking the attitude that I'm going to be raising private capital to fund this deal. So I need to fund the equity, the cash to seller that the seller actually wants. And then I need to fund the assignment fee, I need to fund the agent commission, I need to fund the closing cost, and I need to build in cash reserves. So what does that look like when you build in cash reserves? Well, let's call this $10,000. I'm going to receive a $10,000 check at closing, and I'm going to deposit that into my bank account and. And that's going to be left in the property for reserves. So if we have vacancies, if we have some breakdowns, we have capital allocated to those problems that come up. It's not like it, you know, could happen. It will happen. Trust me. Every property has turnover, every property has repairs. I don't have a single one that hasn't had, you know, those types of situations come up. Happens all the time. It's part of real estate. So you need a plan for that. This is looking at, okay, we're adding up all of the cost. This is the interest rate. This is what a monthly payment, what a PML would expect to get paid. They would expect to get paid $906. Pause for a second. If you are a PML and you want to get paid 13% on something between like one and three years, reach out to me because I can place your capital and get you those returns. Now that we get away from that quick, shameless plug, let's get back to the underwriting. If we're looking at this, what can we shave? Right. So we're assuming we're paying all closing costs. Normally you would probably split that. So let me take 2,500 off that. As we still look at this number. Where are we at? We're at negative 800 cash flow. I don't know how you make this a deal. Like, I just don't like this is going to be a loser no matter what if I delete this. So no cash to seller whatsoever. What does that number look like at zero. This is telling me that my net cash flow is negative 286. You can see here there's, there's really no way that I can make this deal work because our overall expenses for the property is 2386. So even if you got rid of cash, the seller, even if I got rid of the assignment fee, even if I got rid of the agent commission and all I got this down to is raising for closing cost and cash reserves, you can see I'm still losing 100, close to $100 a month. Okay, guys, what do you think? Is this a good cash flowing property? Yes or no?
Yes.
You think this is a good cash flowing property? You would buy this one?
Yes.
Is it a yes?
Yes.
Or is it a yes? Which one is it? Yes or.
No?
All right. All right, big boy. Tell us what the ultimate final verdict is. Is this a good deal? Yes. Beckham, Is this a good deal?
Yes.
Or is it a bad deal?
Yes.
Which one is it?
Mickey Dow.
If it's a bad deal, go like, guess what? Good deal.
Probably Mickey Dow. Minky Dow.
This is a good deal. I know what my underwriting assistant said, but I'm going to have to pass on this one. For me, this is a Sorry. I hope you enjoyed the breakdown. Today we're going to be underwriting properties in this podcast. We're going to take one property address and we're going to be underwriting it for the episode. And you get to see step by step of how we're underwriting properties. Each episode I'll kind of COVID a different flavor of underwriting and kind of highlight some certain things. But I strongly recommend you watching our very basic Underwriting 101 video that will really lay down the foundation for you. But we're just looking at deals. That's what we're going to be doing. This podcast. So if you enjoyed this, do me a favor, go ahead and like and subscribe. And feel free to drop a comment and tell me how cute you think my assistants are. I don't know where they're at, but they're pretty cute. See you next time.
