BiggerPockets Podcast 061 with Ben Leybovich Transcript

Link to show: BP Podcast 061: How to Succeed in Multifamily Investing – A Unique Conversation with Josh, Brandon, and Ben

Josh: This is the BiggerPockets podcast, show 61.

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Josh: What’s going on everybody. This is Joshua Dorkin, host of the BiggerPockets podcast here with my cohost, Brandon Turner and the crowd goes wild.

Brandon: The crowd goes wild. Wow. How’s it going?

Josh: What’s up Brandon how are you?

Brandon: I’m good, Josh. I’m great I was actually just outside cause it was like 65 degrees today and I was trying to remove stumps and it didn’t work real well. I ended up tearing up my yard with my truck. That was awesome.

Josh: I’m really not interested in anything you have to day here.

Brandon: I don’t know how to tear up stumps apparently you don’t pull it with a rope and your truck.

Josh: No, you do it with a chain and somebody else’s truck.

Brandon: There you go. In your neighbor’s yard.

Josh: Exactly. Exactly. Well, so today, Brandon, we’ve got a little bit of a different show don’t we?

Brandon: I believe we do because we’ve got a special guest and a first time repeat. We’ve never repeated a guest before.

Josh: We have not and this repeat guest for those people who are watching on Youtube is actually giggling, sitting around, wiggling right next to you there. It’s Ben Leyboviich. What’s up Ben?

Brandon: Hi, guys. How are you?

Brandon: We are good. We are good. This is a totally different show that we’ve ever done. People are freaking out at home like, you know. Where’s the Quick Tip and all that.

Josh: They don’t where’s the expense.

Brandon: I don’t know.

Brandon: Okay, thank you. Thank you for the invite. I you know, it’s going to be a different show. I think from what I’ve been told, it’s going to be a different format and I’m looking forward to it. I think it’s going to be a great show.

Josh: Yes, no we are too. We are too so for everybody who’s listening to today’s show is going to be—we’re testing a new format and we’re picking a topic and today’s topic is how to buy a multifamily property and we thought Ben would be a great person to join us in today’s conversation for today’s show. We’re very much looking forward to it and I think with that, we might as well kick into this thing. What do you say B?

Brandon: What do you say B?

Josh: B of course, referring to both of you.

Ben: Sounds great, Josh, J.

Brandon: Alright, well let’s do this, why don’t we kick this off at the you know, beginning. Why Ben? Why should somebody buy a multifamily property?

Ben: I don’t know why somebody should. I can tell you why I do.

Josh: Okay, we need a new guest.

Ben: The reason I think most of us buy multifamily property is for the income. That’s the bottom line is we believe that we can get more income out of multifamilies than we can out of SFRs. They’re also efficiencies and management and financing options that are available in multifamily that are not available in single family. It’s kind of a loaded question like everything else in real estate.

Josh: Yes.

Ben: Why multifamilies are for single family, but there are a number of very good reasons.

Josh: Yes, for sure. For sure. Really quick, you know, and I did forget something. Ben was previously on episode 14 of the podcast! You could check out that show at Definitely go check it out and listen and you know for those of you guys who are listening, we’re not really looking to cover so much on the specifics today like the financing, dealing with brokers, things like that. We’re going to talk about things like what makes a good deal. Why multifamily, you know, the type of stuff that more of a novice is really looking to understand before they jump in and make that first story, second or third by decision on an income property.

Brandon: Yes and also, just to point out, when we talk about multifamily, you know, a lot of people might wonder does that mean two units? Does that mean a hundred units or a thousand units and I think at least from my perspective, we’re going to cover everything. It kind of all applies, but I, I mean for those who know me, I’m much more focused on anything smaller so two, three, four, up to you know, I think I have a 24 unit like that’s kind of my range and Ben, you’re probably about the same right now.

Ben: I am the same, I’ve been the same, although right now as most people know from my articles and what I write, I am looking at syndication and so that’s a hundred plus.

Brandon: Yes, so we’re going to cover probably, kind of a full gamut here so.

Josh: Really, you know, on the topic that you’re talking about, the two, three, fours, and then the bigger ones. There is a distinct difference right? I mean a two unit, a three unit, a four unit, those are generally considered what? Those are considered, what? Those are considered residential properties still, correct?

Ben: In—relative to financing options, yes. You can finance with 40 year mortgage, a conforming secondary market sellable, kind of mortgage, Fannie Mae, Freddie Mac type of mortgage. Obviously, you can’t do that with anything five units and above, but there are a number of differences going from smaller to larger.

Josh: Sure.

Ben: Aside for—and I think we just want to focus for the most part on the smaller stuff.

Josh: Yes.

Ben: Today because I think most people listening would derive more value.

Josh: Yes.

Ben: Wherever, you know, if I happen to chime in and say, “Hey, it’s not so different when looking at a hundred.”

Josh: Oh.

Ben: You’re hearing my dog.

Josh: Nice.

Ben: Let me take care of that. Hang on just a minute.

Josh: Wait, are you literally going to leave in the middle of a podcast?

Ben: Yes, well, you know what.

Josh: This is a live show, Ben. You can’t just bounce man.

Ben: You might hear the dog again.

Josh: We might have to again.

Ben: I’m sorry. I’m sorry.

Josh: Alright, so listen, we’re, we talked about us so far. Talked about single properties. What’s the difference between a single and multi? I mean, other than there’s more than one door, more than one unit, is there any other differences?

Ben: There is more than one rent, which is your managing more than one person. Most people—and I think Brandon will agree with this. Most people think they’re managing property. No you’re not. Yes, okay, you can fix a few things here and there, you can call it Proforma or whatever, but by and large success in this is a function of managing people.

Brandon: Yes.

Ben: The more people you have to manage, the more kind of a learning curve it becomes or a little bit more you have to know as a manager.

Josh: Got you.

Ben: That’s probably the learning curve.

Josh: Got you. Would you concur, Brandon? I feel like I’m interviewing the both of you. It’s actually kind of fun.

Brandon: I would concur. I like the word concur. It sounds like something a doctor would say. I would concur and one thing I’ve noticed. I think I maybe even said this last week in the podcast, but like when you’re managing a house. Like I would rather manage 50 houses than 50 units in an apartment building. I don’t know if you feel that way, Ben, but I feel like apartments and multifamily. I feel like that just, I don’t know, it’s more work. It’s more hassle. They’re more needy, maybe that’s the case. I don’t know. Do you feel that way, Ben?

Ben: I feel completely differently about.

Brandon: That’s alright.

Josh: You’re wrong.

Ben: Managing 50 houses versus, yes, you’re wrong, Brandon.

Josh: We need a new sound effect by the way. That would be the awesome sound effect.

Ben: I would much rather manage a 50 unit apartment building and 50 houses.

Brandon: Would you? Yes.

Josh: Brandon, you say the opposite, right?

Brandon: Well, just from my experience. Like I have—half my units are single family and half are multifamily and my multifamily take up ten times more work for me than my single family even though I have roughly the same number.

Josh: I—well let’s talk about that. Why do you think that is, Brandon? I’d love to hear Ben’s take on that.

Brandon: You know if I had to guess I would say that the single family houses I have are generally fixed up already. Or like, I bought them to flip and then I put tenants in them is how I got a lot of them so it makes sense that the maintenance is not as big of a deal there. The people actually have like good jobs and good income. A little bit higher quality tenant maybe then the multifamilies are a lot more, not necessarily section eight, because I don’t have any of those anymore, but just a lot lower income which then—I don’t know, they break things more. Is that bad to say? I don’t know.

Josh: Well, so you take care of your single family and you’re a slumlord when it comes to multis. That’s great. Now we know it’s on the record.

Brandon: It’s out there.

Ben: Let me jump in here because what you both said. There’s a lot in this conversation. The ease of management is a function of desirability. It’s—as landlords, we cannot attract tenants. It’s our properties that attract tenants. When you talk about single family versus multifamily, yes, the common wisdom is that people stay longer in a single family. That—they’re more desirable because of privacy, because of the garage, because of more space, because of climate control system that are you know, dedicated in a single family. You can achieve this in a multifamily. The problem is when most people look at multifamily, they see the big price tag and so they automatically assume they have to step down one or two notches in terms of quality of the biuilding, but when you do that, you end up with quality of the tenant which is one or two notches.

Josh: Yes.

Ben: I think, Brandon and I talk about outlining some of the bullet points for us to talk about and this is going to come up, but the whole aspect, the whole issue desirability as a function of success in this business.

Brandon: Well, can you explain real quick, what is desirability for those people who don’t know. I know you use that term a lot and I like it, but what does it mean?

Ben: Okay so.

Josh: Is that when you two talk privately or?

Brandon: No, on his blog post on BiggerPockets.

Josh: Oh okay.

Brandon: Yes. We can probably talk privately. Me and Ben talk a lot like we text like 15 year old girls all day, it’s, anyway.

Ben: Hey, I’m a 15-year-old boy, you’re my girlfriend. Let’s not confuse things okay.

Brandon: Wow, don’t tell my wife.

Ben: Let’s look at this and this is crucial, throughout the lifespan of a real estate investment so you are looking for it. You are identify it. Now you’ve bought it, now you manage it, now you sell it, either 1031 or just flat out sell it or hold on to it for the rest of your life, but eventually, you have to sell that back. You know, you’re not going to take it with you.

That’s kind of the thinking. Well, throughout that whole process, you’re asking yourself questions about desirability as you’re managing it. You have a product on your hands. Who wants it? Why would they want it?

If you’re going to improve the value of that product in multifamilies face, of course we need to talk about this. Probably value is a function of income so you’re improving value, creating value in a transaction as a function of creating income. Well, why should you be able to buy a fourplex or buy rents for $500 a unit and drive them up to $600 and quarter. Why should people pay more? What is so special about your fourplex that people would agree that it’s worth $625 then the reason you bought it because it was under managed and you saw value in being able to drive—I call it expendability in being able to drive it, but it’s a function of desirability to the potential tenants.

Josh: Yes.

Ben: Your managing is a function of desirability to you so you know, if you have to pay everybody’s water bill, well that’s thumbs down for desirability as far as you’re concerned. If it’s a 125 water bill—if it’s Waldo that Brandon and I wrote about back and forth on the blog whereby it was a single family house and it was split up into three units, there’s something inherent to that problems so management wise, the desirability to the landlord suffers and that has to be reflected in the value.

Josh: Well, now my thought is you know, people and I think I see this with investors and I know I’m a victim of it. I say victim and it’s actually really the wrong word. You buy a single-family house, you even as the investor, particularly newer investors think, oh this is a house, let me clean it up, let me shimmy it up, fix it up, and then you know get it rented. When you’re dealing with a multi, you know there’s so many more pieces involved and I think it’s very easy to overlook the need to jump in and fix up the building up front. I think that’s where a lot of this comes from.

Again, I know, I was a quote, victim. I wasn’t a victim of it, but you know, I experience this myself where you know, you know, I bought some multis and you know, I put money into the units themselves, but you know, in the building as a whole, I wasn’t necessarily doing as much as I could have so you know in the end, everything kind of suffered because of that. Now, there were a million other factors involved in the situation so you can’t really look at any one particular thing, but I think I’m probably being fair when I generalize and say that when newer investors jump in to a multi property, they are less inclined to go and spend the money to do the fix up, up front that they might otherwise do on a single family. Would you guys agree on that?

Brandon: I would agree on that. Darren Saeger talked about that in his podcast back, I’m not sure what number. I’ll have to look it up later and I’ll put it in the show notes, but Darren talked about on his rentals when he takes over one. He goes through and fixes everything. I mean top to bottom, remodels the entire unit, perfectly and with a plan to never touch those things again. I think that’s rare.

Josh: Oh yes.

Brandon: Even in my own case, like I mean I’ve—let’s talk about Waldo. Okay so Waldo, for those who don’t know and Ben just mentioned it was what he labeled, my triplex that I bought. I wrote an article called “How I Bought an Ugly Purple Triplex” and I kind of outlined my whole thing. Ben called it a Waldo and we went back and forth on the blog a couple weeks, just kind of writing articles about it where Ben said he wouldn’t have bought that property and I said I’m perfectly glad I did and the reason why is cause it was different.

It stood out. It wasn’t a normal property. It was a big huge house that was split. They put a basement apartment in. They put a garage apartment in. When I took over that thing, my original budget, I said I was going to spend five and $10,000. I’m actually, to give people an update, I’m at $15-$16-$17, somewhere in there right now on repairs. Largely because of actually something Ben had said, he said, “The plumbing system in a place like that isn’t necessarily designed for a triplex.” Now that wasn’t the problem. The problem was somebody flushed rocks down the toilet.

Josh: Oh, that was the one with rocks.

Brandon: That was the rocks, yes.

Josh: By the way, Brandon spent like an entire weekend like hammering out the plumbing.

Brandon: Yes.

Josh: Because he lives in the middle of nowhere and you can’t get a good plumber on the weekend in the middle of nowhere, which is why you know as a warning, it’s you know be aware of those things because if you buy a property in Lima or in Montecino, I mean you may not have somebody to help you out in the middle of the weekend, you maybe doing your own work.

Brandon: Yes.

Ben: No, no, no. We have people to help us out.

Josh: Got you.

Ben: I want to add something to this conversation though.

Brandon: Let’s do it.

Ben: Maybe you’ll take it the wrong way.

Brandon: Alright, lets hear it.

Josh: I don’t know if he’s going after you or me, but he’s going up.

Ben: People need to know this. You can put lipstick on the pig all day long, if what you got is a pig then what you have is a pig and people aren’t stupid. They’re going to see to see through the lipstick and they’re going to know what you have.

Josh: Yes.

Ben: How do you define? How do you make that distinction? Okay, we can talk about upgrade.

Josh: I’m going to disagree by the way, but keep going.

Ben: We can talk about making upgrades all day long. We can talk about cleaning up, trading up carpets, everything else. Location drives desirability. People know where they want live in. Yes, I never advertise, I don’t buy anything that I have to advertise. People drive the neighborhood that they want to be and they see my for rent sign on the ground. Now, I’m a small time investor at this point with you know 28 units or whatever it is, but whatever it is, it’s 28 units.

Brandon: I got so many, I don’t even remember.

Ben: When I do this syndicate, I mean, I got people moving out of this house right now and their friends are calling me because they want to be in this house. You know, it’s because of location. You have a thousand, okay it’s fine, but it’s location.

Josh: Ben, if you have the best house in the neighborhood, say you’re in a blue collar neighborhood and you’ve put in the best of—you know it’s mixed. There’s multis and there’s singles and you’ve got you know the average rent on those—well forget average rent. You’re building is desirable, you’ve got this pimped out building that’s really, really nice and you’re a great landlord that cares about your tenants and who takes care of this building. That’s going to drive folks right.

Ben: Yes and no because you can’t afford to be that guy. The valuation is driven by the marketplace so as much as I want to make it nice for my tenants and as much as I want mine to be the best rental unless the marketplace supports my expenditures in terms of the purchase price and fix up cost relative to both rents, I don’t have to charge more rent than somebody else. I just want to charge the same rent as somebody else, but have the best property. I can’t do that if I am in a lesser location fixing property up because it’s not—I’m not going to get my money out.

Josh: Well again.

Ben: I got places aside.

Josh: Well you—I mean I’ll agree on that partially, but again, you know you buy the—how much was the purple monster—whatever?

Brandon: $70,000.

Josh: $70,000, you’re $15 in, what are your rents?

Brandon: We just rented the main unit out for $900, the basement for $500 and the garage we rented out hopefully this week for another $5 so.

Josh: 50% rule right there, right?

Brandon: Yes, easily, yes, easily cash flows at 50% easily. It actually beats the—it’s more than the 2% rule. Yes, it’s a good cash flow property even with the 15% that I’m in instead of five because of the stupid plumbing issues, which you know, Ben you were right about. There you go, publicly you were right, but even with that, it was still an incredible deal and largely because it’s in a great location. It’s in the best street in that town.

Josh: It is okay.

Brandon: Like the location.

Ben: Thank you.

Brandon: I think will pull me out now if I had bought that.

Ben: Case in point.

Brandon: If I had bought that same thing over in a bad location, I mean.

Ben: You wouldn’t throw good money after that. You wouldn’t go and put $15,000 into a bad location. We don’t put money into buildings. We put money into location period.

Brandon: That’s a tweetable topic right there.

Ben: The thing of it is.

Josh: It’s the professor.

Ben: I’ll give you an example. Right now, I’m looking at a hundred plus units, okay and the basic formula that everybody looks at buy a C building in a B location and do what you’re going to do to bring up the quality of the building from C to C plus to B minus to B because the location substantiates you doing that. If you bought a B building in a C location then no matter what you do, you couldn’t finance it out. You can’t sell it for enough to get the money out and it’s very questionable if you’ll get the stable rent out of that just because the place is nice.

Josh: I—you know, I think you’re right when you’re looking at a larger property. I think when you’re looking at a two, a three, a four, you know and I’m not saying that somebody should go and buy a property that’s going to lose money. That’s obviously a bad thing, but you know, it’s easy for somebody to look at a property and say “Oh, well this fourplex is you know in a not so desirable area and the numbers look good. The potential rents look good. Why don’t I jump in and buy this property?” Again, I think that’s where a lot of people fail when they jump in on these properties. The numbers make sense, right? I mean you take Brandon’s property.

Ben: Well, no, I disagree though. I disagree that the numbers make sense.

Josh: Well, but you’re not letting me finish. Let me finish. Hold on. Wow.

Ben: I’m sorry, master.

Josh: We’re boxing right here so the numbers make sense on paper, right? Hold on.

Ben: No.

Josh: Oh my god, Ben. Slow down here, okay. The potential rent for the Brandon’s purple monster whether it’s on that really desirable street or say it’s three blocks over where the rents are comparable. Okay, are going to be the same, okay, but if you look at and you compare it to the property that’s on that really desirable street versus the property that’s over there. That’s the intangible, okay. That’s something that has to be evaluated. That’s something that a new investor isn’t so—isn’t experienced enough to be able to evaluate so.

Ben: Brandon, may disagree with me and we had an argument and one of my posts.

Josh: Are you arguing with somebody? Shocking.

Brandon: We argue in every one of your post whether or not we agree or not.

Ben: I think that if I was to quantify or qualify what you just said is because when you talk about that. When new investors talk about numbers, all they look at is cash flow.

Josh: Correct.

Ben: Or perhaps cash and cash return. The intangible is I buy this, not just for cash flow. I want it to appreciate because the equity that’s created allows me additional leverage opportunities. It allows me additional exit opportunities. It allows me to be very creative with private money financing against the equity that I have. It allows a lot of options so while cash flow makes a lot of sense on something. Doesn’t mean I’m going to buy because I’m not—yes cash flow is everything. This is why we buy income property. There are a multitude of other subheadings under the topic of “should I buy this or should I not” above and beyond the cash flow.

Josh: The intangibles.

Ben: My cash flow.

Josh: Right.

Ben: Exactly, that it’s much more difficult to comprehend, to wrap your head around to understand. The cash flow is simple, black and white numbers, you can add, you can subtract. You can even do the cap rate.

Josh: Well, so really quick and then lets move on to the next topic here so what do you tell and this is to both of you guys. What do you tell the new investor who’s looking at a property, whose numbers look pretty good and we’ll talk about the numbers in a little bit here. The numbers look pretty good. How are they to know what those intangibles are? You know, can we define those intangibles beyond location? Well, I don’t know what that means you know I’m a new guy. What is a good location? I mean what are these things that we need to look at?

Brandon: Okay.

Josh: You know definitively to kind of protect these folks who are looking at these multifamilies and I’ll leave it to Brandon first and I know Ben will beat him up afterwards.

Brandon: We probably disagree a little bit on this. Let me tell you a quick story. There was a property a year ago, no probably two years ago, back that I wrote on the BiggerPockets blog. One of my very very first blog post I ever wrote for you guys and it said—it was called “Should I Buy This Sixplex?” Or something like that. I’ll look it up and put it in the show notes.

The idea was it was a sixplex that came on the market for like $90,000 in my town and I looked at it and it was in kind of a bad neighborhood. Not like, I’m going to get shot in that neighborhood, but one that I wouldn’t feel comfortable sending my wife probably alone to go show a unit to. I asked the question. I put the picture on there. I showed all the numbers.

I said, “Would you buy this?” Everybody said no in the comments, said no, no, no don’t buy it. Ben if you were on, I don’t even know if you were on BiggerPockets that time, if you were, you would’ve told me no. Today, you would still tell me no so one of my best friends bought that property after I decided not to. He went after it and he went and bought it and he’s had zero vacancies in two years now on this.

Zero vacancies, he’s had a total of like $50 in repairs in two years. He’s had, I mean, the most smooth, perfect rental of all time. I mean like it’s easiest cash cow ever and he makes a ton of money on it so he’s—my friend has another sixplex in the same neighborhood, the same rents. He loses money on that property. I mean every month, he loses money on that. There’s no—so I don’t know exactly what my point is here, but I guess my point is how do you know, maybe I’m just asking Ben this question. How do you know you get the one and not the other or do you avoid both assuming you’re not.

Ben: That’s it because everybody gets lucky every once in awhile. We’re not talking about one odds here. We’re talking about developing a systematic approach to evaluating and determining what is good and what is bad. Yes, there is gut feelings involved. Yes, you can over rule maybe even yourself in the way that you analyze things and once in awhile everybody gets lucky, but by and large, which is what we’re talking about. Tell him about the other sixplex that just happened, you know, two weeks ago.

Brandon: Well that’s—that’s that same one. This is probably a good time to tell this story so this is—the second sixplex that loses money. I didn’t know it lost money alright so my buddy never told me this so basically, the story goes.

Josh: Let me just clarify, you call him your buddy and?

Brandon: Yes, he’s my buddy.

Josh: Yet he almost sold you a pig with lipstick all over it, huh?

Brandon: Well let me tell the—so the story is he asked me if I wanted to buy it. He said he would finance it. I said that sounds great. I said, “How do the numbers look?”

He said, “Well, I don’t have it all in front of me. My partner takes care of that side of things, but it’s good. We cash flow around $800 bucks a month.” He said, “We’re looking to make, you know, an extra couple hundred. You know, on that so you’ll be making $600 a month.”

I’m like, “Oh great, $600 a month for a sixplex zero down. Great, I can take that.” We went through the entire process, almost to bind it and I kept asking for the numbers and I never really got the numbers from him. It was always, yes, I talked to my partner, he’ll get them to you some time. Then like five days before.

Josh: By the way, anyone listening, that’s a big fat red flag.

Brandon: There’s a big red flag, but I mean like he’s like my mentor and my like closest friend so like I learned a lot of stuff from him.

Ben: Excuse me, I thought I was.

Brandon: Well, after this deal, you might be so anyways, so Ben calls me. I don’t know what we were talking about, but I mentioned that I was buying this property. What did you say Ben?

Ben: I don’t know, but I don’t think I can repeat it.

Brandon: Yes so basically, your point was you need to get these numbers specifically, do not just trust this guy and even if you had the numbers, you still shouldn’t buy this. You know, at that point, I really really need to get these numbers before I move forward. I was just trusting this, you know because I just trusted him to be a good deal. I started doing the numbers. I plugged them into the BiggerPockets, this sounds like a terrible plug, but it’s totally true.

I actually plugged them into the BiggerPockets app, rental property calculator, like the exact everything and it came out to like I would make $40 a month, not $600 a month, $40 a month and that’s if things—that’s if there wasn’t a roof leak or a, you know, window broken or whatever. That’s not taking the fact, cap x at all. It was just normal wear and tear, normal repairs and normal vacancy. I was going to make $40 bucks a month so over the long run, I would have been losing thousands a year on that property probably and so I owe it to Ben for saying, you know, “Brandon, don’t be an idiot go look at the numbers better.” It works. I didn’t buy it so yes.

Josh: Really quick, let me pull out something that jumps out at me from that and then I’ll let you guys box over it. The big thing on this was the numbers right? If ever you’re looking at an investment property and you don’t get the numbers and somebody, the seller is hesitant to provide those numbers for you. Really, you have to look at that as a big fat warning sign. It doesn’t mean don’t invest in the property, there may be a legitimate reason why they may not have it at that moment in time, but if you get any kind of push back at all on getting the numbers and I mean every number. It’s time to move.

Brandon: Yes.

Josh: I’m guessing you guys would agree.

Ben: I think we are going to probably spend some time at least talking about the numbers on the podcast.

Josh: Yes.

Ben: Because of the next thing I’m going to say. I’m going to say that it’s almost better when they don’t give you the numbers than when you do receive the numbers because you will assume they are lying.

Josh: Oh yes.

Ben: It’s ridiculous. I’m looking at these—okay so I’m looking at bigger projects at this point, but the numbers I’m seeing are out of this world. I mean you just scratch your head and you go like, “How do you even arrive at the purchase price looking at these numbers?” You know, they’ll give it to you with a straight face so I hate to be cynical, but you have to be cynical.

More than that, you have to know the marketplace. When you are looking at the schedule of rents that you were given, you have to know how it fits and what you know the marketplace to be in this location. If you—and that’s probably, I’m jumping ahead a little bit knowing the marketplace. We might as well just you know, tie into that because it’s crucial. Analyzing a building is completely useless unless you can place into the fabric of the marketplace.

Josh: Yes.

Ben: You can’t know the truth otherwise.

Josh: Explain that. Go into a little more detail.

Ben: Okay, I’m looking at fourplex whereby every rent is $600 a month according to the Proforma I received from the owner or listing agent.

Josh: Yes.

Ben: Or what have you. I know this marketplace and I know the two bedroom units, of this age, of this quality, of this approximate square footage and amenities rent for approximately 475 units. I just know it because I did my marketplace and I know it. The question I’m asking, first of all, is this valuable. I’m looking at a Proforma that proclaims that there four units renting for $600 a pop and I know that talking from other landlords, everybody else in this style of building, this style of unit is getting $475. Is that valuable? Yes. Something is off. What is so special about these units in this particular fourplex that they should get $600 a unit or is everybody else getting $475? Are you really going to get that? Maybe you didn’t get to the bottom of this question. Maybe you can’t vice a versa, $600 rent in a Proforma and I know that units like this in this marketplace rent for eight. Is that valuable? You bet.

Brandon: Yes.

Ben: Because I want to buy based on current income and if I can negotiate price based on current income and then push the income up then good for me. The catch is that if I cannot do that then guess who’s laughing.

Brandon: Yes.

Ben: I have to know the marketplace.

Josh: On that first case where they’re proclaiming in Proforma that it’s $600 hundred and ultimately, your research tells you to be $475. You know, the average guy might come and say, “Well, this building is getting $600 bucks.” That’s awesome and you know what if the landlord could then verify with rents, hey you know, this building is getting $600 a unit, $600 a unit. You got the leases. You’re presented with everything. Well, again, I think for the novice investor, they’re going to look at it and say, “Wow, well I got to get in on this thing. This looks awesome.” I’m going to get $600 of rent on these units.

Ben: Right and they.

Josh: I have proof of it and in the end, it’s probably some kind of anomaly is what you’re saying that’s happening here and in a long tale, they’re probably going to end up losing out because those rents will probably—they have to come down to market.

Ben: Right and you’re presuming—so for instance and I’m just telling you some of the tricks that people do. You write up a lease for 12 months, would you give a month free and divvyed the numbers up into 11 months, that drives up your monthly rent so on paper it looks like $600 whereas in reality, per annum, they’re paying much less than, you know what it looks like on the PNL for instance.

Josh: Yes.

Ben: Also, it could simply, you know, that’s what people.

Josh: Which is fraud by the way.

Ben: Which is fraud.

Josh: Yes.

Ben: You know, but not to say people don’t do it.

Josh: Yes.

Ben: Which is why it’s so important to look at every piece of this puzzle, which is why I was on Brandon to look at everything, you know. Cause it’s you know, you just don’t know.

Brandon: You know if I could get.

Ben: Hand building, I would have told him not to buy anyhow even if everything was cool and cash flowing.

Brandon: You would have been and we can have that debate, but I want to point out just for people listening, they might be wondering why were the numbers so off. Just to give specifics, first of all, there was flood insurance required there and they wanted—I mean it was like $200 a month for flood insurance. I was not aware there was flood insurance. The power, this is an interesting one—the power billed when I ran the numbers on my own, I was like well, there’s a light bulb in the hallway and there’s a washer and dryer out back. That’s not going to use very much power. I think I estimated $75 bucks a month when I didn’t like my numbers the first time. When I find out the actual numbers, it was $350 a month. I thought like, it’s huge.

Ben: Whoa.

Brandon: Well, why is that? Well, I found out the wiring was like—when they wanted to add a baseboard heater into one of the bedrooms, they would just grab whatever the nearest wire and plug it in. The hallway light was getting fed—the hallway—like the hallway power was feeding a lot more than just one light. It was feeding a lot of different things all over and you know it was reasons like that that drove the power bill to $300 a month.

Ben: That’s why I say my recommendation to you even if it looks like it was cash flowing to still not buy it because this kind of junk was going on at this building and you could smell it from a mile off.

Josh: Well, how did you smell it? I mean besides the fact that Brandon’s got sucker written on his head. I mean did you?

Brandon: No.

Josh: Seriously, this is something that people and whether it was Brandon coming close and Brandon’s got a bunch of units. He’s been doing this a long time. There’s people who come in, how the hell do they know whether they’re getting the wool pulled over their eyes. How do they know whether that’s happening or it’s not happening? What do they do?

Ben: Well, unfortunately I have to tell you some of it is school of hard knocks.

Josh: Yes.

Ben: You just find this stuff out for yourself. You have to get burned once, twice, however many times it takes. I mean BiggerPockets is a fabulous resource, but it—you still have to experience certain things in order to develop the big picture, the foresight. You know, going back to the rent, you know, I didn’t finish what might happen. I’ll tell you, Brandon’s Waldo, building, the triplex. One of the apartments is in the basement. That to me always rings a bell because.

Brandon: It’s a D.I. basement though, but.

Ben: It’s a D.I. of itself.

Brandon: It’s like above ground.

Ben: Some basements are worse than others in terms of safety, egress, all that kind of stuff so just because this particular landlord, lucky enough to rent this unit for $600 doesn’t mean that when you take over the building that you are going to get lucky too.

Brandon: Right.

Ben: You know the market is $475 for this building, are you going to plan on getting lucky or are you going to plan on getting real.

Josh: Yes. Yes, not that’s.

Ben: That’s the bottom line.

Josh: Yes.

Ben: It doesn’t mean necessarily they are lying, they may not be lying. They just might have gotten lucky.

Josh: Yes and that happens. Yes.

Brandon: Or they might have bought this building, remodeled the unit and you know for four years, it’s the same person paying $600 because it was over market back in time, but what would be good it was so nice for this location. They agree a sucker is born everyday.

Josh: Yes, yes, alright. No for sure. For sure, alright, really quick. This is show 61 of the BiggerPockets podcast, Brandon, Josh, and Ben Leybovich here talking about buying a small multifamily and why don’t we move really quick. By the way, you know, it’s funny because over 60 shows you always get the people who leave us good reviews about our show and think, you know, hey you guys are doing a great job, you’re really trying to dig in and get to the bottom of things. Like we said, we are trying a new format today, where it’s more—very much more conversational than our typical show and I’m sure we’re going to get a lot of people who are going to say, “Well, you guys don’t have an agenda and you’re just going off on different tangents.” You know, to that, I stand up and I say, you know, it’s part of a discussion. You know, we’re—this is how people talk and you know as.

Brandon: It’s our virtual coffee shop right here.

Josh: Yes, as your mind you know as things as you get in to questions, you just are going off in different ways.

Ben: I was going to say, we do have an agenda. We just can’t follow it.

Josh: Yes and we’re trying very hard to follow and go over so I’m going to jump on to the next thing here which is rental property rules and this is something I think you know, if you’re familiar with BiggerPockets at all, you’ve heard us talk about, you’ve seen on the site, you’ve seen argued and many directions. Let’s kind of cover those really quick so I’d say the big two that we hear most often are the 50% rule and the 2% rule and Brandon, why don’t you jump in on those two. What are we talking about here?

Brandon: Sure, so the 50% rule is a way of quickly estimating what your potential cash flow might be. All it says is if you take half of your rent and then subtract out your mortgage payment, that’s what your cash flow is going to be so it’s a really really quick rough way of saying so again, going back to the fourplex at $600 a unit like we were talking about before, that’s $2,400 a month total, divide that in half and that half covers all your expenses, except for the mortgage. You got $1,200 left, you pay your mortgage, let’s say the mortgage, you know principal and interest ends up being $800. It means you’re left with $400 bucks in cash flow. That’s what the 50% rule says. Whether or not that’s right or wrong, I guess it’s up for debate. Ben, what are your thoughts on that?

Josh: Well.

Brandon: Sweet you’re trying to say 2% too, alright?

Josh: Well, before you go there and before turn to Ben, I’m going to cut off and say we’ve actually talked about this in the past couple days you and I, the 50% rule and we’ve always talked about. You know the 50% rule is generally a safe rule for screening properties.

Brandon: Yes.

Josh: One of the things that you and I have talked about, Brandon, I think Ben, you might have been a part of these conversations too is on some of these multis 50% isn’t safe. 60% you want look more towards.

Brandon: Yes, we talked about that last week with Serge a lot too about that sometimes 50% isn’t even close to enough especially the larger you get.

Josh: Yes.

Brandon: Would you agree—labelage?

Ben: I mean yes I mean I’m in it. Okay so when you’re going to be a small guy, you want to buy the place, you will manage it yourself. That’s a cost savings to you now. We can have a wonderful discussion about whether or not to include management into the operating cost.

Josh: Yes.

Brandon: That 50% or not, but the fact of it is, is that I manage my own portfolio. I think I can do it better, but when I buy this a 140 unit, I’m sure as hell not going to manage it.

Josh: Yes.

Brandon: It has to be included because I don’t want that job. You know then it becomes a job. Right now, my managing, my portfolio is you know.

Josh: 47 units isn’t a job, but 147 is? Where’s the line?

Brandon: Okay, when I say manage, I’m different from Brandon. I’ve seen Brandon.

Josh: You don’t clean toilets?

Ben: Pictures of him.

Brandon: I don’t clean toilets, but I climb on roofs.

Ben: I just got pictures of hey I’m on the roof. By the way it was a sixplex when he thought about buying and didn’t buy.

Brandon: That was that.

Ben: That was the roof.

Josh: Oh was that the one with the roof with the flashing sign?

Ben: Yes, that’s right.

Brandon: Yes, that was that one.

Ben: I don’t do that so my management is.

Josh: In the rain.

Ben: While sitting in the car with four girls.

Brandon: I did that for a friend. He needed help. I went and fixed it so.

Josh: This is the friend who almost sold that building to you.

Ben: That’s right. This is him.

Brandon: We have a good friendship.

Josh: Yes.

Ben: I think 50% doesn’t really work in the bigger buildings. I think if you get 60%, you’re lucky.

Josh: Yes.

Ben: Meaning that the operating cost, taxes, insurance, up keep, cap x, you know water, sewer, trash, lawn, you name it, everything inclu—and in larger projects of course you have payroll. You have, you know, units you’re giving away to people living at the complex. You have a lot of—if you can get that within 60% and you are still looking at a building that’s not completely trashed, you’re doing really well. 50%, you know, I’ll give an example, that tenplex I bought a year ago. On day one, the gross rent was I think $5,800 plus or minus. The NOI was $3,400.

Josh: Can you define NOI really quickly for those people listening.

Ben: Net Operating Income is and I think we’re going to come back to this in a bit, but Net Operating Income is gross income. Combination of all income streams in a multifamily family asset minus all of the operating costs. You have variable operating cost and fixed operating cost. Essentially, it’s income minus all of the expenses, not including the cost of manage so including the first mortgage, your second mortgage, however many mortgages you have.

Brandon: I like to say it’s the cash in your wallet to pay the mortgage. It’s whatever you have left, I mean like, to pay the mortgage. Is that how—am I looking at that right?

Ben: It’s—pretty much.

Brandon: I feel that’s like the layman’s term of—it’s like that’s how much cash I have left that I can pay the mortgage with.

Ben: Right.

Brandon: I think simple.

Ben: Then you get into and I think we need as part of this—this podcast—we need to talk about debt serive coverage ratio, which is what the banks look at. I think we need to look and we don’t often talk about it at all and cash flow of course is that NOI, Net Operating Income minus your mortgages. I call it cost of money. I call it debt service. You can call it mortgages, whatever mortgage payments meaning monthly expense, okay. This NOI is a very important number because we use it to base our valuation on and the reason we use it as opposed to anything else is because you know the mortgage payment varies with the type of financing attached to the property. Brandon may do it one way and I may do it another way and somebody else may put 40% down on this property and their cost of money is going to be a lot less.

Josh: Yes.

Ben: We need a way that’s uniform to analyze and place value on property. Everybody is going to have to pay sewer. Everybody is going to have to pay garbage. Everybody will have to pay property taxes, insurance. Everybody will have to pay capital expense, you know, fixing the roof.

We all have to do that and so we isolate these expenses that everybody—that apply to everybody equally and we subtract those expenses from the income, which is the same for everybody and we arrive at this magical number called Net Operating Income, NOI and that gives us kind of the apples to apples foundation to then say okay, well if I’m willing to deploy capital at 10% then if I base this on this Net Operating Income, how much am I going to be willing to pay that’s going to give the 10% and that would be the next step. You know, in the progression where you go from figuring out this NOI.

Josh: Got it. Alright, well so I’d say in general then, 50% rule, kind of designed to help people do a quick screen, nothing more than that of a property to see, hey, does this make sense. Generally, as we’re talking here, it sounds like this 50% rule doesn’t necessarily work that well as we expand out to the bigger properties because the expenses are going to be a lot higher. Potentially, on the smaller properties, particularly on single families. It works as a pretty decent for a screen, but that’s pretty much what it is, nothing more.

Brandon: Well you know what—what I like to do is— what I like the 50% rule for is anything, you know, four units or smaller. I’ll always run my numbers two ways. I always run them the real way, right. I put in all the numbers in like the rental property calculator or just on a spreadsheet.

Josh: The rental—what rental property calculator? Plug, plug.

Brandon: Yes, so like I will—I’ll run it through that or my own spreadsheet or on a piece of paper, like on a napkin right? Just how much cash flow I’m going to get minus the expenses. Then I will also run it through the 50% rule in my head. I want to take whatever is worse because I assume like I want to be conservative in this so I always do my calculations both ways. Then pick the worse off one assuming that at least then I would be safe so if I’m running a single family through, single families typically aren’t 50% expenses, but I’ll still run them through that way just in case.

Josh: Got you. Alright, so let’s talk about this 2% rule in just a second. I am going say because it’s my show and I have the prerogative to do so. The rental property calculator that Brandon’s talking about, something we built here on BiggerPockets. Go to We’ve got a rental property calculator. We’ve got a fix and flip calculator on there. Check it out. It’s a great a tool for folks who need something who don’t have a really good excel spreadsheet to kind of help them manage.

Brandon: Well and I would even say, I mean this sounds, I hate sounding like a commercial, but honestly, I swear, as soon we built like—cause we built the rental property calculator off of like my spreadsheet. I’ve not used my spreadsheet one time since then because it’s just easier to use the computer than it is to use a spreadsheet. I don’t know.

Josh: Well, spreadsheet is on a computer, so Brandon.

Brandon: Yes, but it’s a not a spreadsheet. Well, okay. It’s easier to use the calculator than it is a spreadsheet.

Josh: Alright. Alright, yes, yes, yes.

Brandon: Move on.

Josh: Anyway, it’s great. Check it out, BiggerPockets/calc. Alright so 2% rule, what is the 2% rule?

Brandon: Ben, you want it or me? Alright, so 2% rule basically says that you should not pay or you should try to pay for a property, I’m guessing, I’m saying this backwards. Let’s say a property is worth $100,000. The rent should be $2,000 a month. It’s 2% of whatever the purchase price is.

Ben: Right, the rental property should be 2% of the value of the property whereas purchase price…

Brandon: Or the monthly rent times. Correct yes.

Josh: Is that a good number to go by? Does that number ensure cash flow? Is that kind of another one of these semi safety nets.

Ben: I’ll tell you. There’s a term we call yield. Yield is kind of the first degree of looking—the most bird’s eye view of looking at the property. Yield is what it throws off.

It’s the gross revenue, okay? What the 2% rule says is that the gross revenue from the property, all income streams combined, should be 2% of what you pay for the property or of the value of the property. I like that rule because it’s—there’s no ambiguities. I don’t per say think of it as 2% rule, but I look at yield specifically because of what we talked about with the rents.

I know my marketplace. I know how much I should pay for what rents. Brandon and I always talk about this. I know that if there’s $500 of rents, in this marketplace, because I know what sewer costs.

I know what water costs. I know what garbage costs. I know what taxes run. I don’t know specifically, but I know pretty well what they are.

That means that I can look at a rental of $500 a month and know that if I pay $30,000 a door, I’ll be fine. If it’s $550 a month, I can pay maybe $40,000 a door. If it’s $625 a month and I paid $40 a door, $40,000 a door, I’m doing great. That’s kind of the same concept as the 2% rule. I’m sure it will work out to pretty much. Well, I paid $3,735 for the ten units. The gross income was 16 of $5,800 so.

Josh: Pretty close.

Ben: That’s very close to 2%. I mean, it cash flows well.

Brandon: Well, I want to ask something in that’s really interesting that I think. The 2% rule, people often think and we’ve even said on the show before, if you can get the 2% rule, you are going to cash flow. You are going to do really well. It’s almost a guarantee that you’re going to do really well. The sixplex that my friend tried to sell a couple of weeks ago, gross rents were $3,000 a month. The purchase price was $150,000, which means it perfectly met the 2% rule.

Ben: Exactly.

Brandon: Like it perfectly met it; however, it didn’t work out so like yes, it’s helpful. If you can say this is a 2%. It’s a way to screen. That’s the—when I’m looking at 100 properties, I can run through each one of those in a matter of you know 10 seconds a piece in over the course of a few minutes, I can look at a hundred properties and decide which ones I want to pursue, but when it really comes down to it, these are just rules of thumb because if I would have followed it, I would have bought a bad property.

Josh: Don’t make a buying decision based upon one of these rules as the bottom line.

Brandon: Right.

Josh: Use it as a filter, make sure if it gets close to it. If it’s right around there, great, then move to the next filter and run the numbers and find out what the true numbers are, but Ben really quick, I know you want to jump in here. You—you know, we’ve kind of talked about you know what the sewer should be. You know whatever should be, but do you—so and I’m not saying this to kind of pick on you, but I think it’s an important distinction so say what’s your sewer on your ten unit building.

Ben: $200 a quarter--$200 something dollars a quarter.

Josh: Alright so it’s $200 a quarter is $800 a year, is the sewer on a 20 unit going to be $1,600 a year, is it a multiple, or are you basing—you know, because you don’t know, you can’t trust the numbers of the sellers so how did people figure this stuff out?

Ben: Right. It’s not the seller. It’s the sewer—it’s the company.

Brandon: That’s what I did on the sixplex. I called the city and asked them what the water, sewer, garbage bill was and I was shocked at how high it was.

Ben: Well, I mean—when I say, I know what it is, I know approximately what it is because I know this specific marketplace. For instance, I know on the tenplex, I’m paying a county, but on a fiveplex or a sixplex, I’m paying the city. I know those number are going to be different, but I know what they are in each case approximately.

Josh: You’re looking at the 100 unit building what do you go on? I mean is this, again, trust, but verify, where do you get that information?

Ben: Well, again, you determine whether or not to do research based on the numbers we receive.

Josh: Yes.

Ben: The way you do research is certainly not by asking the seller. You ask the company, the provider.

Josh: Can somebody just call up? I’m going to go and buy.

Ben: No somebody can’t. You have to be under contract.

Josh: Okay.

Ben: There has to be some kind of relationship whereby you can say, “Hey, I’m under contract to buy this building but can I find out this net [Inaudible][55:23]?

Brandon: Unless you’re in a small town and you call the lady at the front desk like I did and sweet talk her way into telling me.

Josh: “Oh it’s Brandon.” “Oh Brandon, you look so handsome.”

Brandon: That’s how we roll.

Josh: Well, Brandon owns his town so.

Ben: Yes, Brandon owns his town.

Brandon: Not quite, but so there’s nothing wrong. My point, nothing wrong with calling and asking. You never know what you might find out. It’s not illegal to ask.

Josh: Yes.

Ben: No, it’s not illegal to ask, but again, going to this whole knowledge of the marketplace and I know that newbies that are listening to this are going like holy crap. I mean, you know, I’ve never bought a unit. Not here, not there, not anywhere. How am I supposed to know what those numbers are going to be? You know, I hate to tell you. We can teach you all day long until you start taking action, you’re not going to learn certain things. It’s just a matter of fact.

Josh: Yes.

Ben: You know, we can teach you all the formulas and we can teach you how to think about things, but it you know, you can’t teach you certain things.

Josh: Yes, alright, well trying to keep this thing on schedule. I know Ben is trying to make this the longest BiggerPockets podcast. My goal is to stop him.

Ben: I’m competing with Serge. I’m competing with Serge, man.

Josh: Citing Green Eggs and Ham is a good way to doing it there, Ben so let’s move on to, you know, in our outline, we’ve got the 13 steps in analyzing a property. Let’s start digging into those and you know, not that I want to gloss over it, but we’re already an hour into this sucker and we got a long way to go.

Brandon: You got 30 seconds per step, Ben.

Josh: Let’s be concise and see what we can do here so step one, research going cap rates. What does that mean?

Ben: Okay, what most people think of capitalization rates is a number that somehow represents the value of the building you’re looking at. What people need to understand is capitalization rate, represents the psychological behavior of the marketplace at large. It is the answer to the question of what rate of return are the majority investors willing to deploy capital for in this marketplace for this particular building.

Brandon: Well let me.

Josh: Can you say that in—I like—really dumb that down for us.

Brandon: Yes, I was going to say.

Josh: Like, what the heck does that mean?

Brandon: Yes.

Ben: Okay, if I do a market analysis on ten fourplexes and I realize that each one of them was bought at between nine and ten cap then that tells me, a fourplex of this style, this quality, this age, is going to be valued somewhere between a nine and a ten cap. That’s the behavior of the marketplace. What that gives me is two things. One, I now know what I have to do to beat the average return in the marketplace and two, it gives me a starting point to analyze anything in this marketplace.

Josh: What does that mean in terms of like, I know what I have to do to beat the—can you give us an example.

Ben: Sure. Okay so take NOI of a thousand dollars a month at a—$12,000 a year. At a 12 cap or a ten cap, somebody would have to spend $120,000 to buy this building. Well, if most people are doing that—if most people are expecting to receive a ten cap, to receive an NOI consistent with a ten cap gives the purchase, then I know that if I pay consistent with an 11 cap so if I pay less than $120, I’m ahead of the game. I just gained instant equity as far as the marketplace is concerned.

Josh: Got you so you’re saying that if the average cap rate is x and you can buy the property basically at a discount.

Ben: Right.

Josh: That discount is being evaluated based upon the multiple that the market is getting.

Ben: That’s right.

Josh: Okay.

Ben: That’s part A and part B of course is we buy property and Brandon will tell you the same thing. We buy it because we hope for something we lovelingly call expendability. We hope to take those rents to $500 times four and get rents of $575 times four. We do that hopefully, without increasing, ongoing costs, without increasing operating costs. If we can do that then this whole increase flows through to our NOI.

Josh: What do we hope? What—explain that—explain that again in layman’s terms, you know.

Ben: Okay so I’m looking at a fourplex. I know that units like this should be renting for $600, but this one is renting for $400-$500 because the owner is out of town and is being managed by a broker. It’s just you know, whatever, they want consistent rent. They’re not going to hype rent I mean, I mean you bought it.

Josh: Yes.

Ben: Well, I analyze this property. I determine it’s current NOI, I place a valuation on it based on let’s say I want buy for at 11 cap or ten cap, whatever. I pay that amount. Now, I start managing it and since I knew before I bought, that these units with a little upgrading can rent for $600. What I’m doing is creating $400 of extra income into the building.

Josh: Yes.

Ben: Now, income is nice, but if it’s offset with extra expenses then at the end of the day, it means nothing; however, maybe I have to spend $15,000 just like Brandon did on his Waldo. His one time—it’s a one time expenditure right?

Josh: Yes.

Ben: There’s no monthly incurring cost associated with that. It doesn’t show up in the balance sheet of the income statement of the building. You spent the money. You know what you did, but when the next guy or an appraiser or a buyer analyzes this building, there’s no additional expense so basically what they see is the income that you started out with plus an extra $400 so what they’re doing is, they’re taking the ten cap with what is with what people expect in this marketplace. They’re capitalizing a value based on a higher NOI and what happens? You started out with a thousand dollars a month, $12,000 a year, at a ten cap even if you paid ten cap, you paid $120,000.

Josh: Right.

Ben: Now, that you improved the NOI by $400, now it’s $1,400 a month times 12, whatever that’s going to end up being you know, $19,000 or whatever, right?

Josh: Yes.

Ben: Not even close and that’s the value that you’re going to pay.

Josh: Somebody bust out a calculator.

Ben: Get a calculator.

Josh: Yes, seriously.

Ben: Yes, get your calculator out.

Josh: You’re the one telling the numbers. Where’s your calculator?

Ben: I wasn’t told I had to do the numbers I told—you know, just look pretty and be here.

Josh: By the way, you look very nice with your jacket and you know.

Ben: I came prepared.

Josh: All I need are glasses and goatie and I’ll look just like the two of you.

Brandon: You know something to strive for? Did you say $1,400 times 12?

Ben: $1,400 times 12.

Brandon: $16,800—$16,800.

Ben: $16,800, capitalized to 10% that gives you a value of $160,800 so you paid $120 for this building. You spent 15 to get the NOI to go up by $400 a month.

Josh: $32,000 bucks.

Ben: You’re into this at $135, but the building is not worth at the same 10 cap. You are not asking anybody to pay a capitalization lower resulting in a higher value than that which is the marketplace. You are still working with the same capitalization rate as the marketplace. Now, I have to qualify all of this. We’re talking about small multiplex in here and it doesn’t quite work that way in a small multiplex because of them being residential properties like you started out in the beginning. Residential properties, SFRs, single family residence, duplex, triplex, fourplex, are typically valued with what is called comparable market in house.

Josh: Comps.

Ben: Yes, comps and they look at the sold, they make adjustments, and they value them this way. That doesn’t have anything to do with income so while it’s hunky dory for us to talk about a triplex or a fourplex being creating this kind of you know, it does and it doesn’t. When you get up to ten, 20, 30, these are investor purchases. Investors are buying these things because of income. Income is key to everything.

Josh: Yes.

Ben: They determine how much to pay based on income.

Josh: Yes.

Ben: Which is different from a duplex, triplex, fourplex. We have to make that distinction that while for us as investors, yes, we have to know what we’re doing and it works the same way with a fourplex as it does with a 400 unit apartment community, but in reality, if you were to go to a bank and say, “Hey, my building is worth worn off, can I refinance and pull some out.” They say sure, we’ll send an appraiser out. That appraiser is going to place—they will look at the income, although they will use the GRM formulas, Gross Rent Multiplier. If you want, we can talk about that. Basically, the younger brother of capitalization rate, but they will look at income, but fundamentally, they are still looking at how can I justify? Has anybody bought a fourplex for this amount?

Josh: Yes.

Ben: Can I make adjustments upward because the rents are higher a little bit. It’s better quality, I’ve done some upgrades, things like that. Things like that, but it’s difficult proposition in a small multifamily.

Josh: To put what Ben just talked about for I don’t know how long here he’s talking, into terms that you’d understand. Basically, you can use these cap rates in five plus units, but in a four and under—it’s not—you can’t—you know, raising the rent by x isn’t going to necessarily increase the value unless you’ve done some additional work than just raising numbers up so.

Brandon: Yes, my triplex was only going to be worth what the other triplex in the area sold for. Not.

Josh: Yes.

Brandon: No matter how much income I raise on it. It’s not going to be worth much more so.

Josh: Your explanation was very good. I just.

Ben: You’re triplex—the other problem with it is that it’s Waldo, it’s a strangle… No seriously, that’s an issue.

Brandon: It’s not quite. It’s not quite. I know you say that.

Josh: What is that called? There’s a word that describes it.

Ben: It’s a non-conforming building.

Josh: Yes.

Ben: It wasn’t—the electrical wasn’t run for—to accommodate three separate units. The plumbing wasn’t, the foundation wasn’t built to accommodate a single family structure. It—you know, it—the valuating process [Inaudible][1:07:03].

Josh: He’s very upset about that Brandon.

Brandon: I know. I agree. We can—you know, we’ve debated this a lot on the blog so we won’t rehash it totally here, but.

Ben: We will kiss and make up.

Brandon: Yes, you know, yes well, but I will say that it may have been built as a triplex originally because I mean, it’s got full height ceilings in the basement. It’s a daylight basement. It’s off the ground. The other one is 12 feet in the air. It’s—I mean, the mean house. Anyway.

Ben: They put enforcement in the basement when they built this thing. It wasn’t meant for people.

Brandon: You never know. You never know.

Josh: Alright, children, let’s.

Brandon: That was like a half hour, 30 seconds turns into a half hour.

Josh: Yes, that was it. Exactly. Come on.

Brandon: Alright, now you’ve got ten seconds. You have ten seconds for the next 13 steps so. Alright next, step number two. Oh by the way, these came from your—I stole these all Ben from your Kindle book, The 13 Ways to Value a Multiplex so. If people do want to learn more, you can, I don’t know, go to the show notes and get Ben’s book for whatever, two bucks or whatever it is on the Amazon so.

Ben: Well, moving on.

Brandon: Alright, moving on.

Ben: Step two.

Brandon: Moving on, research.

Ben: Research.

Brandon: Socio-economics dynamics. What does that mean?

Ben: Okay, what that means is that if you’re buying a fourplex with four two bedroom units and you’re buying it in a neighborhood whereby predominantly, people living there and wanting to live there are retirees, who only need a less expensive unit by and large with one bedroom than whatever value you think you’re getting you have to discount for the fact that a two bedroom unit that’s more expensive is going to be tough to rent.

Josh: Got you.

Ben: Because in this particular neighborhood, that’s not by and large what people want. The same applies if you buy one bedroom units with you know, young professionals having one child. You know, what are they going to do with a one bedroom?

Brandon: I would agree for the most part. I mean like obviously, we don’t need, obviously, spend too much time on this, but I do want to bring up, somebody asked me the other day. They sent a private message to me and said, “You know, I’m thinking about buying this property; however, it’s studio apartments and I’m concerned that this area doesn’t have a huge demand for studio apartments.” The area was like Tacoma, Washington, which is you know, hundreds of thousands of people so I told him, “Yes, you may not be the biggest demographic for studio apartments, but there will always be a person who wants to rent a studio apartment. Like, I mean so to a degree, I mean, yes, you need to take that into account, but it’s not like his duplex, is going to be sitting vacant for six months a year just because he’s got a studio instead of a two bedroom which most people want.

Josh: Well, it might though. It very may well.

Brandon: It might.

Ben: I agree with Josh, I would have recommended them to stay away because again, we are looking to open up our market. We’re not necessarily looking to niche our self out. That’s dangerous unless you’re Donald Trump. You’re at the very top of the market and you’re dealing in a totally different demographic. That’s a completely different game.

Brandon: See I.

Josh: Well, I’m going to disagree with you on that and that goes back to the last show, a good friend of yours, Serge, Serge Shukhat, and the show was phenomenal so show 60, If you haven’t hear it. It’s.

Ben: It was phenomenal.

Brandon: Phenomenal. One of our best shows, we had—we’ve had over 20,000 listens in less than a week, insane. You know we talked about building a niche and being an expert in that niche.

Brandon: I think just because we talked about it, it doesn’t mean it’s true, but the point being, you know, if you can become an expert in what people desire, which does go along with what you’re talking about and become the niche player who differentiates yourself from everybody else. In a way where you’ve got that super hero advantage so to speak. You’re going to then thrive whereas everybody else is fighting for the same three-twos that they’re all fighting for. What do you say about that Ben?

Ben: That’s true up to a point. I mean, the fact of the matter is that look, your tenants can do a lot more with a two bedroom they can do with a studio. A studio apartment is going to work for one specific type of a person. If you want to be looking and appealing to that specific demographic, fine, but understand nobody that’s married with a child—not too many people who are young professionals need an office space. Not—you know, you are just—you’re plugging yourself out of a bunch of demographics. This why I don’t like one bedrooms because a two bedroom, you can have you know a married couple with a child, you can have two unmarried people, you can have roommates, specifically, you know, in college town. You can have a person with a TV room, a retiree with a TV room. You are appealing.

Josh: Right.

Ben: You’re giving yourself a bunch of exits and as far as I’m concerned, investing is about options.

Josh: I think you’re right.

Brandon: Yes.

Josh: I’m not.

Brandon: I agree. I think on a large scale, it’s exactly you’re perfectly exactly right. I just think like, if you’re buying a duplex and there’s a studio, don’t not buy a duplex because there’s a studio apartment there. If the numbers work out, you’re not—it’s not going to be impossible to find one person to rent your studio apartments. That was my gist to him it’s still.

Ben: Sure, but like I could tell last week, I looked at a apartment community that was 70% one bedroom units.

Brandon: Yes and I see.

Ben: I didn’t even look at it.

Brandon: Yes, exactly.

Ben: That’s just stupid. I mean you know, it’s—I can’t. What am I going to do with that?

Brandon: Yes cause that will drop your averages over—like year after year which is tens of thousands or hundreds of thousands of dollars.

Ben: Right.

Brandon: Maybe even millions

Ben: Right.

Brandon: Because of that. Yes, so I agree on a big scale.

Ben: Right.

Brandon: Anyway, we got to move on.

Josh: Yes, number three on this is research availability and make up of units, which I think is really part of number two on the socio-economic dynamics.

Ben: Right.

Josh: I think that they kind of go hand and hand. You know, now as quick note to those people listening, even though you’re buying a property. These multis—say you’re looking at two bedroom units. Keep in mind while you’re opening your options, you may not advertise these units as family friendly. You cannot—you have to be very very careful on the marketing side of things because there are laws in place that’s say you cannot.

Ben: There are—there are HUD laws, fair housing laws, you know, licensees, we know about those, this is why you know, I don’t like three bedrooms. Why? Because three bedrooms accommodate larger number of people.

Brandon: Yes.

Ben: Do I want larger number of people in terms of maintenance of my unit, wear and tear. Do I want? I don’t, but I can’t turn away somebody because they have one more child than what I think is reasonable. It’s not up to me to decide.

Josh: What’s reasonable?

Ben: How many children zoo.

Josh: Just—I’m just curious though because, you know I mean.

Ben: I have.

Josh: How many is reasonable? Let’s hear it. What’s the number?

Ben: That’s just like children.

Josh: I want to know because you know, I have three. I don’t know if that’s unreasonable. I’m just curious. Is that number unreasonable?

Ben: Listen, I’ll tell you something. I will tell you. I wouldn’t let you into one of my units. Not because of kids, because of you.

Josh: What’s the number? No I’m just kidding.

Ben: You see what I’m saying Josh?

Josh: I got you.

Brandon: We got to move on.

Josh: I got you.

Ben: The property itself.

Brandon: Yes.

Ben: Qualify and disqualify because you can’t do it. You can’t legally do it. You can get into a lot of trouble.

Josh: You know what and you made a really good point there. I know we’re busting each other’s balls here, but you know, when you said you wouldn’t rent to me, you didn’t mean—you don’t—you wouldn’t rent to me the whites guy, who’s this, this, this, all my demographics. You wouldn’t rent to me because you think I’m a jerk.

Ben: That’s okay.

Brandon: That is okay.

Josh: You don’t have—you’re allowed to not rent to somebody because you think they’re a jerk. You’re allowed to not rent to somebody because you know they’ve got tattoos on their neck.

Brandon: There’s a line in Mike Butler’s Landlording on Autopilot book that was my favorite line from the book said, “Dirty is not a protected class.”

Josh: Exactly.

Brandon: I love that line. Yes. Jerk is not a protected class.

Ben: Smoking is not a protected class.

Brandon: Yes.

Ben: Anything to do with elicit drugs is not a protected class.

Josh: Yes.

Ben: I like people and I think we have to if we’re going to be in this business. We have to be able to deal with people. We have to like people. We have to—you know what the important thing is we have to believe in basic goodness of people, although, we get burned everyday.

Josh: Yes, but—and just really quick I think and the reason I brought that up was it’s important that A people understand protected classes, but B that they understand that there are a lot of segments that are not protected and it’s perfectly within your rights. In fact, as a landlord, you want to make sure to screen out undesirable types of tenants and that’s not based on race, on sex, on gender, and any of that stuff.

Ben: Right and.

Josh: Do your homework, we’ve got a ton of articles on that stuff on BiggerPockets. If you don’t know it, if you don’t understand it, you better do—you better know it before you start renting to people because you can A, get yourself in a lot of legal trouble for screwing that up and B you could get yourself in a lot of financial trouble for screwing it up.

Ben: Correct and let me just add one more thing. We talked early on, we talked about desirability and the important thing and this is what I keep telling people. The important thing is you have to balance what’s good for the tenant with what’s good for you. I’ll give you an example, a two bedroom duplex would be very nice if it had two bathrooms, you know, for people.

Josh: People you use bathrooms. That’s right. Yes, people and cats.

Ben: They like that. Shut up Josh.

Josh: That’s the first time I’ve been told to shut up on my podcast.

Ben: On my end as a landlord, that’s two sets of plumbing I have to clean up. That’s two sets of faucets that when they start to drip, I have to worry about replacing faucets. That’s two sets of toilets I have to lift in order to replace wax rings.

Josh: Well, those are, hold on, those are two sets that you hire a guy like Brandon to do because.

Ben: That’s correct.

Josh: Because you don’t do that stuff yourself.

Ben: That’s correct, but I have to pay him.

Brandon: I don’t do toilets anymore.

Ben: I have to pay him so my operating expense is because of the two bathrooms, go up over time, cap x. No two ways back.

Josh: Yes.

Ben: No problem.

Brandon: Are you saying you wouldn’t do a two bathroom then or if it?

Ben: I’m not saying I wouldn’t do it.

Brandon: If you didn’t have to.

Ben: It would have to justify itself in rents.

Brandon: Okay, good. Yes.

Ben: Frankly, I look at a two bedroom, one bath that I can rent for $650 then the question I ask myself, I know you are very nice tenants and you would love to have two bathrooms because you know—you can—your wife can have one and you can have one. I get it. How much more are you willing to pay? Then they’re say to me $25 bucks and I’m going to say to them, it’s not worth it to me to provide you with that kind of comfort for $25 a month.

Brandon: Yes.

Ben: Because I’m going to spend more than that in the long run, worrying about the plumbing and the extra electrical, the fan in the ceiling and all of that stuff.

Josh: The rent has to justify those two bathrooms.

Brandon: Nice.

Ben: Right. Even then, even if I can get much more money still I’m thinking because I’m looking for as much passivity as possible in all of this so how many moving parts do I want? It really has to be worth my while to get into something like two bathrooms.

Brandon: Yes.

Ben: Right. I mean it really has to be worth my while.

Josh: Got you.

Brandon: That makes sense.

Ben: Now, this works a little differently than SFR because just single families, single family, it works differently, but in an apartment setting, you know, it just, you know, if you take a hundred apartments and you extrapolate it by two and half bathrooms. You got a lot of plumbing to worry about.

Brandon: Yes.

Josh: Yes.

Ben: You know and if people are okay with one and a half, one down and one up, hey you know, that’s good enough for me. I’ll lose the extra $50 because in the long run, in rent a month, because in the long run, it’s going to be a lot less active, a lot more passive, I have to do less.

Brandon: Yes.

Ben: Managing this. That it costs less than cap x. I think it’s important. That’s one of those perspective that newbies—we were talking in the beginning, they wouldn’t have.

Brandon: Yes.

Ben: Because they look at two units. You know, they see one with one bathroom and one with two bathrooms. They say, “That’s great! I would love to have two bathrooms. My tenants would love to have two bathrooms, but until you’ve owned property for a decade and you know how much it costs to have two bathrooms as opposed to one. You don’t gain that perspective.

Brandon: I think that’s why it’s just helpful to have, you know, conversations like this and why this podcast is you know why I’m pretty obsessed with it is because we get to hear from guys like you who can explain those things and we don’t have to go through ten years of owning that bathroom to know those so thank you. Moving on.

Ben: Moving on.

Brandon: Alright.

Josh: Nice transition, Brandon.

Brandon: Thanks. Ten seconds a piece, alright. Well.

Ben: This is working out great.

Brandon: Alright, next one. This one is an easy one. Research going rents. What does that mean? Step four.

Ben: Yes, well that’s that yield, right so you look at the fourplex and you see four rents at $500, $2,000 a deal and that’s pretty right on to you because you know two bedrooms in this unit—units like this in this location should rent for you know $475-$495-$500-$515- five and quarter, somewhere in there.

Brandon: Okay.

Ben: You’re like no, good, it’s what we talked in the beginning about. Back to.

Brandon: Well, what about something actionable, how can somebody actionably check a.

Ben: Call the numbers.

Brandon: Very good, that’s how you check rents.

Ben: Everybody always talks about—everybody talks about oh it makes sense to have the MLS, it makes sense you know to have a license because you know, I can know this. Call, pick up the phone, if you’re too afraid to call, too intimidated to call the number, the for rent sign, to go in there and to check it out. I’ll get the right business.

Brandon: Funny story about that. I call numbers a lot of times and just for fun just—I always use an English accent when I call people and ask them how much a unit is for rent. I just think it’s funny to do. Nobody expects a British person in the middle of you know, hick Washington.

Ben: Yes.

Brandon: To be calling about a property so anyway, yes, verify. I would just call the numbers on the for rent signs.

Ben: I can’t do that because I can’t hide my accent.

Josh: Let’s hear it Brandon, let’s hear the voice.

Brandon: I’m not going to try here, no that’s too embarrassing. Step number five, research.

Josh: Research type of building, research the type of building. There’s various types of apartment building available, correct? I mean we’re not just talking.

Ben: Right.

Josh: I mean high-rise and low-rise. I mean there’s a lot of stuff right?

Ben: Yes, there are good apartment buildings and then there are Waldos.

Josh: Okay, can you explain to me what in hell is a Wal—I mean like I know how you’re defining it with guy, but where is it—is it from the little guy with the red and white hat. Is that the Waldo? I mean.

Ben: Okay, it’s just something that sticks out. It’s kind of like a sarcastic take on the opposite of what Waldo really is which is he gets lost and this thing sticks out like a sore thumb right so here’s the deal.

Josh: Yes.

Ben: If somebody did an addition onto your building, let’s say you had a house and they did an addi—or they subdivided it into a triplex, what are the chances they didn’t pull a permit?

Brandon: Yes they could.

Ben: If they didn’t pull a permit, has their work—had it been checked out when they completed? If it wasn’t check out then are you running a greater chance that you are walking into some lemons, absolutely.

Brandon: Now, here’s where.

Ben: You can’t qualify that in any other way.

Brandon: Here’s where we disagree and I—we just rehash this all the time right, but real quickly, this is where we disagree, I say.

Ben: You can disagree with me and we’ll you know, be over it and laugh.

Brandon: You say.

Josh: It’s because you’re wrong.

Brandon: You say if you’re a newbie, you should not do this. You even said in that post, you said, Brandon will do really well at Waldo because I can handle those things. I can handle the extra $10,000 that I’ve spent on plumbing because I’ve—you know, I’m experienced in this. You say newbies shouldn’t do it. I actually go the other way and I say newbies should do it as long as you know, you can reasonably—you got to have some kind of leeway to be able to afford those big messes, but honestly, this sounds maybe terrible and people are going to yell at me for saying this, if a newbie would have bought that and put that $10,000 on credit card, just to pay for those extra repairs, I still would say do it because.

Josh: Uh uh.

Brandon: Here’s why I say that. Because the experience they would gain from that it’s far worth more than that $10,000 would cost them. That’s why I say it because I—you would learn so much off buying Waldo that whether or not it became the best investment. It’s better than not buying anything. That’s my take.

Josh: Well, there’s okay and I think you have somewhat a very very small point located in there.

Brandon: There’s a lot of good points, but.

Josh: There’s a lot of contingencies right, if you’re a guy who’s got a million dollars in the bank and you buy Waldo for $50,000 and you put ten grand and you lose ten grand, okay, it’s a learning lesson, but if you’re somebody who’s working their butts off at a fulltime job and you’re trying to do this, you can’t afford to lose the $10,000.

Brandon: You can because your $10,000 drops to $2,000 when you spend your nights and weekends fixing that plumbing yourself like I do.

Ben: Oh god, no.

Brandon: No, I know, this is where you disagree with me, but this is what got me to where I am and so I can’t knock what got me to where I am and like.

Ben: I am.

Brandon: People will sit in their couch when they’re 65.

Josh: You’re encouraging people to go through the hell that you’ve gone through to get where you are.

Brandon: I am.

Josh: When they don’t have to.

Brandon: I’m encouraging them to do something and.

Josh: Well, that’s great.

Brandon: Too many people will be sitting on their couch when they’re 65 and they’ll be like man, I wish I would have done something and they won’t. Now if they can do without doing that, great.

Ben: Don’t do that.

Josh: Yes. There’s something we could do baby. Come on.

Brandon: I think they sh—I just think like—obviously don’t buy a bad deal, but this was not a bad deal. This was an amazing deal in a good location that had some unknowns like the plumbing, but you know, you just roll with the punches, make it work.

Ben: You know I stayed by, stand by what I said.

Brandon: We’ll agree to disagree.

Ben: You will do very well at that because you’re able to do the plumbing, but I disagree with you.

Brandon: I only did some of the plumbing. I hired the rest.

Ben: I got to tell you, hang on. An email I received two days ago form a woman who read up about me, knows my circumstance and the first statement in the email was, “I’m living your nightmare.” She is not able to work. She—at young age became disabled. She is looking into real estate as a way of helping to offset some of the burden from the husband who is the only working at the moment. Are you going to recommend that person to buy Waldo?

Brandon: I would recommend that person—now again, it’s different for everybody, but I would recommend that person, yes to buy Waldo, but that might be after making their husband work a part time job delivering pizza for six months to save $20 grand a reserve fund to buy Waldo, that’s what I would. I don’t care what they do, but you got to hustle and that’s a way. I hustle by doing plumbing. If somebody can hustle by delivering pizzas or by—get a partner to buy that property that can afford that. I don’t care what the hustle is, they got to hustle.

Ben: The thing of it is you’re talent is worth very considerably more than the pay you’re receiving for your hustle. I can tell you that because I love you and friend.

Josh: I actually agree with Ben here by the way.

Ben: You think you are doing yourself a favor, you are not. You could be spending your time in terms of both dollars and personal fulfillment doing something else and being much farther, I think than where you are with Waldo and that thing is just you know and you have others.

Josh: Theme start up.

Ben: your—but it doesn’t have to be that way and I wouldn’t recommend to anybody that it would be that way. I just wouldn’t.

Josh: Yes.

Ben: I just can’t.

Brandon: I think that just—I think this is helpful for people to hear both sides of it because I mean, I’m not necessarily—I’m not changing my opinion and I don’t know if I ever will. I understand exactly where you’re coming from. I want people to like know that I guess like it got me to where I am today. I’m you know—I’m pretty happy with where I am today with rental-wise. I can’t knock what I’ve done.

Josh: Here’s what—I’m going to cut you off here and.

Brandon: Go ahead, we got to move on.

Josh: We’re going to move on, but before we do, I’m going to just kind of consolidate the argument here. Here’s what Brandon’s saying, take away the details. What Brandon is saying is get off your backside and do something. He’s saying you got to—you can’t just you know—you know think forever and analyze and analyze. At some point, you got to kind of get in, get a little bit of dirty.

Brandon: There’s something wrong with every property. That’s just.

Josh: Right and I think Ben’s going to agree that—that’s the truth because otherwise, you know, you’re going to be 65 and you’re never going to have done something. You know, it’s real estate is dirty. Problems will come, you will experience them, you will have to learn how to deal with problems. Moving on. God, what do I need you guys for? Alright, step five.

Brandon: We did that, six.

Josh: We did that, step six, research vacancy factor.

Brandon: Yes, ten seconds, Ben.

Ben: Well, what, why don’t you do it? I can’t do ten seconds, sorry.

Josh: What is your—the vacancy factor is the rate by which you’re going to make a general, you’re going to make an assumption that this property is going to have x amount of vacancy every year. Correct?

Ben: Sure.

Josh: Okay, so how do you research?

Ben: I mean your building is going to be vacant at some point—your unit is going to be vacant at some point. You’re just making a guestimation of how often.

Josh: Right.

Brandon: How do you guess that?

Josh: How do you get that information?

Ben: Well, personally, I have a friend who owns 600 units and when I want to know what the vacancy rate is in this subdivision or that subdivision, guess who I ask? Pretty much, with that many units.

Brandon: Yes.

Ben: You are setting the market. You know exactly what it is so how do you get access to these people? We don’t even have a REA. I can’t say, go to your REA and talk to people. Although, it’s probably a good idea, but in Lima, we don’t have REA. You have to pick up the phone, which goes back to if you want to fly, you got to hang with people who fly.

Josh: Where do you find people who fly with real estate?

Brandon: BiggerPockets.

Ben: You find them.

Josh: BiggerPockets.

Ben: It’s very important to be market specific guys. I mean you are talking about BiggerPockets, hearing what vacancy rates in California is going to do exactly nothing for me.

Brandon: Yes.

Ben: In Lima, Ohio.

Josh: Yes.

Ben: It just—it doesn’t do anything for me.

Josh: You’re right, you’re right. Absolutely.

Brandon: That’s where.

Ben: In principal, we can agree on what it means, but in reality, in order to understand the market behavior, I have to know locally what it is and you know, you ask an appraiser, you ask a commercial banker. You can ask a commercial banker what the going cap rate is or an appraiser. You can ask them what the GRM is, you can ask them a lot of things and it’s their job. They’re getting paid to know this.

Brandon: Do you recommend calling up a property management company to ask them the vacancy rate or do you think they’ll be too peachy because they want to sell you something.

Ben: No, I would recommend, in fact I do this now, somebody that manages a thousand units. Yes, a professional property management, a brokerage that manages SFRs and duplexes and a few units. You’re not really going to get fair representation of what it is anyhow. You got to talk to somebody. The drawback is that they’re not going to take your business unless you’re bringing them a syndicated 120 unit. They don’t want your fourplex.

Josh: Yes.

Ben: You couldn’t afford them in the first place.

Josh: Yes, alright, so that’s great, really quick. You know, you say real estate is local and I’ve got to defend us some way shape or form. Hey you are correct a thousand percent, I agree completely. Real estate is completely local and that’s why we have tools on BiggerPockets to let you network locally with a lot of people, our fine users page let’s you look in your zip code to see other people, We got a lot of tools on there that let you do that for that very purpose because we want people to be networking and getting that information, doing business together, helping each other out to be successful, and so you know, yes, in the case when there’s not a REA, you know, you might be able to use us, but there are plenty of other ways that you talked about to find other folks.

Brandon: Yes.

Josh: Next section to this and we really got to fly on this is, Ben, you’re winning the battle against us. He’s Darthvader over here. Like the Dark Side is crushing us. Analysis of income and expenses and value calculation.

Ben: Looking good doing it too.

Josh: If you do say so yourself, right?

Ben: If I say so myself.

Josh: Yes, alright so step seven is research and verify gross income. We talked about gross income, how do we research and verify it?

Ben: Well, gross income is add all your rents together, if you have a Laundromat facility on the premises and you can’t really know how much it makes, but you can guestimate how many tenants you have. How much laundry do they do. You know, that kind of thing. By and large what I’m talking about is, what does a two bedroom, one bath unit, in a 1960 construction, brick, duplex, with a garage go for in your neck of the woods. You need to know that. In this particular neighborhood, I know that. I know that over here in you know, this area, it’s going to be between six and 650 depending on the condition, but in that area, it’s going to be $725 and eight. I know those things and I have to know those things in order to be an effective landlord.

Josh: What if there aren’t reasonable, you know, this is the issue that people have on comps. What if there aren’t reasonable comp properties in the area that are of similar make, model, age, so on and so forth. How do you go about doing it then?

Ben: I guess you’re going to have to.

Brandon: Don’t buy it.

Ben: Stay away because then you’re talking about a Waldo.

Brandon: Makes sense.

Josh: It’s an outlier at that point, okay, fair enough.

Ben: The problem with that is selling it because nobody wants an outlier.

Brandon: Yes.

Ben: That’s just human psyche. You know, we don’t want an outlier.

Brandon: Unless it’s cash flowing at like $1,200 a month on Waldo and it’s all fixed up.

Ben: If you understand cash flow.

Brandon: Yes.

Ben: If you understand cash flow. If you understand, if you’re an experience investor. If you are Brandon, how many Brandon’s are in the marketplace? You’re talking about a triplex, which is a Fannie Mae, Freddie Mac, qualified [Inaudible][1:34:44].

Josh: If you guys are fighting on this freakin’ property.

Brandon: We’re not fighting about this.

Josh: Every time we go there, I’m just.

Ben: I’m serious.

Josh: Cut, cut, cut, next question.

Ben: I am serious, the whole point—listen to this, this is an important point. The whole point of buying under four units is that you can sell it to a home owner occupant.

Brandon: That’s what I’ll do with Waldo someday. I mean because it’s a four-bedroom house.

Ben: That opens up.

Brandon: With two extra units, I’ll sell it to a homeowner who wants a beautiful big huge house and they will pay extra because it’s got those extra income units. That’s my exit strategy someday.

Josh: Well, nobody is going to buy for the beautiful big house that wants a beautiful big house and two extra income units that they have to then convert to be part of the extra house.

Brandon: Well, they won’t. No they.

Josh: Unless they want to have their tenants living in the building.

Brandon: That’s what they want. They want income property because they’ll live for free. They’ll buy that thing for $150 from me and they’ll—their tenants will pay their entire mortgage. That’s my exit strategy.

Josh: Well, as long as that’s an exit strategy that you have. I don’t have an issue with it, Ben does, but that’s Ben.

Brandon: I mean, it’s one. It’s—

Ben: No, no, I don’t. That’s exactly it, that’s why you buy four units instead of five because a four unit will qualify it for a regular person with a regular 30-year mortgage. A five unit will not.

Brandon: Yes.

Ben: The added bonus of having a duplex, fiveplex, fourplex is that you can sell it to an investor or you can sell it to an owner occupant who’s going to live in one unit so it opens up your market.

Brandon: Well.

Ben: The problem is is that if—when you are buying, it’s cash flowing great, but for one reason or another, it’s not going to be appealing to an owner occupant. Then you are destroying the whole segment of desirability that was supposed be present in this deal.

Brandon: Yes.

Ben: It’s now not present. My concern with Waldo in general, quote on quote is that there are aspects of it that are going to disqualify it as desirable acquisition for a homeowner.

Josh: Got you.

Ben: If that’s the case, you’ve got problems.

Brandon: If you saw it, you would change your mind. You got to fly out to Washington, but anyways. Moving on.

Josh: I’m going to kindly ask my cohost and my guest.

Brandon: We’re not mentioning it anymore.

Josh: To refrain from talking about Waldo going forward so we can actually get this show done before people are—I don’t know.

Brandon: Yes, no more. Just come out and see it.

Ben: Alright, okay, no more.

Brandon: Alright, number eight, research and verify operating costs. How do you do that?

Ben: Okay and that’s one of those things where you call the garbage company and find out.

Brandon: Yes.

Ben: For a four unit building, how much they will charge you to have four bins of you know, whatever. You need to kind of have an idea. You call the electric company and you find out what approximately usage to expect on an apartment of 800 square feet that’s heated with baseboard and you know what’s typical.

Brandon: Yes.

Ben: It’s a little bit of work, but it’s work that has to be done because yes, we need to verify what the information is given to us in specifics, but before you even place an off-it, you set foot into this thing where you even drive up to this fourplex. You kind of have to know what you’re dealing with.

Josh: Yes.

Brandon: Yes.

Josh: Hey, I’ve got a really really quick follow up on this and that’s you know, the debate of as a landlord paying utilities versus not in the last show. I do want to keep it brief, but in the last show, we talked about you know, sub-metering, things like that for some of the utilities, which makes sense in certain cases, but in other cases, you know, you really—if the market says, you’re paying the rent, if you’re paying utilities for your tenants then you’re paying utilities for your tenants, is there a—is there you know, how do we go and discover this information?

Ben: Well, this tenplex for instance was individually metered for water and yet the seller was including water with rent. Well, with them being individually metered, I wasn’t going to do that.

Josh: Yes.

Ben: Because I called the water company and I saw the bills from the property that I requested as part of me due diligence process and I knew that the bills are going to run between you know $12 and $20 a month. Well, that’s important, why? Because $20 a month times ten units is $200 a month, times 12 is $2,400 a year. At 10% capitalized, that’s a value of $24,000 that he was giving away and I wasn’t about to give away.

Josh: Yes.

Ben: The next question is am I going to accrue a bunch of vacancies because now I go in and tell everybody that guess what the party’s over and you got to pay your own water, maybe, maybe not. That’s where you have to know your marketplace.

Josh: Yes.

Ben: What people will and will not do for this kind of unit in this location for this kind of building.

Josh: Is there any kind? Is there a standard is kind of the last question you know when you hit say 50 and over units—50 units and more, you know, are you? Are landlords generally paying for these? Not paying for these? Is there—there’s no general across the board is there?

Ben: We never want to pay utilities.

Josh: Correct.

Ben: That’s a blanket statement. Right Brandon? I mean we never want to pay utilities. I mean poor guy’s spending a thousand dollars a month.

Josh: Let’s stop picking on Brandon, god.

Ben: Well, no, no, he posted that.

Brandon: I can’t. Yes.

Ben: In a thread.

Brandon: We can go over. We can spend forever on that, but yes. I mean we talked about it last week quite a bit too and I mean if we can avoid paying expenses, obviously that’s the best, but sometimes, like when you buy them especially, you’re like, you’re kind of forced to do whatever the building was set up for and.

Ben: That’s exactly. Well coming back to this thing.

Brandon: Maybe you shouldn’t buy it in the first place, correct.

Josh: There you go.

Ben: When you’re converting a single family where the systems were designed to be single-family right?

Josh: Alright.

Ben: I never said the word.

Josh: Yes, you didn’t have to. Step nine assess the NOI, we talked about NOI earlier, how are we assessing the NOI?

Ben: Gross income minus operating cost.

Josh: Fabulous.

Brandon: Step ten.

Josh: Step ten, assess cash flow.

Ben: NOI minus the cost of money and this is a function of how you’re going to finance it. If you’re going to pay all cash, you won’t have cost of money and your cash flow, basically is your NOI at that point.

Josh: I—go ahead sorry. I was going to ask there’s an argument that I’ve seen when you value a property, you know, it’s not even an argument. When you value a property, you know you’re debt service—is that something that something you include in the numbers or do you calculate the property based upon a 100% financing because I know a lot of people will go ahead and say we always go that way because that’s going to you know, give you a certain type of response.

Ben: Right. You know so that would be me in a small multiplex you should always kind of imagine you’re going to finance it 100% and look for cash flow, a hundred dollars a door.

Josh: Yes.

Brandon: Yes.

Ben: It’s kind of a rule of thumb. At least with possibilities to drive it up.

Josh: Yes.

Ben: The more kind of scientific way of looking at it is something called DSCR, sometimes they call it DCR, Debt Service Coverage Ratio. That’s what the banks use. Basically, what that says is they look at your net operating income, which is your income, gross income, minus all of your expenses. They take that number and then they juxtapose it against your mortgage payments, your cost of money. Basically, they’re trying to see how easily you’re going to make your mortgage. This is for their sake so for instance if—your NOI is you know, $1,200 and your mortgage is $1,000 a month, well, that tells them that the only thing left to cash flow after you pay your mortgage is $200 bucks on this building, you know, that’s 1.2 ratio, debt service coverage. That’s not enough and most banks now, it used to be. We have a bubble. It used to be they would give up money at 1.1% as long as you’re making 10% more than your mortgage payments. They would finance the deal. Of course we know how that turned out.

Josh: Yes.

Ben: Nowadays, most banks won’t do anything under 1.25% and for a newbie, I would tell them 1.4%-1.5%-1.6%, just to be safe. Of course, Brandon, on his triplex is getting like you know, 2% or above 2%. That’s an anomaly kind of situation that—he’s generating very high cash flow. He’s paying with his time and he’s late f, if you’re willing to do that.

Brandon: I was.

Ben: Then look at that.

Josh: Number 11, cap—wow this is—we’re having a real hard time here following instructions Ben Leybovich, step 11.

Ben: No, yourself.

Brandon: He’s very jealous of W-A-L-D-O.

Josh: Yes, apparently he is.

Brandon: Moving on.

Josh: Step 11, capitalize value.

Ben: Well, Brandon, you want to take that? I feel put on the spot.

Josh: This is based upon?

Brandon: Yes, this is based on your steps. I’ll let you take it.

Ben: You take the NOI and you apply whatever capitalization rate and you arrive at a valuation so let’s take.

Josh: We had talked about these a few examples.

Ben: We talked about these.

Brandon: Yes.

Josh: Okay, so we don’t need to rehash that. Alright, step 12, adjust for physical condition liens and management.

Ben: Right and so like this is kind of looking at those numbers and saying, I have this building, how easy is it going to be to manage it? Well, if it’s going to be a pain, then I’m going to want it to reflect in how much I paid for it. I’m going to want to pay less for it right because there’s got trigger for some sort.

Josh: Yes.

Ben: If I’m buying this thing and I know then 18 months, I will be replacing the roof and it’s going to cost me six grand, well you know, I’d probably want to reflect that in the purchase price or adjust the purchase price. Even though the numbers right, see the num—that’s the problem with the numbers. The numbers—that’s a snapshot. Here’s this building, here’s a snapshot, five minutes later, something else is going to happen.

Josh: Yes.

Ben: That’s where you would have to have perspective that comes with time and only buildings and all of that to take those numbers and then to extrapolate what they mean and in reality over time.

Josh: That’s.

Ben: That’s where we’re at—the step we’re at.

Josh: I think that’s where a lot of newbies also really really blow it because it’s very easy to say, “Hey, here’s the numbers today. I got you know, A,B, and—you know, I got these units filled, everything looks great, I’m getting kind of a deal, they don’t see the cap x. They don’t see the maintenance that comes with these multifamilies or even with a single-family property. You know, they don’t look at the roof and they don’t calculate that in and you know extrapolate over time and what that’s going to do to your NOI. You know, you’ve got to include all these things, all these maintenance items into your valuations because you know, if you assume everything’s peachy, you’re going to be in for a lot of trouble as things go along when you’re first AC gets stolen or broken, or the roof falls apart or the walls crack or whatever the heck happens.

Ben: You know, this whole conversation—I have a mentor, his name is Ted. I learned a lot of things from him.

Josh: Did he try and sell you a really shitty deal? Oh, did I say shitty, whoops.

Ben: No, no, he didn’t. He didn’t, but one of the things he told me that stuck, a long time ago, is he said, “Stumbling blocks and stepping stones look very much alike at first.” What this podcast is really all about is getting past that at first. This entire conversation—take the numbers, that’s a snapshot. Now how do you get past that? What’s the perspective to get past the numbers, to understand, is this really a stepping stone to get you from here to there or are you going to pay for it in some way shape or form that you don’t know yet.

Josh: Yes.

Ben: That’s what this conversation is all about.

Josh: Wow, that’s really deep. I didn’t realize that’s what I was talking about for the past, is it two hours? Wow. Tick, tick, tick, time is ticking.

Brandon: Step 13, we got to finish it up.

Josh: I do agree by the way.

Brandon: Yes and I like the quote from your mentor. I’m going to make that a tweetable topic on this show so.

Josh: Yes, I advise finding mentors like Ben’s Ted.

Brandon: Ted.

Josh: Ted as opposed to one who is going to.

Brandon: No, actually, let me.

Josh: I’m sure he’s a very nice guy.

Brandon: No, let me actually say what’s wrong here. You mentioned Ben, like remember I said earlier, I didn’t think my friend actually knew he was losing money. Like I don’t actually think he knows.

Josh: Right.

Brandon: I don’t actually thinks he knows because he was even an experience landlord, he’s experienced at this. I don’t think he realized it because he wasn’t accounting for the cap x and the vacancy and the repairs, but when I put all those numbers into the equation, he was losing money. In his mind, he just thought, you know, income minus the water bill, minus the insurance and taxes. There’s my profit. That’s—even experienced guys are guilty of the same thing so.

Josh: Yes, but that is the whole point of this show I think.

Brandon: Yes.

Josh: You know and looking back over what we’ve kind of bloviated over, over, and over. You know, the property is not a snapshot. There’s more to it than just that singular picture that you’re going to get and you’ve got to understand that and if you don’t understand that. You know, you’re going to experience it at some point and it’s going to hit you and again, you know, not to disparage you know, Brandon’s guy or his buddy, you know, that’s a mistake that a lot of people, a lot of people have and so if this show teaches you absolutely anything beyond the trust, but verify, realize that there’s more—there’s always going to be more in the picture. Go into any deal. Go into any property, keeping that in mind. It’s going to give you somewhat of an advantage over somebody who may not be doing that.

Brandon: Yes.

Ben: Right, it’s what you don’t know.

Josh: Yes.

Ben: Is going to get you and there’s you know you don’t know what you don’t know.

Josh: Yes.

Ben: I don’t know what I don’t know. I, you know, that’s why I call people and ask people if.

Josh: Yes.

Ben: You know.

Josh: I got you. Awesome. Alright, step 13 and the final, step here, adjust your price relative to financing package.

Ben: Well, you know most people on BP know me as creative finance guy.

Josh: They know you as the argumentative guy I think.

Ben: Very opinionated, creative finance guy and basically, all of that says is this. If you have an opportunity to get into a deal that cash flows, but requires you to bring $93,000 down. Would you be willing to pay a little more for that deal in exchange for only needing to bring $5,300 to close it? Would that be okay? Presuming that it’s still cash flows. I think the answer should be yes because the single greatest barrier to entrance into this game is a cash intensive game real estate is having money. A lot of people don’t have money. I certainly didn’t have money when I started and so I had to approach it from a standpoint will it go through. If I have to hold the hammer in my hand, like Brandon, I can’t do it. No, this is—this is seriously that is.

Josh: Yes, sure.

Ben: I cannot do it. I can’t do climbing, who am I kidding. If this is what’s necessary and this is what’s required then this game may not be for me. Same is true with bringing, back then, might have been $10,000—you know, it might have been a $100,000.

Ten and a hundred make no difference because I had neither at that point. Right, so would you pay more. I know you did the numbers. You evaluated the whole thing. The thing is just worth a $120,000.

Would you pay $140 and would you still cash flow it? If it meant you got in with nothing out of pocket or very minimal out of pocket. That’s a call, a judgment call that you have to make. Whatever your minimum NOI requires. Whatever your minimum cash flow requires because obviously, if you finance more then your cost of money goes up then your cash flow goes down so you have to make that call. Fundamentally, if I needed to bring that kind of money down, I wouldn’t be in this game.

Brandon: Yes.

Josh: No, that’s right.

Ben: That’s exactly what happened with this tenplex.

Josh: Yes.

Ben: I mean the purchase price in this thing was $393,500 and at you know, 20 normal, 25% value payment would have required almost a $100,000. That would have put it completely out of reach.

Josh: Yes.

Ben: I wouldn’t have done it because it’s stupid to bring a $100,000 down on a ten unit in Lima Ohio. I mean it’s just calculating what works right so I was able to avoid doing that, but I’ve done it in such a way that I’m cash flowing really well still even having financed the entire purchase essentially.

Brandon: I think that’s difficult because I mean, one of the reasons people finance is to bring down the payment so they can get more cash flow.

Ben: That’s and that’s.

Brandon: That’s what they should. Most people do and so what you did, is you found a property that was such a good deal, that you could afford creative financing because that’s.

Ben: It.

Brandon: What it’s all about.

Ben: You’re exactly right, but more that. I think it’s a huge mistake to put more money down to create cash flow. We’re not in the business of buying cash flow. We need to be creating cash flow, literally, out of thin air. That’s out job. We’re entrepreneurs. It doesn’t take a lot of brains to throw cash on the table. That’s not intelligent investing.

Josh: Yes, yes so you could—I mean—ultimately, the bottom line is you can make any property cash flow by putting money down. I mean I could put 75% down on a property and say, “Oh this thing cash flows great!” Dude, you’ve got 75% down. Hell yes, it better freakin’ cash flow at 75% down.

If you can find a property that cash flows at zero down, you know, suddenly, you’ve found something that’s fantastic. Really quick, along with this and then we got to start wrapping this thing up is—I think it’s really important while creative finance is fantastic, it’s a great way to go. You have to have some cash on hand. You’ve got, you know, buying property with no money down is great. It’s doable, it’s possible. You cannot be a real estate investor with no money because expenses come up and things happen and you need to have reserves and if you don’t have reserves, you’re going to be out of business very very quickly.

Brandon: I would agree, but I would add that if you have a partner who has cash, you could do it. That’s one of the only ways I think I would recommend doing it.

Ben: I would agree further, but I would qualify—you have to have access.

Josh: Fair enough.

Ben: To money.

Brandon: Yes.

Ben: You have to have access to reserve. Maybe have a line of credit set up.

Brandon: That would be like a partner or a line credit of credit. Yes.

Ben: Or you know, it’s—or maybe even a credit card if you’re really—you have to be—I have to tell people, you have to be extremely. I’ve used them, but you have to be extremely cautious.

Josh: Yes.

Ben: When using a credit card.

Brandon: We can do a whole show on credit cards cause.

Ben: Right.

Brandon: I’ve had good and bad stories on them, but anyway.

Ben: Right.

Josh: Yes, fantastic, well I—I don’t know, I hope we covered the 13 steps of analyzing a property. I—you know I—our goal was how to buy a multifamily property. I don’t know we walked through finding the property. I don’t know that we walked through a lot of those things, but I think we did a pretty decent job of covering.

Brandon: I think there’s so much information out there of how to. I mean, like what, I’ve written two articles called “How to Buy a Small Multifamily Property.” That’s the mechanics, but this was more important than the mechanics.

Josh: Yes. Absolutely, absolutely so I, you know, with that I think it’s official, we are at right about two hours. Ben, you did it. You’ve manipulated Josh and Brandon and.

Ben: I’m getting offline with you guys and calling Serge right now. I’m telling you flat out, honestly, cause you know he’s a few hours behind me so.

Josh: It’s midnight his time. Yes, yes.

Brandon: You can tell him, yes.

Josh: Good luck with that. Well, listen, I definitely want to thank you very very much for being here, for joining us. I think this is a fantastic show. I think you can get past the Waldo debates.

Brandon: That was a lot though.

Josh: There’s an incredible amount of value in what we covered so I do want to thank you very very much for everything.

Ben: It’s my pleasure.

Brandon: Yes, thank you.

Ben: Hey, it’s BiggerPockets, home away from home.

Josh: That’s awesome.

Ben: Really, okay, so here’s the thing, I’m a nice guy, but I’m difficult to get along with.

Josh: Really?

Ben: To find two gentleman, one of whom is wearing such a wonderful tie, who belike me. That’s huge. I mean, you know.

Josh: Do we really like him?

Ben: You got. I love it.

Josh: Alright, that’s great man. That’s great. Well, listen, thank you, thank you again. For everybody listening, this was the BiggerPockets podcast show 61. Definitely check out the show notes at Ben will be there ready to fight and argue with you. He’s.

Brandon: I expect the comments in the show notes to be a little longer than usual this time.

Josh: I do as well so definitely go there and check it out. Otherwise, if you haven’t listened to the previous 60 shows, I really strongly recommend you do that. You know, we’ve covered such an incredible amount volume of information in these 60 shows and it costs you nothing. Get in there, check it out, learn a thing or two from every show from these amazing guests that we have and otherwise, if you’re not already a member, I strongly encourage you to jump in, get involved, participate, engage. If you’re not doing that, you’re definitely missing out on the biggest value that you can get from BiggerPockets.

There’s way more value in that interaction than there is from reading. I guarantee it, I promise it. Otherwise, check us out on Facebook. Check us out on Youtube, Twitter, we share stuff all over the web on other channels so definitely be sure to follow us on those and with that, that’s the end of the show so hopefully you enjoyed this format, don’t beat us up to much. If you do, yell at the other guys. I’m Josh Dorkin, host of the BiggerPockets podcast with my cohost, Brandon Turner.

Brandon: Signing off.

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