All Forum Posts by: Noah Krietsch

Hi Greg,

Would you call this property an A, B, or C class? Do you have the Trailing 12 expenses of the prop?

Based on the income number you gave ($4500), that's annual income of $54k per year. Assume 5% vacancy (which is low for this small number of units, but let's use it), your annual income goes to $51.3k. 

Assume a 50% expense ratio (which could be less since tenants pay all utilities, but let's use it for now), so your annual expenses would be $25.6k.

NOI comes to $25.6k per year. At $320k asking price, that yields an 8% Cap rate. Your rejected $290k offer would have yielded 8.85% Cap rate.

I don't know your market, but pretty much everywhere in the whole country, it's getting harder and harder to find 8 caps. So I don't think the seller's asking price is out of line. You could try to counter at $300k? But i wouldn't feel bad about paying full asking price at all. Especially since you think you can increase rents 10%.

Anthony,

I agree with Oleg on what an actual bad debt/credit loss is. 9 times out of 10 is when a tenant doesn’t pay their rent. 

I remember when I first saw these bad debts/losses when I first started underwriting deals, I was quite confused on what the hell it was. 

I kept thinking that people were essentially double hitting themselves because the "bad debt" isn't being collected in the income column AND they are counting it as a loss in the expense column. Kind of like when depreciation is included on the T12 statement sometimes (which means nothing to the prospective investor, the depreciation clock resets as soon as property changes hands anyways); that depreciation "loss" is not an actual expense, and neither is that bad debt. I THINK the owner is writing off the bad debt on their taxes somehow and that's why it's on their profit loss statement

I am still a bit unclear on this though, because in the research I’ve done, it still seems odd that people are reporting bad debts because per the IRS “Generally, to deduct a bad debt, you must have previously included the amount in your income or loaned out your cash. If you're a cash method taxpayer (most individuals are), you generally can't take a bad debt deduction for unpaid salaries, wages, rents, fees, interests, dividends, and similar items.” I would really like to get a CPA’s take on this.

Ultimately, I just ignore the bad debt / credit losses entirely when I'm underwriting based on Actuals because that will artificially deflate the NOI. The same way I don't include depreciation as an expense when I'm underwriting a deal to understand the NOI of the property as it is being ran by the current owner. Whatever tax schemes and strategies the current ownership is using don't really concern me; I just want to know the operating income and expenses and I can apply my own tax strategies accordingly should I acquire the property.

Hi Trent. Congrats on the purchase. I have looked at a few multifamily deals in Lansing but did not end up pursuing.

Househacking is a wise move, and will pay big dividends in the long run as you are able to keep socking away cash to dump into future multifamily deals since your living expenses are paid for while you live there and you've minimized your capital depletion with the 5% downpayment.

One thing to note...don't forget about the closing costs in your ROI calculation (will range from 3-5% of the purchase price of the house).

The question you posed is a good one: should you raise the rent on the existing very good & clean tenant? My answer is no for a duplex (or anything 4 units and under), and here's why:

• Having a solid, clean, long-term tenant in smaller properties is actually worth more to you than the potential $100/mo extra rent you may or may not be able to get because of the vacancy and unit turning  (in larger buildings 24+ units, vacancy and turning units is just an inevitability that is built into the underwriting, but in quads and smaller, vacancy and unit turning can blow up all your profits)
• In the 7 years that she has lived there, there could have been instead new tenants moving in every year, likely driving ~1mo of vacancy every time new tenants came on board (need to time turn the unit, get the new tenant in order, etc...many people think they can do all this in under a month but it's just not true)...so that's 7yrs*$700 vacancy=$4900
• The less clean tenants who would have taken her place would have driven ~$800 unit turns each time they moved out (unless you do all the painting and cleaning and all that garbage yourself)...so that's 7yrs*$800 per turn=$5600
• So in her time there, there could have been $10,500 in rent lost to vacancy+the cost to turn the unit, as opposed to $8,400 potential additional rent  (and you will have had a lot less headaches too if you keep the good clean tenant instead of chasing higher rents)

Just my 2 cents.

Hi Francis.

1. Take a look at the website USA.com/rank.  You can search any city, state, zip code, etc... Upon searching for a given city, you can view lots of helpful demographic data like renter occupied % rate for an area, poverty levels, median household income, % of jobs per a given sector, and much more.  The big thing is knowing the right metrics to look at.

2. Your best options are:

a) LoopNet-->filter it to Multifamily

b) Find commercial real estate brokerages and view their listings directly on their website  (some brokerages will have access to the pertinent documents for a listing on their website, or you will have to request them from the listing broker)

Looking at and starting to analyze deals will give you a background / solid base in how multifamily works. Then you can start researching how syndication works. I would not recommend starting to learn syndication right away before learning how to underwrite a multifamily deal in general.

With the banks, you'll be at the mercy of the appraisers that they hire to evaluate your property, as well as their internal underwriting principals

Multi-family appraisers are going to use both the income approach (strictly NOI/cap rate), blended with a comparable buildings cost per unit methodology. How much any given appraiser weighs the income approach vs comparable buildings cost per unit is going to vary appraiser to appraiser.

• So if you are running a very efficient property and manage to keep your NOI very high, you may get shafted by an appraiser who weighs to heavily comparable building unit costs
• Conversely, if your property is running inefficiently, that same appraiser would "boost" up your property's value beyond what your NOI deserves
• Banks also will have a set of standard values they use for underwriting like vacancy %, capex/unit/yr, repairs&maintenance/unit/yr, etc...

Also, take a look at this thread for more info:

https://www.biggerpockets.com/forums/432/topics/368546-how-will-a-bank-value-an-apartment-building-for-financing

@Michael Ealy

I have had this question before as well. To draft up an LOI would require Adam to put an offer price into that LOI though, no? To do that before reviewing the actual profit&loss statements seems irresponsible, but maybe that is just common practice...

Yes, we can look up the property taxes & water bill online from public records, and use some general rules of thumb to estimate expenses to come up with a generic offer price, but I would much rather have the actuals to generate an offer price than to put an offer into an LOI that had just conjecture behind that offer.

@Adam Craig

Just running some very rough numbers, based on your feedback that rents are currently between $400-$525/mo, I took an average of that to get $462.5/mo/unit.  

Then I applied a 5% vacancy rate. That comes out to $42,180/yr with 5% vacancy.   

Taking an extremely simplified guess at the expense ratio being 50% of the gross income, that would mean the NOI is $21,090. $21,090/$325,000 = 6.5% Cap Rate.

That expense ratio could be drastically different in reality though once you review the financials. Curious what Michael's response will be.

All,

Thanks so much for the input. 

@Tara Wright  I agree that Brokers will tend to lean towards always using their pro-forma numbers, despite me always requesting ACTUALS in bold, underlined, and italicized.

@Gwyeth Smith and @Jorjio Hopkins

I think you are both right; it should be included in the criteria sent to brokers (or at least listed as something me the investor is looking for) . 

Not so much so the brokers can filter properties based on it, but to show them a) You're not just throwing darts at the wall with your eyes closed, hoping something will stick  and b) Gives you the opportunity to show consistency like stated, and also share your underwriting model with the broker if and when a property they send you doesn't meet the criteria, lending credibility to yourself as a competent investor.

Hello All.

I am working on a very clear and concise "send-out" to give to commercial brokers / brokerages that tells them who me and my partner are, our background, why we want to work with this broker/brokerage, and lastly, our list of criteria for multifamily assets.

Using Jake and Gino as guidance, I always hear in their podcast how they gave list of criteria to brokers of what they were looking for. Mom&Pop, 8 caps or higher, high value-add potential, etc...

Included in that Jake and Gino list of criteria was a 10% minimum cash-on-cash return based on ACTUALS. And I think that is a great way to filter out properties when I the investor am underwriting deals.

But here's what doesn't make sense to me...why would I tell a broker what Cash-on-Cash return I want to have when there are variables in that CoC equation that the broker does not / cannot know?

Cash-on-Cash return = Annual Cashflow / Initial Investment. Or.... CoC = (NOI-Annual Debt Service) / (Down Payment+Closing Costs).

The broker has no way of determining what my annual debt service will be on any given deal. Broker doesn't know what APR % I will get on the loan, loan amortization length, % down required for the loan, what final closing costs will be, etc... All of those details can drastically change the annual debt service, and thus, change the CoC return %.

So asking a broker to only bring you deals with 10% cash on cash return (or whatever %) does not seem feasible for the broker to do.  Or the broker will bring you deals that supposedly have a 10% Cash on Cash with no real fidelity behind the analysis that yielded that 10% CoC number. It's like when you see Cash-on-Cash numbers in Offering Memorandums...it means nothing.

Is there a set of "industry standard" debt service variables that a broker would use to analyze the CoC % of a deal? For example, would one assume a 5% APR, 20yr Am, 25% down payment, 5% closing costs, 1% loan points? But again, as interest rates rise, that 5% APR assumption becomes an obsolete analysis metric quickly...

TL;DR - Should I even include CoC return % based on actuals in my list of criteria that I send brokers?