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David:
This is the BiggerPockets Podcast show 589. What I look for is me. So I think I’m a good realtor because I buy a lot of real estate. So if you come to me and you say, David, I want to buy real estate, I’m not looking it from a perspective of a salesperson, I’m looking at it from the perspective of someone who wants to help build your wealth. I like to work with other realtors who also own real estate and who like real estate. They don’t have to be a realtor, they want to be a realtor.
This is David Greene, your host of the BiggerPockets Real Estate Podcast, here today with my co-host Rob Robuilt Abasolo. How’s it going today, Rob?

Rob:
Oh, it’s going good, man. Just in the throws of putting together offers and negotiations and re-negotiations and triple re-negotiations. But I think we’re getting to some closure here, which I’m really excited to share with the audience at home.

David:
Yes. If I’m going to use a jujutsu analogy, which I do too much of already, we’ve got our joke sunk in and we’re just slowly, slowly tightening it. And this deal is about to submit to our plan. So on today’s show, Rob and I are going to walk you through the 10 steps to make sure that you get a property under contract in 2022.
So we actually have a rhythm, a pattern, a plan, if you will, of what we do to make sure we are moving forward on our plan of getting a property under contract. And it’s only been, what do you think, Rob? Like a month or two? How long do you think we’ve been going at it for?

Rob:
Eight weeks at this point. In six months, it’ll be eight months.

David:
There you go. But only two months of actual focus.

Rob:
Two months or so.

David:
Yeah. Like looking to get a deal. And we’re narrowing in on the one that we wanted the very most, that we think is going to be awesome, that we’re super excited about. We wanted to make a show that shared what we did to get to this point, right? Everyone always says, here’s the deal I got. They hold it up there and they wave it in front of you and they say, look, how cool I am. I got a good deal. And then you listen to you go, oh, I wish I could get a good deal, but I’m just not as good as them. And I kind of suck. So that’s what we’re trying to avoid.
Here’s all the work that went into the after picture, right? No one shows you that. They just show you what the six pack looks like. Well, this is what the actual workout routine looked like to get to have a six pack like Rob. So I’m very excited to be able to bring this to people today. This is a very practical show. If you write down these 10 steps and you and your partner or you yourself start executing them, you will get to a point where your offer is accepted as well.

Rob:
Yeah. I think we talked about this on a previous show. Or, hey, maybe it’s in a show that’s coming after this one. But consistency is the number one most important factor to success, I think. Especially in this game, in this market, so many people that come to me and they’re like, is it too late? Is it oversaturated? Is it so competitive? What do I do?
And I’ve heard you just say it time and time again that you don’t find good deals. You make good deals. And that’s kind of this deal that we’ve been working through. It, really on the surface, wasn’t what we wanted, but we started laying out our terms. We’ve been very consistent about chipping away at the other side. And I think now, after consistency and some tenacity, now we’re finally getting to a part where we’re seeing progress. And it’s by following this system that we’ve just been doing for years now, right?

David:
Tenasistency. The word that Rob created on today’s podcast.

Rob:
Hey, you heard it here first. It’s actually going to be the first book that I write tenasistency.

David:
I like it. Brandon used to make up words. And now Rob is doing the same thing. So we are really excited to bring this show to you, especially if you’re someone who knows that you want to take action, you just don’t know what that should look like. This is what it should look like. For today’s quick tip it’s going to be, check out BiggerPockets agent finder. If you go to the website, you can find their agent finder service, which will help find you a real estate agent that is familiar with the BiggerPockets way through the actual site.
When you are looking for an area that you want to invest in, like Rob and I did, you’re going to need to find an agent. Now we describe on the show how we found ours, but you can also use BiggerPockets to do it even easier. So I highly recommend that you check out their agent finder system and find an agent who understands investing in your needs today.

Rob:
I wish I would’ve heard that quick tip first before all the work that I went through. But duly noted, David.

David:
Yeah. It’s funny how I say that on the podcast, but I didn’t say it to you when I was asking you to go do something.

Rob:
I want people to take out their notepad and I want them to write down, verbatim, everything we say. No. Create your system. Honestly, I think that’s the real important message from today. Go in, have a system, stick to it. the more you can be disciplined about not straying away from your system, I think the more results you’re going to achieve in the long run in your portfolio.

David:
I agree. And make sure that you’re okay with tweaking that system. So whatever you create in the beginning is not going to be what you have in the end. It sort of evolves like everything else in life. So you don’t need to have it perfect to get started, but you do need to have something.

Rob:
Something yeah. That’s right.

David:
All right. Let’s get into the show. Mr. Abu Solo. So nice to have you joining me today. How are you?

Rob:
It’s a Wednesday. I don’t know when this is going to be released, but it’s always a good day here whenever I’m recording a BiggerPockets Podcast.

David:
Yeah. And in addition to it being a good day because of the podcast, we also have some potentially good news where you and I are very close to getting something in contract. You want to share a little bit about the background of where we are on this property we’re trying to buy?

Rob:
We’ve really been working this one. I probably, in most other circumstances, would’ve not necessarily called it quits, but no, I don’t know, maybe I would’ve because it was kind of one of things where a lot of convoluted communication going on and disgruntled sellers with offers and everything like that.
So you and I approached a property that was 3.4 million in Arizona. And we put an offer in, not too much under, but at around 3.25 million, because it been sitting on the market for six months I think. And they effectively told us to kick rocks at first. You came in, you swooped in with an all-star strategy that we’ll get into. It really worked out to the T. And now we’re just kind of waiting to hear back on some of those final details. So we won’t count our chickens yet, but it’s looking pretty good.

David:
Yeah. And what we really want to do in today’s show is we sort of want to share with everyone what the rhythm looks like of how we approached buying a property. Because I think this will work for anybody. Doesn’t have to be with a partner, but it doesn’t involve account ability, predictability structure, and a plan. That’s what we’re trying to give you, is if you look at the whole idea of being a real estate investor as a human body, this is a skeleton, this is what everything else sort of hangs off of.
So we have 10 parts to this plan. And the first is that we have to determine the criteria. So this could include finding an asset class, finding the area, want to invest in, and then picking a price point. Now, in different episodes, we’ve talked about those things. So we don’t want to get into them too deep, but I will share that our plan was that we wanted a short-term rental in a high appreciating market that we thought was going to be friendly towards short-term rentals. And we wanted to get into a price point that we felt would help remove some of the competition.
So we didn’t want to be chasing after $400,000 houses because so many other people are there. We basically wanted to get into a price point where we felt like there’s not a lot of other investors that are in the same arena as us because we frankly didn’t want the competition. Is it anything you want to add to that Rob that you can think of?

Rob:
Well, Yeah. We also wanted to just find a deal that was worth our time.

David:
Yes.

Rob:
And that’s really important because we’ve batted around dozens of properties at this point.

David:
Such a good point.

Rob:
And you’ll shoot something down, I’ll shoot something down because we’re just like, this doesn’t excite me for this reason. So, honestly, the best learning experience here is getting into a partnership with somebody that you haven’t partnered up with before. And what you and I have really done is we’ve explained each other, our respective philosophies in investing in why we do things a certain way. That way, whenever the partner shoots something down, we can respect that decision because we understand where they’re coming from.
So it’s been a really, really fun process. I’ve done partnerships now, Oh, I don’t know, seven, eight times they’ve all worked out. I think if I remember correctly, you’ve typically shied away from partnerships, is that right or-

David:
That’s true.

Rob:
… you haven’t done as many?

David:
Yeah.

Rob:
You want to talk about why, or maybe we can hold off into the very end? We don’t want to spoil all the good stuff yet. Yeah.

David:
I’ll give you the gist and then we can get into at the end. The main reason I haven’t got into partnerships is that most of the time, the assumption is we’re cutting the work in half, but you actually end up doubling the work. Because what happens is everyone ends up doing their job and then they have to explain to everybody else why they did that job and sort of satisfy the curiosity. So it ends up being more time.
And a lot of the times we get into partnerships because we’re afraid of doing it on our own, which is a terrible reason. You actually want to get into a partnership because you know you have a very good skillset in one area, which you wouldn’t have developed if you were afraid. You’ve already, at that point that you’ve developed a skillset, taken action to a certain point and your partner has to.
And the last is that the time element, like what you said, there has to be enough meat on the bone in this deal to justify all the work we’re putting in this partnership, which is why I’ve only done it on multifamily properties that were bigger. I never did it on single family homes. I could get into the more later, but do you have any questions after hearing that?

Rob:
I knew that. I was just throwing you a softball, but I think that makes a lot of sense. Because, honestly, I’ve done so many partnerships now. And one thing is when you partner up with so many people, it’s very tough to kind of go big or go home with every single partner. And so if you’re just going to partner with somebody on just one house, you’re right, man, there’s a lot of education, a lot of handholding if the other person is new to it.
And then if you’ll never actually end up doing any other partnering or any other houses, flipping or anything like that, then it was just a lot of education for one deal. Whereas you and I are trying to cultivate something a little bit bigger. We’re trying to go pretty big here. And so that’s why we’ve sort of been really taken our time with really understanding our viewpoints and everything like so.

David:
Very good point. Now, point number two, out of our 10 steps here, has to do with our viewpoint that we’re forming. So Rob and I look at every deal that we evaluate through a matrix of five different areas. The first is the revenue that it creates or the return on our investments. So that’s usually the first thing we look at is, hey, would this property cash flow? And how much would it cash flow?
The next thing we look at is the equity. And that’s either, are we getting it at a really good price, so there’s equity built in, or is this an area where we can reasonably expect appreciation to be happening and why? That’s where we start.
The third is we look at debt, like how can we use debt on this property? Is debt a benefit to us? Rob and I believe that in this environment borrowing more money, especially if it’s at a rate lower than inflation, is a good strategy. If you’re a Dave Ramsey fan, you. Well, you’re probably not listening to us talk about real estate using debt if you’re a Dave Ramsey fan. So I don’t worry about that, but we look at debt when it’s used wisely and prudently. That’s good thing.
The next thing we look at is time. Like, would this property take all of our time? Even if the revenue looks great, that revenue stops looking great if it’s a 30-hour a week job to manage this property, to get that 60% ROI. And then the last thing is risk. Like how much risk are we taking on in ordered buy this deal?
So every time we have a property that we’re going to analyze, we look at it through these five, I call them prisms, right? Imagine holding glasses up to your face and you’re looking through those glasses at the property, what are you seeing when you put on that different lens? Is there anything you want to add on to that, Rob?

Rob:
I mean, for the most part, I think kind of in the price point that we’re in, risk is sort of the big one, for me personally, because most of actual properties that I’ve purchased I would say cost between, well, $165,000 from my tiny house, all the way up to $624,000 for my house in LA.
So now we’re looking at properties that are at a minimum, two million, three million. And that right there places a whole new level of skepticism and critical thinking and scrutiny for every single deal. But the strategies that we’ve learned are whole career, they still apply the same. You got to be willing to take a risk every so often. And I have my whole experience, I have my whole life here of always being strategic to rely on and really take a bet on myself that I can figure anything out. If I have a little bit of confidence in myself, there’s never been a time where I didn’t succeed at what I do in this space.
And I know you probably feel the same way. And so when you really just kind of walk yourself the back from all that, it’s not as risky as-

David:
It feels that way.

Rob:
It is, obviously, but it does feel that way. It does. Yeah.

David:
Now it’s important to highlight when you’re doing this, as Rob and I do it, when you put on your risk goggles and you look at the deal through the prism of risk, you’re going to see risk. What you’re not doing is just looking at all your deals with risk goggles and saying, oh, I found risk. Don’t do it. Risk is going to be there.
Instead, what you’re doing is you’re looking at where the risk is and determining, do I have a plan that will mitigate if something goes wrong in that area? That’s what’s key about this whole thing. So you can imagine looking at a three and a half million dollar residential property is going to involve some significant areas of risk. We’re going to be renting out for a lot of money per night. That could change. What if we can’t get, whatever, 1500, $2,000 a night for this property?
You’re going to have a lot more expenses associated with an estate this big. You are going to have the fact that if there is a decrease in the market, these properties, they’d be very hard to sell. People still need to buy starter homes even when the market drops. They don’t have to buy luxury homes.
So what we do is we sit here and we say, all right, here’s where we have risk. How are we going to mitigate it? What is our plan? We come up with a contingency for every area that we can see when we put on our risk goggles. And there’s very practical things, right? We’re going to be borrowing some money to buy this place and to fix it up. Well, we’re going to keep at ridiculously large amount of money in reserves so that even something goes wrong, we have like three years of reserve set aside that we can pay somebody back.
That is an example of how we look at risk. We see where it is, but we put a plan in place. We keep moving forward. And you could do that for everything. If you’ve got your ROI goggles on, how can I improve the ROI on this property? Is there a place where I can make it go higher? As far as the appreciation and equity, there’s no appreciation here. Well, that means that I need to get this property with more equity built in. Or, there’s no equity in this deal, we’re going to be paying at the top of the market. Well, is the market continuing to move up? Because that can grow equity, right?
It’s not is it or isn’t it there? It’s, where is it missing and what is our plan for how we’re going to improve it? And so that’s just, what I wanted to highlight is we look at every deal through these lenses, but they’re is no perfect deal. Every deal will have something. Or in every one of these areas will have something that you don’t like. Your job as the investor’s to figure that out. Anything you want to add before move on to number three?

Rob:
Yeah. I just want to talk about a little bit of the discipline here that just between you and I, what actually we do on a weekly basis. Because we are pretty consistent. I don’t think we’ve missed a week yet, but we basically meet every single week. Same time unless there’s something comes up and we have to just move it, move it to the next day or something like that.
But we meet every single week. Most of the time, I would say 80% of the time or maybe 90% of the time, we Zoom, which I think is important to me. Well, first of all, I’m ADHD. So when I’m on the phone, I just know that it’s going to be so much easier for me to walk around and look at the dust on my door frame or on my fan or start making my bed. I always make the bed when I’m on the phone. I’ll remake it. I’ll take the sheets off and make it several times.
So being on zoom really forces me to be there, be in the moment, give my time to… Because our time is valuable. And so you want to respect your partner’s time and everything like that. And we’ve been really consistent about that. And I think that has really, even if we don’t have something to present, we’re still excited to meet, I think.

David:
Yeah. So that for exist to number three, which is that we meet weekly to review what we got going on. And this is incredibly important. I really, really want to just pound this point. If you are an investor and you’re committed to getting your first deal, maybe you got Brandon Turner’s Intention Journal, maybe you attended a webinar where we talked about how to get your first property, or maybe you just heard on this podcast, you said, I want to do this.
My philosophy is, if it is not in my calendar, it does not exist. If I’m going to go have dinner at my mom’s house or I’m going to my niece’s birthday party, it has to be in my calendar. If I don’t put it in my calendar, it doesn’t exist and there’s no way I can guarantee I’m going to be there. And if I do put it in my calendar, I can’t schedule anything else for that time. That’s what I love about it, is I block off the big things first and everything else goes around it.
So you not going to have success finding a property if you’re new and you’re not used to this if you don’t block time off to do the things that you need to do. And Rob and I block a time off every week where we’re going to meet and review the properties that we are considering.
Now, Rob, I just want to thank you for being incredibly gracious because the reason we don’t meet a hundred percent of time on Zoom is a hundred percent David. It’s me every time that say, ah, I’m stuck, I’m not going to make it back to the office. Can we do this on phone? And you’re very cool about that. But it is important that you do the meeting in a structured way, right? So we like ours on Zoom, because we can share our screens, we can go over the properties that we’re reviewing.
Now what’s happening is Rob and his partner are showing me the properties that they’ve looked at throughout the week that they think they have the best chance with and saying, hey David, here’s what we like about them. Here’s what we’re not sure about. Here’s what our thinking is. What’s your opinion? And then I will weigh in with my perspective based on the experience that I have with real estate. And they’ll learn from what I’m thinking and I’ll learn from what they’re thinking.
And what we end up coming up with is a list of questions on every property. Now, some of them we dismiss, right? Maybe during this, we realized they’re an HOA that doesn’t allow for short-term rentals. That’s happened a few times where they only let you do it six months out of the year. Those get thrown out. Other ones, we say, yeah, this would work, but we need to figure out these things.
And in that meeting is when we determine what we would need to know. This is why it’s so important you have the meeting. So we have our list of properties. We then get our list of questions. Now we’ve got our work set out for the next week. And that would lead us to step number four, which is delegating tasks. Rob will say, hey David, here’s what we need from you. Can your lending team solve this problem? Can you tell me what you think? Do you know a realtor in this area that could help us answer this question.
And I’ll do the same thing. I’ll say, Rob, can you look this one up on AirDNA and tell me what you think. Can you look at a comp that would show maybe the rents will be higher than what AirDNA is giving us. We will delegate the task that we have on an individual property. And then that’s what we’ll work at for the following week until we meet again. And anything you want to add there, Rob?

Rob:
No, no. I think we can move into number five because this really sets the tone and the communication for the entire week. And number five here is, communicate throughout the week for follow up. So this would be text messages, emails, voice notes. I actually really like voice notes. We send a lot of those. The only thing I don’t like about them is, when you send them, if you don’t hit, keep, they erase.

David:
Yes.

Rob:
And all of the golden nuggets that you send me, they’re gone. They’re gone after I listen to it one time. But it’s really nice because we may not be in a scenario where we can take a phone call. I’ve got two kids and all that. You might be in meetings and everything like that. But we can relay some pretty nuanced things that are very hard to relay via text message. We send emails. This is where we’re kind of introducing each other. Like if you’re introducing me to a realtor that you’re connected with, or if you’re introducing me to someone on your lending team, this is where I can then pick up the communication and drive that ball forward a bit.

David:
Yeah. That’s important. So if you’re working with a partner like what we just mentioned in step number four, when we’re delegating tasks, okay, Rob, you’re going to work on this and I’m going to work on this. You don’t want to just get and then say, oh, I don’t know what to do. I’ll wait until the end of the week and we’ll discuss it. You just lost five days of possible productivity.
Instead, Rob’s going to say, hey, this is what they’re saying. What do you think? Or I’m going to be like, hey, I’m stuck on it. This is worth it. Can you look this part out for me? I need help accomplishing my part and you can help me with it. And that’s when this communication happens.
The voice notes, they’re powerful. It sounds simple, but there’s times when you’ve received a text that was like three feet long and you just think I’m not even going to read that. That’s something that should have been a voice note.

Rob:
My entire inbox. I’m like, no.

David:
Exactly right. And then there’s other times where you get that phone call and you’re like, I just don’t have time to take this call. So the voice note is the perfect medium between the two. And if you have a partner, this is something that you need to be working on yourself. If you’re meeting every week with yourself to review where you’re at on every property, make sure you’re working throughout the week to get the answers to the questions that you needed so that when the week comes, you actually have information to be able to move forward. This is the structure that’s so important, is we’re treating it sort of like it’s a job. Not just like it’s a hobby.

Rob:
I’d like to squash a bug here. Just something that I’ve really been wondering since the day I met you. And I just want confirmation on if this is an urban legend or if it’s true. When I first met you, when I did the BiggerPockets Podcast like six months ago, I was like, oh yeah, I’ll shoot you a text. And then you’re like, man, I’ve got 1200 unread texts right now. I was curious, do you actually have 1200 texts? Because I think about that every single time I text you.

David:
It’s more now. In fact, what happened is I need a new iPhone because you hit a certain point where it stops displaying the number on little text thing. Like it doesn’t even tell you how many unread text messages you have. I hit that. So that’s one of the things I say to human beings. If you take the same road everybody else has taken, you’re probably not going to get there, right? Like, Rob, text me. And if you don’t hear back, you don’t take it personal. You’re like, all right, I need to email his assistant Krista and get time on David’s calendar. And then boom, you’ve got all my attention.
And I use that hack all the time. If I’m trying to get ahold of somebody who’s over 30 years old and they’re really busy, I send them a message on Facebook Messenger because nobody else uses that other than 30-year-olds or older. Right? So if you look at my Facebook Messenger, I have like two or three unread messages. If you look at my text, I have a million. So that’s just a little a quick tip for everybody there, is find the road most traveled.

Rob:
Quick tip. Okay. It’s good to know. All right. Well, I always send the gentle… Just I write bump anytime I hear back bump. Just a little friendly reminder.

David:
Yeah. Everybody who’s listening. If you’re in my life and you text me, just bump me all the time. I don’t get upset about it. I’m never going to say, why are you bumping me? I’m like, I know I need bumps. I need to get bumped all over the place. It’s really hard to get ahold of me. And I’m aware of that. Thank you, Rob, for your patience there.

Rob:
Go to the day. I need to get bumped everywhere. All right, cool. So moving on to number six. This one is receiving information from your realtor. This is really… Man, this is big, because we get so amped up and step five here, texting, I’ll text you bangers all week and be like, dude, check out this house. It’s going to gross $250,000. And then we get all excited and we’re like, oh, what if we do like a hot tub and oh, a golf card, and a basketball court. And we get all excited. But it’s kind of one of those things where I’m usually better about this, but on some of these luxury properties, one cannot help but get excited at certain properties, because they’re like dream properties. And then you talk to your realtor and your realtor’s like, oh yeah, that isn’t an HOA. And they will not allow short-term rentals. And you’re like, no, I spent three hours counting this out. Happens all the time.

David:
Everyone does this. This is where experience has led me to sort of being able to direct in these situations better than someone who’s not. Experienced by my own properties. And frankly, the thousands of houses that we’ve helped our clients buy, I had to learn how to do the same thing. You don’t want to get too emotionally connected or put too much time into a property that you don’t have a good chance of getting.
So when we first look at them, it’s easy to just want to run as far down the path as you can get, even in your mind of, oh, I can do this and I can do this. And I love it. And I have to have it. And as a realtor, I’ve learned, if that house has been on the market for two days, don’t do that. There’s 30 other people that are doing the same thing. And you know what? It kind of goes down that don’t take the road that everyone else is taking, right? Like if you’re trying to text me, that’s not the best method. You don’t want to look at houses that everybody is looking at, especially if you’re going to put all that time into it.
So what’s important is that you identify, is this a property that would work for what we want? You go through your matrix, which for us is these five prisms that we look at. And then we say, do we have a chance of getting it? So oftentimes, the first step is having our realtor call the listing agent and saying, how many offers do you have and where do we actually have to be? And if the listing agent plays this dumb game of, I don’t know, highest and best, that’s like one of my pet peeves is this little parrot on the shoulder of a pirate that just says highest and best, and they call themselves a realtor. That is not selling a house.
If you’re a listing agent doing that, they are not earning you money. They need to be aggressively trying to get a good offer from the other side. But if we get that and they’re like, oh yeah, they just said highest and best And they just don’t really care, we’re probably not going to go after that property. Okay. Let everybody else have it. That’s why we went after the one we’re talking about now that’d been on market 190 days or whatever it was because they weren’t getting a ton of action and we knew that we had a better chance of putting time into it. So that’s huge.

Rob:
Well, I’ve actually got a new policy now. Whenever a realtor says highest and best, I actually submit lowest and worst. So I’ll submit an offer for $2 and see if it’s a-

David:
Put that in your pipe and smoke it.

Rob:
Highest and best.

David:
That’s really good. So a lot of what the conversation involves around in the beginning is something that actually should be happening in the due diligence phase. Okay? That’s why you have an inspection period. And it’s just it’s easy to not be disciplined and to do all that up front and call it work. And this is how you get your heart broke, right? Like you try to date too many people that aren’t interested in you, you’re just going to get tired of the rejection and stop dating and become like a cat person. Right?
That’s not what we want to do. We only want to actually put our efforts of pursuing the properties that we have a reasonable chance of getting. So part of this is experience, but the other part of this is just working the system that we have, where we know, all right, realtor, we need you to go find out, can we get the property? What price would realistically get it at? They’ll bring that information back to us. We will then kick in and say, okay, at that price, would this work? How much equity? We look at it through the prism. How much equity be in there? How much risk would be in there? How much revenue would we expect? And if they have nothing, then we go look for a different property.

Rob:
Well, yeah. Let’s talk about that a little bit. Because there’s obviously the communication… Well, not just the communication, but the actual selection of your realtor-

David:
Yes.

Rob:
… is so important. So can we talk about what do we look for in a realtor? What kind of questions do we ask? How do we even choose ours? I would like to tell that story in a second.

David:
Yeah. So I’ll start and then I’ll let you tell our specific story. I’ll start with a general. What I look for is me. So I think I’m a good realtor because I buy a lot of real estate. So if you come to me and you say, David, I want to buy real estate, I’m not looking at a firm perspective of a salesperson. I’m looking at it from the perspective of someone who wants to help build your wealth.
I like to work with other realtors who also own real estate and who like real estate. They don’t have to be a realtor, they want to be a realtor. Now, that means they’re going to be picky about their clients. So you actually have to be on your A game to get them to work with you. And a lot of people don’t like that. They want the realtor that answers their call right away, that they can boss around. I don’t like that. If I can boss around my realtor and I haven’t proven why I should, they’re probably not that great.
So what I tend to look for when I’m going into a market is what is our strategy. That’s why the number one thing that we talked about was determine your criteria, what asset class, what area, and what price point, because you want a realtor who works in that area, owns in that area, sells in that price point, and understands that asset class. That’s actually what you’re going to look for.
We kind of talked about that, Rob. And I connected you with a couple people. And then with this specific issue, we had a bunch of questions and I said, hey, we need to find a person that is an expert in this asset class. Why don’t you call the brokerages in the area and ask who their luxury specialist is, and then find out if has these questions. And I shouldn’t have been surprised. You completely hit it out of the park on your first try. You came back with a rock star. So tell me what you actually did to make that happen.

Rob:
All right, man. So I woke up. I went out to my front door. I took out my yellow pages. I found it. I was like, all right. And I flipped all the way over to the S’s and found Sotheby’s. I mean, we all know that Sotheby’s is obvious one of the more lucks places out there. And so I called him up. And it was like the receptionist of the place. And I was like, listen here, bub, Robuilt and David Greene are looking for a luxury house. I was like, excuse me, do you have anybody that might be able to help us please?
And so they were asking and I was like, look, it’s really important to me that they know short-term rentals because I already know short term rentals. And so if they don’t know, I’m going to know that they don’t know. And so she was like, okay, okay, great. She actually ended up patching me through to two people. They were like partners. I think they partner up on selling houses and everything like that.
And I talked to the guy. He was super nice. I mean, really, really nice. And I started kind of interrogating him a bit and being, well, what does short_term rental mean to you? And we kind of went back and forth. And it was pretty clear that it wasn’t his wheelhouse, but that’s okay. We talked it through and I was like, hey man, honestly, I appreciate your time, but I need someone that can help me accurately estimate how much we’re going to gross on a property like this because it’s $3 million.
And he is like what, you know what? I know a guy. And I was like, you do? He’s like, I know a guy. He doesn’t work here. He actually works at a competing brokerage. And he’s really great. This guy knows everything there is to know about short-term rentals. He owns five luxury short-term rentals. He owns a property management company that manages 70. This is going to be the guy. And I was like, hey, I just want to say, thank you, because you just gave over a $3 million lead to a competitor. And I know he’s your friend, but that’s super nice of you to do.
And that’s what he did. And I called the guy. I talked to this new realtor. And he was schooling me, man. He knew everything there was to know about luxury. And his insight throughout this whole process has been so helpful for us because now I can run my comps and I can go back to him and say, hey, am I off here? I have calculated $47,559 and 49 cents. Is that right? And he’s like, yeah, that’s pretty close. Or, actually in this neighborhood, it’s a off because of this, this, and this, and this.
And so there’s a little bit of a synergy there that I get to work with. And it wasn’t necessarily easy to get to that realtor. There was a little bit of work involved, but now it’s going to dramatically affect us moving forward because now we got the best of the best.

David:
And that perfectly highlights step number six, receive information from your realtor. If you know your asset class, your area, and your price point, you can go to the realtor and say, what do you think we need to do to get these properties? What should be be aware from? And that’s some of the stuff he provided, because he owns these things.
One of the concerns I had was, we’re being told this is the revenue that’s going to get in tonight. That seems really high. How can we verify that? Well, he happens to own properties and he actually said you’re probably going to get more than that. You’re more than okay on this one. Avoid these ones. So we got information from the realtor that helped us to develop the strategy that we use to move forward.
And number seven, the next step would be communicating what we need to that realtor. So that’s where you say, here’s what I want you to look at up. Here’s a question that we’re stuck with. Can you ask someone else in your office if they know what to do in these situations. That is also very important, is that after your weekly meeting and the tasks are delegated, that you go communicate with your agent and say, here’s what I need to know. Is that something you can help me with? Or is that not something you can help me with very clearly?

Rob:
Well, we also want them to go in and sort of suss the situation, if you will. Right? So if this property’s been sitting for 1, 2, 3, 4, 5, 6, 7 months, we kind of want to know why, and we want to know if the sellers are at all motivated. Why hasn’t it sold? Has it fallen in escrow or has it fallen out of escrow?
And go in and do a little bit of recon. Run some recon on the property. Get back to us and let us know why. And usually, they’ll go in and they’ll talk to the listing agent. And that property that’s been on the market for six months, that listing agent might say, oh yeah, you could pay. By the way, the seller’s super motivated. Between you and I, let’s get this done. That’s not exactly how it worked out for us, but that’s really important to have. A realtor that can play the game of bit. I think that’s going to work out in your favor whenever you’re really going back and forth in negotiations.

David:
Yeah. And I’ll probably highlight here before we move on that when you’re telling your realtor here’s what we need, a big piece of it is telling them to call the listing agent and find out if we wrote an offer today at this price, would it be taken? Just don’t waste your time in a hot market if there’s 14 other people that want that house and you’re insistent on having very strict criteria. It’s great to have strict criteria. That’s why the first step, is you should figure it out. But if the property isn’t going to work for that, don’t try to make it work. Just move on from it and find a house or a property where it’s still going to work for you and they’re more motivated.

Rob:
Yeah. It’s been really interesting because we tend to only look at properties that have been listed for a while because I we’re just so tired of competing. Why compete with a hundred people when we can go find the diamond in the rough that’s been listed for a while and see if we can make that one work.
And for the most part, I think most of our options have been things that have been sent for a bit at that higher price point, which is really great for us because we see where we can add value to the property. And we know that we can maybe come in a little bit lower. And if we can’t come in a little bit lower, maybe we can start asking for things like seller credits.

David:
That’s exactly right. Now, I use this a strategy on the David Greene team with all of our clients, because I tell people, stop chasing the house that’s been on the market for two or three days. You’re going to get your heart broke. You’re going to grossly go over asking price. But of course it’s tempting. But it says it’s only $800,000 on Zillow. Why can’t I get it for that price, go work a miracle?
But this is the strategy that I use myself. We’re looking at one here that had been on the market 190 days. I have an offer out on one yesterday that was sitting on the market at 2.4 and sat there until it expired. And we got a hold of the sellers off market. And I’m now trying to put a deal together with them because their motivation level is different after their house sat and expired.
I only go after properties that I think the seller wants to sell it just as much as I want to buy it. If I want to buy it more than they want to sell it, they’re going to get a lot of other buyers and they’re going to sell it for more. So be disciplined in how much time you spend on a property. The first thing you should be looking at after it matches your criteria, which for us are those five things, is do I have a chance of getting it? If the answer is no, don’t put any more time into it. Wait until it falls off the market or it sits there for longer. If the answer is yes, then you can dig in with a little bit more due diligence.

Rob:
Yeah. If you’re excited about a property, just a rule of thumb. If you see a property, you pop up on Zillow and you’re super excited at how beautiful it is, and you’re even more excited at the price point, you’re probably not going to snag it for that price point. It’s pretty rare.

David:
All right. Step number eight is actually writing an offer. So we’re going to do a show in the future with a lot more detail about this, but just let’s focus on this deal that you and I are working on that we’re probably going to have in contract today. Can you share a little bit about the offer that we wrote, what we asked for and why?

Rob:
Yeah. So I alluded to a little bit at the beginning of the show, but this house was on the market for, I think just under six months by a couple days. It was listed at 3.4 and we made an offer with a couple of interesting contingencies. So we came in at 3.25 million, so about $150,000 less than asking. But then we also at asked for a $75,000 credit to be applied toward closing costs and other things like that.
So really when you start mapping it out, the offer is closer to 3.175 million. And then we also ask for all the furnishings to be included as well. They weren’t necessarily all my favorite furnishings, not necessarily things that I would choose, but they were pretty good. They were good enough for this property. And I was like, I’m happy with 90% of this stuff.
And so when you factor that in, that stuff could be anywhere from 35 to $50,000. And that’s really important for us, especially in this short-term game where cash-on-cash is a really important metric in our matrix, right? And so if we can save $75,000 in closing costs and we can save $50,000 on furniture, we’ve just saved over $100,000 dollars in cash. And so our cash-on-cash, our ROI really starts going through the roof.
Was there anything else on offer that… Oh. Yeah. And then we also asked for a 60-day close,

David:
A 60-day close because we wanted more time to be able to raise money. And then we asked for a home warranty that would cover anything that might break in the property. But I want to highlight here, is that price is not the only thing that matters. Most people get stuck on price. They think they won or they lost based on the price.
This property, from what we’ve seen so far, we have to do inspections still, appears to be turnkey. We’re not going to have to spend hardly any money in fixing this thing up. And now that we’ve taken out our closing costs and we’re actually able to buy down our rate with that 75,000 credit and get it to be a cheaper monthly payment, and we don’t have to furnish it, even if we paid more than someone else, our cash-on-cash return would be much higher in theirs.And we would have more capital to buy another house.
That’s the thing, is we structure the deals so that we have minimal money in it while still keeping incredibly big reserves so that it’s not risky. And getting to borrow the majority of the money at a lower interest rate. Now, people get really good deals on properties, but they need a ton of work. And then they dump a bunch of money into it. And then they got to borrow money from somebody else, like a hard money lender at 12%.
And so even though the price was better, what they actually end up spending per month ends up higher. So it’s not only about the price. And that was one of the ways that we’re able to work this deal out to work for us, where the other people who were looking at that property probably just got stuck on the price and couldn’t see past it.

Rob:
Yeah. Literally, you and me, just with the credit and the furniture, you get to keep $60,000 in your pocket, I get to keep $60,000 in my pocket. Not only that buying that rate down, that’s not necessarily a big deal on a $300,000 house, but on a $3.25 million house, buying down a half a percentage point, that’s a pretty significant difference, not just in the monthly, but in the actual interest that we’re paying on that property over time, over the life of that loan.

David:
That’s exactly right. So that’s one strategy that we use on the David Greene team that we brought into this one, was a lot of the time, if you got a deal with a seller and they’re willing to take 500 grand, it might be better to give them 520 with a $20,000 closing cost credit that you can use to cover your closing costs us, to fix the house up, to buy down your rate. Because when money is cheap like this, borrowing more of it is less expensive than when rates are higher.
Another thing moving on to number nine actually offers strategies like our strategy with this deal is when we first submitted that offer, they said, no. They told us to go… You said kick rocks? I think maybe pound sand might be more appropriate because it’s in the desert. Right? Surrounded sand in Scottsdale.
So they told us to go pound sand. And we said, that’s fine. This is normal. Right? My experience as an agent, I understood that the sellers were in an emotional place. They received our offer as kicking the pants. Like this to them was like an insult. That it was lower. And if your house has been on the market for six months and it’s not selling, you have some unrealistic expectations. They should have already dropped the price.
So here’s what we said to the realtor, ignore them for a couple days, then we want you to go back to them. And this is what I would do if I was the buyer’s agent representing us, is I would say, hey, my clients are going to buy this house if I tell them to buy it. They rely on what I’m saying. They don’t really understand whether they should buy this one or another one. They told me to go find them a deal that works for their numbers. And that’s my job.
So if I tell them that this is the one that’s going to work for their numbers, they’re going to do it. But the numbers need to be right here. Listing agent, what do we have to do to make this work? And we are going to put the onus on that agent to go work on her own clients and say, guys, what do you need to feel good about this deal?
That is different than what most agents will do, which is they’ll protect their own ego at the expense of yours. So what they’ll do is they’ll say, I got a lot of clients. I don’t really need this sale. But my clients really want the house, what do we got to do you here? That doesn’t work. You want it to be the opposite. You want your agent to say, I want to put this deal together. Tell me what has to happen in order to do it. My clients will listen to whatever I tell them.
That’s literally what I say to the agent on the other side. And what happens is it now gets the listing agent to go to her clients and be an advocate for us. She’s or he is going to go say, listen, we got an offer here. We haven’t got anything else. I think this is our best shot. What do you guys need to feel good about this deal? And then she’s going to go back to our agent and say, here’s what they said. And he’s going to say, oh, that just the numbers won’t work at that. What can we do to get him to this point instead?And we let the agent sort of whittle down the sellers until they got to the point where they were good with us.
Now, I knew if this house had been on the market for six months, that there’s a very good chance that they’re not going to maintain their resolve to keep going. That was one of the things that Rob really liked about it, is he’s like, dude, this one’s been on the market for a long time. There’s not a lot of houses that are at this price point. There’s not a lot of buyers that are looking at this price point. They can’t move on with their life until they sell it.
And that’s what you want to remember, is when it’s been there for a long time, when that offer comes in, their knee jerk response is no, most of the time. But then what happens is their thoughts start going into, what else could we use this money to buy? If we got rid of this thing, we could go buy that house in the Caribbean, or we could buy that multi-family property that we could use to retire. All that stuff starts moving through their head and it slowly weakens their resolve to hang on at.
And lo and behold, about a week, maybe a week and a half later, a realtor came back to us and said, yeah, they’re willing to accept your terms. They just asked for a few little things to be different.

Rob:
Yeah. I actually want to point out the phrase I that he put out there. And I think he said putting them on ice. He’s like, oh yeah, I call that putting them on ice. And so that’s basically… That’s ignoring them for a little bit. And then coming in strong and saying, hey, I want to put this together. And then that realtor came back and said, oh, highest and best, whatever. And then he was like, okay.
Then he put them on ice for, I don’t know, however long, several days. And then he came back and then he is like, hey, I really want this of my clients. They’re not going to go for it. I’m the decision maker here. I’ve comped it out. The numbers have to be here. And yeah, they accepted most of the terms and were kind of working through what that means.
But all in all, a pretty… I called you the morning he told me that. He sent me a text and he said call me. And I was like, oh, okay. This is always my favorite text from a realtor. And then he was like, all right, hey, they didn’t really counter your counter after they had let it expire. And I was like, man, David’s going to be so happy about this. Because it worked out exactly how you called it, man. It was like pretty funny. Exactly how you called it, hey man, I guess what you’re talking about.

David:
Well, thanks, Rob. This is David Greene team pen. I’m holding up here. That’s why I learned it. Right? So that’s why we wanted to share this, because most of our listeners won’t have the experience that I do being in these situations and they wouldn’t have understood this is a stride that will work. So I wanted to make sure we conveyed that. Because it did worked awesome.
The last thing, step number 10, is have several irons in the fire. And this is what we do so we never get too in love with this deal. While we had it on ice when they rejected our offer and we said, hey, just let them chill for a minute, let them think about it, we didn’t just sit around crossing our fingers and feeling tempted to adjust our standard. We went out and looked for other homes. And it let our realtor tell their realtor, hey, these guys have me looking for other properties. If you guys don’t want to put this together, they’re going to find something else. I’m going to find them something. You be the thing that I find them.
But you got to be willing to keep looking. You cannot fall in love with any one deal. So we sort of set that one off to the side and we kept evaluating other properties. We kept meeting every week. We kept bringing new properties into this perspective that we had so we never fell in love with one property. This will help you in two ways. One is it will stop you from falling in love with the property you should not be in love with. Two is, if that property is really good and you just don’t want to accept it when you see everything else is not as good, it will make it more clear that’s the right property to go for.
This is what we do to make sure that we protect ourselves in those two ways. Anything you want to add there, Rob?

Rob:
No, I think that’s… Obviously, I very much overanalyze every deal and I think your advice to me. Because in this market, it’s crazy. We’re just lucky to get an offer accepted. Period. But your advice was like, hey, stop being a sniper and start throwing grenades. And I was like, all right. All right, I’m going to ease up a little bit on every single criteria. Then I just started. I was like, okay, I’m just going to look at all of the other prisms in the matrix, I guess, if you will. And I’m just going to cash flows there, but I’m just going to really start evaluating deals on all those other points and start looking at dozens of deals. And I’m like, all right, we have all of these to fall back on right now if this one doesn’t work out.

David:
Right. We call that the call of duty strategy, right? You don’t win a call of duty by just hiding in one little spot and waiting. You have to go out there and go crazy. Now, once it’s in contract, we will go into sniper mode. That is when we look down the scope at every little single fine-tuned detail to make sure we like the deal. It’s not appropriate to do that before you even have it in contract. That’s how you’ll just burn yourself out. It’s too hard to look from a scope if you’re trying to see the whole field. So that’s what we’re getting at there. I forgot about that. That’s a really good analogy that you brought into this.

Rob:
Yeah. Well, hey, it was just yours. I’m just throwing it back out there. But yeah, we’ll get into that whole strategy of the actual due diligence of a luxury property in a different episode. But this is pretty good synopsis on everything we’ve been going through for the past what? Eight weeks or so?

David:
Yeah. That’s exactly right. And I really believe this method works. I do it with… When I partner with someone, this is how I do it. And when I was in super buying mode, this was a strategy that I had set up when I was buying three to five deals a month. And I was using the birth strategy is I’d meet with my realtor every week. We would discuss these things. I had a prism that I looked at every property through. I would look at the list and say, here’s what I need to know.
Now, it’s obviously more fun and better to do it with a partner like Rob who understands this asset class because he’s done it a ton. And I don’t really have to teach as much as Rob is bringing value. That’s what you want your partner to feel like. Is their angles that you don’t see. And they know stuff that you don’t know yet. And Rob’s really experienced with this. So that makes it a lot more fun and easy.
But the system’s the same. And that’s what we’re trying to say. These are the 10 things that you need to do if you are serious about wanting to get your property under contract. So thank you for joining me here, Rob. I’m going to let you get going, but I’m going to give you the last word.

Rob:
Ooh, wow. So much pressure. I guess… Hey, the personal note here. I’ll let you know what the realtor says. He’s going to be getting back to be here in like the next hour or so. So the ultimate cliffhanger for everybody listening at home.

David:
So if it works out great, we’ll start our series of due diligence, like we said. And if it doesn’t work out, that’s fine, we have other irons in the fire. We’ll talk about them at our next meeting. We win either way. So, thank you very much. This is David Greene for Rob call of duty Abasolo. Signing off.

Mindy:
Welcome to the BiggerPockets Money podcast, show number 287.

Kassandra:
You need to actually create a relationship with your boss, a professional relationship with your boss that is positive, and that is open for dialogue. This is what I’m saying. This is a project to people. Asking for a raise is a project. It’s a step-by-step process.

Mindy:
Hello, hello, hello. My name is Mindy Jensen and joining me today is Kassandra Dasent, a world-class connector with the voice of an angel. On top of that, she is a gem of a person and absolutely a joy to be around. Today, we’re going to talk about how to really quantify one’s value in the workplace setting.
I am here to make financial independence less scary but just for somebody else, to introduce you to every money story because I truly believe financial freedom is attainable for everyone no matter when or where you’re starting. Whether you want to retire early and travel the world, going to make big-time investments in assets like real estate, or start your own business, I’ll help you reach your financial goals and get money out of the way so you can launch yourself towards your dream.
We have a lot to unpack in today’s episode because Kassandra has an enormous amount of information to share with you today. Here’s thanks to the sponsors of today’s show. Kassandra, welcome to the BiggerPockets Money podcast. I am so excited to talk to you today.

Kassandra:
Thanks so much for having me. I’m legitimately excited to talk about you, talk with you, I should say, and about this topic.

Mindy:
I reached out to Kassandra after she posted on Facebook that she is a connector and sharer of information. She offered to share on a variety of topics. The one that really, really hit home to me was how to advocate for one’s self in the workplace with regards to negotiating salary and bonuses. I think that this is something that people know they should do and also really gives people the heebie-jeebies because they don’t want to do it. It really makes us uncomfortable to advocate for ourselves and push, push, push, but if you don’t push, your boss isn’t going to give you a raise, right? So let’s jump right into this. Why do you feel that it’s so uncomfortable for people to really ask for a raise and really ask for a lot of money as a raise?

Kassandra:
I think one of the reasons… Actually, I don’t think I know. It’s from an emotional perspective. A lot of us are dealing with the fact that it’s almost like survivor’s guilt in the workplace especially if it’s during recessions, if it’s during major consolidation of companies, mergers, things of that nature. So if you’re experiencing that or you’ve had that experience, you tend to feel the thought of, “I should be grateful for what I have. I should be thankful for what I have because so many people are not in the situation that I have that I have a job.” So you get the guilt conscious on you that you should be just thankful and just leave it alone and just take what you get. So that’s definitely one.
For women in particular, I think we’re still working through a lot of constraints in the workplace in terms of whether some of us females are few and far between in our profession, especially in domains such as engineering, science, mathematics, even in the education system, how many are tenured versus not. So already if you feel like you are in the minority, whether it is a visible minority or whatever minority you represent, you feel that, again, “Okay, well, if I have a position, if I feel like, ‘Okay, I have a good salary. I shouldn’t push this any further.’” So I think definitely it’s a collection of emotions, guilt, and also you don’t know how to do it. Very few people talk about what the roadmap or what’s the process to actually setting yourself up for potentially getting that raise or that transfer or that bonus. So a lot of people don’t really discuss… Still many of us don’t talk about our salaries, so what makes you think that people are going to talk about the process of how to get a raise?

Mindy:
That’s so true. It’s not like there’s really this, like you said, roadmap to… right after your review do this, and three months later do this, and six months later do this. It does have to be this conscious, all the time but not really all the time but all the time process that you’re thinking about. Because how many people have been sitting there, “Oh, my review’s next week. What’d I do? What’d I do since my last review?” That is, to me, I sit here and talk about money all the time, and that is me. I’m not looking for advancement in my company. I don’t want to manage anybody. I don’t want to grow my career. I’m at the end of my career. I’m right where I want to be. But that doesn’t mean I don’t want more money. Who doesn’t want more money?
So sitting here, I’m like, “Ooh, I know I’m supposed to do my review every January. I’ll remember. I don’t remember. I don’t remember at all.” We talked to Erin Lowry on Episode 169. This is Episode 287, so it’s been a minute. She talked about keeping a success folder in your inbox, on your desktop. Any time anybody gives you praise, like through email, put it in your inbox. If somebody shares with you successful thank you accolades, anything, you put it in your desktop folder so you can remember what it was. You don’t have to rack your brain. You just go into your folder, “Oh, that’s right. There’s 27 emails from people who loved me,” or, “Here’s 57 things I did right at the company.”
Episode 169 released a really long time ago. Guess who hasn’t started her success folder in her inbox yet or on her desktop? That would be me. So this year is different. 2022 is the year of Mindy, and I have now a success folder. Every time somebody sends me something, “Mindy, I’m so thankful for your podcast,” I get a lot of emails like that, it goes in my inbox or my success folder inbox and it goes in… I’ve got work things. People send me DMs on Facebook. If you want to do that, it’s [email protected] on Facebook, [email protected] on Twitter, [email protected] if you want to send me a letter so I can put it in my success folder, or you can send one to [email protected] But not everybody has a boss who hosts a podcast with them. So let’s talk about some of these things. Erin’s success folder is a really great idea. How frequently should I be looking into that?

Kassandra:
I definitely second what Erin said. It’s so important to have a log of your accomplishments or successes, comments, feedback. You need that. Before we even talk about the money part, it validates your work. It lets you know that you are doing good work and that you’re impacting somebody positively. You’re doing good work. So first and foremost, give yourself the kudos to say, “I am getting an acknowledgement.” You know that you’re doing good work, but when you get that affirmed back to you, that confirmation, that knows that you’re on the right track. You’re doing something right. That’s first and foremost.
The other part of that equation is it’s not only important to have that log. Here’s where the money part comes in, and here’s where you start setting yourself up for that conversation is that you need to actually link it back. Whatever accomplishments or whatever feedback you’re getting, you need to link it back to any department goals, any major organization objective, essentially. So you need to know, is this falling in line with what the company wants to do? Is this falling in line with what our department is looking to achieve on a monthly or a yearly basis? So it all has to roll back, roll up, I should say, to the upper levels of your company, your division, or whatever that may be. Because if you cannot quantify your results to management, they’re really not going to give you anything.
That’s the truth. Because as much as you think you’re the best thing since sliced bread, which you are, we’re not saying you’re not, you are, but for money purposes, you need to come with metrics. You need to demonstrate the fact that you were able to resolve X problem has saved the company money or has saved the company from going into a dire situation on a project, whatever that consequence could have been, and you need to map it out. As a program manager, my job is to plan. It’s to expect unforeseen circumstances and be able to address them with potential solutions. From the gate, I need to look forward. I need to be future looking. You know what I mean? You need to do that as well with your career.

Mindy:
Oh, that’s really great advice. I love that: be future planning. Yeah, you need to pull it back to the business objective. Oh, the business wants to do this. Here’s how I contributed to that big goal, here’s how I contributed to these little goals, and this is why I have earned this raise. That’s another thing that Erin said in her episode was it wasn’t just, “I want a raise.” Well, nice for you. I want a new car. You don’t just get things because you want them. You earn them. You don’t even deserve them. You earn them.

Kassandra:
Exactly.

Mindy:
Here’s what I have done, and here’s why I am so valuable to this company.

Kassandra:
I think and also just to… It’s not only the company objectives. Also, typically in a corporate setting or in a company environment, every year, once you do that, we have a common review process, so there’s the department objectives, but then you, yourself, are supposed to come up with personal objectives to show the company that you are looking to grow, that you are planning to grow your career or grow within your position. So whatever you’ve accomplished, you need to find ways to tie it into both: the company objectives and the personal objectives that you identify, that you said were promising to the company that you are going to fulfill, two-pronged.

Mindy:
Let’s see. I want to make sure that I’m on the right track. It’s been a year since I had my last review. I’m doing great. I know I’m doing great. I want to make sure that my boss thinks I’m going great, too. How can someone check in and use their boss to their advantage to make sure that not only does their boss know that they’re doing well, their boss knows that they are expressing interest in growing, but their boss can help correct anything that they’re seeing? Because just because you think you’re doing great doesn’t mean that your boss thinks you’re doing great.

Kassandra:
Absolutely. I think what you said is key. You have to take the initiative. You cannot allow your career to be determined by your boss because your boss probably has more than one employee. You may not be the only person in their sphere, so you cannot count on them to manage your career. It is your career. It’s your responsibility. If you have a great boss who is… she’s very forward in the sense that she or he takes the initiative to set up quarterly meetings or monthly meetings, that’s great. But you need to think like the boss because at the end of the day you have to put yourself in their position to say, “Okay, well, how much of the full purse of money am I going to allocate to each employee? Why is [inaudible 00:12:44] deserving 6% raise while Emily’s only getting 3%?”
What I would suggest, first and foremost, is that you approach your boss and say, “Hey, I would love to have check-in meetings with you. I know your schedule is busy. I think it’s important for me to be able to tell you what’s going on within the workplace, within my environment, within the team because I know that you’re not really hands-on because you trust us as employees to get the job done, but I know that you’d like a summary.” So whether it’d be a monthly or quarterly call, whether it’d be an email every couple weeks, however that person likes to receive information is how you’re going… You need to cater to them. That’s the first thing is that you need to take control and cater to them how they like to receive information.
Secondly, you need to be delivering that information. You need to be consistent with how you communicate your results or communicate what’s going on or communicate even obstacles or even situations that are not going well within a project or within, let’s say, customer service. The metrics are off. You need to be able to clearly and succinctly explain the problem, explain what you’re doing to resolve the problem, and communicate with them that the problem is resolved, because that’s what you’re guaranteeing them to do is you are here to resolve problems. That’s what we get paid to do. We create, we innovate, and we resolve problems. That’s what we do as people. So that’s the first and foremost thing is you need to take control. If you want a one-liner, you need to take control of the process, and you need to set and establish consistent reporting to them.

Mindy:
How much time do you think it would take to set this up? How much time should be spending on checking in with your bosses? Is this a five-minute process? Is this a 30-minute process? Is this per week, per month, per quarter?

Kassandra:
I think it really depends on the nature of your job. Let’s say, for example, you’re working in a call center, you typically have more touchpoints than, let’s say, someone who’s a program manager or who’s in engineering. You may have it just monthly. You may have it biweekly. Again, that’s why it’s important to have that first conversation with your supervisor and say, “Hey, based on your current workload, based on your schedule, what works best for you?” You don’t want to be domineering and say, “Okay, I’m just going to send them emails.” You don’t know if they’ve got a thousand unread emails. You don’t. I know I had a boss who had. In reality, that’s it.
So it could vary. It could be weekly. But typically from my experience it’s been biweekly to monthly. Quarterly is a stretch. I think quarterly is a little long. I think you should at least touch base monthly, let’s call it average, at least monthly for at least 15 to 30 minutes every month if you’re doing a con call. If you’re doing email, I would say every two weeks, very short, concise emails, bullet points. They don’t have time to read. Put yourself in the position of your boss always.

Mindy:
That’s very interesting. You said quarterly is a little long. If you’re listening to this and you’re thinking to yourself, “Oh, yeah, I get together with them once a year,” I’m thinking-

Kassandra:
Oh, gosh.

Mindy:
… we do quarterly at BiggerPockets, but I also don’t do a [crosstalk 00:16:23].

Kassandra:
Do you remember? My question is, from each quarter, do remember those conversations?

Mindy:
I don’t remember what I did last week. I have a terrible memory.

Kassandra:
This is why I’m saying it’s important to stay in the front of their thought. Because if you’re not present in their thought. If they don’t think about you at least once every couple weeks, either they’ve got too much on their plate or you have not put yourself in the sphere of consciousness, and that’s really, really important even if it’s for five minutes, even if it’s just for… My manager and I, we talk about our dogs. It doesn’t always have to be about work, but it’s building that connection and that rapport that you need to establish first before demanding money because that’s very off-putting. You need to actually create a relationship with your boss, a professional relationship with your boss that is positive, and that is open for dialogue. This is what I’m saying. This is a project to people. Asking for a raise is a project. It’s a step-by-step process.

Mindy:
Let’s talk to our introverted friends. It seems confrontational. I’m not an introvert, and it seems almost confrontational to say, “I want a raise,” because I would love if my boss just recognized it and gave me a big pile of money. But I also don’t like to pay more than I have to for anything, so I can understand why my boss wouldn’t want to pay more than they have to. If I’m not out there advocating for myself, who else is advocating for me? But it seems really confrontational at the same time. So how can our introverted friends make the most of this plan?

Kassandra:
I am an ambivert, if you will, so I can related to many people. I can be social when I need to be, but I’m good at home with my cup of tea and with my dog and I’m fine. Life could stay like that, I’m happy. So I can understand the anxiety that people may experience or just the plain, “I just don’t want to do this.” So I think you have some questions that you need to answer for yourself. How important is getting a raise to you? If you decide on a scale of one to five, let’s say, that one is not important and five is, “Okay, I need this raise because I want this new car or I want to pay debt off,” or whatever that X is, the closer you get to five, then you need to realize that, “Okay, what needs to give in me, what am I willing to give up in terms of discomfort in order to gain?” Because this is an exchange of energy at the end of the day.
If you decide that, “Okay, I’m a four and a five. I want this money. I deserve this money,” so here’s where, again, you say… If you’re an introvert, typically it’s easier to do this by email. You’re not visually in front of somebody. You’re not having to just read someone’s reactions visually. That’s very tough for introverts. So if your boss knows you as a person… Again, I come back to building that relationship of understanding so they know you as an employee so they respect your boundaries as well. They understand that, “You know what? He or she is a great worker. They just don’t do well with face-to-face constantly all the time.” So you have to explain to them who you are as a person. Otherwise they’re going to do things to you that you don’t like. They’re going to make you do things that you don’t enjoy. It’s true.
In my career, I have managed to mold my boss to react to me in a way that makes me feel comfortable. Really, that’s it. It sounds psychologically challenging, but it’s not. I really want to encourage everybody that talking to your boss is not the end of the world. You’re going to have to do it. If you really want the raise, you need to educate them on how you best like to communicate. It takes time. For some it might be easier than others.
If you’re in the situation where a boss is not necessarily respectful of your introvertedness, what I would suggest you can do is perhaps… It depends if you’re on a bigger team or not, but you could potentially ask a colleague to not intervene for you… I don’t know how I can put this. They can advocate for you in very subtle ways. What I mean by that is, let’s say there’s a con call and everybody needs to be on video. By the way, I don’t go on video typically for my company con calls. I’m very like, “No, you don’t need to see my face,” because I built over time a level of self-confidence and self-awareness that I’m not afraid that I’m going to be fired if I advocate for myself.
That’s the muscle that I’m encouraging you to build is learn how to advocate for yourself even if you’re introverted. There are ways to do this. I’m not an expert in it by any means. It’s also a process over time where you’re just like, “You know what? The worst that can happen is I lose this job. I know I’m skilled enough to find another one.” That’s where I am at this point in my career that I’m very confident in my skills and my ability and my value. I know my worth. I know my worth. Now it’s just finding your way of communicating your worth and your belief in your ability to do your job so that your boss really doesn’t pressure you into doing or communicating in ways that you don’t want to communicate.

Mindy:
Let’s switch gears a little bit and talk about setbacks because it is really nice to think that your employment is always going to be unicorns and rainbows, but there are problems that sometimes come up. You make a mistake, a project doesn’t get out on time. Sometimes the project doesn’t get out on time due to no fault of your own, but it’s still your project so it doesn’t go according to plan. How do we get back on track after a setback?

Kassandra:
The first thing that is crucial, you need to accept responsibility for it. You need to demonstrate that the blame game doesn’t work here. So if you are responsible for an outcome, you need to take responsibility for that said outcome. You cannot hide behind other people. You cannot throw people under the bus. That’s not going to lengthen your career. It really will shorten it, in fact. So first and foremost, you just need to be honest. Explain why it went wrong, explain the factors that caused it to go wrong, and really come up with some solutions, plan A, B, and C, not just one option. You have potential options how to be able to rectify or at least limit the damage or the consequences of what happened because sometimes we can’t fix it to fruition. Some projects just… You know what I mean? It doesn’t end well.
In those cases, you really just have to say, “Okay, well, I identified why and how and when it went off the rails, so for future, I am logging it so that I recognize that if we are even close to being in that position in a future effort, I know how to roll it back. I know how to divert, and I know how to deal with it.” So there’s lessons learned, we call them in our world. That’s really it is you’ve got to acknowledge it. You have to state the reasons why. Then you’ve got to be able to present solutions or how would you do it differently in a future project.

Mindy:
What do we do if you state your case, “I have earned this raise because of XYZ. Here’s all of my proof. Here’s all of these things that we’ve done right,” and your boss says, “No, we can’t give you a raise at this time. The company doesn’t have any money. I don’t agree with your assessment”? Whatever the reason is when your boss says no to your raise request, what do you do?

Kassandra:
Before you go into the raise, you have to understand that there are two outcomes potentially. There is the, “Yes, okay. Yeah, we agree with you.” There are actually three outcomes. There is the, “Yes but we don’t have as much money so here’s what I’m going to offer.” There’s the worst-case scenario that you outlined that says, “You know what? No.” But before you go into that meeting, you need to be prepared to essentially say, “Am I willing to walk away from this job if I don’t get this raise?” Before you even open that door, what’s the worst-case scenario? Are you willing to accept it that you would be willing over this issue even if your job is amazing, you love your colleagues, you love the work that you do, all the good stuff? But if that money request is denied, are you willing to give that up?
Then secondly, depending on the type of boss that you have, they may be thinking, “Well, they’re a potential flight risk because they’re asking for money, and if they’re told no, well, then they’re going to quit.” You have to also understand it’s how you communicate that request with money. That will determine how they will view you even if you’re told no. So you can still be told no and both parties leave with the same respect that you guys entered into the conversation with. So it’s really important how you approach that conversation. Like I said before, are you willing to stay with the current terms if you love your job or if you appreciate your job, or b) is the issue of money so important…? Like, you’re seriously underpaid, and they’re not willing to budge, are you prepared to look for something better that will pay you your worth? That I cannot answer. Only you can determine that answer for yourself, but you have to understand that that is a conclusion.

Mindy:
Let’s talk about that for a minute. I want to go in and ask for a raise and my boss is going to say no. How can I ask so that I am preserving my relationship with the company? Honestly, I’ve got to take care of my own self first, and if I need income, I don’t want them to think that I’m a flight risk until I have found something else. How can I ask for a raise in a way that says both, “I’m really serious, I want this, but I’m not going to leave if you don’t give it to me”?

Kassandra:
I think actually you start with that: You are not interested in leaving the company. You’re really, really happy with the work that you’re doing. You feel that it’s fulfilling to you. You feel that you’re a valuable contributor to this organization. That’s the bridge is that you’re a valuable contributor to this organization, and here is metrically why my value. I’m actually now demonstrating my value from a dollar/cent goals, objectives, perspective. But you always lead off the conversation is that you are genuinely happy with working at XYZ, working for you. Also, highlight the boss’s qualities as well, that, “You’re a manager that really helps my career to grow. You help me with opportunities.” Make them part of your success. You’ve got to get their buy-in. That’s what this is. This conversation is a buy-in. They need to buy in to you as a person.
So that’s my suggestion is how you would lead that conversation off is that you’re happy. You’re genuinely happy with your job. You’re happy with them as a manager. Also, I would suggest, ask them of their opinion of you. I know it’s scary. I know it’s scary, but feedback is really important. We’re not perfect. No one is perfect. We can all improve, and show them that you want to improve in the process. So with all these things, I think if you really position yourself as pro-them, not anti-them… But at the end of the day, you have the right to ask for more money. They know this. They know this. This is why they have HR. They know that employees are going to do this every year. It’s not surprising to them. I want you to become comfortable with the idea that you going into ask this, they’re expecting it.

Mindy:
Ooh, I like that. It isn’t surprising. Rates go up. We’re in inflationary periods right now. There’s a cost of living increase. There’s a cost of goods and services are going up. Girl Scout cookies went up this year.

Kassandra:
Hello? Yes.

Mindy:
Everything is going up this year.

Kassandra:
[crosstalk 00:30:05]. Actually, I want to add… Let’s say, an example, they love the work that you’re doing. They acknowledge that you’re contributing. They acknowledge the results because many acknowledge. They see for a fact that you are producing. But for whatever reason, they say that, “No, unfortunately we don’t have the purse strings for that,” you can negotiate in other ways. Well, can you get an extra week vacation? Can your bonus be increased? Because they tend to give more money on bonuses because it’s not guaranteed every year.
But still, if you were to say, “Okay, I’m typically allowed up to a 15% a year bonus,” would they be willing to give you extra on that? Because it’s still money for you. Technically, this year you got, let’s say, $3,000 more than you would have because they put it on the bonus side or you got an extra week of vacation. Do people understand a week of vacation, what that calculation is? That’s a nice piece of change, and that’s rest for you. Or, for example, can they, kick in more money to…? Let’s say, if you’re a smaller company, potentially they can kick in more money to a HSA or a 401(k). There’s a lot of ways around this, so don’t think that the door is shut to straight cash. So you also have to think about how else would you potentially be willing to be remunerated.

Mindy:
Ooh, that’s a really good point. I would love more vacation time, hey, Scott. We actually just went this year… I’m super excited. We went to unlimited vacation so as long as you’re getting your work done. Maybe I’ll just be unlimited vacationing to Fiji when it’s freezing cold outside. That’s great. More vacation, more bonus, more 401(k), more HSA.
Let’s say that there’s none of that available. When is it a reasonable amount of time to check back in with your boss? Let’s say that you love your job. I think that there’s a lot to be said for finding a company that you like to work at. I’ve worked for Satan himself, and it’s no fun. You get up in the morning, and you’re like, “Ugh, I have to go to work.” You drag your feet. You don’t want to get out of bed. It is just soul-sucking. Then I’ve worked for companies where, my husband is a stay-at-home dad now, I’m walking out the door, the girls are fighting, and I feel guilty because I’m going off to work and I’m going to have a good time.
So the difference is night and day, and it’s this huge weight that’s lifted off my shoulders. If I was working at this, and I am working at this job that I love so much, if they said, “No, we don’t have money to give you for a raise,” I wouldn’t automatically think, “Well, I’m leaving,” because in my decades of working I know that there’s a lot of value in working for a company that you love. When is a good time to check back in? Should you ask your boss about this, or should you just throw it at them, “Hey, okay, we don’t have any money now. I’m going to check back in six months or three months or tomorrow? Is there a rule of thumb to checking back in for more money?

Kassandra:
Yeah, there typically is a process. That’s usually agreed upon during that initial discussion, that initial ask, so you can ask, “Well, what would be a good time to check in back?” if they even mention, “We’d love to do this for you, but now’s not the best time. Our company’s just going through some difficult times,” or whatever that case may be. You could suggest whether it’s six or eight months, but give enough time a) let’s say if it’s a real deal where it’s a cash crunch, to allow them to work through that, and b) you collect more proof. You collect more ammunition. This works for you in a couple of ways.
Typically six months, eight months is a good period to check back in. Also, for bigger companies, they typically have a schedule, so you need to learn what their review schedule is and their calendar is because they literally have cut-off dates that decisions are made because it goes to committees to approve budgets. So you need to learn what that schedule is for your company. So you’re actually asking for that review in the cycle so that you can actually collect on it so you don’t miss the window. You need to know what that window is. So whatever that window is for your company, play within the window.

Mindy:
I like that a lot. I’m trying to think, as you’re talking, “Oh, yeah. That’s August.” And it’s known, so ask your business, ask your HR department. Now let’s go to the nuclear option. Despite all of your best efforts, there is no money available, that maybe the company’s not doing well, maybe other things are happening. Are there any warning signs that you need to leave no matter how great the company is?

Kassandra:
Well, if they’re a public company and they’re traded, you should be watching their stocks to be honest. So that’s kind of left field. Most people are like, [crosstalk 00:35:31].

Mindy:
That’s a great tip.

Kassandra:
So you should be watching their stock. You should be following the company’s results. Every company that’s traded on the stock exchange has quarterly earnings, and that basically tells the state of the company’s finances. They are published. They are public information. You can find it either within the company or outside, but either way you should be seeing if you are working for what other people, investors and shareholders, view as a healthy company. When you start to see that the company’s lagging, their earnings are off, they’re missing their earnings completely, like zoom, it just went south, you know what I mean, that’s an huge indication actually that you may need to look for another option. So that’s my first tip and biggest tip I would say.
The other thing is, how many people are quitting? How many people are being hired versus leaving? So see how your department or how your core team is shifting. Are people leaving? Where are they leaving to, if they’re talking about it? If people are leaving but they’re not hiring to fill that role anymore, they’re starting to share the responsibilities across people, these are signs. These are warning signs that you need to pick up on.

Mindy:
That’s really powerful. Don’t get caught being the last employee there to close up the company and then get your $1.50 severance.

Kassandra:
Literally. I got you another tip I thought of because I lived it. I’ve never really been fired from big girl jobs. I have lived through two corporate downsizings, and they’re traumatic. The typical rule of thumb is the longer you are there in terms of years worked, the higher chance you have to be let go. If you know that you’ve been at a company for, say, 10, 15 years and they’re looking to do massive cutbacks, you need to be very careful. So you need to start considering, should I negotiate for severance? Should I potentially take the money if you can find another job within your field? There’s a lot of things that wrap into this, but I want people to think that that is a potential possibility that you might be on the chopping block faster than someone who got hired only six months ago or two years ago because they cost less. You cost more typically.

Mindy:
That is a really good point because when they do a buy-out, it’s usually based on how many years you’ve been there, so you get a month for every year you’ve been there. Well, here’s two months versus 10. If you’ve been there for two years, you probably know the processes and understand enough that you can help them maneuver through [crosstalk 00:38:46].

Kassandra:
Like I said, they’ll keep you around because you’ve got the knowledge. Until you’ve passed that knowledge on to somebody else, you’re still golden to them, but as soon as that knowledge transfer occurs, you’re at risk.

Mindy:
Okay, that’s sparks a couple of questions. We’ve heard the advice that in order to get a big raise, you need to leave your job and go to another company. We’ve seen that in several of our guests, A Purple Life and Financial Mechanic, kind of job hopped. You and I are the same age. It was definitely taboo for us to job hop when we were younger, but now it seems like it’s no big deal to just spend a year at a job and then move on and move on and up in the pay scale. Does it look bad to your current company that you went out and sought another job even though you weren’t planning on leaving? Are they thinking to themselves, “Oh, Kassandra’s going to leave, so we will give her the raise so that she’ll stay until we can find somebody to replace her”? Or do they think to themselves, “Wow, Kassandra went out and figured out what her worth is, so we’re going to reward her by giving her so much money”? That doesn’t really seem on-brand for the companies.

Kassandra:
Gosh, I think it really depends on your skill set. It depends where you’re working. Like, if you’re working for Apple or Microsoft or Google, you know what I mean, they’re desperate to keep high-knowledge talent. So this is very subjective. For, let’s say, people who are doing administrative work or people who are doing clerical work, for example, in the minds of many companies it’s almost sad to say, but they’re a dime a dozen, meaning that you’re easily replaceable. So they don’t value you as much as they should. That’s where you need to be careful in terms of what role that you’re currently in. How much knowledge do you have at the company? For example, you mentioned, we’re in the same generation. I was one of those exceptions that did leapfrog before it was-

Mindy:
Wow.

Kassandra:
… en vogue because I understood that… Really, the ultimate bargaining tool is when somebody wants you. When you’re at that hiring process and they want you, that’s when they’re most willing to give you the most. Really and truly, that’s just the reality of how it works. So it is much harder when you are already installed in your job. You’ve been there for a couple years. If you haven’t been advocating for yourself and you suddenly find Jesus in the process and you’re like, “Oh my gosh, yeah, I’ve been underpaid. I need to fix this right away,” they’ve been like, “Oh, oh, okay. She’s now aware. How do we handle her or him?” It really depends how you’re coming in, what role are you working in, what company do you work for, what relationship do you have with your bosses. Again, I come back to that. If you haven’t established a positive relationship from the get and you haven’t maintained it, that’s your job. That’s part of your job. It’s not only your job to do the work. It’s your job to make your bosses think you’re a superstar because you are.

Mindy:
Oh, I love that. I love that. I’m going to mark that as a quote. We’re going to have that up. It is your job to make sure your boss knows that you are the superstar that you are. How frequently should somebody update their resume? I know people who have never… As soon as they get their job, they just put it to the side. I look at that girl in the mirror every day, although I’m not looking for a new job, I don’t want a new job, but how frequently should you update your resume? Because it’s kind of hard to remember all the things that you’ve done.

Kassandra:
Well, if you’re keeping a log of what you’re doing, it’s not hard at all. It comes back to that folder. So that folder serves multiple purposes. That folder is not only to help you navigate your present career and to demonstrate your value to your company in the hopes of being rewarded financially. It’s also to help you to position into a new job should you need to do this very quickly. LinkedIn is a great tool, and I don’t think enough people use it the way it is laid out properly. I think your resume updates should be happening in concert with your updates to your folder. You can set yourself a time, let’s say, every three months. You have a meeting with yourself. You look at your folder, and you’re like, “Okay, well, what projects have I working on or that I’ve completed that they challenged me? They provided me an opportunity to learn a new skill set, new software, new systems, new programs, new processes. Whatever these newness is that can translate in potential raises, whether inside or outside the company, that’s when you need to update your resume in tandem.

Mindy:
My final question, how long should your resume be? I ask this because I see a lot of resumes. I’ve seen some 25-year-old applicants who have a three-page resume, and I’m like, “Ooh, no. You’re supposed to do that now? No.” I mean mine’s not even three pages and I’m not 25.

Kassandra:
No, no. Max is two, and two is big max I would say. If you’re able to consolidate everything into a one-pager… Obviously, it depends on age. The older you are, you have typically more work experience but that depends. If you’ve been at the same company for three years or for 30 years, I should say, you can actually format it to one page where you just separate the roles that you had or what you’ve working on. Ideally, I think the rule is that HR typically looks a resume for less than 10 seconds and chucks it. If they don’t see what… The other part is a lot systems are automated, so they’re looking for key words in your resume. So if they’re not finding key words that align to the job posting, that gets chucked. So you need to [crosstalk 00:45:05]. I don’t know if you knew that.

Mindy:
It’s been a while since I applied for job really. I only applied for this job. Before that, it was a really long time.

Kassandra:
A lot of companies are using that automatic, automated screening process, and it’s based on key words. It’s no different than websites. If they don’t see a certain number of key words, let’s say five out of 10 key words that they have identified in the job postings that is important or crucial to finding the ideal candidate and it’s not on your resume, this is why your resume can’t be cookie-cutter for each job that you apply to.

Mindy:
Oh, say that again for the people in the back. Your resume cannot be cookie-cutter. Say it again.

Kassandra:
You cannot be submitting the same resume with the exact same description of your job to 10 different postings because, again, it comes back to those key words. Also, the job descriptions may not be… They’re not unique necessarily. They’re not exactly unique. So you need to cater to them. Again, do you want this job or not? It’s work.

Mindy:
It is work. Yes, it is work to find a job. I was laid off once. I completely deserved it. I was a terrible employee. I’m much better now. It was horrible. I was married at the time, I’m still married, but I was married at the time, which made it a lot easier to regroup over the weekend, and then Monday I was at the unemployment office. It’s been a long time.

Kassandra:
Well, we’re dating ourselves because I remember the unemployment office, too, because I did get fired when I was 17. I’ll admit that. I was a bad employee.

Mindy:
I was at the unemployment office, and then I grabbed the newspaper and started looking for jobs in the newspaper because that’s how you found a job in 2002, I think it was, maybe 2003. Either way, that’s how you did, and Monster.com was just happening.

Kassandra:
That was it.

Mindy:
LinkedIn didn’t exist. I would circle everything. Then I applied to absolutely everything. I wanted them to tell me no because nobody was calling me up saying, “Hey, Mindy, are you looking for a job?” That might happen now, but back then nobody was reaching out.

Kassandra:
No, the age of recruiters was not happening then. It’s a completely different world when it comes to job hunting now. Honestly, for me, I find it so much easier, but I think a lot of people are lackadaisical in terms of they approach finding a job even today. Recruiters will not knock on your email or call you unless they have seen something publicly about you that interests them. That’s just how it works. So you have to make yourself an interesting candidate. There’s a process. You need to put work into this. You need to stand out because there’s millions of other people that want… [crosstalk 00:48:11] they want the same job.

Mindy:
Yeah, yeah, absolutely, absolutely.

Kassandra:
How do you stand out?

Mindy:
Anybody who’s had one applicant for the job that they were advertising for.

Kassandra:
Exactly. If it’s one applicant, you should question whether you want that job or you want to work there.

Mindy:
Exactly, exactly. Oh my goodness, Kassandra, this was super fun. Is there anything else that you want to share that I forgot to ask or that you think people who want to prove their worth or want to go on and look for a new job need to know?

Kassandra:
I think we’ve covered so much. I would just encourage people to put yourself out there. Before you put yourself out there to ask yourself, what’s the worst-case scenario? Can you live with that worst-case scenario that they tell you no? Nine times out of 10, yes, you can accept that no. But don’t be afraid to put in the work in order to justify why you deserve more. So it’s not an automatic. It’s not a guarantee. But I think it helps you to grow as a person to be open to that conversation, exchanging that information and seeing, “Yes, I know I deserve it. Here’s why. But I’m open to feedback, too.” I think that’s part of the conversation that people don’t typically go into that with is open yourself up to their perception of you as well because you might be working and thinking that you’re doing great, and their perception of you is not the same. It may be for a reason that… miscommunication. This is an opportunity to correct it before things get worse.

Mindy:
Yes, yes! If you want a raise in six months, you need to know now that you’re on the right path.

Kassandra:
Exactly.

Mindy:
Kassandra, I love you. You’re the best.

Kassandra:
Thanks so much.

Mindy:
This was super fun. Kassandra, thank you so much for your time today. I really appreciate you.

Kassandra:
Oh, it’s my pleasure. Thanks for having me.

Mindy:
From Episode 287 of the BiggerPockets Money podcast, she is Kassandra Dasent and I am Mindy Jensen saying so long and toodle-loo.

Californians might be facing new taxes, again.

Waves were stirred last week when Assemblymember Chris Ward (D-San Diego) introduced the California Speculation Act (AB 1771).

The bill is the Assembly’s latest attempt to curb rising housing costs and bludgeon investor profits. If passed, the Act would add an additional 25% tax on the capital gain from the sale or exchange of residential properties within three years of its initial purchase.

In other words, California lawmakers are trying to disincentivize investor activity in the state’s housing market. Yet, the bill’s language will also affect the traditional homeowner, including the most vulnerable.

An Overview of the California Speculation Act

The California Speculation Act carries the following provisions:

• Homeowners would be taxed up to 25% on capital gain if they sell their home within three years of purchase.
• The tax applies to all “Qualified Taxpayers”.
• Applies to most residential properties with few exemptions.
• First-time homebuyers and affordable housing units are exempted.
• Properties sold within three years are subject to a 25% tax. After three years, the rate declines by 5% each year until seven years have passed.
• Collected taxes would be put towards community investment, with 30% designated for affordable housing.
• If passed with a 2/3 vote in the Assembly, the bill would become law on January 1, 2023.

What’s The Story Behind It?

California’s housing market is notoriously expensive. San Francisco usually charts at number one for the most expensive real estate market in the U.S. State tax rates are also among the highest in the nation.

AB 1771’s intention is to lower home prices by preventing investors from taking advantage of the market with cash offers. According to the bill’s sponsor, Chris Ward, the Act will dissuade institutional investors who buy up homes with cash and flip them at inflated prices soon after.

“We’ve heard of people getting into their first home getting beat by cash offers,” Ward said at a news conference. “When investors fall out of the buying pool, that will give regular home buyers a chance to buy a home,”

For Ward, prices are a major problem. As a representative of San Diego, historically one of the more affordable spots in California, he’s overseen skyrocketing real estate appreciation that’s put San Diego on par with San Francisco, a voting issue that does not bode well for him.

Unfortunately for Ward, his bill is being faced with significant opposition.

According to detractors, the main issue facing California’s real estate crisis is the severe lack of housing supply. Demand has been through the rough over the past few years and supply has been exceptionally slow in catching up.

California housing starts in 2021 totaled about 120,000. That’s a slight uptick from 2020, but right on par with the last four or so years. It’s way down from 2004 or 1988 levels though, where total units rose well above 200,000. The state is also below its construction goals, which is targeted to fall around 180,000 units per year.

In essence, California is short several million housing units and is still not on track to meet demand. This, paired with high tax rates, has created a catastrophically overpriced market, locking out millions and putting an enormous amount of pressure on low-income and first-time buyers.

In fact, many real estate experts are pointing out that the Act would likely exacerbate the inventory crisis.

“California has a meaningful affordability crisis. Unfortunately, this bill would tax most homeowners and investors alike, leading to an even worse lack of inventory, one of the leading reasons for housing price escalation. We believe this is well-meaning legislation with significant unintended consequences,” said Nema Daghbandan, Partner at Geraci LLP, the General Counsel for the American Association of Private Lenders.

A leading issue with the bill is that it applies to all qualified taxpayers. Unless you’re on active-duty military service or deceased, you’re considered a qualified taxpayer. If you were to sell your home within a seven-year period, then you will be subjected to the tax, investor or not.

The argument, of course, is that most Californians don’t sell their homes that quickly, which is true. For instance, residents of Los Angeles tend to keep their homes for a median length of about 16 years.

However, it begs the question of whether it’s an infringement of the property rights of sellers? Let’s say you bought a home in Los Angeles in 2020 but were just offered a fantastic job in San Francisco. The catch is that you need to relocate.

Should you be taxed up to 25% for needing to move? A joint statement by multiple California real estate trade associations, including the California Association of REALTORS®, says absolutely not.

“According to the Neighbor 2020-2021 American Migration Report, over 20% of those surveyed stated they planned to move based on job changes, financial challenges, or additional space requirements. Under AB 1771, property owners with a growing family seeking to move into a larger home, downsizing due to the job loss of one of the occupants, or even those who must relocate to act as a caregiver for a loved one who became ill would be harshly penalized for simply needing to move” the letter stated.

The statement continued to scorn the bill, citing critical data that suggests investors who paid with cash only made up 3.8% of all transactions in 2021. It also ensured to address the bill’s primary reasoning, which is to lower prices.

“Further, [the bill] does nothing to ensure that first-time or other homebuyers are guaranteed access to homes, nor does it create more housing opportunities. Rather, the bill will cause unintended consequences for the market by reducing the number of homes available for sale. In January 2022, new home listings continued to drop by the double digits – with listings declining from 13,301 in January 2021 to just shy of 10,000 in December 2021. The reduction in listings would be exacerbated by this bill as it incentivizes investors to actually hold on to their properties longer and would force homeowners who need to sell to wait – further depressing California’s ownership housing supply.”

Closing Thoughts

Overall, the California Speculation Act is a senseless attempt to curb housing prices and will likely cause more harm than good to the real estate market.

By targeting all qualified taxpayers instead of investors specifically, it’s hard to see this bill as anything more than a government money grab off the backs of highly valued homes.

We’ll keep you updated on further developments.

On Wednesday, March 16, 2022, the Federal Reserve announced it would be raising interest rates for the first time since 2018. While the 25 basis point hike (one basis point=0.01%) was largely expected, the underlying shift in Fed policy will impact the housing market, and real estate investors should understand and pay attention to it. 

In this article, I will provide a brief overview of what the Fed is doing, why they are doing it, and how it could impact real estate investors. 

At the conclusion of the March meeting of the Federal Reserve, it was announced that the Fed’s target for the federal funds rate would increase by 25 basis points. The target federal funds rate is the interest rate at which banks borrow reserve balances from one another. It doesn’t actually impact consumers directly. 

However, when the target rate rises, it sets off a domino effect that ultimately hits consumers. An increase to the federal funds rate makes it more expensive for banks to borrow; this, in turn, makes it more expensive for banks to lend to consumers—the cost of which is passed along to consumers. 

This week, it got a bit more expensive for banks to borrow and lend. It’s a big shift from the stimulative policies the Fed has embraced since early 2020. 

The federal funds rate is one of the primary tools the Federal Reserve has to manage the economy. In difficult economic times, it is lowered to stimulate economic growth. We saw this after the Great Recession, and then again at the beginning of the COVID-19 pandemic.

By lowering interest rates, the Fed incentivizes business and consumers to finance their spending by borrowing money. For businesses, this could mean new hiring or expanding into new markets. For consumers, this could mean buying a new car or house while rates are low and debt is cheap. The impact of cheap debt is an increase in the amount of money circulating in the economy, also known as monetary supply. An increase in monetary supply generally stimulates spending and economic growth. 

There is a downside to so much money flowing through the economy: inflation. Inflation is commonly described as “too much money chasing too few goods.” So to fight inflation—and reduce the monetary supply—the Fed raises rates. As interest rates climb, businesses and individuals are less inclined to borrow money to make big purchases, which means more money sits on the sidelines, helping curb inflation. 

Raising interest rates is a bit of a dance. Rates must increase to fight inflation, but rising rates also put the economy at risk of reduced GDP growth—or even a recession. Again, the potential for reduced borrowing and spending that comes with increased interest rates can hurt economic growth. 

This is why people like me watch the Fed’s moves so closely; we want to know how they will balance their dual responsibilities of fighting inflation and promoting economic growth. It’s a tightrope walk. 

What happened this week was expected. As they have been signaling for weeks, the Fed raised rates by 25 basis points. There’s nothing particularly interesting about that announcement, in my opinion. 

The data that interests me the most, however—and the data that will impact real estate investors the most—is contained in the dot plot.

This graph shows what the people who actually make decisions about interest rates believe about where the federal funds rate will be going forward. Each dot represents the opinion of one Federal Open Market Committee (FOMC) participant. 

Another way to look at this data is presented here: 

From this, you can see that the median projection of FOMC participants is now about 1.875% for 2022—a very dramatic increase from where we are today. This shows a clear position by the Fed. They intend to raise interest rates aggressively through 2022 and expect rates to keep climbing to 2.8% in 2023 before flattening out in 2024. Over the long run, the FOMC would like to see rates at around 2.4%. 

For context, the highest the upper limit of the target rate has hit since the Great Recession was 2.5%, which is where it sat for most of 2019. The Fed is planning to go higher than we’ve seen in years, and then bring it back down a bit, presumably once inflation is in the 2%–3% year-over-year range that the Fed targets. 

For real estate investors, interest rates are hugely important. As I’ve discussed already, they impact the entire economy. Importantly, rates also impact real estate investors and the housing market more directly—through mortgage rates. 

The reality is this: Although the Fed announcements make for a lot of news, the Fed’s target rate doesn’t impact mortgages that much. Check out this chart: 

The green line is the federal funds rate (the chart hasn’t been updated to reflect the announced rate hike), the blue line is the average rate on a 30-year fixed-rate mortgage (owner-occupied), and the red line is the yield on the 10-year U.S. Treasury bond. 

If you eyeball the relationship between the green line (federal funds rate) and the blue line (mortgage rates), you can see that there hasn’t been a particularly strong correlation between the two variables, at least since the Great Recession. 

Instead, look at the relationship between the red line (yields on 10-year treasuries) and the blue line. There is a robust correlation. If you want to know where mortgage rates are going, you need to examine the yield on 10-year U.S. Treasuries—not the Fed’s target rate. 

Yes, bond yields are impacted by the federal funds rate, but they’re also influenced by geopolitical events, the stock market, and many other variables. I am not a bond yield expert, but bond yields have risen rapidly this year, and given recent events, I wouldn’t be surprised to see yields hit 2.5% or higher this year. 

If that happens, I think mortgage rates for a 30-year fixed owner-occupied property could be around 4.50%–4.75% by the end of the year. That would be a significant increase from where we’ve been over the last few years, although still very low in a historical context. 

Before the Great Recession, rates were never below 5%, for as far back as I have data. Keep that in mind as you navigate the current investing environment. 

Mortgage rates will rise, and this will put downward pressure on the housing market. Rising mortgage rates decrease affordability, which then lowers demand. In a more typical housing market, this would have a pretty immediate impact on housing prices. But the current housing market is different, and “downward pressure” on housing prices does not necessarily mean “negative price growth.”

Remember, there are other forces driving the housing market right now, many of which put upward pressure on prices. Demand is still high, driven by millennials reaching peak homebuying age, increased investor activity, and higher demand for second homes. Additionally, supply remains severely constrained, and as long as that is the case, there will be upward pressure on housing prices. 

What happens next is hard to predict. On the one hand, we have rising rates putting downward pressure on the housing market. On the other hand, we have supply and demand exerting upward pressure. Without a crystal ball, it remains to be seen how this all plays out. 

If I had to guess, I believe prices will continue to grow at an above-average rate through the summer, and then come back down to normal (2%–5% YoY appreciation) or even flat growth in the fall. Past that, I won’t even venture a guess. 

Although I like to make projections to help other investors understand the economic climate, in uncertain times like these, my personal approach to investing is not to try to time the market. Instead, I try to look past the uncertainty. In my mind, the housing market’s potential for long-term growth remains unaffected by today’s economic climate. Short-term investments, to me, are risky right now. (Full disclosure, I don’t flip houses even during more certain economic times.) But long-term rental property investing remains a great option to hedge against inflation and set yourself up for a solid financial future five years or more down the road. I’m still actively investing because inflation will eat away at my savings if I do nothing. And I know that even if prices dip temporarily in the coming year, investing now will still help set me up to hit my long-term financial goals. 

David:
This is the BiggerPockets Podcast show 586.

Andrew:
Do not fall for the temptation of actual cash value insurance policies. In most cases, a lender will not let you do that. But if you’re buying a property for cash or you’re doing some kind of non-traditional debt structure, don’t fall for the trap of, “Cool, I can save a little bit on my premiums,” because the minute you have a loss, that will come back to bite you big time.

David:
What’s going on everyone? It is David Greene, your host of the BiggerPockets Podcast, the show where we show you just how powerful real estate investing can be. Our guests include food servers and firefighters, counselors, and corporate execs, people with a wide range of backgrounds with one thing in common, they got the real estate bug, they got educated and they took action.
Now it’s our job to help you do the same. Now we are going to do that today by bringing in my personal friend and multifamily investing partner, Andrew Cushman. Andrew Cushman has been on this podcast several times. I believe this is his fourth appearance and he is a multi-family investing specialist. On episode 571, we dug into what he calls phase one of his underwriting, where he looks at would this property possibly work if everything went great?
In today’s episode, we get into phase two where we verify is everything actually great and could this deal work? Now, this is a very, very detailed, practical sort of information packed episode where you could take the information and literally create the same system that Andrew runs. And I hope that many of you do. If you’ve ever learned what goes into analyzing multifamily property, this might be the most important episode or piece of information that you watch ever.
This will teach you more about investing in multifamily property than you probably ever heard in your life. And that doesn’t mean that you need to actually go do everything we talked about, but this will give you amazing insight into what goes on that will give you confidence in your own investing and maybe help you understand if multifamily is a niche that could work for you.
There’s all kinds of different strengths and weaknesses associated with each asset class of real estate, and today we dig in pretty deep on what goes in to multifamily investing. Now there’s eight steps that I’m going to want you to follow. And at the end, Andrew and I talk about a deal that we’re going to be putting together that you can get more information on. So make sure you listen all the way to the end to learn about that.
And if this is your first time hearing about Andrew or multi-family investing, please go back and listen to episode 571 after you finish this so you can see what led up to it. Now, if you end up liking this episode and you’re like, “Man, I like learning about something new that I didn’t see coming.” Today’s quick tip is going to be to go to biggerpockets.com/store and check out the books that they have.
There’s books on all kinds of topics, and it’s good to read them just to get a feel for if you would like investing in that type of asset class. And if that’s really where you want to put your focus and attention and learning to grow, the other thing you can do is get on the BiggerPockets forums and ask questions and see how many other people are thinking the exact same things as you, and trying to figure out the same questions that you’re trying to figure out.
So many of us think that we’re on this journey on our own, and we’re really not. Everyone else is taking it with us. So get hooked up with some people on this hike and this journey to the top of the mountain that we’re all taking and will be very encouraging for you. Without further ado, let’s get into it with Andrew Cushman. Andrew Cushman, welcome back to the BiggerPockets Podcast.

Andrew:
Hey, good to see you again. I think it’s going to be a great day. I put the left earbud in my left ear on the first try, that’s always a good sign.

David:
Is that your barometer to tell how things are going to go?

Andrew:
Yes, it’s very predictive, yeah.

David:
I like it. People are getting in behind the scenes look on just how to be successful in real estate investing.

Andrew:
That’s the key right there, yeah.

David:
Now today’s show is going to be a masterclass on underwriting multifamily properties. So heads up if you’re not into multifamily, this is one that is definitely going to be focused on that niche specifically. But I think that there’s value that you’ll get out of this anyways because we’re going to go into really the fundamentals of real estate investing.
The specifics of how to evaluate multifamily are going to be covered but there’s always a why behind what we’re doing. Now, we had Andrew on episode 571 where we went over what Andrew first was phase one of his underwriting when it comes to multifamily properties. Could you give us a brief summary of what those six things were?

Andrew:
The phase one underwriting was just, and we won’t go through all of the different steps, but the phase one underwriting was just a quick and dirty like you’ve got 10 properties in your inbox, you did the screening that we talked about way back in episode 271, I think it was or 279 yeah, 279 and you said, “Okay, well these three look interesting.”
But you don’t want to spend eight hours underwriting them so you just go through and make some fairly positive assumptions about rent growth, expenses, your debt, all of that and look at it say, “Well, okay I spent 30 minutes, 15 minutes underwriting this.” Under the best case scenario, these rosy assumptions, the deal doesn’t work, trash it, right?
But if under those rosy assumptions, it does look like a great deal, that’s when you move to phase two, right? Because you’ve done the screening, you’ve done phase one, the cream rises to the top but turds float there too. And phase two is where you’re going to figure out that if the property in question, which one of those it is.

David:
The turd test.

Andrew:
The turd test, yeah.

David:
Brandon is not here so that’s probably the best that I can do coming up with names.

Andrew:
All right, well, we’ll take it.

David:
Okay, so we also talked about the four levers that really, really make a deal work. Can you go over those briefly?

Andrew:
Yes. And there are other levers, but as we discussed, these are probably four of the most powerful ones. One are your rent growth assumptions. So did you assume 2% rent growth or 3? And over a five year timeframe, that’s cumulative and it has a huge effect. The second one was, what are your cap rate assumptions? Did you assume cap rates stay flat? Did you assume they go up 100 basis points or 50 basis points over your whole time? That changes things significantly. Especially if you’re looking at IRR.
The third one is the time of sale. Are you planning on underwriting for a three year sale, a five year, 10 year? What if you’re going to hold it indefinitely? Moving that endpoint significantly affects how you underwrite and are you looking at IRR or cash on cash? So that’s another huge lever.
And then the final lever we talked about was leverage itself. Are you going in with 65% LTV debt, loan to value, or are you trying to max it out at 80 with a bridge loan? Are you trying to put preferred equity on top of that to get to 90? So those are the four levers that we went in a lot more in depth and that can very significantly affect your underwriting.

David:
And you really want to understand those levers because if you’re going to invest as a limited partner in somebody’s syndication, they might have fudged the numbers by putting these levers in places that aren’t natural. So for example, we mentioned cap rate assumptions. If you’re not super into multifamily, all that means is a cap rate is a measure of how desirable an asset is in any specific market.
The lower the cap rate is, the more people want it and the lower a return an investor will accept to get into that market. If a general partner or the syndicator is assuming that demand is going to go up, meaning cap rates are going to go lower, they can make the deal look a lot better on paper than it’s actually going to be.
When Andrew does deals and when we do deals, we assume the opposite. We assume cap rates are going to go higher, which means that there will be less demand. And it’s a more conservative approach. If the deal still works under those conditions, it’s much less likely to fail. So that was some really good stuff and just understanding how easy it is for somebody to sort of manipulate numbers when they’re making an offering, as well as you can talk yourself into a deal being a good deal by kind of playing with those levers.

Andrew:
Yeah, you’re a hundred percent right. It applies both ways. If you’re looking to invest as an LP, you want to understand the impact that those things have so that you can dive into their underwriting and make sure that either they are not intentionally pulling a lever they shouldn’t, or just unknowingly pulling it, or be maybe you just don’t agree with their assumptions.
And then yeah, if you’re doing your own, you can make a spreadsheet tell you anything you want. And so you got to be cognizant that you’re not doing that. Well, if I just assume the cap rate doesn’t move, this is a great deal. Real world is often different than spreadsheets so be careful.

David:
And we’ve all been there. That’s exactly right. So phase one like you mentioned is just, hey, if we assume the best does the deal work? Because if it doesn’t work under best circumstances, don’t look at it all. And it doesn’t really take that much time. And another thing I really love about the system Andrew has here is this can be leveraged to other people.
So Andrew, you have two people on your team that for the majority of these deals, they’re actually working phase one underwriting and they’re only coming to you or putting more time into it if it passes phase one underwriting. So anytime you can create something like what you’ve done here, it makes it easier on yourself to leverage anything you want to add on what things have been like since you made that change.

Andrew:
So it used to be me looking at everything and doing every step and it was brutal. And I started to get burned out on it where a deal would come to my inbox and I’d be like, “Oh geez, another deal I got to underwrite.” And I lost the excitement, right? Whereas now we have a virtual assistant that’s worked with us for a couple years now who does that screening process that we talked about way back on 279.
Then I have an acquisitions person who does that phase one underwriting that we talked about in our last episode. If a property looks like it’s cream and not a turd, then he sends that to me, we talk a little bit, he then goes into phase two and then he proceeds from there. So when you go to phase two is it’s screened well, it passed phase one underwriting and it looks like a property that you want to own and, or you think is at least worth putting an offer on.
And that’s a whole nother topic to get into on another time but there’s a lot of different reasons you’d want to put an LOI on a property even if you might not necessarily want to win the deal on the first bet. This is the process phase two that helps you decide what price in terms that you would consider doing that. And so this is definitely more time intensive. So you don’t want to do it on every deal, only deals that have high potential or properties that you think you’d really want to own.

David:
All right, everybody. So buckle your seat belts because you’re about to get some high level practical information that you can actually take away from the podcast and apply the minute that you leave into evaluating a deal. There’s going to be eight steps to underwriting phase two. Anything you want to add before we get into those?

Andrew:
Yeah. So if you’re used to listening to podcasts on 2X speed, don’t do that because I’m already going to be talking fast.

David:
That’s a great point. All right. So what is step number one?

Andrew:
Step number one, rent increases. So there’s a number of components to this. There’s market rent growth over time. There’s hopefully you have found a value add deal so there’s a component of bringing the property up to where rent should be today. And then we’re going to talk about actually step two, is loss-to-lease.
And they both factor into rent increases, but we’ll save loss-to-lease for just a minute. So far as regular rent increases. First, we’re going to talk about… We talked actually in phase one about market rent growth over time. That’s where you’re assuming, okay, market’s going to keep going up 2 1/2% or 3% a year. But how you determine where market rent should be today is we use what’s called a scatter chart in Excel.
And I’m going to pull up a visual here. If anyone is just listening and you’re not on YouTube, we try to explain this so it’s understandable but the best thing to do is go to YouTube and take a look at the chart that we’re showing. So what you’re seeing now is a one bedroom rent comp analysis. And by the way, these are real, we didn’t make this up.
These are from deals that we actually have offered on. We did take out the name of the actual property so we don’t have a hundred thousand people going to look at it, but this is real data. And in this example here, we’re looking at one bedroom rent comparables. And you’ll see on here there’s Oceanside, East Park, Laurel Creek, Westview, Whispering Pines, these are all comparable properties to the one that we’re looking at.
And on the chart, there’s a bar that’s labeled in red called one by one unrenovated. That is an unrenovated unit at the property that we are doing our phase two underwriting on. And how the chart works is the bottom access is the square footage, right? So as you move from left to right, that means a smaller unit to bigger unit. The vertical access is rent. So on the low end, this chart starts to 800 and it goes up to 1200.
And so what we do is you take all these… When you get a bunch of data from Axio or CoStar, wherever and all this different floor plans and different sizes and rents, it’s kind of hard to just look at all that and figure out, “Well, okay, where’s my rent?” Right? So you make it visual. And so what we do is we take all those data points, we put it into Excel and we create this scatter chart.
And then if you look there’s a blue dotted line that kind of goes from bottom left to upper right it’s called the regression line. There’s a nasty statistical definition of what that means, but basically it’s just a visual line that shows how the different data relate to each other. And what you’ll see is the reason the line goes up from left to right is because rent tends to increase in that market as the unit size goes up.

David:
As the property gets bigger.

Andrew:
Yeah, as the units get bigger. People generally are willing to pay more money for larger units. And the steepness of this line kind of tells you how much that submarket values a bigger unit. But the most important thing that we’re trying to show here is if you look at our one by one unrenovated unit, it is sitting at $900 a month in rent. Every other property is a thousand dollars or higher, right?
So by plotting these, you can immediately look at this and go, “Well, okay, I should be able to do a light renovation and at least get the rent from 900 to 1,000.” All right? And if you look at the chart, you’ll see that we actually have the one by one renovated is the one that’s in green at 1,025, which is slightly above two of the other data points.
Well, all right, Andrew, why is that one higher? Right? If the regression lines right at 1000, why do you have it as 1,025? Because part of our analysis is we looked at those other comparables and saw what the interiors were like and said, “Okay, well, if we spend $6,000 or whatever the number was, we can meet or exceed those plus our professional management with a lot of experience in that market, we have high confidence that we can get to 1,025.”
So that is what we’ve found to be the most effective way to quickly and accurately at the same time determine how much rent bump you can get, right? Again, there’s more like if you’re buying a property, you’re going to go visit these property and actually tour these comps and all that. But when you’re sitting at your desk doing phase two underwriting saying, “Okay, I assumed in my phase one that I can raise rents a hundred bucks a month or 150, is that true?” This is where you’re verifying if that rosy assumption was true. And based on this chart, these units should pretty easily get to about 125.

David:
Now I see you have several different complexes that looks like all the different names of them. How did you go about gathering the data that you put into this chart for what Whispering Pines gets Westview, Laurel Creek, et cetera?

Andrew:
Good point. So we try to get it from as many data sources as possible. So we’ll get it from Axiometrics, CoStar. And anyone who’s tried to sign up for CoStar is like, “Andrew, that costs an arm and a leg.” You’re right. So we don’t pay for it. We go to brokers and property management companies that do and say, “Could you please send us a report for this submarket or for this property?”

David:
Nice.

Andrew:
ALN is another source of data. But also what we do is we perform our own surveys. We will get online and look up every property just using Google, apartments.com, rent.com and get every property in the area, call them, get it off the internet, get all own data, and then ideally we have two or three sources for the same data set. We compare them and try to get them to line up as much as possible, and then plot them on this chart.

David:
Wonderful. Okay, so tell me how you would… Let’s say that you had a rosy assumption and then you pulled up this chart. What would let you know, “Hey, stop right there. We’re not going to be able to get the rent bump that we’re going to need”?

Andrew:
Yeah, right on. So if it’s one of those things where we had a call with the broker and they’re like, “Oh yeah, you can easily get these things to $1,200 a month. The seller renovated one unit and he leased it for $1,200 a month and you should be able to do the same.” So, okay, cool. In phase one, boom, $1,200 a month. Oh, this property looks great. We do this, sorry, no. It’s only going to be 125, maybe 150 best case scenario. So we go back, change the underwriting and it might kill the deal. So then that’s what you’ve… Again, you look just like in phase one, you’re looking for reasons to say no.

David:
There you go. This is the verify part of trust but verify.

Andrew:
Exactly. Yes.

David:
Okay. Anything else you want to cover before we move on to the next step?

Andrew:
Yeah. You know what? Just to get it all in, let’s go ahead and keep on moving. So the next part of this that I want to talk about is number two, is loss to the lease. And to be fully transparent, I was in the business for several years before I even fully understood what that actually meant. All right? So here’s what loss-to-lease is.
Let’s say you’ve got a tenured apartment complex, and you are advertising that your rent is a thousand dollars a month. But when people walk in the door, for whatever reason, maybe you’re asking too much, maybe you didn’t hire the right leasing person, whatever, when people walk in the door, you’re actually leasing it for 950, right? You’re marketing it for 1000, but when that lease is signed, it’s 950. So how that’s treated is you are losing $50 a month to that lease, right? So market’s 1000, but your lease is 950 so your loss-to-lease is $50 a month, right?

David:
Okay. Let me see if I can make sure that we understand here. What you’re saying is if you’re being told that the unit will rent for a thousand dollars a month, you’re putting it in to your rent estimator at a thousand dollars a month.

Andrew:
Right.

David:
But recognizing that’s not accurate, you looked and see, well, what is it actually renting for? Only 950? So you have to subtract that $50 from somewhere and you create the category called loss-to-lease to do it. It sounds very similar to how vacancy is used. When I was new at investing, I would say, “Well, it’s going to rent for $1000 a month, but I have a 10% vacancy rate so I’ll just put $900 a month in for rent.” That’s actually not the right way to do it. You should put in the full thousand and create a separate category for a vacancy where you take off a hundred. Is that the same principle working here?

Andrew:
Yes, it is. And so what happens is loss-to-lease sounds like a negative thing, and it is if you’re an owner, but if you’re a buyer, it’s an opportunity that you’re looking for. And candidly, loss-to-lease is my favorite value add because it has the lowest execution risk. We talked about the situation where you got 10 units, you’re marketing them for 1000, but you’re actually signing leases for 950.

David:
Can I interrupt you again real fast?

Andrew:
Yeah.

David:
What’s a reason why somebody would put a tenant in at 950 when they’re marketing it at 1000.

Andrew:
We saw this a lot during COVID. People were just nervous and like, “Dude, if I can get someone that’s actually going to show up and pay, I’ll give them a discount.”

David:
So maybe for whatever reason, they had a special running that month where they said, “Hey, get X amount off your rent or something,” that they don’t have to do all the time, but they were trying to lease it up. So they gave that person a discount off of what they normally would get for market rent. Is that accurate?

Andrew:
Exactly. And sometimes you’ll see where the entire tenant base in a property has it, other times you’ll see just a couple of exceptions because it was a friend or they felt bad or they were nervous because of COVID or maybe it was December and traffic was slow and there’s all kinds of reasons.

David:
Okay, thank you. Go ahead and continue.

Andrew:
I’m going to pull up another visual. And this is another scatter chart, looks somewhat similar to the one that we had on the previous slide. And this is another one where you’re looking for a visual to give you a quick reading of what the data is saying. So I started to mention before that loss-to-lease sounds like a negative thing, but in a up trending market like we’ve had for the last 10 years, as a buyer, loss-to-lease is a huge opportunity, and again, probably your easiest value add.
So what we have here on the screen, this is for a property that we actually purchased back in March of 2021. So again, this is real data, real property. And what we did is on the horizontal access, which if I remember from high school as x-axis, we have the date of every lease on the rent roll, right? And then on the vertical access again, is the rent starting at 1150 going up to 1400 in this case.
So you say, “All right, well Andrew, why would you organize the data like this?” Right? So the older dates are on the left, the newest dates are on the right. And then again, rent goes up from bottom to top. So what we did is we’re taking the actual rent roll from the property that has the lease rates and the date that that lease was signed.
And what happens when you plot that on this chart so that you can see the date and the amount that the resident is paying, it becomes very clear when you look at this chart, “Hey, wait a second. Every lease that was signed in the last six weeks, they’re getting 1,350, but the older leases all averaged 1,264.” Clearly, now you need to dig into it a little bit to find out well, did they do renovations or were not?
In this case, and I can tell you this because we bought this property, in this case, they had not done any renovations. They were just finally starting to catch up with the market. And I mentioned before, you might see one lease that’s kind of high, that doesn’t prove a trend. But when you have six weeks consistently of every lease that was signed is all of this is significantly higher, that’s a sign that you can probably buy that property and take all of those other leases, which are represented by very low dots on this chart and get them up to that 1350.
So what you’re looking for are two numbers. You take the rent roll and you average and again, do this by floor plan so this is a one bedroom. If we take every dot on this chart, the average in place rent, meaning people are actually paying it is 1264. But the last 8 to 10 dots on here were all 1350. So what that tells us is we can almost do nothing, just buy the property and manage it well, and then get the rent up from 1264 to 1350. That’s an $86 increase just for managing it and catching it up to market.
Now the reality was now that we’ve owned this property for nine months and the market has continued upward, we are multiples above this level, but this right here not only gives you a huge insight into the opportunity at the property, but it also gives you kind of a backdoor insight into how the overall market is trending. And we have found this chart to be one of the most powerful tools in our underwriting analysis.

David:
Yeah, this is brilliant. Let’s talk about a couple reasons why this is something that should be focused on a lot, but often isn’t. The first thing is like you mentioned, loss lease is the easiest thing to correct. It’s the least expensive and the fastest. You can walk in there and immediately see, “Well, we should be getting this rent so we can bump it up to this before we do anything.”
And you always want to take care of your easiest things first. So if you’re buying a unit that has a very small loss-to-lease or it’s insignificant, in order to increase the rents, it’s going to take a lot more work. You’re going to have to do something like add amenities or upgrade your units, you’re have to spend some money and some time to get there.
Looking for something with loss-to-lease if you were going to compare this to single family properties would be like, you’re getting it significantly under market value. There’s a lot of room to get up to the ARV but even before you do a rehab. Another thing is like when you mentioned, this shows you what’s going on in the market. What you’re referring to is that the higher the loss-to-lease across an entire market, the faster rents have been rising and the leases haven’t expired fast enough to catch up with it. And that’s where you want to be if you’re assuming that that trend is going to continue, which in most cases it is. Go ahead.

Andrew:
Yeah. And I was going to say for those listening who are afraid to buy right now, there is a window of opportunity I’d say for probably the next six to 12 months. There are so many property owners, especially in the, I’d say under 50 unit space where because of COVID fear, whatever, they have not kept up with the rent increases of the last year. And we keep seeing property after property where rents haven’t been raised in two or three years and they are 20% below market now. I don’t think that’s going to last forever, so again, this reveals a huge, huge opportunity.

David:
Yeah. You and I are still finding those deals if you know what to look for. And this is the big red flag that shines, it says, “Hey, come look at me. I am worthy. There’s something here where people are not taking advantage of me.” It kind of reminds me of that old movie She’s All That where you have the nerd that no one’s paying attention to, but really they’re the beautiful princess underneath it.
This is one of those things that you can see, man, this deal would clean up pretty nice. So understandably so that’s why you have it so early in your underwriting process. Because if there’s not a lot here, there’s got to be some that else about that deal that makes it really appealing, that makes you think that you could improve it. This is definitely the best to look for.
And I can’t highlight enough that metrics like this help you understand what’s trending in a market in general. So just imagine that if most leases are signed for 12 months and rent goes up over a 12 month period, let’s say it goes up a hundred dollars over the year, many of those units that signed 10, 11, 12 months ago are going to be at rents that could be going up. And sometimes the apartment complex just extends them on the same lease that they have, right? They’re afraid of vacancy or whatever’s going on. So this is how you can identify that there’s something juicy here. Anything you want to add before we move on to the next step?

Andrew:
Two things. One, if you’re looking for low hanging fruit, this is picked in a basket, sitting under the tree, waiting for you. And then, okay, well, how do you use this? In this case, there’s $86 loss-to-lease, right? That’s no renovations. So if you’re going to renovate the unit and bring it up to a higher level, you take your loss-to-lease, you add your renovation bump to that, that gets you your total rent increase that you are putting into your underwriting. And ideally, your underwriting model should have these as two separate items, loss-to-lease and renovation increase, and you want to be able to toggle and adjust those independently.

David:
That’s a very good point. This goes down to the principle of levers in real estate, which I don’t know if anyone else talks about but when you get into investing pretty significantly, you start to recognize. Like Andrew, you mentioned the four levers that make a property worth more. Cap rates going down might be the biggest lever of all. You can improve your net operating income to make the value of a property goes up.
But that pills in comparison to the power of cap rates significantly going down. It’s just a bigger lever that moves things more. I say the same thing with the BRRRR method. If you’re looking at ROI, you want to get a higher ROI. Well, you can improve your cash flow, that’s one way. But if you can decrease the amount of capital you put in the deal, that lever is way bigger and it makes your ROI skyrocket.
So the deeper you get into investing, the more you’re learning on where do I get the most bang for my buck? What lever do I want to pull on? The rehab bump versus loss-to-lease are both levers that make your rent go up. But loss-to-lease is the bigger lever that’s much easier to pull on. And you’d rather find properties that have that kind of opportunity. So there’s always going to be both, but this is ideal. You want it to be on the loss-to-lease side as opposed to having to manage an entire rehab to get the same result.

Andrew:
Yeah, again, it’s all risk reward. This loss-to-lease generally carries the lowest execution risk of any value add strategy.

David:
Love it. Okay, number three. What do you have for us?

Andrew:
All right. Let’s jump onto debt quotes. And I have another example here, and this is, again, this is real life. This is a debt quote that we received actually on a property that we are under contract to purchase. I did redact some of the specific information for the asset. But when you’re looking at debt quotes, what you don’t want to do is just get… Or I shouldn’t say you don’t want to do.
But in generally what we have found to yield the best results and the highest chance of you being able to perform and close on the deal is to work with a competent and trusted loan broker who will take all of the stuff that you’ve gathered on this property, package it together really well and put it out to multiple lenders to help hunt you down the best deal, right?
Now, you’re not going to do this, you’re not going to actually send this to a broker every time you kind of get interested in the deal. This is, I’d say a deep phase two where you’re actually going to send it to them. But I want to have an example to actually show people some of the key terms to watch out for.
But when you’re doing the, I’d say an initial phase two, you want to at least have, if you don’t feel like you already have a really good grasp of what current debt terms are, then you want to at least run the deal by a competent loan broker and say, “Hey, I’m looking at buying this for 5 million, I want to get a loan for 70% of the purchase price. And here’s the P&L and I think I can get rents up this much. Could you just give me a rough idea of what we might expect for loan options?” Right?
That’s what you want to do in the beginning. Because again, you don’t want to waste your time, but you definitely don’t want to waste anybody else’s time. You want your team members to know that if you send them something, odds are it’s going to go through and everyone’s going to get paid. So again, so the initial phase two is either you already have a sense of what your debt term’s going to be, or you do a quick email or phone call.
If you’ve done a phase two and now, oh, hey, this thing looks good and we’re negotiating an LOI, or we really want to strengthen our offer, that’s when you might have your loan broker send you what I’m about to go over. So you know once you get into it kind of what the terms are going to be. So if you look on the visual, and again, make sure you go to YouTube, BiggerPockets YouTube channel so you can actually see this.
You see three different options on here, and I’m not sure why it’s labeled 1, 2, 4, but it should be 1, 2, 3. So the first is an agency fixed rate, agency floating and then debt fund floating. So agency, that means Fannie Mae and Freddie Mac, which are your government sponsored agencies, debt fund, that’s kind of everybody else. That’s bridge lenders, life companies, actual debt fund, et cetera.
And we could do an entire episode on just structuring your debt properly. But the main things you’ll see here or the main things you’re going to want to take into consideration when you’re doing your underwriting is number one, the term, right? So if you look on this, you’ll see agency is 10 year and the debt fund is three year. Especially right now, I won’t say don’t do bridge because there are appropriate times to do that, but be very careful with loans that have short maturities, right?
Long term multifamily, I strongly believe is going to continue to do phenomenal. But what you don’t want to do get a loan that is completely due in two years or three years and you have no other option other than refinancing or selling. Because what if the debt markets aren’t favorable at that time? Right? You always want to give yourself a little bit of exit.

David:
So what you’re saying is that the shorter that the loan term period is, the less time you have to get things squared away where you’re safe and the less things are able to go wrong before you get hurt?

Andrew:
Exactly. The longer the loan term, the more flexibility you have to adapt to and overcome any adverse scenarios that pop up.

David:
In general, it’s a safety feature to have a longer term loan. And I think one of the mistakes that newer people make is they always assume, “Well, everything’s going to go right and on that timetable, this is where we are.” And that is never the case. Nothing ever goes right.

Andrew:
Yeah. You will never, ever exactly hit a proforma. You will always be a little below or hopefully a lot above, but you will never, ever exactly hit it.

David:
Well, the reason that you come out ahead a lot of times is give yourself this runway. All of your assumptions are always negative. You’re like, “Well, this is going to go wrong and this is going to go wrong and this is going… And if all that goes wrong, I’m still okay under these circumstances.” I think when the market gets hotter, it gets harder to stick to that sort of a discipline approach that we take when we’re buying.

Andrew:
Yeah. I’ve definitely missed a lot of good deals over the years because of that, but I also sleep well. So to me, it’s an acceptable trade off.

David:
Nice.

Andrew:
So the next big thing you’re looking for is loan amount. Different lender, size things in different ways, but you want to know, am I… And so on this particular deal, they were giving us a range of, okay, with agency, you’re going to get anywhere between 13.7 and 13.9 million.

David:
Can you define what agency debt is briefly?

Andrew:
Yeah. That’s the government sponsored agencies, Freddie Mac and Fannie Mae.

David:
Fannie Mae, there you.

Andrew:
Which are fantastic commercial lenders. In fact, they kept the market alive in March of 2020 when COVID shutdown down all the bridge lenders.

David:
I’m glad you say that because we rarely ever say anything positive about the government. But that doesn’t mean that nothing positive ever happens, we just tend to not give credit to that.

Andrew:
And it’s more fun and easier to complain, right?

David:
That’s exactly right.

Andrew:
Than it is to give credit. But no, yeah. Well, that’s the thing. So bridge loans are great, but especially since you brought it up, that is another risk, right? This is going to sound negative, but I love bridge lenders, we do use them occasionally. But bridge lenders are like roaches when you flip on the kitchen light at night, they scatter as soon as danger arises, right?
So you look back at 2008, you could not get a bridge loan anywhere. March of 2020, bridge lenders, every single one of them left the market. If you were going to get debt, it was going to be Fannie or Freddy, that was basically it. So they tend to come and go. And what you want to be careful of, okay, I’m going to get this great bridge loan or I’m going to refinance into one and if something happens like March of 2020 or 2008, those bridge loans may not be there.
So again, just something to be aware of, that’s in the additional risk. So I should think of a better analogy, because I don’t like to call our bridge lenders roaches because they’re great partners. But this is the idea of scattering into their…

David:
They’re fair weather friends, so it’d be a great way to say.

Andrew:
There you go. Fair weather friends. There you go, there you go, there you go. So again, and then if anyone who’s on YouTube, you’re going to see there’s probably about 15 terms on here. So we’ll hit the really high ones or most important ones. So the next one is implied rate. And basically what that is saying is what all the lenders do is they take some kind of index, might be the 10 year treasury might be SOFR, it used to be LIBOR.
And they’re going to add what’s called a spread on top of that so it might be 2% or they’re going to have a number. And they’re going to say, “Well, okay, the interest rate that we’re implying you’re going to get is X,” right? So if we look at this, it says, “Okay, fixed agency is between 3.25 and 3.35. If we go floating rate agency, which means the rate can go up and down as the market interest rates go up and down, because that protects them from getting locked into a low interest rate loan, they will give you a lower interest rate to start so that’s between 2.8 and 2.9.
And then the debt fund is 3, to 3.6. So you can see, depending on which route you go significantly affects the interest rate. So that’s something you’re going to want to know what those rates are. The next one is max as is loan to value. This is one of the downsides of agency right now. If you look on here, the agencies are only going to give us 63% of the loan to value.
So if you’re buying a $10 million deal, they’re only going to give you a loan for 6.3 million. Whereas the bridge lenders are willing to give 75% on a 10 million and deal 7.5 million. In today’s highly competitive market where everyone’s fighting to get the returns that are needed, that extra 12% leverage can be huge in whether or not your deal is appealing to investors or not or whether it hits a certain IRR. But just be aware higher leverage, generally speaking means higher risk.
So again, which route you go depends on your source of capital, your tolerance for risk and your business model. But these are all terms that you want to know. I have heard many horror stories of somebody assuming they were going to get 75% or 80, they get down close to closing and the lender comes back and says, “Oh, sorry, it’s actually 63 or 62,” right? You need to know that upfront because if you’re planning on 80 and you get 63, your deal just blew up. So you got to know this stuff in advance and properly underwrite it.
Another key one to help prevent that is to know what’s called your DSCR, that stands for debt service coverage ratio. So if your property makes $10,000 in net operating income a month and your mortgage payment is $10,000 a month, that means your ratio is 1, right? 10,000 divided by 10,000. You won’t get a loan on that from the agency. What they want to see is generally speaking is a minimum of 1.25.
And again, that changes based on market and property size. That’s the number you want to know. You want to ask your loan broker or whoever you’re working with, what is that ratio need to be? So if they say it’s 1.25 and you’re estimating your mortgage payment’s going to be 10,000, then that means your property needs to have a net operating income of 12,500. 12,500 divided by 10000, 1.25, right? That’s the number you need to know.

David:
Basically that means a lender’s looking to see, “Can you repay the debt we’re about to give you? Can you cover the debt service on this deal?”

Andrew:
Exactly. And they want to make sure you have a minimum of 25% cushion in case something goes wrong.

David:
Yeah. You want to know something crazy? In the residential space, there’s such a demand for lenders that want to be investing in there that a loan company can do a 0.8 debt service coverage ratio. And it’s a 30 year fixed rate loan. That’s how much money is floating around there in the residential world that needs to find a home, that they’re basically saying, “Hey, if the property brings in $8,000 a month, it’s going to cost you $10,000 to get this loan, we’ll still give it to you.”
Now that doesn’t mean that you should ever operate it where that is the case, but they’re looking at it saying, “Hey, they can make up the rest of it with their income.” So these standards are definitely… I’ve noticed they’re tighter in the commercial space, but that’s okay because nobody is buying commercial property assuming it’s not going to make money.
The reason you’re buying it is because it makes money. A lot of residential properties purchase for different reasons. You use it to vacation, you use it to live in, you can kind of make it work as an investment. But residential real estate was never intended to be income producing property like commercial property is.

Andrew:
Well, yeah. And yeah, geez, we could probably do, like I said, a whole podcast or a whole Q&A on this. But just keep it moving. I’m just going to kind of hit the next ones really quick. The next one you want to know is how many years of interest only, right? Is it three? Is it five? Is it 10? Most bridge loans are interest only for usually the full term so the first three years.
The next one is what’s the amortization schedule look like after its no longer interest only? So you mentioned residential loans are typically 30 years. Fannie Mae and Freddie Mac are often the same thing, 30 years. A lot of bridge loans don’t amortize. It just stays interest only. Some bank loans might be 20, 25 years.
So you need to know what the amortization looks like because it doesn’t sound like much. But the difference between a 25 year and a 30 year amortization can have a significant hit on your cash flow because you’re paying more principle. It builds equity so that’s good, but it’s not loose cash flow that you can use. Okay?

David:
So let’s clarify that very quickly. If we’re talking about an interest only loan, basically they’re going to… You’re only paying the interest on the money you borrowed, you’re not paying down any of the principle. So the downside is that if it’s interest only, you’re not building equity by paying the loan down, the upside is you’re actually keeping more money in your pocket. Is that a great way to summarize it or a good enough way?

Andrew:
Perfect. You got it.

David:
So it can make you… This is why I want to highlight it. It can make you feel wealthier than you are when your cash flow is very high, but your loan isn’t being paid down, right? It’s usually better for you and less risky because cash flow in the bank can be used to get you out of tough times rather than paying the loan down if you’re disciplined with your money. And that’s why I want to bring this up, is everyone’s always excited about interest only loans, but it can create this false sense of security that you have more wealth than you actually do because that balloon payment is still building and you’re not creating equity as you’re paying down the loan.

Andrew:
Yep, exactly. If you save it, it’s an advantage. If you spend it, might not be the case.

David:
And the reason most of these loans are structured with interest only first is they’re trying to give you that cushion, right? To build up your reserves, to handle things that could go wrong that you didn’t foresee. They’re making it easier for you and they’re kind of like training wheels for the first little bit. And then after the three or five years, whatever it is, that’s when the amortization schedule kicks in and your payment goes up because you’re also paying down the principle.

Andrew:
Yeah. And also, especially if you’re doing value add, they know that yeah, cash flow might not maximize until three years down the road. So another huge one is prepayment penalty. And this has caught a lot of very experienced operators off guard the last five years. Because we all thought rates were going to go up and they never did, they went down.
Prepayment penalty means if you buy a house, you can pay off your mortgage basically anytime you want, right? David, I mean six months, 12 months doesn’t matter. And you just pay it off, you’re done. In the commercial world, the lenders say, well, they’re taking that loan, they’re selling it on the secondary market and they’re promising investors that those investors are going to get a return.
So if you want to pay off your loan early, Fannie or Freddy will say, “Okay, Mr. Greene, you can pay off your loan early. But by the way, we promised our investors a certain yield so you have to pay us all that extra interest we are no longer going to receive so that we can keep our investors happy.” And that’s an oversimplification. It doesn’t quite work that way, it really is nasty stuff, all these symbols that I haven’t seen since my advanced engineering classes.
The idea of it is if you pay off that loan early, you’re going to have a large fee or penalty that you are going to have to pay. So if you’re going to sell the property in three years, don’t get 10 year fixed debt because you’re going to have a huge prepayment penalty. They also call it yield maintenance.

David:
There’s always fancy words to describe very simple things when you’re dealing with multifamily. You and I should make an article, right? Like yield maintenance, Dutch interest, even agency debt sounds much cooler than Fannie Mae loan. Loss-to-lease is a cool thing to say. There’s a lot of it. When you get into this space, there’s definitely words that get thrown around and you’re like, “What does that mean?” Even cap rate like, “Oh, that’s just the return you get if you didn’t take debt.”

Andrew:
Yeah, if you bought it for cash. So the other two things are, what kind of lender fees are you going to have? Is the broker going to charge you a point? Is the lender going to charge you a point? Is there an exit fee? Most bridge loans while they don’t have prepayment penalty, they will have an exit fee. Meaning like when you repay it off or refinance, oh, we’re going to charge you a point on the back end, right? Or a half a point or something like that.
Again, nothing wrong with it. You just need to be aware of it and make sure that you underwrite for it. All right, next one is insurance quote. Don’t have a visual on this just because it gets pretty dense, but we’re just going to touch on a couple of things. Number one, never ever, ever use the seller’s number for insurance, right?
I can’t tell you how many times we find sellers that are either underinsured or improperly insured or their brother’s sister’s cousin has given them a discount that you’re not going to get. There’s all kinds of reasons not to use the seller’s number. Another reason is a lot of times you’ll come across where situation where someone is ensuring based on ACV, which stands for actual cash value. You want to always ensure for replacement value.
I made this mistake in my first deal, fortunately it worked out okay because we didn’t have any claims. But if you have replacement value, it’s going to cost you more upfront because what the insurance company’s going to do is they’re going to say, “Okay, if your building burns down, it’s going to cost a hundred dollars a square foot for us to rebuild it.” All right?
And if your building does burn down, basically that’s how much they’ll pay you. Again, we’re simplifying. If you do actual cash value saying, “Well, geez I can cut my premiums in half if I go for actual cash value.” Then what the insurance company’s going to do when you’re building burns down is they’re going to come in and say, “Well, yeah, you know what? This was built in the ’80s and the roof was 10 years old and this was five years old.”
So they’re going to apply depreciation to it and they’re going to say, “Well, the actual cash value of this is 50%. So here, your $5 million building, here’s 2.5 million, good luck.” Now you got to come up with the extra 2.5. So do not fall for the temptation of actual cash value insurance policies. And most cases, a lender will not let you do that. But if you’re buying a property for cash or you’re doing some kind of non-traditional debt structure, don’t fall for the trap of, “Cool, I can save a little bit on my premiums.” Because the minute you have a loss, that will come back to bite you big time.

David:
Well by calling it cash value, that’s misleading.

Andrew:
It is.

David:
Oh, I’m going to get the cash, right?

Andrew:
Yeah, that’s why I did it the first time. Like, “Wait, my premiums are half and it’s cash value?” I’m like, “Okay, cool.” And then a little bit down the road, I figured out what that actually meant. Again, this was 10 years ago, we know this stuff now. I said, “Oh, you know what? Let’s go ahead and make this replacement value, thank you.” And again, I got my one year of premium savings and considered myself lucky and moved on, never did that again.

David:
It’s one of those things that in multifamily, there’s big words that can be used that can be misleading. I’ve said this before. I have a general rule that if anybody says finance, instead of finance, I have to look very closely at everything they say because I assume they’re going to try to pull the wool over my eyes. So don’t be that person at the cocktail party that tries to sound smart by saying finance. We all know what it’s actually referring to.

Andrew:
So we’ll speed through a handful of these other things. So they’re a little more self-explanatory. The two main things you were going to need to get an insurance quote are the total rentable square footage and the annual revenue, right? Those are the two main you’re going to get. And you send that to your insurance broker, he should be able to give you a good rough ballpark idea of what that’s going to be.
Some other things you’re going to want to know, the next biggest thing is is there a history of claims? Right? If they’ve got three other insurance claims, that’s called a loss run, which is the history of losses, your rates are going to be higher. Because the insurers, understandably, they’re going to be nervous about that at building.
You also want to find out, have there been any shootings or assaults? Right? So if you go on Google Maps, grab the little yellow man, drop him on the property and he runs away, you should run away too. Because what that means is if there’s been shootings or assaults or any kind of violent crime, you’re going to have an extremely difficult time getting insurance in the first place.
If you do, you’re going to pay more for it and they’re probably going to exclude incidents of violence, which means if someone gets shot in your property, it’s not covered by your insurance company and they go to sue you for 10 million because the shooting was of course your fault as the landlord, the insurance company’s going to say, “Well, good luck, David, that one’s on you. We excluded that.”
That’s part of your screening too, or hopefully you’ve already screened for this and you’re not looking at a property with shootings, but again, you’re going to really, at this point, you want to make absolutely certain. Now some other questions. Does the property have aluminum wiring if it was built especially ’60s or ’70s?
Is it sprinklered? That doesn’t mean it has nice irrigation for the landscaping. That means does it have those little sprinkler heads inside the units? And is it in a flood zone or not? Flood zone is a completely separate policy. And again, if you go back to our screening, we don’t buy in flood zones for a host of reasons. Doesn’t mean you can’t, that’s a business decision for us, but we don’t. And here’s the tip David, what do you think is one thing that flood insurance does not cover flooding from in the commercial world?

David:
Maybe your own fire sprinklers when they go on?

Andrew:
Actually we’ve had that happen, that’s covered. Rain. Flood insurance doesn’t cover flooding from rain. And you say, “Well, okay, where else would flooding come from?”

David:
A dam breaking [crosstalk 00:48:10].

Andrew:
Yeah. And here’s the thing. So we learned this a few years ago, fortunately, not the hard way, just by asking enough questions. So when you’re getting a flood… So what flood insurance covers, it covers flooding from a body of water, the lake overflows, the river overflows, the ocean comes in on storm surge with a hurricane.
If it just rains 12 inches and the water piles up in your parking lot because it can’t get away fast enough and floods units, that often does not count and often will not be covered. Most cases you have to specifically get that written into the policy that that is covered. And that saved our butts this year. We had a property in Florida we bought, we specifically made sure that was written in there.
One month after we closed on it, tropical storm came through, 17 inches of water in the parking lot because of rain not tied to a body of water. If we hadn’t had that clause inserted into the insurance, again, not in the flood zone, it’s not in a flood zone, it just rained too much, then we would’ve been out of luck some big bucks. So that’s a really big one. All right, so moving on to property taxes.

David:
Number five, property taxes.

Andrew:
Yes, number five. This one’s absolutely critical. This is another one where sellers and occasionally some brokers will try to get this past newbies and say, “Oh taxes are really low.” Especially in again, in markets that we’re seeing now where prices have been trending up significantly that property taxes are lagging, right? And this is something that is very unique to each county and state.
So we’re going to go over some general processes for estimating property taxes, but you’ve got to dig in and find out how your local municipality handles this. Everyone is different. So I’m going to go ahead and pull up an actual tax statement to show this. But basically the gist of it is you want to go to your county assessor’s website, download the current statement, right? And then use that to determine how and when they’re calculating reassessments and then estimate your taxes, future taxes based on your purchase price and how they’re doing that.
So I’m going to go ahead and pull up, this is an actual property tax bill. This is from the Valdosta area or so the Lowndes County in Georgia. And what you’re going to see here in this area, they do a fair market value. So they estimate a value for the land, value of the buildings. They add that together and then they use that value to determine the taxes. It’s not that simple though. For some reason, nobody’s been able to explain this to me.
And if a listener hears this and knows the answer, I’d love to reach out and let me know. They don’t just work from that fair market value. They take that fair market value, they multiply it by 40%, then they take what’s called a millage rate. And a millage rate is again, just another one of those fancy terms for a number that they’re multiplying by to come up with whatever number they want, right?
So there’s two levers that the municipalities pull to change your taxes. One is the value, two is the millage rate. So what they’ll do in this county is they take your fair market value, they multiply it by 40% because I think it’s… I guess it’s fun. Then they multiply that new value by the millage rate and that gives you your taxes.
So in this example, again, go to YouTube, I’ve highlighted these numbers in yellow so it’s a little bit easier to see. The fair market value for this parcel was 2,476,000. Multiply that by 40%, the taxable value is 990,000. They have it broken out, there’s actually multiple millage rates, one for the KIPP school, one for parks and recreation, great show by the way, one for the industrial authority, whatever. And so the total millage rate is 34.77.
Again, would be… You would think, “Well, I will just multiply by 34.77, no millage rate, I think stands for mills, which means you divide by a thousand first.” So you take your tax bill value, multiply it by 0.034, that gets you your net tax on the bottom right highlighted in yellow of 34,439. You say, “Okay, that’s great, Andrew. That just tells me what today’s taxes are, right? So how do you use that?”
Now this tells you how they are currently calculating taxes. So you take that formula, fair market value times 40%, times the millage rate equals taxes. You go in and you put your purchase price in there, right? So now take your new purchase price times 40% to get your new tax bill value times the millage rate equals your future taxes.
Now, what that does is that’s actually telling you your absolute worst case scenario. That’s telling you if the county comes in, says, “You bought it for this, we’re assessing you for that same price.” In most cases, that doesn’t actually happen. What we do is we take our purchase price, cut it to 80% and then put that number into this equation, right?
And again, there’s a lot of other factors. Some areas do this every five years, some areas do it as soon as you buy it. It’s different by state by county. But the gist of it is go pull a tax statement, number one, understand how they’re calculating it and then use their method of calculating with your new purchase price to figure out what your future taxes are going to be. And in many cases, yes, your taxes may double or triple when you get reassessed. And if you don’t factor that in, your deal just blew up two years down the road.

David:
Very good. And if this isn’t making sense because you’re listening on the podcast, check it out on YouTube, there’s a visual aid. You can see exactly what Andrew’s walking through. It actually makes a lot more sense when you can look and see. It looks like the millage rate is basically how the county is splitting up the property tax amongst the different municipalities or organizations that need the money.

Andrew:
Yeah. And generally speaking, you don’t need to worry about how they’re splitting it up, you’re just looking for the total. I did highlight parks and rec on there just as an example, but really all you care about is the total. So again-

David:
Is the total.

Andrew:
Yeah. So you use that total number in your calculations and if you’re interested in where it’s going, that’s fine, but it doesn’t affect your underwriting.

David:
Okay, that wraps up property taxes. Moving on to number six.

Andrew:
Yeah. Number six is property manager’s opinion. And is exactly what it sounds like. You should already, at this point on your team have a well qualified property management company that is part of your team that you can get their opinion. And you’re not calling them on every deal that you look at, but this is phase two, you’re getting serious, right?
So what we do is anytime we’re at this point with a property, we will email our property management company and say, “Hey, are you familiar with this property and are you familiar with this submarket, and could you please give us your opinion?” Right? And typically what they’ll do is and once in a… I mean, in the beginning, before we knew our markets and before we were screening, they’d say, “No, run away, stay out of there. We don’t want to manage that, you don’t want to own it.”
But now with the screening, that doesn’t happen anymore. So many cases, they know the property… A good property management company’s going to know the property and they’re going to be able to give you feedback. And ideally, they’ll send someone over there to drive it for you and be like, “Oh yeah, we drove over there and it’s a great property and a great location, but there’s trash everywhere which that’s an opportunity, that’s really easy to fix.
Doesn’t look like anyone cares, they have no marketing, but it’s on this great high traffic corner and you could put a playground and a dog park. If you added some landscaping based on… And by the way, we manage a property quarter mile down the street that’s getting $400 more a month. This one, not quite nice so you could probably get 200.”
That’s the kind of feedback you’re looking for, someone who’s already an expert in that market to give you feedback on the market and on that asset and give you their opinion of it. What you don’t do is you don’t send them a budget and say, “Can we make this happen?” Because you don’t want taint their feedback. You want them to come back to you with a blank slate.
And again, if you’re screening right, most of the time, that should be at least somewhat positive. Every once in a while you might miss something. But that’s exactly, is you want a property manager’s opinion of the asset. And then once they do that, you might go back to them and say, “Well, geez I’m planning on… My loss-to-lease says I can get $125 rent increases. Do you guys think we can do that?”
And they’ll either confirm it or say, “Nah, it might be 80 or not. Geez, you can get 150, no problem.” Right? So that’s exactly what it is. You want to get a qualified property manager’s opinion of the asset, the location, the submarket and do they want to manage that for you?

David:
Yeah and be careful that you don’t do what you mentioned when you start to fudge things on a spreadsheet to make it work. Sometimes you feed them the information you want them to give back and they of course, want the revenue that’s going to come from managing it. So they regurgitate that back to you and now you’ve tricked yourself into thinking that they are capable of doing it.

Andrew:
Exactly. Don’t feed them anything. Just blank slate ask them in their opinion.

David:
Very good. Okay, number seven.

Andrew:
Yeah, renovation budget. So if you remember from the phase one underwriting, we basically just did kind of a quick guess like, “Yeah, I think we can spend 8,000 a unit renovating this, and we’ll do 200 grand on the outside,” or whatever the number is, right? Because the broker said you can spend this much and it’ll be great so you do that on the first shot.
Page two, ideally somebody on your team, either you or the property manager has toured this property and you’ve walked through and you’ve identified things like… And again, this is an example from an actual property that we purchased. We’ve walked through and we’ve said, “Okay, well, we’re going to spend… And we don’t have time to go into the details of how we came up with this, but we’re going to spend 600,000 on renovating interiors.
And let’s see, we need to do about 25,000 in landscaping upgrades, parking lot needs to be resealed and restripped. We’re estimating that at 63,000. New signage, 31,000, fencing, 35.” So basically if you go on YouTube and you look at this, what we’ve done in phase two is rather than just a guess of eh, a few hundred grand inside and a few hundred grand outside, now it’s really coming down to it.
And again, we’re just underwriting, we’re not under contract. So we’re not having contractors go out and give us bids. We are leaning either on a combination of our own knowledge or if you don’t have that knowledge yet, go to the property managers and say, “Hey I’ve looked at pictures, I’ve toured this. I think these are the eight projects that we need to do. What would be your range of how much this would cost?
How much should I plan for redoing the parking lot? How much should I plan for putting in a nice, pretty monument sign?” Right? All of those things. So phase one, you’re just throwing in some high level numbers. Phase two, you’re breaking it down by project, right? So again, these aren’t hard bids, they’re just getting a lot more granular so that you aren’t going to…
Because you don’t want to underestimate and run short, but you also don’t want to overestimate and lose the deal that otherwise could have worked, right? And two other things I’d really want to highlight on here. You look at the bottom, you’ll see contingency 126,000 and long term CapEx reserve. Two very important things that I often see people leave off. If things go great, you getaway with it. If they don’t, you’re going to be in trouble.
Contingency is exactly what it sounds. That is, oh geez. You know what? Appliances just… Cost of appliances just went up 10%. It’s going to cost me more, right? Or just found a bunch of windows that are cracked and fogged, we got to replace them. Well, that’s not cheap. It’s just adding in some room for finding stuff that goes wrong. Or you might discover, “Well, geez, if we do this additional thing, we can bump rents even further.”
You want to have brought the money in up front to be able to do that and maximize the value of your investment. The second is long term CapEx reserve. For us, it’s just the number we’re comfortable with. It might be different for you. We just do a thousand a unit, right? Because we know we’re typically going to hold for five years. Things happen.
Maybe the roof gets damaged and you have a $200,000 deductible on your insurance policy. Well guess what? That’s either coming out of your pocket from your investors, which you never ever want to have to ask for, or your term reserve that you started this out with in the first place.
So that’s what that long term CapEx reserve is, something happens year three or four or five, or if you’re holding long term, maybe even year 10 so that when that comes up, you’re like, “No problem. I got this.” Your investment’s safe, your investors are good. That’s an absolute key line item. But yeah, lots more we could jump into but I know we’ve been talking for a bit, so that’s kind of the gist of what you’re doing phase two renovating or renovation budget.

David:
And there’s almost always going to be a renovation budget of some sort, because you’re usually looking to buy something that has meat on the bone. And if there’s meat on the bone, then there’s work you’re going to have to do to get there. So this is something that I know a lot of people have questions about, how do I know what the rehab’s going to cost? It’s kind of something you got to look at a lot, speak with different contractors, get a feel for a baseline of what that’s going to look like. But you definitely want to be comfortable with it because anytime you’re buying an asset of this size, there’s going to be some kind of renovation that needs to happen.

Andrew:
Yeah, absolutely. And I said there’s two types. There’s I would say required renovation, like deferred maintenance and then there’s opportunistic, right? Like, “Hey, if we do this, we can attract better quality residents and bump the rents.”

David:
Right, there you go.

Andrew:
And then those are two categories, yep. So all right the final one.

David:
Number eight.

Andrew:
Yes, number eight for today, final one for today is follow up on P&L items on the T12, which stands for trailing 12. That’s a profit and loss statement that is broken that shows you an entire year snapshot by month, right? So it’ll show the income and the expenses for each month, 12 months lined up in columns right next to each other.
Property P&Ls are like fingerprints, snowflakes and penguin mating calls, right? No two are the same. You’ll see stuff from handwritten on pieces of paper to beautiful Yardi printouts with every single account perfectly lined up and everything in between. And you will see stuff on P&Ls that’s sketchier than a photo of Ozzy Osbourne at church, right? And this is where phase two, you ask questions about that kind of stuff.
And I think we’ll… We didn’t want to do this on YouTube because those 12 month P&Ls are so dense, but we will provide one in the show notes for everyone to go look at after the fact. But some examples of things you’re looking for is anything that’s unusually high or unusually low, right? If you expect insurance to be $300 a unit and it’s 450 a unit, that’s a red flag. You want to find out why.
Maybe they just have a bad insurance broker or maybe they’ve had three fires and a shooting, right? And again, and some of this stuff gets redundant, but that’s on purpose, right? You want redundancy so that if something important gets missed on one step, you’ll catch it on another. So missing payments. I can’t tell you how many times we see the landscaping bill suddenly doesn’t get paid for two months.
Well, where did that go? What happened? Why? Or the utilities go way up and go way down. Does that mean they’re having underground water leaks all the time? What’s going on there? Often times you’ll see strange accounts, large credits are another big one. You’ll look at, “Oh wow, the repairs and maintenance on this property is really good. It must be a great property.”
But then you look closely at the P&L and wait a second, there’s a $30,000 credit. Where did that come from? Because if you just look at the end number, it’s going to be wrong. Because they’ve reduced that expense by 30,000. And there’s lots of legitimate reasons for that, but this is where you go ask, right? You’re looking for opportunities and traps.
So again, if their insurance is 450 a unit because they maybe have a, not a great loan broker and you can get it for 350 legitimately, that’s an opportunity. If it’s 450 because they had three shootings, that could be a trap especially if you assumed you could get 350 in phase one.
These are the things you’re asking questions for. Other things that you might run across are things like HOA fees. We’ve actually owned an apartment complex that had HOA fees. It’s not a problem as long as you underwrote for it in the first place, right?
Usually, you’re not going to assume that, you’re not going to automatically underwrite for it because most don’t have it. But if you’re on the hook for $20,000 a year for HOA fees and you don’t put that in your underwriting, all of a sudden you’re behind the eight ball when it comes to hitting your proforma. We actually saw a T12 one time that was a T13, meaning they had 13 months of data in 12 months, which means all the income and expense numbers were inflated.

David:
Artificially inflated, yeah.

Andrew:
Yeah, artificially inflated. I don’t know if it was intentional or not, but it was not accurate. Stuff like cell phone tower income.

David:
And I should probably say when we say T12, we’re talking about the trailing 12 months of profit and loss, right?

Andrew:
Yeah. And so they had for 13 months on there for some reason. You’ll see stuff like cell phone tower income, billboard income, people leasing out units corporately, things like that, all good stuff, but yeah, okay, well, does that transfer to you? Does that stay with you? And does that terminate? When does that lease expire?
Again, things to look into because we have a property with a billboard, it’s great income. But we had to make sure that when we bought the property, that that transferred to us, right? We found one, we had a contra account on it. And then I’m like, “What the heck is a contra account?” Basically, my understanding of the accounting definition in English definition, a contra account is an account that you use to adjust another account up or down to make it look like how you want to make it look, right?
So need to say that was something that we dug deeply into like, “Okay, why are you guys just putting in… Why do you have a contra account and why are you trying to use it to adjust these other accounts?” Right? It was definitely a red flag. And actually we never got a clear explanation and we didn’t end up buying that property.
So again, those are just some examples of the things that we’ve come across and you could probably list a hundred, I’m sure everyone’s listening, is like, “Oh my gosh, you should have seen this thing on here that I found one time.” But that’s what you’re doing. Anything weird or different on that P&L and phase two, you want to ask questions of either the broker or the seller to clarify what that is and find out is it an opportunity or is it a trap?

David:
Beautiful. Okay, that was really good. Like I promised everybody, you’re getting a masterclass in evaluating multifamily property. Can you give us a brief rundown, Andrew, of the eight steps in underwriting phase two?

Andrew:
Yeah. So underwriting phase two, the quick recap. Number one, rent increases. There’s two components of that market rent growth, we talked about last time and then this time we talked about renovation increases, bringing it up to market. Number two was loss-to-lease meaning, hey, you know what? The last five leases were signed for a hundred dollars more.
If I buy this, my research indicates that I should be able to at least get the remaining leases up to a hundred dollars. By eliminating that loss-to-lease, I effectively bring my rents up a hundred dollars so that can be a huge opportunity. Third one is debt quote. When you’re doing phase two, you’re getting serious about hopefully making an offer. You don’t want to just be guessing at your debt anymore because that’s one of the big levers.
You want to at least get a quick verbal or if you’re getting deeper into it, get an actual kind of like quote matrix like we showed where they’re saying, “Yeah, if you go this route, it’s this and if you go this route, it’s this.” Number four was insurance where again, you’re not having everyone go through the full process of getting an entire quote, but you’re going to give them the total square footage and the annual revenue at a minimum and say, “Hey, ballpark, what’s the cost? Is it 300 a unit? Is it 400 a unit?”
Number five is property taxes. You want to find out how does that municipality currently determine property taxes, and using that method after you buy the property, what does that mean for how much your reassessed taxes are going to be? That has a huge, huge impact on your P&L.

David:
That’s for all real estate. Don’t look at what a property taxes currently are, unless the values are going down, I suppose. When I bought my first property now that I think about it, it had sold for 565. I bought it two years later for 195. I paid property taxes in my import account up front on the higher value and I got a refund check.
But we haven’t seen that in a long time. It’s usually the other way where you’re going to get another check after closing that says, “Hey, you owe us more money.” So it doesn’t matter what the person is paying right now, it matters what the value’s going to be based on, which is usually your purchase price when you buy it.

Andrew:
Yep, exactly. Number six was the property manager opinion. Get someone who just knows that market inside and out and get their thoughts on it with… Don’t feed them. You’re hoping for good feedback and so it’s tempting to give them something to hand back to you, don’t do that. Just ask them blank slate.
Number seven is renovation budget. Again, you’re not having contractors go out there, you’re just trying to break it down and get a little more granular and say, “Okay, well here’s the list of projects and here’s how much I think those are going to be and that total’s up to this.” Because best as possible you don’t want to overestimate, but you also definitely don’t want to underestimate.
And the final one is this falling up on P&L items that either don’t make sense or that could be an opportunity or could be a trap. So those are the eight things that we covered and there’s lots of other little sub pieces and different parts that you could dive into. But those are kind of eight key ones that are part of phase two. And determining is this cream or is this a turd? And if it’s hopefully cream, then that’s where you decide, “Okay, am I going to put an offer on this?” And then get into, “Well, how do I write that offer? How do I decide the terms? What’s going to be appealing?” And go from there.

David:
Well, thank you. I actually get to brag a little bit. You made be very proud. Everyone, this is why this is my multifamily partner right here because he’s this good. So thank you for sharing how you put this system together. I’m happy I got to play a small role in encouraging you to leverage some of this stuff out to these other people because that’s grown into this incredibly detailed, very, very accurate way of analyzing properties that is leading into success. Do you mind sharing a little bit about what you’re up to right now? What properties are you looking at? What does your week look like and what success are you having?

Andrew:
Like I said, with this, going back to the loss-to-lease, that’s been created by the last year and a half, two years, there’s a lot of opportunity out there. We’re under contract on a couple hundred units right now and then we actually just got a offer accepted.
We’re not fully under contract so I don’t want to give out any specifics. But we got an offer accepted in a market where it’s one of the strongest, fastest growing markets in the country. We already own multiple properties in that market so we know it well. So we’re super excited about that one. And that is actually going to be our first ever 506(c). Well, I think we’ve done 16 or 17 506(b)s where we never talk about it basically you have to already know us just to find out about it.
But this one is going to be 506(c) and we’re doing that one with you, David. If that property, if we do get it fully under contract is something that you might be interested in, it’s investwithdavidgreene.com. Right David?

David:
Yeah. If they go to investwithdavidgreene.com, you can fill out a form that will basically end up putting us in touch with you where we can share more details about this deal if this is something you want to invest with Andrew and I on. Can you break down what 506(c) means?

Andrew:
That gets down to the SEC regulations. So 506(b) means if you’re raising money for a deal, you can’t solicit. And solicit basically means anything, right? You can’t talk about it on a podcast, you can’t post about on Facebook and LinkedIn. You have to have a preexisting relationship with anyone that’s investing. 506(c) means you are allowed to talk about it but anybody that says, “Hey, I want to invest,” has to be accredited and verify that they’re accredited. So that’s the difference. It’s just a different set of regulations and rules that the SEC puts out for syndicating.

David:
Now, if you don’t know what that means, that’s okay, you could still go to that website, you could register. We will let you know if this deal would work for you and the status you’re in, or if a different situation with me would make more sense. But Andrew’s being a little bit humble here. He found this deal off market, it’s a great area. The property that we bought just before this one has exceeded everyone’s expect times 10. This is the best part about Andrew, is he’s always super conservative as underwriting. He’s like Eeyore when he underwrites but he’s like Tigger when he performs.

Andrew:
I love that, that’s great.

David:
It’s perfect, right? So he always under promises and over delivers and that’s why I partner with him. So if you would like to partner with us, please go there. Now the last stage in the entire underwriting system, we’ve gone through phase one, which is, would this work? Phase two, is this cream or is this a turd? Phase three would actually be when you send the letter of intent and you actually go through the process of putting it in contract, can you share Andrew if they want to learn more about what to do at the last phase, where can they go?

Andrew:
Yeah, go to davidgreenewebinar.com. And I think what we’re going to do is David and I are going to do a webinar on how you put together an LOI. So I say you’ve been through all these steps, it’s a lot of work. Fortunately, you found one that looks really good, you want to own it. And we’ll talk about what kind of terms do you put in the LOI? How do you determine what can you say, do you put in references? Do you not put in references?
What if your offer seems kind of low? Do you still do it? Do you not do it? How do you communicate that with a broker? How do you communicate with that the seller? We’ll go through and talk about crafting the best offer that gives you the highest chance of getting the deal, but at a minimum, gives you credibility and builds your reputation in the market.

David:
Now we know not everyone listening to this podcast is going to go buy a $50 million apartment complex, you might not even buy a $5 million one. But you do now have the information that you would need if you wanted to do it. So our goal here was to basically show you every step, phase one, phase two, and then a webinar where we can talk with you with more length basically and we can answer more questions and we can actually get out in a podcast about what to do when you want to write an LOI and how you put a property in contract.
I can personally vouch for Andrew. He’s a great dude, he’s super smart, he’s very good at investing, we’ve made a lot of money investing together. And I feel comfortable telling other people this is the person that I invest with because that means a lot to me. So I would highly encourage you to go there and register.
There’s other webinars too. I do other stuff on lending practices or short term rentals. There’s a lot of stuff where I try to get back to the BiggerPockets audience. So I highly recommend everybody listening to this to do that as well as if you would to invest with us, that’s a great place to start. Any last words you want to leave people with Andrew?

Andrew:
Yeah, I would just say I know that was… I guess hopefully everyone’s still awake and I know that was a bit dense. But I mean, that’s the reality of what underwriting even a 5 or a 500 unit property is. In order to do it right, you have to get it down and dirty into the weeds of these numbers and these P&Ls. And if you’re saying, “Oh my gosh, I could do this for 30 minutes, then I’d run away screaming,” go partner with somebody that loves it or hire somebody that loves it.
But in order to properly underwrite, this is the type of thing that you need to do. And yes, there’s other ways of doing it, there’s other ways of looking at the data, this is just what we have found to work exceptionally well for us. But as long as you use the principles that we talked about, then you should be able to hunt down some really good deals for yourself.

David:
That is wonderful. You reminded me of something. When I was first in the field training officer program as a police officer, I worked for an agency that covered five counties. So when we were training, they would drive us through every county and go to the main areas that they thought we would need to know in an emergency.
This is the hospitals in these areas. These are the local police departments that if you ever need backup or you’re trying to figure out like, “What can I do in emergency?” Here’s places that you can go. Here’s places where the county stores equipment that we might need in the case of a flood or something like that. And they knew that we would never remember all of these places that way.
It’s impossible to remember that much information. But the thing is, they also understood when I was trying to find that place three years down the road, I would remember little landmarks that I saw or I would spot the building and say, “That’s the one that I’m looking for.” It sits in the back of your head.
Now I couldn’t walk you through turn right here, turn left here, but when I got close, I recognized I’m on the right path. That’s what a podcast like this is. You are never going to remember all eight steps plus the four levers we talked about before, plus the six steps in phase one underwriting, you don’t need to. No one is going to learn it like that.
It’s getting the concepts in your head and as you take this journey, those will stick out like milestones. Just like when you’re in the woods on a hike and you’re not sure exactly where you are, but you remember a certain mountain peak or you remember a tree that’s in a certain place and it’s like, “Oh yeah, going the right way.” That’s what information like this functions.
So don’t beat yourself up if you’re listening to this and you’re thinking, “I’m an idiot, I don’t get it. I’m never going to understand this.” Andrew didn’t understand this when he was first putting this together, I don’t understand this stuff. It’s something you have to do over and over and over like everything else in life. So don’t beat yourself up.
Instead think if you thought that was interesting, that was fascinating, that’s a good thing. That’s your fire. Add wood to that fire, build that fire, pour into that fire, invest into that fire. Build up that desire to learn more and as you stick with it and you stay in this world long enough, this stuff will start to make sense and you’ll start to get confident.

Andrew:
Yeah, that was an excellent recap. This doesn’t come on the first… This was built and honed out of looking through literally thousands of deals and properties. It’s not something that I or anyone else starts off with.

David:
Well, I’m really glad that you shared that thousands of properties expertise and experience with us here today. And I hope people join us on our webinar where we can talk about it my more and consider investing with us and getting some experience and making some money in the process. Anything you want to say before we get out of here?

Andrew:
No. Like I said, in the beginning, I put the earbud in the right ear first and so far, that’s working. It’s been a good day and it’s good talking with you and hopefully we do it again here soon.

David:
How can people get in touch with you?

Andrew:
LinkedIn, that’s probably the only social media platform where I am somewhat active, and then our website vantagepointacquisitions.com. There’s a couple of different tabs on there. If you want to connect, fill out the little form and that comes to my inbox.

David:
All right, you can follow him there. You can follow me at Davidgreene24 on social media. I also have a brand new spanking and website up, Davidgreene24.com. And I will be, or maybe by the time this releases already have released a free text letter that kind of explains what I’m doing, what I’m up to, what kind of properties I’m buying, where I’ll be speaking and how we here at BiggerPockets can help you to grow in your own education to achieve your goals.
So please consider following me there. And if you like this episode, go back and make sure you listen to episode 571 where we break down phase one of this process. And then do you remember your other episodes you’re on Andrew? Was it 170?

Andrew:
Yeah, it was 170 and 279.

David:
So this is your fourth time on the podcast. That’s how good you are.

Andrew:
Wow, I guess that’s a pretty small group. I feel honored.

David:
Yeah, if you’re on the Mount Rushmore.

Andrew:
Well, thanks.

David:
I have a really funny meme that says the Canadian side of Mount Rushmore and it has a bunch of the butts of the president, says they’re sticking their head on the mountain from the reverse side.

Andrew:
Oh, that’s awesome. I love it.

David:
Oh, I also thought that was funny. All right, I’m going to let you get out of here. This is David Greene for the BiggerPockets Podcast signing off.

Q: Do you trust “The market” for your real estate profits?

A: Those who trust “The market” are at the mercy of the market. 

I think this is folly. Hopefully, many of you agree. 

Here’s what I’m talking about… 

The real estate syndication realm is awash with new operators showing their investors dazzling returns. Profits that would astound investors from Wall Street to Main Street. 

And these syndicators are raking in massive profits along the way as well. I know many operators who were in high school during the Great Financial Crisis and working W-2 jobs just a few years ago who have joined the multi-millionaire club in this current rush to riches. 

But this scares me to death.

You see, the same “Market” that made them and their investors rich could also destroy them. The streets of history are littered with such casualties. 

Here’s how it looks in the real estate world…

The value of a commercial real estate asset is based on two variables: 

1. Cap rate
2. Net operating income

Value = Net Operating Income ÷ Cap Rate

If this formula is unfamiliar, check out this post. 

The cap rate is the market’s evaluation of the value of an asset. It is based on the interest rate, a risk premium, the desirability of that asset type, the location, and more. Factors outside the operator’s control. 

And of course, the net operating income is the gross operating revenues minus expenses. And this is largely in the control of the operator. 

As you can imagine, a seasoned operator focuses on the latter. They see intrinsic value hidden in an asset. They acquire the asset and do their magic. They put their team and technology to work to raise the income and create value for investors. 

Seasoned syndicators don’t count on “The Market” to do the heavy lifting.

(If The Market cooperates, their investors get a double win. But their “hope” lies elsewhere as we’ll see.) 

But rookie syndicators trust the market to do the heavy lifting. They hope for various circumstances to line up perfectly to turn a profit. Factors like: 

• Continually compressing cap rates
• Continuous low interest rates
• The end of eviction moratoriums and other pandemic fallout
• The continuing rise of inflation

Take away one or two of these factors, and their house of cards comes tumbling down. Because trees don’t grow to the sky. And hope isn’t a sound investment strategy. 

Newbies trust the uncontrollable market for their profits. 

Pros trust the market, too. They trust the market to lower their profits. 

Seasoned pros assume the uncontrollable market will lower their property values. Pros focus instead on the more controllable acquisition process and Net Operating Income. 

They trust their talent, team, and technology to create profits in any market. And they plan to hold assets through market ups and downs to provide investors a more stable and predictable source of true wealth. 

Warren Buffett’s folly?

Do you remember the late ‘90s tech bubble? Investors made billions in this runup in tech values. I can see some similarities between what is happening today, though the excesses were even more extreme then. 

Buffett seemed out of touch. He and his Berkshire Hathaway investors missed out on stupendous profits as the dot-com bubble ballooned to staggering heights. 

Buffett was only in his late ‘60s, but he was called senile. At his annual billionaire’s retreat in Sun Valley, Idaho, his colleagues wondered if he’d lost his touch. 

Buffett addressed the group, assuring them he was well aware of the differences between investing and speculating. He was happy staying on the course that had served him so well over many decades.  

In his 2000 letter to shareholders, Buffett stated this: 

“By shamelessly merchandising birdless bushes, promoters have in recent years moved billions of dollars from the pockets of the public to their own purses (and to those of their friends and associates) … Speculation is most dangerous when it looks easiest.” 

Of course, we all know what happened. The bubble burst…and Buffett emerged as the hero…yet again. 

Check out this graph showing the NASDAQ’s rise and fall. 

Wikipedia described it this way: 

The dot-com bubble, also known as the dot-com boom, the tech bubble, and the Internet bubble, was a stock market bubble caused by excessive speculation of Internet-related companies in the late 1990s, a period of massive growth in the use and adoption of the Internet. 

Between 1995 and its peak in March 2000, the Nasdaq Composite stock market index rose 400%, only to fall 78% from its peak by October 2002, giving up all its gains during the bubble. 

During the crash, many online shopping companies, such as Pets.com, Webvan, and Boo.com, as well as several communication companies, such as Worldcom, NorthPoint Communications, and Global Crossing, failed and shut down. Some companies that survived, such as Amazon.com and Qualcomm, lost large portions of their market capitalization, with Cisco Systems alone losing 86% of its stock value. 

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So, are you saying we’re in a bubble, Paul? And what can we learn from Mr. Buffett? 

I am not saying we are in a bubble. 

But I am saying that we need to learn from Mr. Buffett here. Buffett didn’t care about the price of NASDAQ or the billions his pals were making speculating. He didn’t care that his portfolio had underperformed the market for years or that people were calling him senile. 

Buffett cared about sound investing fundamentals. He cared about the same thing he had since he acquired Berkshire Hathaway in the mid- ‘60s. 

His goal was to invest in undervalued companies with sustainable businesses and products managed by competent management teams. That didn’t change because the market changed. 

Buffett wasn’t relying on THE MARKET to tell him how and where to invest. 

And I don’t think we should either. 

We can count on the market for one thing: to be the market. Just like the wind blows wherever it wishes. It is not in our control. 

Good sailors reach their destination in any weather. They are not dependent on wind or waves or temperature. 

A dozen recommendations for investors who believe this post 

If you are a Syndicator… 

Don’t overpay for assets. 

Don’t count on the market to make a profit. 

Don’t believe “it’s different this time.” 

Don’t count on the next decade to be like the last. 

Don’t overleverage with the belief that you can be just like the last guy who did it and repeat their success. 

If you want to speculate, do it with your own cash. Don’t drag investors in and call this speculation an investment.  

If you are a passive investor… 

Don’t invest with any syndicator until you’re sure they’re not a speculator. 

Don’t put all your eggs in that one basket. Diversify. 

Don’t swing for the fences. Slow and steady wins the race. 

Don’t invest before conducting careful due diligence on the syndicator and the opportunity.  

Don’t invest in overheated deals in overheated asset classes in overheated markets. (Remember, hope isn’t a sound investment strategy.) 

Don’t trust the market to generate your returns. Do trust a great operator with an excellent track record, a veteran team, and proven processes. 

Final thoughts

It’s possible to trust the market as a commercial or residential real estate investor or in any other asset type. Did you hear about the great Dutch tulip bubble of 1634 to 1637? 

Trusting your acquisition and operating skills will serve you well in any market. But please don’t count on the market to do the heavy lifting for you. 

BiggerPockets exists to help you grow in your analysis capabilities and make wise investment decisions, so you won’t have to rely on the unpredictable market. This includes bolstering your skills to navigate good markets and bad, plus connecting you to great investment managers and opportunities. Has this post helped you clarify these issues?