The Math That You NEED BEFORE offering on A Rental Property!

I've bought hundreds of rentals and in the process I know that the order is deal first, then debt, then equity. Figure out your deal before you line up the money. This process will carry you through everything. As part of that, I got a question today on our mentorship group that I want to share with you in this video, which is what math do you actually need to see from the seller or ask the broker for to go under contract? Now, once you're under contract, you do due diligence, you verify the income, the expenses, you get a lot more details once you're engaged on the deal. But to make that initial decision, do I think I have a deal here? What do I really need to see? I'm going to show the two documents that I really need to see to make an educated decision and how to proceed from that point in finding your deal. So if you're on the first part of your deal and you are learning all the pieces or you're trying to figure out how to be more efficient about what do I really need to see to start my underwriting, looking for one thing first, a rent roll, which is simply who are the tenants, how much are they paying, and when do their leases start and end? I also ideally would like to see any deposits attached to those tenants there, but not really necessary when we're starting the process. What I really want to see is What is the scheduled income for the property and how occupied is the property today? Uh, that is a very simple request. Basically every deal should have that, and if an owner doesn't know that, that should be very easy for them or their property manager to find out. That is not super secret information. At the most basic level is a basic document, the rent roll of who is here, what are they paying, what is the scheduled income of this property. Pretty simple. The other one is called a T-12. 12, or trailing 12 months. I will accept a T3, the trailing 3 months, and it's actually— those are the most important months because that shows you what am I buying today. Ideally though, I want to see what are all the expenses that came up over the course of a year, what is your average income through the last year. That's the best snapshot of how a property is performing. I'll do you one better though, I'll show you what one looks like. All right, this one's slightly incomplete. This is pulled from my software for property management, Appfolio. There's a couple of things I do not run through the software. So there'll be a couple of things that are missing here, which is going to be the mortgage expense I pay direct from the bank account and my renovations, which were notable on this property. However, the first thing I'm looking at, I can show you everything line for line. This is the actual income of the property month by month, trailing 12 months. We started $2,300 in rent. We're looking at total rents in here. 22, 16, 17, 19. We get all the way up to 24, basically $25,000 right here. And then it goes back down all the way to $18,000. If I'm looking at this on a stabilized property, this doesn't look very stable to me. I have questions already in here. Now let's break this down. If I ask for a T12, what are the most important things? Well, one, I can show that this property has done $25,000 in a month. That is a thing. That has happened. We have collected that much. One, I want to see how that compares to what should have been brought in, which I'll share with you. We've never had perfect collections on this property. This one's value-add. We're not done with the project yet. So if I'm looking at this, I show, well, if I, if I wrote in my pro forma, which is my essentially, this is what I'm trying to sell you, I would say, oh yeah, the property can bring in $25,000. I've proved it. Sure I have, for one month. But what are you buying? Over the last 3 months, $20,000, $19,000, $18,000. This isn't telling me a story of a property that brings in $25,000 a month. I'm waiting these months more than I am the other one. I do think there are questions that I would have here. It was making $22,000. Why the dip here? Why is there a second dip that we're in right now? Well, I can now, as a seller, show you invoices for what we did. We actually went through a string of evictions for people who were actually pretty significantly delinquent. But we did a lot of property cleanup here. We also did a lot of renovations in this time. So occupancy was at an all-time high here. We actually chose to eliminate some of our tenants or not renew some contracts of rougher tenants to improve our community, to add safety. And we eliminated a couple of nonpays, which did lower income. We should be higher than this when we finish stabilization. But there is a recognition, like if I was selling this, we'd have to recognize, yeah, This number is not this number. That may play into the pricing. When I'm reviewing these though, I'm looking for abnormalities. To me, I'm seeing a lot of abnormalities in income. I'm not seeing a consistent number every month. I'm going to have questions. We get into some of our expenses. You can learn a lot in here. I know that landscaping doesn't have a lot. I might wonder why we only have landscaping October, November. But there's questions. You're looking again for abnormalities. Legal fees, boom. All of those evictions, well, those conveniently line up right around the time we had our best and subsequently went into our worst collection months. We won the evictions here. We got people out of the building. We had a lot of legal fees to go through that. Why the legal fees line up with the story of the rental income go down further. Here's something that I would definitely notice. Expenses. Plumbing doesn't cost anything, doesn't cost anything, doesn't cost anything. All of a sudden, boom, boom, boom, boom, boom. 5 months in a row of plumbing and then back down to zero. If I'm trying to budget, am I expecting to have a lot of ongoing plumbing or these one-time fixes? That's a question I'm going to have before I go under contract. Now, in this particular deal, we have galvanized steel pipes in the buildings. There's 4 buildings. 3 of them have been repiped to PEX now. So as this buyer, I know 2 things. One, I'm buying a building that has a lot of renovated plumbing, which is brand new and upgraded to PEX. That's going to outlive me. I really like 3 of the 4 buildings. I also know that all of the other buildings failed in the last year. How long do I expect building number 4 to last before it needs a re-plumb? Galvanized steel. That stuff hasn't been used in a long time. It's going to fail. That is a fact. That's not a guess. Within the next few years, if the plumbing is not preemptively replaced, it's going to fail. I need to know that if I'm buying this property because I need to be able to budget. This right here tells me, okay, for the plumbing of these buildings, it's actually not all that money. I might want to get a reference for what contractor they used. I also want to look at the plumbing of the other buildings and make sure it's consistent with what I want to do with building number 4. Again, you're not seeing the maintenance budget here. I pay that out of another account so it doesn't pass through the software. If I was sending someone an actual, an actual T12, then I would actually, you know, provide more numbers than this. But this is a great example of what a 95% built-out one would look like. So you know what you're looking through. If I only have the T3 though, I can see a lot of income, a lot of expenses. I have a good idea how the property is performing. This is the type of stuff that we look at. From this point, do I know everything? No. Have I reviewed bank statements yet to make sure that these numbers are all true? Absolutely not. I did see a lot of those numbers weren't just round numbers. They're real numbers. What I would like to see is owners who can explain every single detail of every step of this for me. If I can just understand what is it I'm buying, how did we put this deal together in a way that makes sense, and is everything I was told when we put this deal together still true after we verify it? We do that due diligence. If you have this piece and the numbers you're seeing here matches the rent roll, so you're saying like, okay, what's supposed to be brought in is brought in or roughly brought in here. I see the story and I've had my questions answered about the expenses. I feel pretty comfortable with what I'm buying. I don't need more to go under contract. If I have these two things and I've asked any related questions to abnormalities, we go ahead and we put it under contract and now it's our deal to lose. Now it is up to us to make sure that they're able to prove that everything they showed you is true, which is going to be bank statements. It's possibly going to be, in most cases, a stopple letter to the tenants where they're also signing saying my rent is what they said it is and my deposit is exactly this and they sign it. That's what a stomp letter is. There's a few other pieces that you'll need to verify throughout. I actually like to see a few of the utility bills to make sure they line up. But when we verified the numbers are correct, you then move on to closing the deal and you own a piece of real estate. I thought it was a great question. It was worth a video. I'm kind of doing this live and from the hip. There's been no real planning and mapping as I usually do for videos. I just wanted to share the story and show you like really diving into a T12, what you're looking for, what they look like, what a well-documented property looks like. If you don't see those things, that And that's the last point I'll make. If they can't provide these, it doesn't mean you can't buy the deal. It means you have to be much more conservative on your estimates. If they don't know what their rents are, you need to come way off of market rent and assume like, okay, well, let's say they're getting 60% of market rent then. I'm only going to write the income at 60% of what market rent could be because they won't tell me what the income is. If I don't know the expenses, I'm going to estimate really high on the expenses. If they cannot provide you enough information upfront, your offer has to be either lower price or better terms. If you can verify more details, you can put together a better offer. It's in everyone's best interest they have good books. Sometimes you have a property that just does not have the bookkeeping. You have to work with it. You just have to make sure it's a better deal so you can afford more errors in the math. That is the basics of how to buy a deal, what you need to see to go under contract. That is the really one of the last pieces of deal before you get into debt and equity, which are other videos that we have on this channel all the time. And all of course, film more on how to structure both in the near future. Thank you guys for watching. Like and subscribe, it helps me support the channel, and we will see you guys on the next episode.