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SHOW NOTES FOR EPISODE 561: EFFECTIVE UNDERWRITING FOR MULTIFAMILY PROPERTIES
Every multifamily investor has their analysis spreadsheet, whether they bought it, borrowed it or created one from scratch. But how do you know if it is truly effective in separating the best deals from the disasters? In today’s podcast, multifamily investor, author and underwriting expert Rob Beardsley shares his multifamily analysis insider techniques that has helped him pick the best deals.
What You Will Learn
- What are the three main criteria that must be right before advancing further
- Why you need to share your underwriting model with brokers, bankers and investors alike
- How to identify a good multifamily market
- Why multifamily provides long-term, inter-generational wealth
- How debt type and condition of the property should determine your hold period
- Tips for finding the right investors for your project
- Why it’s important to understand the analysis model you need before you start looking for properties
About Our Guest
Rob Beardsley
Rob Beardsley oversees acquisitions and capital markets for Lone Star Capital and has acquired over $100M of multifamily real estate. He has evaluated thousands of opportunities using proprietary underwriting models and published the number one book on multifamily underwriting, The Definitive Guide to Underwriting Multifamily Acquisitions. He has written over 50 articles about underwriting, deal structures, and capital markets and hosts the Capital Spotlight podcast, which is focused on interviewing institutional investors
More About Rob
- He grew up in Silicon Valley, California
- He had two major influences on his life
- Technology – a lot of people around him were very successful in tech
- Everyone wanted to join a tech start-up or other technology company
- His parents want him to do the same
- Real Estate – His parents were running a successful real estate business buying and selling luxury homes
- They also did residential flips and development projects on the side
- He had real estate exposure early on
- Technology – a lot of people around him were very successful in tech
- He went to school to get a computer science degree
- But along the way, he did circle back around to real estate to generate cash flow and for long-term wealth creation
- He saw Buy ‘n Hold as the best way to achieve those goals
- He saw his parents working very hard, always trying to find the next deal and they were exhausted
- They made good money but weren’t building assets and therefore long-term wealth creation
- He wanted to do it differently
- That pushed him in the direction of multifamily
- All this happened while he was still in school studying computer science
- He started investing in real estate and, eventually, his company, Lone Star Capital was formed with a partner
- Today they have :
- A property management arm
- A growing portfolio
- One thing he had to figure out along the way was underwriting
- With the help of his parents and mentors, he was able to succeed quickly by:
- Having a Mentor: He recommends all newbies to find a good mentor and network to start out with
- Aggressive Networking: He went lots of meet-ups and conferences
- In one way, his naivety worked to his advantage
- He just jumped into these larger deals without fear or trepidation
- He just thought, “I can just figure it out as I go, figure out how to put a team together and raise the capital.”
- That attitude, along with having the right people, helped him succeed
- During that time, it was a period of focus
His First Purchase
- He asked his dad where he thought he should buy his first property
- His dad said Silicon Valley because that’s the market he knew
- He started looking there
- It was very hard to find deals based on the model he had created, which was for cash flow
- The properties he wanted did not exist in the Silicon Valley area
- After looking at over 100 deals, he told his dad, “I don’t think this is the right fit.”
- So, he stared looking out-of-state and started networking with other people familiar with other markets
- That’s when he found Texas
- There’s a lot of great opportunities there
- The growth is fantastic
- The types of assets they wanted to buy were plentiful there
- Large garden-style apartment communities
- Suburban-style communities
- They started taking regular trips there to learn the market
- They drove the properties
- Toured the properties
- Learned about the kind of construction
- Began understanding the neighborhoods
- It took a year to finally find the right property
- He was still in school, working on his computer science degree in Silicon Valley
- He was building his business in his off time
- Trying to teach himself:
- Underwriting
- How to build a brand
- Raising capital
- The operations
- All while going to school full-time
- Thankfully, he was building the company with a partner that was older, had more contacts and had more experience than he
- He also relied on his family’s contacts in Silicon Valley
- Time was the critical component to get the deal done
- They had many meetings and introductions
- Ultimately, it was people they knew from their meet-ups and organizations who went out to their networks to pull in the funds they needed
- He found his partner at one of the conferences he attended
- He wasn’t looking for long-time partners, just people who wanted in on this deal
- His philosophy is to “Network fast, but partner slow”
- Trying to teach himself:
- Their first purchase was a property that was a lot larger than he was comfortable with
- In 2018, they found a 261-unit multifamily property in Houston
- It was a class C property, mid 80s build
- Purchase price was $15.4 million
- It was rougher than what they were hoping for
- There were tons of obstacles to closing:
- Raising capital
- Biggest challenge of his life
- A lot of people think it’s easier than it really is
- There’s a myth that if you have the right deal, the money will show up
- It starts with trust and relationships
- The deal DOES NOT sell itself – that’s a myth
- He had to talk to everyone he knew, get introductions and offer pieces of the pie to make the deal happen
- He kept a good attitude and was committed to make it happen to get it done
- He thought, it doesn’t matter if I get squeezed on fees or ownership, along as we get the deal done
- He knew it would be the best thing that ever happened to him – as if he was getting paid to learn
- Qualifying to borrow the debt
- You need people in your management team that have the net worth the same size as the purchase price
- He knew he had to get the right people on the team, to form partnerships, in a short amount of time
- They were able to raise $4.4 million for the acquisition
- And finally, the deal went through
- Raising capital
After the Purchase
- They discovered a number of problems after purchase
- They thought it was near-stabilized – it wasn’t
- After they bought it, performance and occupancy declined
- The rent roll was of poor quality
- Lower occupancy than expected
- High turnovers
- They had to start the implementation of the value-add strategy
- But they had a lot of fires to put out at the same time
- Curing deferred maintenance
- Renovating the exterior
- Updating the interior to attract a family demographic
- Added washer/dryers to each unit
- It was a typical value-add type deal
- Spent just under $10,000 per unit for renovations (including exteriors)
Analyzing Properties
- In the beginning, when he was first looking for properties, he was looking at lots of financial statements and pro formas
- He wasn’t even sure what he was looking at
- He was also trying to build his own pro forma
- However, this is how he learned to analyze properties
- It forced him to understand the financials
- He had to know how the model is made – and not just use someone else’s model without knowing what the calculation meant!
- He wanted to avoid “garbage in, garbage out”
- But he knew he had to create his own model to create a pro forma and projected returns
- He also would run his analysis by other experienced investors, bankers, brokers, investors, etc. to get their feedback
- He would revise/make changes to his model based on feedback
- To this day, he looks forward to people’s feedback and evaluation of his underwriting, process, methodology and business plan to continually improve his model
- He was especially concerned with investor feedback
- If an investor could tear his underwriting, etc. apart, that was not good but, at the same time, he learned a lot from their feedback
- There is an issue today with some sponsors who don’t want to share there underwriting, methodology and how they got the numbers they have
- Rob likes to be transparent and will share their full financial models with their investors
- He also encourages passive investors to learn how to do underwriting
- Today, they analyze over 500 properties a year (10 deals a week)
Criteria At-a-Glance
- Median household income
- If the number is $20,000, you have to ask yourself if you really want to be in that area
- Population growth
- Condition of the asset
- Age of the property
- Pricing
- However, this can be tough to screen by
- You may find something that, on the surface seems expense for the area but, when you look closer at the numbers, it looks OK
- Cap Rate
- He says it’s important but it is involved to get an accurate number
Deal Sources
- Mostly from brokers they already know
His Markets
- Texas is their main focus now
- Easier to add acquisitions in a market they already know
- But he sees, in the future, expanding out to other markets and additional strategies
- Regarding analyzing markets
- There are factors about a market that are not readily convertible to numbers
- Schools, for example, are an important factor but, for example, they may be A,B,C,D – but how can you plug that into your model?
- Median income
- Population growth
- They don’t directly impact your underwriting but they are important nonetheless
- The way these things show up and reflect the market are in your
- Rent growth assumptions
- Exit Cap Rate (determines the price at which you project to sell the property for)
- There are factors about a market that are not readily convertible to numbers
Hold Strategy
- Hold strategy may vary by deal
- He tries to keep the deals the same in terms of the hold, as he can, because it is easier to compare deals to each other on the underwriting analysis
- It’s easier to do a a relative analysis
- He typically will do a 5-year hold on properties he’s financing with permanent debt (Fannie Mae Freddie Mac agency debt) – long term conservative debt
- On an unstabalized property, with low occupancy, where there may be a bridge loan to finance the cap-x, large construction loan, that would be a 3-year hold
How His Underwriting Differs From Others
- His model has it so it can calculate on a monthly basis
- Most are annual, year-over-year
- His model also has it so you can factor in a re-fi
- The draw back is you have to make assumptions about rates at the time of your re-fi
- He likes to make as few assumptions as possible
- It does, however, help to see how the re-fi affects your over all expenses and yield
- It also helps internally so you can look at what various exit strategies look like
- Value-Add
- Everyone has their own way of projecting their value-add
- All models are all the same, except this one piece
- They all vary substantially
- renovation, value-add and stabilization process
- Some will write out a whole rent roll, write out how many units per-month they are going to renovate, vacancy, etc. and they get very complicated
- He decided to keep his model very simple
- He specifies a “stabilization period”
- If, for example, he has 100 units and they think they can renovate them completely over an 18 month period
- You input 18 months stabilization period
- The model will project, on a linear basis, that renovation program, then slowly trend the rents from the in-place to the pro forma over that 18 month period
- They figured this is the most straightforward way to go
Lessons Learned Post-Covid
- They increased their reserves
- When they were purchasing during the pandemic, they automatically built into their model, assuming there would be some near-term issues
- They underwrote higher vacancy numbers, lower collections/ higher bad debt
- What they didn’t want to do at that time was to say, “The sky is falling” and make the numbers look awful, because they knew they wouldn’t buy anything
- So they said they would just adjust the near-term numbers and, on the long-run, we’re going to be OK
Biggest Mistake
- His first deal
- Had much lower quality rent roll
- They didn’t factor-in that “take-over dip” – which is very common when buying a value-add property, especially lower end properties
- Non-payment
- Evictions
- Re-stabilization process
- They now have it built-into their underwriting model, allowing for those things so they can allow for
- Use of reserves
- Extra time that will be needed
- They thought they would have better cash flow at that time and their investors ended up getting mad at them because the pro forma said they would be getting funds from cash flow
- That was a difficult learning experience
- But it taught them they they should have everything accounted for, especially upon take-over
Biggest Success
- Choosing the Houston market from the beginning
- It has been a great market for them
Advice for Old Dawgs Looking at Real Estate Investing to Help Them in Their Retirement Years
- For passive investors, when looking to invest in a syndication
- Look at the individual sponsors and/or companies
- Make sure you trust the people
- Are my investment goals in alignment with their strategy?
- If your goal is cash flow
- You need to focus on investments that produce durable, growing cash flow
- Look at how you might want to take shots in your portfolio as far as appreciation, products and strategies
- You also need to factor in taxes
- Access risk
- If your goal is cash flow
Current Business
- They want to continue to grow the base portfolio they started
- Continue to drive successful results at the individual deal level
- They want to scale their current strategy
- They also want to add additional strategies
- Getting involved in the development space
Rap-It-Up
- Favorite real estate book: Investing in Real Estate Private Equity by Sean Cook
- Favorite business book: Getting More by Stuart Diamond
- Most valuable web site for success (other than your own): JusticeMap.org
- Favorite quote: “Do things when you can, not when you have to.”
- If you lost everything – all your assets – and had to start all over, knowing what you already know, and you only had $1,000, what would you do to re-launch your real estate investing business? Hang on pretty tight to the $1,000, look for good deals and use the money for travel expenses to visit the properties.
Get Rob’s Book – The Definitive Guide to Underwriting
- Buy his book here!
How You Can Reach Rob
- Website: LSCRE.com
- Get his free analysis spreadsheet model:
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