A Beginner’s Guide to Analyzing Big Deals & Building a “Bulletproof”

Ashley:
This is Real Estate Rookie episode 200 and niner.

Kenneth:
So people are realizing that there’s something going on in the economy. So I think it’s bringing fear to the market. Kind of what we’ve been doing is just trying to educate, because if you keep your money in the bank right now, it’s not making anything, it’s actually losing money, if you want to be, technicalities. Also, if you put it in stocks, I mean that would be very fearful. I would be scared to do that. And then crypto, I mean, that would be another thing that I would say was probably not the best idea. So where is the best place to put the money? I personally would say, and this might be biased, but I think it’s real estate just because it would hold its value, at least to an extent.

Ashley:
My name is Ashley Kehr, and I’m here with my cohost, Tony Robinson.

Tony:
And welcome to The Real Estate Rookie podcast, where every week, twice a week, we bring you the inspiration, information and education you need to kickstart your investing journey. Now, usually I kind of start this part of the episode with reading some highlights from recent reviews that we’ve gotten on the podcast, but today I’m going to switch it up just a little bit, and I want to read some comments we got on YouTube for one of our recent episodes we put out on YouTube. And in that episode, Ashley and I talked about how one of the reviews talked about how boring Ashley and I are, and we like to read some of the bad reviews from time to time as well. And we just so much appreciated how the rookie community came to have our back.
So someone said, I love their chemistry, I also love the rookie podcast because every guest provides tangible lessons learned. Someone else said, imaginary. Derek said, I love you guys and you’re genuine chemistry. The show is amazing and extremely helpful. Please invite me to the next pool party. Someone else said, I love Ashley’s laughing. It’s so genuine. Please don’t stop due to negative reviews. You seem so much fun. And the last one, this one is from Paul Garza says, don’t change. I learn from your intro. I like to hear what you guys are personally working on. Makes me think of different situations and angles. So guys, we love that you appreciate the boring banter between me and Ashley. And I love that we now have a new name for the intro of the podcast, the boring banter. So why don’t we get into some for today, Ashley, what’s new with you? Give me some boring updates.

Ashley:
Well, first of all, I want to say, I love you guys so much and thank you. Those really warmed my heart, reading those messages. And even if everybody hated my laugh, I cannot make it go away. I can’t help it. So thank you guys. We really appreciate you guys taking the time to make those comments for us.

Tony:
So what’s new, Ash? Give me some boring banter about Ashley Kehr’s universe these days.

Ashley:
Well, I’m super excited because Tony and I are headed to Denver, where we are going to do a podcast recording together, live in person, and then we are also hosting a meetup in Denver, so that is going to be August 15th. I’m not sure when this episode is airing, before or after, but if you guys were there, it was great to see you. I think this will come out after and then, but yeah, it’s always great to get together with Tony and Sarah. And then after that headed to Tony’s short-term rental conference. And then it will be BPCon, so super excited for it to be in sunny San Diego this year. So if you guys haven’t checked it out, go to biggerpockets.com/events, and hopefully we’ll see you there.

Tony:
Lots of travel, lots of good things happening. I guess the only update that I have on the business side is that we’re, the city that we invest in, actually, I think we did this for Rookie Reply about the permit changes for some of the cities we invest in.

Ashley:
Yeah. In Josh [inaudible 00:03:36].

Tony:
Yeah. So that’s causing us to kind of adjust our game plan, but there’s a lot of folks who are now, and this has always been the case of short-term rentals, people that are afraid to invest in cities where the regulations are a little bit more stringent, but honestly, I’ve never seen that as a bad thing, if anything, it just kind of weeds out some of your competition. So it means there’s less people that are going to be looking to buy, which means, A, you have a little bit more leverage when you’re purchasing properties and then, B, when you’re actually operating, obviously there’s less short-term rentals. That means there’s less supply, which means there’s potentially opportunity for you to charge more and higher prices, so.
Just another day in life of a short-term rental host, but trying to keep things moving. But anyway, we got a good guest today, right? So this is the end of the trilogy. We have Kenneth Donis and we’ve had all three of the Donis brothers on the podcast. So we have them together in episode 175. So Kenneth, Jeffrey, and Kerwin all came onto that episode together. And then we’ve been bringing each brother on separately to kind of talk about their specific parts of the business. So again, they were all together on 175, then Jeffrey was on episode 193, Kerwin was 199, and then we finish off today with Kenneth on 209. Kenneth, welcome back to the podcast, brother, excited to have you on kind of finishing out the trilogy of the Donis brothers. How you been, man? How you doing?

Kenneth:
I’m doing well, man. Thank you guys so much for having me. How are you guys doing?

Ashley:
Good.

Tony:
Man, trying to keep up with you. You and your brothers just travel all over the place. I see you guys posting pictures at this conference and that conference and seems like you guys are out there networking and making connections, man.

Kenneth:
Yeah, absolutely. We definitely try to have fun with it, trying to meet a lot of people. In this business it’s really about who you know, not what you know. Well, I would say it’s about what you know too, but definitely a lot more on who you know, so.

Ashley:
Kenneth, before we get into this episode anymore, can you just give a little bit of information about yourself and what you’re doing in real estate right now? Just in case somebody didn’t listen to your previous episode.

Kenneth:
Yeah, absolutely. Well, like they said, and thank you, Tony, for the introduction, Kenneth Donis here. One of three of the Donis brothers. I’m Head of Marketing for our company, Donis Investment Group. Currently we have a little north of a thousand units in our portfolio right now, looking to acquire some more. So we’re slowly growing, but yeah, thank you guys so much for having me.

Ashley:
And Kenneth, let’s break that down because I don’t want everybody to think that we brought on some expert who’s been doing it for 20 years and has built up a thousand units, and not to say you’re not an expert, but just tell everyone how long you’ve been doing this and how exactly you acquired those thousand units?

Kenneth:
Yeah. So my brothers and I started in real estate wholesaling a few years ago and we’ve been at multi-family for going on two years now. So it’s been a slow burn, but we’ve been able to be co-sponsored on a few deals alongside some of our partners we’re in a bigger mastermind group called Think Multifamily, so we definitely give a big shout out to them. That’s pretty much how we’ve been able to be a part of bigger projects, to be quite honest.

Ashley:
Okay. So let’s break that down a little bit. And confirm or deny this if I’m explaining this correctly. So within that group of people or other people that you’ve partnered with, you have either brought the deal or you’ve provided some kind of value to be a general partner in the deal. So it’s not like you’re going out and you’re just taken down a thousand units, the three of you by yourself, but you are strategizing as to how you can provide value and to get a piece of the pie. Is that correct?

Kenneth:
Yes, that is correct. So in this business, what we came to learn is in multi-family it’s really a team sport and in team sports you have different people that play different roles in different positions. So in different various of acquisitions that we’ve had we’ve helped out with different things. So yeah, I mean, it’s just a bunch of, pretty much, partners and we all have our own role and we all have our respective areas in which we can help out.

Ashley:
Kenneth that is great. Realizing, so young and so new into real estate, investing is leveraging those partnerships and obviously it’s turned you guys into experienced investors. You’ve built up a large portfolio and you’ve made tons of connections. Today, we want to focus on your piece of your company though, the marketing and the acquisitions, so let’s kind of start there. What’s the first thing you want to go over today, that is part of your job role?

Tony:
Sorry, Kenneth, really quickly before you jump into that. If you can, just for the listeners that aren’t yet familiar with the phrase syndication, just give us a quick rundown of what that is and then lean into to the part that you focus on.

Kenneth:
Yeah, absolutely. So basically the word, syndication, is just gathering money and then going out and buy something. So in this case, apartment syndication, so we’ll go out, gather the equity. Of course, we’re taking debt on these properties. So we’ll go out and gather the equity in order to buy apartment complexes. And then, of course, our investors that invest with us, they get a return on their investment or the money that they put into the deal, so that’s just kind of what it is in a nutshell. What I do is I’m Head of Acquisitions, so I am the one underwriting. Well, first off, meeting with brokers, getting deals, underwriting deals, touring the deals, pretty much all upfront, trying to find a deal, trying to find an opportunity in which we can provide our investors.

Ashley:
So the majority of these deals, are you guys the ones that are finding them and then bringing them to other people that are already general partners on a deal to build a team, and how are you selecting as to who you take your deal to?

Kenneth:
Yeah. So, like I said, in this group, we have been co-sponsors, meaning that we’ve helped out on various other items. So we’ve had other partners that actually found the deal. We’re actually working on our first deal that we’re working on that we found, or I found, in Atlanta. But as far as how we figure out what to take to our investors, well, first off, we go by market, we just want to… We have a buy box, right? So it’s kind of the similar to single family. You can look at every single multi-family apartment, but I mean, there’s so many of them that it would be too broad. So you have to narrow it down to what you’re looking for and what you would be willing to, I guess, put up with, right? So, one, the market, so whether you want to invest in a tertiary market, meaning it’s not as populated, it’s a little bit smaller, maybe not as much activity.
Or a primary market, something like Charlotte or Dallas, or like a larger market, that’s a little bit more competitive, but obviously they have steady rent growth, steady job growth. And then you go into looking into the asset itself. So do you want to invest in a little bit older assets, ’60s, ’50s product, and either, usually with those products, there’s sometimes a lot of problems with like plumbing and electrical, just because everything’s so old, or do you just want to do newer assets? Things that were built in the 2000s or late 1990s. So that’s kind of the buy box. Now, it also depends on how many units you would like to acquire. So if you’re syndicating, you could pretty much syndicate any amount of units, but obviously the more units you have, the larger the purchase price will be. So depending on your capacity or if you’re just buying it yourself, you can buy a few units and, or continue to buy larger, a hundred plus, 200, 300 units. So I think narrowing it down is very important.

Ashley:
Kenneth, how are you creating that criteria? So for example, part of your criteria is it must be at least like a hundred doors or something like that. How did you come up with that number? What’s, if someone out there is looking to go and do multi-family, how can they be like, okay, I know that I can maximize my return if I’m getting over a hundred units or I want to be in a B to A-class market. What are some tips and tricks you can give to people to help them actually define what their criteria is going to be, instead of just saying, oh, I know that I want luxury units? What’s the best way they can actually figure out where they’re going to get the best return?

Kenneth:
Yeah. Great question. And I think, I like to say, honestly, if the numbers make sense, I think any deal is a good deal. So if it’s a good deal, I think, doesn’t really matter about the unit size. Obviously the larger, the better, because you get a little bit economies, the scale, meaning you’re not spending more per unit, so you have a certain threshold as far as expenses, so a certain amount of units cover your expenses, if that makes sense? So after you surpass a certain threshold within the unit sizes, you’re not really increasing the amount of expenses, so you’re just making more profit. But I would say, it really depends on your situation.
If you think you have, if you’re an executive that is in a large corporation or a large company and you have a network of people that are making 100, 200, maybe more, thousand dollars a year, there’s a potential for you to be able to syndicate a lot of money and therefore you can go out and buy a larger asset. But if that’s not your case, if maybe you’re just at your job and maybe you’re not surrounded by people that are a little bit higher-net-worth, you can go out and buy a smaller apartment complex or a quadplex or a duplex. So it really depends on your own situation. That’s what, at least, what I would say, but it’s all down to the numbers, right?

Ashley:
So the first thing you would say to look at is what is your budget, almost. So if you’re going to be doing a syndication, if you’re going to be raising money, how much money can you raise if you’re going to be borrowing private money? How much is that? If you’re getting bank financing. How much do you believe that you’ll be able to get for a property and then kind of look at what the average cost is for that many doors. And this all applies to even single family homes or duplexes too. So you can narrow your criteria, your buy box, to look at properties that are within your budget.

Kenneth:
Exactly.

Ashley:
And then also you mentioned too, how many doors are going to cover your expenses? So look at the overhead. So if you have a property that has 20 units and it’s going to cost you X amount to have the driveway snow-plowed, but you can look at a property that has a hundred units but it’s still going to cost the same because it’s the same size driveway, or something like that, to have it plowed. I think that’s also, that’s great advice right there too, is to look at what is the overhead of the expenses where they’re most likely not going to change as those units increase.

Kenneth:
Yes. That is a hundred percent correct. And to touch on your first point. So it’s not just, I would say not really just your budget. I would also say, like I said, this apartments is really a business in which it’s who you know, because I personally don’t have the net worth or the liquidity in order to sign and qualify for these loans but I have a network of people that can sign on these loans and they have the experience, they have the net worth, they have the liquidity.
So, if you surround yourself or go out and meet people that can KP or basically be a key principle and sign on these loans or they could tell you, hey, I can write a cheque for, I have investors that can write a cheque for 10 million or whatever the amount, 1 million. So it’s also about who you know. So if you can, not necessarily how much money you have or your direct… Not exactly just how much money you have directly, but how much money around the people that you know have, and, or their net worth, pretty much.

Ashley:
Isn’t it funny, at least for me growing up, I was always taught, never co-sign for anyone, never co-sign on an auto loan. And now, as investors, we want to be the person that eventually co-signs for a $10 million to loan for a property. But yeah, it’s just funny how that changes.

Kenneth:
Yeah. I, a hundred percent, agree. And the reason is because, one, this is good debt, right? So this debt, as long as the asset keeps performing, that debt that you’re taking out is making you money, right? So we’ve always been taught, obviously car loans, house, depending on your perspective, those might not be the best kind of debt. And two, you get a slice of the pie for just signing on the loan. And I mean, yes, it’s somewhat of a risk, but these are all a majority non-recourse debt, meaning that as long as you’re not committing fraud and, or just operating the property correctly and you’re not doing anything that would pretty much trigger a bad boy carve-out, they can’t come after you personally. So you’re using your balance sheet and there’s, I would say, I wouldn’t say that there’s no downside or no risk, but there’s very minimal risk, I would say. So that’s why people do it.

Tony:
Yeah. So Kenneth, you’ve done a great job, but I just want to kind of like rephrase it, that way people would see it a little bit more clearly. So what are all the things that should go into someone’s buy box? So you talked about like number of doors, you talked about condition. What are the other few pieces someone should really narrow in on when they’re talking about their buy box?

Kenneth:
Yeah. So area, I’d say median household income, number of doors, which would kind of correlate with purchase price. So I think those kind of go hand in hand. Year built and yeah, those are pretty much, I would say are… And crime, but I think that kind of goes hand in hand with the area and stuff.

Tony:
So, I mean, and obviously you’re looking at price as well, right? You know that, hey, I’m not going to buy a property that’s a $100,000, I’m not going to buy a property that’s $100 million. So how are you determining what price point that you’re going after? Because since this is a syndication, obviously you don’t have the money in the bank today. So it’s like, how do you know what’s a reasonable price point for you to get under contract that you can then go out and raise money for?

Kenneth:
Yeah. Great question. And I think, so we kind of have an understanding as to, in our network, how much money we could put together if we had a deal that checked all the boxes, pretty much so to say. So if it’s in a great area, there’s job growth, population growth, the median household income is good, the asset is not old, doesn’t necessarily need a lot of work, there’s not a lot of crime. So if it checks all the boxes, what can our partners, some of our partners or the people that we know, how much money do we think we could bring to the deal? So that’s kind of what we look at first because, obviously, we’re bringing the equity, you’re raising the equity so that you can get the loan. And that’s kind of how we kind of reverse engineer to see, okay, well, this is our maximum purchase price, or at least this is where we feel comfortable.

Tony:
So there’s always the issues to you, Kenneth, with soft commitments, like soft commitments versus money wired, right? You can have one money for the soft commitments, but it’s going to be a different number when the money actually gets wired in. So what kind of buffer do you typically kind of look for? Right. It’s like, I don’t know, say for example, you’re buying a property and, we’ll just use round numbers, so it’s easier, but say you’re buying a property that’s a million dollars and say that your down payment and what you need comes out to, I don’t know, $400,000, what you need to close and execute your business plan. How much would you want to see in soft commitments before actually getting that property under contract to make sure that you can close on it?

Kenneth:
Yeah. I would say probably close to double. Well, I wouldn’t say double and that’s because… Yeah, I’d probably say maybe like three-fourths more, so let’s say like 600, likely. So we have a little bit extra that’s, I think that, that would be a safe, comfortable number.

Tony:
Okay. And then one last question on the money raising piece, we can keep moving. So given where the market is at today, I think there’s a lot of fear and uncertainty amongst some investors. Some people understand that this is a good time to buy because there’s less competition. Other investors are a little bit more frightened. How is the current market cycle impact, A, your underwriting in general, but then, B, your ability to go out there and raise the funds that you guys need?

Kenneth:
Yeah. So two huge things that just come to mind. A few, I’d say like six to eight months ago, we were getting 75, 80% leverage on, pretty much all day, on any asset that we were looking at, as long as the area was a good area. Nowadays, we’re getting quoted 65% leverage, 65 to 70% leverage, which obviously means that you need to raise more money. And then I would also touch on with everything going on in the pullback that we’ve seen in stock market, crypto and people, it’s an obvious that what, I don’t know if it was obvious, but I would say a lot of people are starting to realize that there’s less loan applications being applied for, I guess, for people in search for homes. And this is because interest rates are going up and that therefore correlates with the amount that you’re going to be paying per month.
So people are realizing that there’s something going on in the economy. So I think it’s bringing fear to the market. So I think kind of what we’ve been doing is just trying to educate, because if you keep your money in the bank right now, it’s not making anything, it’s actually losing money, if you want to be technicalities. Also, if you put it in stocks, I mean that would be very fearful. I would be scared to do that. And then crypto, I mean, that would be another thing that I would say is probably not the best idea. So where is the best place to put the money? I personally would say, and this might be biased, but I think it’s real estate just because it would hold its value, at least to an extent.

Tony:
Yeah. Just one follow up on that.

Kenneth:
Yeah.

Tony:
Can’t remember which hedge fund it was. It was either Blackstone or one of those big hedge funds. And they recently announced that they raised $30 billion for a real estate fund they’re going to be launching here shortly. And I think that was like one of the biggest raises they’ve done when it came to real estate. And one of their big selling points was that real estate is one of the best hedges against inflation. And I think that’s why there was so much interest and why they were able to garner so much investor capitals because real estate is one of the best ways to make sure that your capital, at least paces with, but can oftentimes outpace the rate of inflation.

Kenneth:
A hundred percent. I definitely agree. I mean, there’s a lot of different asset classes or investment vehicles that you can pretty much invest in, but we’ve, especially now, we’re all starting to realize, well, I guess I kind of knew this, but a lot of people are starting to realize that they aren’t as secure as you would think. And so there’s all this money that is now starting to be pulled out of these markets and they’re sophisticated enough to know that they don’t want to just leave their money in the bank. So they’re all chasing after an asset class that has been proven to pretty much beat inflation year by year.

Ashley:
Yeah. The only thing I would add to that is with putting money into the stock market, I think that if you are going to hold your money in the stock market for a long time, now could be a great time because if you look at the 30-year history of the stock market, especially index funds. Pretty much all my stock market money is in Vanguard Index Funds. And I still think that’s a great way to diversify if you don’t need your money within the next maybe several years, I think that you can see some growth there. But still 100%, real estate is still my favorite investment strategy that there is because you have so much more control over it.

Kenneth:
I agree. I mean, you don’t take a loss until you sell, right? So.

Ashley:
Yeah. So Kenneth, now that we’ve kind of talked about what your buy box is, your criteria. What is the next step? You find a property that fits that criteria, what happens next?

Kenneth:
Yeah. So there’s a underwriting process and a lot of people can do this on back of the napkin kind of thing, but we usually use an analyzer. So we go through our analyzer, we analyze the deal. There’s a lot of steps, I guess you could say, that you would want to go through and check out to make sure that these numbers make sense.

Ashley:
Kenneth, so when you mention your analyzer, is this like a software? Is this like a spreadsheet you guys put together? What exactly is that?

Kenneth:
It’s a spreadsheet. And like I said, I’m a part of a group. So the group actually built a spreadsheet. I could be biased when I say this, but I think that I’ve seen several spreadsheets and I think that this is the most in depth spreadsheet out there. And like I said, I’ve seen a few of them. I haven’t seen all of them, so that might be a biased thought. But I would say, obviously we want to look at the comps, see what other comparable properties, similar vintage, similar area, what they’re renting for and what condition their units are in. So obviously if you see this property and it’s ’80s build, let’s say, but it isn’t renovated, let’s say, but you see other properties that are similar in ’80s vintage in the same area that have grander countertops, new flooring, new cabinets, paint, the whole nine, but they’re getting $200 more.
Well, we can obviously tell that this subject property is not achieving those rents because they’re not in the same condition, but we can also conclude that if we went in and did the same renovations, we can likely get that same rent bump, so that’s kind of what we look into. So the rent comps. We also want to make sure that we get quotes. Several, there’s a several, a checklist. So we want to make sure that we get quotes from our insurance company, because you can take a guess as to what insurance will be, but I think most insurance companies provide free soft quotes, which they can, they’re pretty accurate. So it doesn’t take them that long either. So you would want to get an insurance quote to see what you’ll be paying an insurance.
We usually like to either consult a tax consultant because taxes can be very tricky depending on what county and they change in every county. Some counties they freeze, some counties they reassess on sale. It’s different all over the place. So there’s not like one strategy. So a tax consultant is what we usually like to do, but you could call your tax office and just kind of ask them, a historically, how do they appraise and what their millage rates are, which is just kind of what they assess.

Ashley:
So you’re talking about like calling the assessor’s office?

Kenneth:
Yeah, exactly. And they can pretty much provide guidance, but we just like to be pretty accurate with our numbers.

Tony:
Kenneth, one follow up question. I’ve actually never heard of a tax consultant when it comes to identifying property taxes. Usually what we do is we just call the county of the city or whatever. Where do you find this tax consultant? Is there like a website where folks do this? Or is it like just, yeah. How do you find this person?

Kenneth:
Yeah, well, I was put in touch, so like I said, that’s the good thing about being in a group, I guess that kind of has already people that they’ve used in the past. But I’m sure you could just Google tax consultant or tax assessor consultant then I’m sure that there’s, there’s tons of companies out there that just specialize, especially in certain areas. You would just want to make sure that, obviously, that person that you’re consulting is familiar with the tax in that county because if they’re not, like I said, it can change in counties and in each state there can be tons of counties, so. Yeah.

Tony:
Ashley, have you ever used a tax consultant or do you typically just reach out to the county assessor’s office too?

Ashley:
Yeah, just the assessor’s office.

Kenneth:
Yeah.

Tony:
Yeah. Interesting. All right. Sorry, Kenneth, didn’t want to get you off track, but I just wanted to [inaudible 00:27:23].

Kenneth:
No worries.

Tony:
So continue.

Kenneth:
And the reason we do that is, well, yes, to get a better accurate representation as to what the property taxes will be. Because if you’re in this, whenever single family, obviously you’re holding for long-term, but in the value on a multi-family property is what it produces an income. So if you’re incorrect about your numbers, that can negatively affect or positively affect your valuation. So we just want to make sure we’re as accurate. And also once you hire one, they can also try to pretty much appeal the assessment. So that’s kind of usually you use a tax consultant to appeal or go to the county and just appeal on your values so that they can lower your taxes. But yeah, so I guess the next thing on the list, we like to consult our local property management company.
So although we are, I would say, experts in the areas that we’re investing in, no one knows that area better than usually our property management companies. So we usually like to build relationships with property management companies that are in those areas that we’re investing in so that when we find an opportunity, we can go to them and they could potentially, they can provide us a budget for expenses, what similar properties of similar vintages and in this similar area are running at. For example, what they’re spending on marketing or payroll, things like that, because they know that market better than most people because they usually manage lots of units in that area. And also what they think based on the comps, what they think rents could be pushed to and what renovations you would need in order to achieve those rents. So I think, and we rely heavily on our property management company.

Tony:
And let me ask just one clarifying question, Kenneth. You’re running through a lot of really, I think, beneficial things to do, but are you doing all of this before or after submitting your initial offer to the seller, to the broker?

Kenneth:
Yeah. So this is all before we submit an offer. And the reason why is because in this business, it’s all about reputation and people, there’s a term called retrading, which basically means you go back and try to ask for a discount. And if you do that without, obviously, if you go in and do due diligence and find that there’s foundation issues and no one knew, or termite damage, for example, no one even knew that there was termite damage, then you need a discount because you need to repair that. But if it’s just because you didn’t do your numbers correctly, you’ll get a negative connotation to your name and it’s not really, it’s very frowned upon in this space.

Tony:
Gotcha.

Kenneth:
So we just want to make sure we have all of our ducks in a row, so that when we submit an offer, we don’t have to go back and try to get a discount for something we should have already kind of looked at.

Ashley:
Kenneth, how long does this initial checklist for underwriting take you? To get an insurance quote, to talk with your property management company. What’s an average timeframe? So if you think of an investor right now, or the past year, not even right now, going after single family or duplex, especially on the MLS, it’s like you have to analyze that deal that day. So what is kind of the timeframe look like for multi-family doing the underwriting?

Kenneth:
Yeah. And this depends, obviously, on various factors. Unfortunately, you have to depend on other people who are also very busy and are probably receiving tons of deals, especially now. But I would say, usually, I mean the initial underwriting, which I do, I guesstimate most of these numbers before I go to insurance, property management or a tax consultant. So I try to find those numbers for myself and just see, usually because I know the area and the market and things like that, usually they’re not too far off.
So if they don’t even pass that first, I don’t even go to that step. But once I do send it out to them, I’d say it takes anywhere from four days to a week for them to get back. Usually the, it depends on how much time we have, but on these deals it’s not like you’re buying, it’s usually pretty hefty of a price, so usually you have a lot of time to submit an offer. So I’d say usually they’re on market for at least a few, I’d say minimum two weeks, most of the time, almost like a month. So you have plenty of time.

Ashley:
So when this property, the underwriting goes through and you’re like, yes, we want to make an offer. Are you putting together a full contract? Are you submitting a letter of intent, an LOI? What’s kind of the next step after that?

Kenneth:
Yeah. So once you figure out like, okay, I like the area, I like the price, this makes sense for us, the returns are great. You then draft up a letter of intent, which just, it’s a non-binding agreement pretty much, just stating that this is the price, these are the terms. So usually not, more so now there’s less pushback, but usually on multi-family you’re putting hard money, day one, how much you’re going to be putting, there’s a certain period for due diligence, which is pretty standard in single family as well. And then how long you’ll take to close. So I think standard 60 days here in multi-family. So you kind of draft up the price, the terms and it’s a non-binding agreement, so it’s just showing your intent, but people pretty much respect that heavily in apartments.

Ashley:
So you guys can Google an LOI, a letter of intent, online and find a million different samples of what it looks like. And it’s very common in the commercial real estate world for a letter of intent to be submitted to a seller before you actually have a full contract drafted. So kind of what are some key elements of your letter of intent that you think everybody should use in theirs?

Kenneth:
Yeah. So like you said, you can find a ton of them. So obviously, the date, who it’s going to, the purchase price, the address, well, at least the name of the property, if you want the address but I just usually put the name, the purchase price, how much earnest money or hard money, if you want to put that, how long you’ll have to close, how long you’ll have for due diligence, and whether or not you’ll have financing contingency. Everything else can pretty much be spelled out in the contract. Which, I mean, the contracts are usually really long, so you don’t necessarily have to go into all of that.

Ashley:
So after you’ve submitted the LOI and put that together, what does the due diligent look like? Are you driving comps? Are you going to the actual property? Are you sending people there? What’s that the due diligence process look like for you?

Kenneth:
Yes. So, and I meant to say it, so before submitting an LOI, usually we tour the property. Now there’s some companies that don’t tour, they don’t even want to spend their time looking at it if they’re not even going to win the deal. And it really just depends on what you want to do. I personally think it’s just best to look at it, that way you’re not wasting your time or the other’s, seller’s or broker’s time.
So usually we like to get on site. We like to tour the property. Usually they’ll show you a renovated unit and then a classic unit, and then you’ll get to walk around. You’ll get to look at the amenities. You’ll get, I mean, you could drive the area. So usually we like to drive the area. We like to take a look at the comps that have sold, so sales comps. We like to take a look at rent comps. If we have the ability, we like to potentially schedule tours and secret shop, pretty much, rent comps to see kind of what their units are with our own eyes. Because you can look at it on the internet, but it looks a lot different, usually, in person. So we like to do all of that before submitting the LOI, and then yes, we submit the LOI.

Ashley:
And, of course, when you ask to see a unit as a potential buyer, they’re going to show you the best unit there is.

Kenneth:
Yes, exactly. Yeah.

Ashley:
So, you do the whole checklist and then once you’re like, okay, we like this deal, then you kind of save the actual visiting of the property last and then you’re going and writing your offer?

Kenneth:
Yes. That is usually the very last thing that we do.

Tony:
One follow up question on that, Kenneth. Where do you live in relation to the markets you’re investing in? Because I can imagine for some folks, say you live in California but you’re looking at the Dallas or the Midwest somewhere, it could get expensive trying to find all those properties before actually submitting your LOI. So how do you guys balance that, not wasting too much money up front if the deal doesn’t go anywhere?

Kenneth:
Yeah. And that’s a great question. So we do have properties that are a little away. So we’re in North Carolina and we own properties in Florida. We try to look for deals that are in North Carolina and Georgia, which are either driving distance or just a quick flight away. I would say or recommend that you look in your backyard, unless you’re in a market that you wouldn’t want to be investing in, which is up to your own preferences, right?
But I think the best would be to start just because if you, whenever you look at a map, usually in a place that you live, you can pretty quickly say, oh, I know where that’s at, that’s near this store or near this area and this area’s good, or I don’t know if I want to be in that area. So you kind of already understand that because I’m sure you’ve been driving to work. You’ve either been taking your dog to the veterinarian. You kind of already know the area. So I think that, that would be the best thing to kind of start off with in your backyard.

Tony:
Cool.

Ashley:
The last little piece here that I don’t think we touched on is when you are going to, you’re underwriting the deal, who are you talking to about financing the deals to get that, to find out how much you’re going to have to leverage the deal for, how much money you think you can raise, who’s going to sign for the loan, things like that? Are there key people you discuss that with before you go into underwriting?

Kenneth:
Yes. So as far as financing, so when we do underwrite, we do send it as well to, we use a mortgage broker that all of our group pretty much uses. But you can, I mean, the amount of debt that’s out there, as long as you qualify obviously, is actually insane. So especially with multi-family, they want to lend on these assets as long as it’s a good asset and you can prove that there is value potential. So I would say, you can pretty much Google any mortgage broker, go on LinkedIn and you can find them there. They’re all over the place. Fortunately for us, we have someone that we use and we also have someone that has the capability to, at least for all the deals we’re doing, they have the capability to sign on the loan as a key principle.
But like I said, it really just depends on your network of people. So if you know someone that’s pretty high network or net worth, I mean, and they’ve already told you that they’re willing to sign on loans, you can kind of keep that in mind. They’ll obvious, the mortgage broker will ask for balance sheets and liquidity state proof, things like that and also schedule real estate owned and things like that. But you can kind of have that in line before you go out and submit an offer, I’d say.

Tony:
Well, Kenneth, you’ve done a great job of walking us through kind of what that checklist looks like. But I just want to recap for the listeners to kind of package it up for them. So first you underwrite the deal, right? Then you’re getting your quotes, your insurance, your mortgage, your property management, your taxes. If all those things check out, then you’re actually trying to get boots on the ground, go walk the property, drive the comps. And then if everything checks out, you move on actually submitting your LOI. Does that sound about right?

Kenneth:
Yes. That’s a hundred percent correct.

Tony:
Okay. Awesome, man. So there’s a few pieces there that I want to spend a little bit more time drilling into because I think this is where most newer investors might find some challenges, but first is actually meeting with and networking with brokers. So early in my investing career, we had aspiration of also going into multi-family syndication. We had a really difficult time getting decent deals from brokers, right? Most brokers, they kind of have their Rolodex of syndicators that they get their deals to first, and if those syndicators don’t want it, then they’ll kind of start sharing it with other people, right? Which usually means you’re getting leftovers.

Kenneth:
Yeah.

Tony:
So how can a new investor, I guess, position themselves when talking to a broker to not get the deals that no one else wanted?

Kenneth:
Yeah, absolutely. So first of all, I mean, I think getting to know someone is the best way, honestly, and in order to do that, you need to see them in person, whether that’s you tell them that you’re going to be in the area, or if you live there, telling them, asking them if they want to go grab dinner or not dinner, usually lunch, I do. So go grab lunch or a coffee or something. That way you can get face to face, or if you’re already on their list and you go, usually you can go to their website, sign up for their email blast and they send you deals. So if they send you a deal and it’s on market, you can usually schedule a tour with them and go out and just tour with them, get to know them. And that way they kind of understand, they see you, they see that you’re serious.
And you just get in front of them because then you get to know them. You talk to them, you kind of learn about their story. They kind of learn about you. They see that you’re real, because most people they’ve never met before. So regardless, although you probably won’t be the number one person they think of, you will very easily differentiate yourself to the thousands of people that they have on their list, just because they have already seen you and they’ve gotten to speak to you, and you can get to know someone pretty easily when you speak with them in person because energy’s everything.

Ashley:
Let me ask you this. What’s a piece of advice you have where someone can get in front of somebody, like a really busy person, where if you ask them to coffee, you ask them to dinner, to buy them dinner, if you want to just stop into their office and talk, that, that’s not going to happen because they’re too busy for that. Even if it is somebody who wants your business, if you’re not somebody they know already has a track record or can definitely close a deal, it’s going to be a lot harder to get in front of someone. So do you have an advice of how you can stick out in their mind at all? Is it sending them a gift every single week or nonstop phone calls, sending letter, love letters.

Kenneth:
Yeah.

Ashley:
I don’t know. What would your advice be on that?

Kenneth:
That’s a great question. So two things, if you’re speaking about brokers, in general, in order to, I guess, get brokers to like you, I would say just really getting in front of them. I mean, like I said, whether or not you can, sometimes they give opportunities. If you constantly go on tours, you constantly underway and then you answer them and tell them, hey, this deal does not work because of X, I don’t like the area or the returns are not there or just kind of explain why the deal doesn’t work for you. They’ll start to kind of understand what you’re looking for and they understand you’re serious, but if they send you something and then you just never answer them, they won’t ever really understand kind of why the deal didn’t work. So you’re not really helping them.
Now, if you’re just talking about, I’d say, I guess, valuable people or people that are high-net-worth or just people that don’t have much time, I’d say the number one way is to start a podcast. We, on our podcast, we’ve been able to bring a ton of people. We’ve been able to ask them good questions, but really sometimes questions that we have ourselves. And most people, if you kind of invite them to your podcast, most of the time, they would love to get on a podcast because it’s more exposure for them. And they’re not going to just ask you, how many downloads do you have or anything like that, anything crazy. And over time, you’ll have great conversations with a lot of people. Usually you’ll get their email, at least. Sometimes you can even get their phone number on their signup sheet. And yeah, you can stay in contact or email them once in a while.

Tony:
That’s a great tip, Kenneth, about starting your own podcast. And I’ve shared the story many times, but when I started my first podcast, that was a big part of my motivation as well. It was just like meet as many people as I could. And I was putting out three episodes a week when I first started my podcast and I was doing the math. I was like three people a week at 52 weeks a year, that’s like over a 150 people I’m going to get to meet and talk with, as I’m doing this podcast. And I love that. But one follow up question. How many deals would you say you have to look at? How many deals will a broker send you before you find one that’s actually worth something? Is it one good deal for every five? Is it one good deal for every 100? Where do you kind of fall in that spectrum?

Kenneth:
Yeah. I would say, so I guess, and I think maybe things have changed now. I think the market is turning into a buyer’s market. So we kind of have more say. But as of recently, usually it’s about every 100 deals, 10 of them will make sense for you or fit your, I guess, criteria or something or get… Yeah, your criteria, I mean. And then out of those 10, you’ll probably submit those 10 offers, and out of those 10 you’ll potentially get one or two accepted. And then out of those one or two, you’ll close on one. So two accepted you’ll close on one. So that’s kind of like the metric, I guess. So we aim to underwrite a 100 deals. I wouldn’t say as fast as possible, but we kind of know once we’re getting closer to a 100, it just seems to work out somehow.

Ashley:
And that shows the importance of keeping track too. So you actually know what that metric is within your business.

Kenneth:
Absolutely. Yeah. Organization is key, for sure.

Ashley:
Yeah. Kenneth, this has been all great advice and I want to keep it going by moving on to our Rookie Request Line. As a listener, you can call in at any time to 1-888-5-ROOKIE, and leave us a voicemail. Tony and I will get it, and we may pick it to be played on our show for a guest. So this week’s question is from Nick Bowers from Colorado Springs. I have a question regarding my first investment. I’m investing out of state. Now I’m torn between cash flow or appreciation. I’m worried that I can’t do a cash-out refi on multi-family and grow my portfolio. Which avenue do you guys suggest? Thank you for your time and I love the show. So what would be your advice there, Kenneth?

Kenneth:
Yeah, so especially in times like now, I would say obviously you want to be in a market in which there’s potential for appreciation, but I would say that the number one thing that you should not compromise is cash flow. As long as the property is cash flowing, it doesn’t matter what the value is. You’re still making money. You can still service the debt. You can still service all of the expenses and you can keep it. The worst thing to happen in real estate is not to be able to make your payments or have negative cash flow because that’s kind of what can hurt you if there is a downturn. Evaluations may fluctuate, but if your property’s just producing income and usually rents stay steady through recessions, which is pretty historical, you will be fine. So I would say cash flow for sure. But obviously, you would like to look into a market that has potential for some upside.

Tony:
Yeah. Kenneth, that’s a great point. And honestly, this question about cash flow versus appreciation comes up a lot and, honestly, I think it comes down to the unique person situation. If you’re trying to replace your W-2 income as fast as you possibly can, appreciation isn’t going to help you a whole heck of a lot, right? You need cash flow. But if you’re just trying to invest as a way to help supplement your retirement, then yeah, maybe cash flow isn’t as important today and you’re more concerned about appreciation. So whenever someone asks this question about appreciation versus cash flow, I think it’s a deeply personal question that’s really more aligned with what that person’s goals are when it comes to real estate investing. For me, cash flow is always more important because I knew I needed the money coming in to replace my W-2 income. So I think hopefully that helps point you in the right direction.

Kenneth:
Yeah. Correct.

Tony:
Kenneth, we want to take you onto our rookie exam. So I know you answered this back when you were on with your brothers, but maybe we can tailor your answers today to be a little bit more about the acquisition side of the business you’re focused on. So if you’re ready, we’ll take you to the rookie exam.

Kenneth:
Awesome. Let’s do it.

Tony:
All right. So question number one. What’s one actionable thing people should do after listening to this episode?

Kenneth:
Yes. So I mean, whether you learn how to underwrite, and underwriting can be pretty, it can get complex, but I would say it can be very simple as well. Just learn how to underwrite on the back of the napkin. And or if you have, if you can find an analyzer that you want to use or a model that you want to use, just underwrite deals, whether or not you’re going to go out and look at them or you don’t have to go through all the way, but just understanding why the numbers are the way they are and what makes them that way. I think just looking at deals and learning how to underwrite deals is just the most important thing.

Ashley:
And if you need something to use to analyze a deal, you can go to biggerpockets.com and use the calculators on there to analyze a deal.

Kenneth:
Exactly.

Ashley:
You get five times free and then, but if you’re a pro member it’s unlimited, so.

Kenneth:
There you go.

Ashley:
A really great, easy way to get started because there’s a little link next to every expense, every income input, every input has a little blue link and you click on that and it tells you what it is and where to get that information from. So really great for beginners and experienced investors too. Hey, Kenneth, one question real quick. When you are talking to a mortgage broker, you’re talking to investors, you have some kind of report or you’re showing your calculator, your spreadsheet to these people, that’s super beneficial, right? To have something to kind of put in front of them, instead of just saying, hey, this deal is going to cash flow X amount without showing the proof. Yeah.

Kenneth:
Yeah, exactly. So you obviously build a pro forma, which is just looking into the future, what you think you’ll be spending on each item like payroll, what taxes will be, what marketing is going to be. Just going through those line items and what you think you’ll spend, and then also where you think income will be based on where you think you can push rents. So kind of showing them that spreadsheet and those numbers kind of helps them put together an image or the vision as what you’re seeing.

Ashley:
Yeah, and the Bigger Pockets calculator reports have, once you analyze it, you can just print off a report, little pretty chart, all your numbers on it to show to people. So mortgage brokers or investors on the deal.

Kenneth:
Awesome. Yeah.

Ashley:
Okay. So our next question for you, Kenneth, is as far as your role in marketing acquisitions, what’s one tool, software app, or system in your business that you use?

Kenneth:
I would say CoStar, but that might be a little pricey. Really, I mean, honestly, you can use apartments.com. I sometimes go to apartments.com. I mean, maybe it’s not really like software, but apartments.com, I mean, that’s literally, I’d say, a majority of the time that’s where most apartments market their rent and they put pictures there. They try to make their property look as beautiful as possible and try to market. Because whenever you search up, if you’re moving to a new place and you search up apartments for wherever, apartments.com does their own marketing, so likely their ad or their website is going to be the first link up in the top. So most apartments and us included, we use apartments.com and we market on apartments.com. So I use that to look up rent comp. So I find the subject property and then I’ll look at other properties in the area and kind of see what their finishes are, what their renovations look like, and then what they’re renting their units out for.

Tony:
Awesome brother. So last question for you, where do you plan on being in five years?

Kenneth:
Five years. Oh, wow. That’s a long time from now. So we have, I’d say, some pretty audacious goals. We’ve come across people that have grown their companies pretty quickly. So I’d say one year, five years, I’d say half a billion of assets under management and on the acquisition side, so not as a co-sponsor, pretty much as acquisitions, at least. So yeah, I’d say that, that’s our goal. So whether, and I would say units, but wherever, depending on the market, it could be a 100,000 per unit or a 130,000 per unit. So I think that kind of varies. So yeah, I’d say, closer to a half a billion in management.

Tony:
I love that Kenneth. So our goal in our business is to get to 1 billion in 10 years. So half a billion in five years is almost the same thing, man. So I love that.

Kenneth:
That’s our tenure, so that I just had to do, yeah.

Tony:
You did cut it in half, right?

Kenneth:
Yeah.

Tony:
I love it, man. All right, cool. So let me highlight this week’s rookie rockstar. This is Jason V from Wilmington, North Carolina. I’ve actually never been there, but we’re actually looking at some properties in the North Carolina area. So I might have to pick your brain Kenneth. But Jason says that he’s been investing for two years now and wants hear his most recent success story, but he closed in an eightplex last week. And as part of this deal, he was able to complete a 1031 exchange and got his first commercial property, first commercial loan.
So he believes that the fair market value with the current rent is around $700,000. He plans to do a cash-out refi in six to 12 months and hopefully pull out $200,000. And he’s believing that the value at that time of the property would be about a million bucks, which is amazing, right? To increase the value in such a short period of time. So Jason, congratulations to you, excited to see you get that first commercial deal done. And hopefully we’ll get you on the show soon, once this deal wraps up. So you can tell us all about it.

Kenneth:
Yeah. Jason, congrats. Wilmington is like two and a half, I’m in Durham, North Carolina, so that’s a two and a half hour drive from us. My brother actually studied at UNC Wilmington before dropping out and pursuing real estate full-time. But congrats, that’s awesome. Hit us up, so we can link.

Ashley:
Yeah. Great job, Jason. Excited to see what you do with the deal. Well, Kenneth, thank you so much for joining us again, back on the podcast. Can you tell everyone where they can reach out to you and find out some more information about you?

Kenneth:
Yes, absolutely. So you guys can find us on pretty much at @donisbrothers and that’s Donis, D-O-N as in Nancy, I-S and then brothers on YouTube, Instagram, Twitter, where else? Oh, TikTok. Pretty much every platform.

Tony:
Everywhere.

Kenneth:
Yeah, pretty much everywhere. And then our website is www.donisinvestmentgroup.com, if you guys want to learn more about investing in multi-family and why that might be beneficial for you guys. Yeah, you guys should check us out.

Ashley:
Hey, well, thank you so much. We really enjoyed having you back. So make sure you guys go back and take a listen to the Donis brothers episode. So we had the first episode with all three of them, number 175. Jeffrey was on 193 and Kerwin was on 199. So yeah, thank you so much for joining us. I’m Ashley, @wealthfromrentals and he’s Tony, @tonyjrobinson. And we will be back with another episode.