Whiteboard Wednesday Miami Multifamily Addition

Hey YouTube, Cody, and I've got Christian back for this week's video, Whiteboard Wednesday Miami Edition. We're here with 5 more questions, and we're in Miami because we're going to do some training with Grant Cardone at GrowthCon, and we're going to actually look at some real estate around here too with our buddies. So we're going to dive straight into these 5 questions. Christian, what's question number 1?

Cody, uh, let's see here. This is looking to buy my first rental next month with a partner of Fuck, they changed.

What?

It switched to the other one. I was like reading it like this wasn't the question.

You're butchering it.

I am butchering it. Start from right here. I'll start at 35 seconds in. Intro, go.

Hey YouTube, I'm Cody and I've got Christian back for this week's video for Whiteboard Wednesday Miami edition. We're in Miami to go check out 10X Growth Con with Grant Cardone and we're going to tour some apartment buildings. As you know, we're always looking to expand And we're looking in Florida. So, we've got 5 questions for you. We're going to dive straight in. Christian, what is question number 1?

Question number 1, would you recommend having a property manager on a 3 to 4 plex to get the most value out of the property? Or do you just assign those to your larger properties?

Well, if you're buying a 3 to 4 plex, you know, get that first triplex or first 4-plex, I would manage it yourself. If this is your 10th building, put it into property management. But the reality of the situation when you're getting started, is you're not going to know how to manage your manager. You can't just trust people to do the right thing. And so I recommend folks learn doing it themselves. It is not that difficult to go out and manage a 4-unit apartment complex. It is not that many people to manage, and there's not a lot of stuff that's going to go wrong typically on a 4-unit building. There's not enough people for a lot of things to go wrong. There's one roof, there's maybe one water heater, depends. Hopefully there's more than that, but depending on the building, there's not a whole bunch of just systems that could go wrong. So I would manage it yourself, and then once you get past 10 units, push it out to property management because you're going to have a better ability and capacity to set expectations for the next manager to take care of it as you would want it taken care of for yourself.

Absolutely. Do a little bit of it, you can manage your managers even better.

Our next question: Looking to buy my first rental next month with a partner. Eventually we want to look at private finance with friends and family. My question is, during a recession or time of interest rate hikes, is cash-out refinance a viable option to pay back investors?

Absolutely. Cash-out refinance is always an option, and we do this really simply. There's two pieces of math you have to do when you're buying. You want to look at day one. We look at the financials and we go, what does it look like today? Let's take a snapshot of how the property is performing today. We'll look at metrics such as cash flow, market appreciation, and market growth. Then we look at what is our exit. If you're doing private capital and you have 5 years on that, we need a snapshot of what do we expect it conservatively to look like 5 years in the future? Or if it's 3 years, math for 3 years. If it's 7, so on and so forth. You need to know what it looks like today and where it's going to be. The future, you don't have a crystal ball, so you need to be really, really conservative. Use very generous numbers. Assume that expenses are going to go up in the future. Assume that rates will increase a little bit. If you find out they don't, turns out you just made more money. But buy deals that work regardless of the economic situation you're in at your exit, whether that is refinance or cash out. Our next question: How do you determine if a property has enough value-add for you to successfully refinance and pay off your lender and keep it— wow, these questions are made to go together, that is perfect. Uh, Cody, how do we know when we have enough in a property to refinance?

So I talk a lot about this in the previous math videos, and we'll, we'll dive into this on here, but we only have two buying criteria when we're looking at selling: how do we buy it and how do we never lose it? And the way we buy it is through creative finance. We go over that in some of these videos and in future videos. And then how do we never lose it is built off of cash flow. The way that you are 100% confident that you can get the value up is you can improve efficiencies and get what's called net operating income up. NOI, or net operating income, are the dividends that you would collect as a property owner if you owned it outright. Now, the reason this doesn't account for debt— this is your top-line income less all your operating expenses. Debt is not an operating expense because everybody's debt's going to be different. My seller finance debt, there's not a single deal, not a single loan that is the same. And it's not going to be the same as your FHA loan. It's not going to be the same as a conventional 5% down loan. It's not going to be the same as a jumbo loan. All these different debts are going to have different structures, different amortizations, different payoffs. If they have a balloon payment, prepayment, there's all these different features. And that's the reason that you don't include this. But if you owned a building outright, How much money would you put in your pocket at the end of every year? And if you can improve that, you can improve the value. We talk a lot about that in some of the past videos, Math 101 and Math 201, where we go a little bit deeper. We've got debt yields, we've got mortgage rate factors, and you can calculate out risk to lenders. But at the end of the day, what I look for— can I raise the net operating income on an asset And by how much? And I set out ratios. We can go over our ratios in a future video. That would take forever on this one. But you set out your ratios, and as long as you check that box when you're looking at an asset, you're looking at a piece of real estate, it's a go, it's a green light. And never violate your principles, don't violate those ratios, and you're set. Perfect.

We'll include a link in the comments section, or at least in the description, about how to do the math for both 101 and 201.

Our next question: How do you estimate renovation costs if you're starting out, like a rule of thumb, if the contractor isn't available?

Oh my goodness, that is hard. So if you're just starting out, it is really hard to estimate costs. If you're doing a little TLC, slap some paint on some cabinets, swap out a countertop, you could do a renovation, make a unit look really good for $5,000. If you're doing electric and plumbing in an older building, that price can swing from $3,000 to $15,000 depending on how the building's built and what they're actually doing in there.

And some of the rent-out goes higher. I mean, we've spent upwards of $30,000 on units. Mm-hmm.

When we initially came in and thought it was going to be $15,000. Like, we're not always right. So you can't replace experience, especially when you're new. I would say find an available contractor for your walkthrough. Make that a priority. Get actual quotes. That is going to help you so much and get better numbers. If that is just literally not available where you're at, you can't get anyone out there, find an experienced investor or, I mean, a home flipper, someone who knows how to estimate costs, who've done this many, many times.

And don't skip this. Don't skip the step just because someone's not available. Find someone that's available or extend your timelines. If you violate this rule, you will get burned. It's not a matter of if, it's a matter of when.

Yeah, it's— that is a, a quick recipe for losing if you, if you don't know your expenses. All right, last question here. If you have different interest rates for first and second position debt, would you just add the individual payments and still use the annual debt payment over original loan amount formula? This is in reference to your Math 201.

Okay, so yeah, in reference to Math 201, we're looking at debt yield. If you're bringing in all these different creative loans, you've got a first position loan, a second position loan, a third if going really adventurous, getting in the weeds. You're going to look at your debt yield as a first position if you were going to go get a new refinance and cash all them out. The reason that we look at that equation is it accounts a little bit, not the whole picture, but a little bit for lender risk. If they had to foreclose on you, what would be their cash-on-cash return on the money they lent you? Now, the reason we do this just on the total amount is because if you're going to get takeout financing, you're getting financing to take out all the other loans, then you need to underwrite for whoever's going to give you that money. Because granted, you got the money today, great, but you don't need to go get new money because you've already got it. If you want to cash everybody out, the, the bank, the first lender, maybe the seller finance, and then investors, you need to look at it from a takeout lender who's going to give you new money and underwrite for them. That said, in the meantime, you've got all these different loans. If you've got a first position, second position, And your second position is probably going to be a higher interest rate than your first because it's riskier. You just need to underwrite for cash flow. That's net operating income less mortgages—mortgages because it's plural in this case—equals cash flow. And hopefully that cash flow is positive. If it's not, you better have a clear, concise plan to get it positive because if you go negative for long periods of time, you will lose everything. It doesn't matter if you have a bunch of liquidity. If you cannot get any of your businesses, the real estate positive, eventually you'll run out of money.

It's just how it works. And starting over is not what you want to do. If you're going to do this, build it to work the first time. Yeah.

So that said, those are the 5 questions for this week's video. If you want to see something next week, it will not be Miami edition, it'll be rainy Tacoma edition. However, we are posting this every single week. Put your comments down below in the comment section. And as always, like, subscribe, and we'll see you guys next time.