October 8, 2025 • 32 mins
Deals don’t fail on closing day, they fail in the spreadsheet. We open the hood on how we actually underwrite Northwest Arkansas real estate right now, cutting through hype and focusing on decisions that protect cash flow and sleep. From rent comps in Fayetteville, Springdale, Rogers, and Bentonville to the new wave of A‑class concessions, we map the reality on the ground: tight vacancies in key unit types, steady absorption, and slower rent growth that rewards disciplined assumptions over wishful thinking.
We start with the essentials, pulling a clean T12, validating the rent roll, and running a true market survey within one to three miles, bracketed by vintage and finish. Then we show how to phase rent increases over 6–12 months based on lease expirations and planned upgrades, instead of flipping to “market” on day one. On expenses, we get specific: model insurance with live quotes, assume 30–50% tax resets post-sale, add professional management even if you plan to self-manage, and fund maintenance and CapEx reserves for roofs, HVAC, plumbing, and turns. No more 30% expense ratios inherited from mom-and-pop books.
We also break down DSCR in plain English and why lenders look for 1.20–1.25 minimum at stabilization, plus how to stress test interest rates, lease-up speed, and concessions. For exits, we model cap rate expansion, not compression, and tie sale timing to the business plan. Along the way, we highlight the most common mistakes, understating expenses, overstating rent growth, and betting on an aggressive exit, and how to avoid them with simple, repeatable checks. If you want deals that work at today’s numbers and get better with execution, this framework will help you separate signal from noise in a fast-growing, maturing NWA market.
Enjoying the show? Follow, rate, and share to help other NWA investors find practical, no-fluff guidance. Have a question or want our underwriting tools? Send it our way and let us know what topic you want next.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_00 (00:07):
Welcome to Northwest Arkansas Investing Podcast, your
go-to source for real estateinvesting in Northwest Arkansas.
SPEAKER_02 (00:12):
With your seasoned investor just starting out, we
bring you expert insights,market trends, and practical
strategies to help you buildwealth through real estate.
SPEAKER_01 (00:20):
From buying and selling to property management
and long-term investmentplanning, we cover it all so you
can make smart, informeddecisions in this fast growing
market.
Let's dive in.
All right, welcome to NorthwestArkansas Investing Podcast.
I'm here with Mr.
Brian Wagers, my co-host.
And uh we just got done talkingthrough um deal structure and
partnerships.
And so if you if you haven'tlistened to that one, hop back
(00:43):
over there.
We did a quick uh 15, 20 minutesegment on that.
And uh our next episode, we justwanted to talk through you know
underwriting tips and uh justhow we're evaluating deals today
and with how the market hasshifted and with uh the effects
of inflation over the past fiveyears, um, and really just kind
of how how we look at deals.
(01:03):
And I think this is an episodethat I would have loved to have
in my back pocket if I wasgetting started.
Um, but even just as anexperienced guy and kind of
hearing Brian how you're seeingit, same thing with me and kind
of some of the smallermultifamily and stuff like that.
And so uh I think you knowsomething you'll hear from a lot
of uh you know big names alwayssay Grant Cardone because I used
(01:26):
I've watched him for years, butuh Grant always said that he uh
even when he wasn't able to buydeals that he was underwriting a
hundred deals just to understandit, you know, a hundred deals uh
a month or a hundred deals uhevery six months or whatever.
Um and so even you know, my Iwould say just starting out,
even my advice would be dealsthat come on the market in
(01:48):
Northwest Arkansas, a duplex oranything that you see out there,
I would just encourage you tounderwrite it and understand
like is is this a deal?
A lot of what come comes on themarket nowadays, especially if
it's smaller multifamily, is notgoing to make sense.
But I think it's important forum for an investor to understand
that and understand what leversare are being pulled today,
(02:09):
which we'll which we'll getinto.
But um, but yeah, I think justfrom a market it check, real
quick, a market reality check.
Um, you know, I just went to theSkyline report in uh Washington
County last week.
I know they've got the otherones coming up, and then a lot
of that data will drop, whichwe'll we'll talk about soon.
But uh everything you've seen,where where do you see rents
(02:32):
trending in uh in NorthwestArkansas?
SPEAKER_02 (02:34):
Man, that's a good question.
I think it depends on A, B, andC.
Um, and to really get a goodgrasp on that is to do exactly
what you just said isunderwriting deals that are on
the market and deals that havetraded.
You know, that's what I firstdid when I first got started in
commercial real estate.
I was on loop net and justanalyzing these deals that had
(02:57):
been sitting there for a whileand seeing what made sense.
Um and so same thing when I wasdoing, you know, this when I was
going after my first singlefamily, I underwrote, you know,
20 deals before I I got thatfirst one.
So it's a great practice.
Um as far as where rent's going,you know, A-class, there is a
lot, you know, anything that isbeing built is is A-class.
(03:20):
It's hard, you it's hard tobuild a C class product.
So there is a lot of A-classcoming online.
But at the same token, 36, youknow, people are moving here uh
I don't know, a day a day iswhat the last statistic has.
So those guys are usually movinghere for Walmart, Tyson, JB
(03:41):
Hunt, University of Arkansas.
So it's a lot of white-collarjobs, so they are wanting that
premium product.
They were they may not uh wantto jump into their first home.
They might want to get a feelfor the area.
They may only be here on a oneto three year stint, so they may
not want to buy a home and gothrough all that.
So they're wanting for a niceplace to live and they're
looking for a new build rental,whether that's a home or uh an
(04:04):
apartment.
So, you know, I think localinvestors see the cranes in the
sky and seeing all this newbuild come in.
It's you might think, oh man,there's a lot, but you know,
they're it's getting absorbed.
You know, I we'll see on theSkyline report.
Um, I think there was asoftening on the A-class rents.
Um, you know, where it was,rents were increasing, you know,
(04:27):
five to ten percent a year ormore um on some properties.
I think right now I wouldunderwrite for three percent
rent increases.
Now where you start that isreally just depends.
Um, you know, I think for Aclass product you're seeing
around two dollars a square footon uh rental, um, you know, for
(04:51):
C class, you know, and C classin Fort Smith, it's a dollar a
square foot.
Yeah.
Um C class and NWA, you know,anywhere from there to a dollar
fifty or more.
So it really depends on whatsubmarket you are in, if you're
in Fayville or in Rogers, andReno Rogers ranges quite a bit
too.
(05:12):
And so does you know, so so doesevery submarket.
So what are you close to?
I would really dive in on yourcomparables.
So I, you know, any kind of dealI'm doing, I'm doing my own
market survey.
So I'm looking at all thecomparable properties to me
within one to one to five miles,you know, preferably one mile to
(05:34):
three miles, you know, but I'llhave some comparables to go out
further.
Sometimes you might not have anapples to apples comparison.
You might, you know, be having ayou might have a 2000 year, you
know, something that's built in2000 and everything around you
is 1980s built, so you mighthave to go back, yeah, go a
little bit.
So I would suggest, you know,almost looking at okay, what are
(05:58):
these these older propertiesthat are renting very close to
me, and then what are thesenewer properties achieving that
are a little farther out, andtry to come up with somewhere in
between there.
So there's still a large demandhere and in WA.
You know, I've seen this uh theWhole Foods Apartments projects,
those are coming online.
Um it's like Alta or something,Vista at Alta.
(06:21):
You know, I I was looking at aRogers project here recently.
Um, you know, the the rents wereeverywhere from$1.60 to like
$260.
Um but that and and then there'sthe Northgate um new apartment
complex going by Ruth Chris.
Um that they had an advertisefor$260.
But if you dive in, they're conthey're offering a thousand
(06:44):
dollars off the first twomonths.
Yeah.
So that's gonna hurt youroverall, you know, you're giving
up a lot to concessions andleases.
So you're seeing a lot of thatwith the A-class product.
There's a lot of concessions andlost a lease.
So you have to factor that in onthe new new product.
SPEAKER_01 (07:02):
Yeah, absolutely.
And I've even started to see ita little bit in uh in like B and
C class stuff that just offeringmaybe first month rent-free um
on a 12-month lease, which whichI don't think we've seen in a
while.
So um still really interesting.
It went to the skyline reporttoo, which again we'll talk
about a lot of that data comingup, but uh vacancies still
(07:24):
continue to be really low, uh,especially in areas like
Springdale specifically, um,which I know you've got a deal
coming up there, and thenFayetteville is still very low
in that in those one, twobedrooms specifically, um, and
then even three-bed for the mostpart.
Both of those cities are superlow.
So um it'll be interesting tokind of continue to see, but I
(07:45):
know rents with vacancy being solow and there not being that
many units, um, and a lot ofthese units that are being built
are being absorbed, rents justkind of can you know naturally
are going to continue to climbuh slowly, and I think it's good
to have that conservative lookaround two to three percent.
So uh when it comes to expensesthough, so we talked we talked
(08:06):
about rents and kind of what youknow what we're seeing there.
When it comes to expenses andwhen you're underwriting a deal,
um and looking at what what thatlooks like, um a lot of times
you know you can use calculatorsout there.
Bigger pockets has a calculatorthat a lot of people use uh when
you're underwriting deals, andthey have like an insurance
calculator on there.
(08:26):
You can basically use the youknow, which obviously is not
going to be the most accurate,but at least give spits you out
kind of an idea of whatinsurance will be.
But um you can plug in detailsabout the property, maybe roof
age, uh, you know, unit age,stuff like that, and then it'll
spit you out kind of anestimated insurance quote, so
(08:47):
you can uh you can kind of beable to underwrite a little bit
quick more quick or quicker onthat.
Um and then property taxes,payroll, some other stuff like
that, property taxesspecifically, too.
Um how do you look at that whenit comes to let's just say
you're looking at a smaller dealfirst, and property taxes are
(09:07):
maybe showing, you know,$2,000 ayear.
How do you how do you look athow you input that into your
underwriting?
Because obviously when ittrades, it's gonna be reassessed
at some point in the next yearto two years.
Um, are you do you project thatin your underwriting or or do
you plug in what's what'scurrently there?
How how do you look at uh stufflike that?
SPEAKER_02 (09:28):
Yeah, 100% do not plug in what's currently there
on insurance or taxes.
Taxes and insurance are gonna beyour biggest you know deal
killers, I guess you could say.
Um definitely account for bothof them to come up.
I would get I would try to havea couple live insurance quotes.
I would I would get insurancequotes um on some properties
(09:50):
that you're looking at to get anidea of what what they're gonna
be at.
100% increasing that.
Um property taxes, anywhere from30 to 50 percent increase from
what the previous was, dependingon how long they've owned it.
They may have an incrediblebasis where their their property
tax is still based on, you know,hasn't really increased yet.
(10:11):
Arkansas is good for it, youknow, it's some other markets
where it's you know 30% of theassessed value.
You know, I think you know,maybe lowest 15%, uh size 30%.
So definitely increase ofproperty taxes, increase
property insurance, and you caneven get uh consultants on that.
SPEAKER_01 (10:30):
Yeah.
SPEAKER_02 (10:31):
I kind of smiled when you said the bigger pockets
uh calculated.
I used to use that.
I mean for our for developmentdeals, I I pay an analyst, you
know,$250 an hour to analyze,like an institutional analyst to
to go over all assumptions andto really build out a model for
(10:51):
each project to account for um,you know, the construction
period, to account for the leaseup period, to account to have
different scenarios ifconstruction costs are up or if
rents are at X, what happenshere?
You know, to run different leaseup schedules.
(11:12):
Um what happens if we're leasingfive up a month or ten up a
month?
So um your level of uhunderwriting can really change.
But there's a there's a lot ofgood um models out there.
I would use different ones.
I think um as far as forexpenses go, you know, insurance
and property tax are the bigones.
(11:32):
Definitely want to account whatI see very commonly for the
smaller ones is it's a mom andpop run property and their
expenses are very low.
They're not putting much intounit, they're not accounting for
unit turns, they're notaccounting for paying property
management or payroll, so that'snot on there.
So sometimes these guys arerunning it at 30% expenses, but
(11:56):
in reality, when you take over,you're gonna be putting more
towards these units as theybecome vacant.
Um, you're gonna be putting inprofessional property management
unless you're managing ityourself.
So, you know, as I've seen aslow as 30% for new but like
realistic new build, like brandnew 2025 build, you're not gonna
(12:17):
have you know turn like turn upfor that first year or so.
You know, it's gonna be veryminimal.
So 20 30% is seen in the marketas kind of the base for a new
build, anywhere from 30 to 35percent.
And then, you know, I I've seenexpenses as high as 55%,
depending if the owner is payingfor utilities.
(12:37):
In Northwest Arkansas, much morecommon for the renters to be
billed back for water andelectric and cable, or even set
it up themselves too.
So you definitely want to getclarity on that.
SPEAKER_01 (12:50):
Yeah, that's a great point.
Uh something that I've runacross a lot lately with uh some
older properties, uh, you know,C class for the most part, is uh
you know something that theytypically aren't like talking
about openly or have that onmaybe sometimes don't even have
it on their PL is is uh you knowlike water like utilities
(13:11):
specifically.
Maybe they are all they're notindividually metered on their
water or something like that,but they're you know, so the
owner pays for that, but theysometimes they charge back
tenants for it, sometimes theydon't.
Like that, those are things tobe thinking about as well.
Um and we'll get into some moreexpenses, but you know, things
to look out for, stuff likethat.
(13:32):
But I thought I I just thoughtof that kind of from that, and
and uh I think yeah, that takesus exactly to the next point.
SPEAKER_02 (13:39):
So what to gather for this whole underwriting
process.
And and the first thing is howthe property has performed the
last 12 months, and how is theproperty performing today?
And so what you're gonna get iswhat's called a T12, which is
the trailing 12 months uh ofprofit and loss, um, and what
(14:00):
the current income is today, andthat can usually be shown with a
rent roll or with leases.
So you're gonna see what it istoday and how it's performed the
last 12 months.
If you want to do a deep dive,you could even go 24 months and
36 months to really uncoversome, you know, maybe they had a
huge water expense.
You might find out there wassome plumbing issues if you go a
(14:21):
little bit further back.
Um but that's the first step ishow is the property performed
the past 12 months and how is itperforming today?
SPEAKER_01 (14:30):
Yep, and and again, just look into and and with some
of the calculators that you mayuse out there or models, um,
there will probably there willlikely be a section where you
can, you know, well what doesthe property look like at
current rents?
What does the property look likeat market rents?
Um if you don't have acalculator like that, uh email
Brian or I.
(14:50):
I've got one for sure I can sendyou.
I'm sure Brian does as well.
Happy to send that to anybodyfor free.
Um, but yeah, number one wouldbe understanding your rent cops,
comps, how the property'sperformed the last 12 months at
least.
And then from there, kind ofbuilding out a pro forma income.
Brian, for those that don'tknow, what does a pro forma
mean?
SPEAKER_02 (15:10):
Yeah, it's it's a projection of how you're going
to run the property.
It's pretty much a businessplan, you know, in an Excel
spreadsheet or whatever modelyou have.
It's how we expect to stabilizeexpenses, or, you know, in some
cases, what how are expensesgoing to go up and then how are
we going to boost income?
Yeah.
(15:30):
So you're going to want to lookat how you can look at how it's
being run today, and that can beyour start.
And you might see these guys arecharging an average of twelve
hundred dollars in rent, butmarket clearly says we can we
can charge fourteen hundreddollars for the same thing.
(15:51):
What I commonly see also is theysay, okay, all of these, you
know, 12 units or that's gonnahappen day one.
This commercial property now isuh all of a sudden at our pro
forma rent.
So you want to make sure that'sgradually coming in, whether
that's three months, six months,twelve months, you know, I think
twelve months is reasonable.
(16:12):
It depends on uh how long thecurrent leases are, how long the
current renters are in therefor, what's their current
agreement?
Is it month to month, or are yougoing to just be stuck with them
for a little while?
So you can't really push thatrent.
And sometimes you're gonna haveto make improvements too.
So once a resident gets out,then you have to come in and
make those improvements to theproperty, and then you have to
(16:32):
fill someone else out there.
So it's not gonna be day one,you close on the property and
they were charging$1,200, andnow all of a sudden it's$1,400.
You know, you want that proforma should show it being
gradually brought in.
SPEAKER_01 (16:46):
Yep, that's a great point.
And and then one other point tothat too, uh uh something to
watch out for, Brian.
I'm sure you've seen this allthe time.
But um, you know, what you'llsee out there, let's say a
property comes up on the market.
Um brokers will oftentimes bemarketing their pro forma.
Uh, maybe it's a pro forma sixcap or something like that, um,
(17:07):
or a pro forma, what the proforma would look like, and not
really, obviously, they want toshow what it could be and not
maybe it maybe you have aproperty that's way
underperforming in in rents andthings like that.
And that's really what you wantto dig into first and then kind
of start to to back into it,understanding market rents and
and look what a pro forma couldbe.
(17:28):
But just something to look outfor as you're through that
underwriting process.
And then just like anotheranother big item, this is gonna
be one of the biggest, in myopinion, is uh expenses and and
just kind of layering those inconservatively.
Some things that come to mindhere maybe are our management
fees.
Um, you know, maybe somebeginner investors will be
(17:49):
looking at deals with a 0%management fee because they're
gonna do it themselves.
Um, I I would recommend evenunderwriting it with management
fees because most people, youknow, maybe won't have the time
to manage it themselves andstuff like that.
So that could be something thatcould be anywhere.
There are uh shops out there Ithink that will do it for pretty
(18:12):
inexpensively.
Um I think it's an area that issuper important though, and you
get what you pay for here.
You could probably have a lot ofmanagement.
I've seen management fees outthere that will do it for four
to five percent, and others thatwill be up to ten percent, or
maybe maybe there's they gohigher than that.
But this is an area this isgonna that will be one of your
number one partners in the deal,um, and and that are gonna kind
(18:35):
of help you continue to stayupon those those market rents.
And typically, if they're a goodmanager, they're gonna they're
gonna pay for themselves.
And then just some other thingsthat that I think about, Brian,
you can add to this on theexpenses piece, but something
that I see I think a lot ofpeople don't underwrite for,
especially the beginners, are uhmaintenance fees or excuse me,
(18:57):
maintenance uh just I guess kindof a set aside money for
maintenance, uh just commonmaintenance that's gonna come
across units, and then samething for vacancy, reserves for
both of those.
Um obviously those aren't thingsthat are you know to you close
on the property and tomorrowyou're gonna have an expense
for, but I think having reservesfor maintenance and having
(19:19):
reserves for vacancy isimportant.
What are your thoughts on those?
Are those common items thatyou're also underwriting with?
100%.
SPEAKER_02 (19:25):
You're gonna have your day one CapEx, what we're
doing to spruce up the apartmentor commercial property or single
property, single family orwhatever it is, you know, um,
you're gonna come in, hopefullyspend money right away so the
residents know that you're theregetting new ownership.
Um but like you said, you know,the maintenance, also known as
CapEx, you want to set asidemoney for CapEx unforeseen that
(19:51):
that are gonna happen.
And that that's gonna be unitturns, that's gonna be HFACs,
that's gonna be, you know,possibly new roofs depending on
the age.
And you're wanting to set thataside um every month.
You know, it's not a bad idea tohave a maintenance replenishment
where a certain amount of yourincome is going towards you
know, a capex budget for thatrainy day where you might need
(20:13):
it.
Um hundred percent on what yousaid on the management, make
sure you're adding that anywherefrom three to ten percent
depending on the type ofproperty, you know, single
family being the highest uhpercentage, and then lowest, you
know, large tenant-based uhproperty.
SPEAKER_01 (20:30):
Yeah, that's a good point.
And then just some just someother items that we're looking
at typically in the underwritingprocess.
You know, an item that I thinkwill be really important to
banks typically is your DSCR,which would be your debt service
coverage ratio.
Um you know, a number thatyou'll see out there a lot is
1.25 debt service coverageratio.
(20:51):
I guess number one, Brian, justin layman's terms, how would you
explain that to a to a uhbeginner?
SPEAKER_02 (20:58):
Yeah, so debt service coverage ratio 1.25
means that you're you have 25%of income over all your debt and
expenses.
So if you're cut you're you'recovering your expenses, your
utilities, your management fees,um, and the debt payments to the
bank, how much extra are yougonna have at the end of the
(21:20):
day?
If all that's a hundred thousandand you're bringing in
twenty-five thousand dollars ofcash flow, that's a one point
two five DSCR.
So usually banks want to seethat you're able to cover all
the expenses and their debtpayments at least with a 20% to
25% gap is what I've seen.
1.2 to 1.25 is is going to bethe minimum.
(21:41):
So um same thing on the investorside.
You want to make sure that youhave that for you know, again,
for that rainy day cushion umand for cash flow for you, for
your investment.
You want that distributable cashto um get start getting your
money back.
SPEAKER_01 (21:57):
Yeah, absolutely.
And I think I think that's agreat, great point, and and
something that you're gonna wantto be able to go to a bank and
say, you know, here here's thefinancials, here's the pro forma
of kind of what we expect it toperform at once we have it
stabilized.
Um, and that kind of gives usthat DSCR, that debt service
coverage ratio that we talkabout, which will again will be
(22:20):
an important thing for thebanks.
SPEAKER_02 (22:21):
And that can change to from your day one DSCR to
your stabilized DSCR, where youhave once you've spent that
money and once you've increasedthose rents, that can jump up
quite a bit.
SPEAKER_01 (22:33):
Yep, absolutely.
And then uh I think kind of oneof the biggest last things that
we were looking at when it comesto the underwriting process is
is uh just looking at you knowwhat is our exit and and kind of
understanding, hey, this is thisis a business plan.
We're putting together abusiness plan to show the bank
and to show our investors ifthere are partners in it, and uh
(22:55):
and how how do we expect to getout of this if we you know is it
if it's gonna be in three years,if it's gonna be in five years,
if it's gonna be ten or moreyears, um understanding your
your cap rates and what thatexit looks like, I think is is
really important.
SPEAKER_02 (23:09):
Um yeah, cap rates definitely want to stress test
different cap rate scenariosthat you know a lot interest
rates have a lot of uh upwardand downward pressure on cap
rates, depending on what thenext buyer is going to have to
borrow at.
The type of asset is gonna behave a big factor in that.
If it's a brand new build, youknow, your cap rate is gonna be
(23:30):
lower.
If if it's you know right byWalmart's home office and it's
in Bentonville and it's brandnew, like you know, you're
probably paying a pretty low caprate.
I've seen this below four caps,you know, and as high as ten cap
in a you know market like uhMemphis, Tennessee, where it's
above that ten cap or where it'sa different type of asset where
(23:51):
it's uh mobile home park, youknow, those might, you know, the
appreciation is going to beharder there, but you should be
getting more cash flow on thosetype of investments.
SPEAKER_01 (24:02):
Yep.
And then you know, for thosethat don't understand, cap rate
would be your capitalizationrate.
And so if you were to whatreally what that means, if you
were to buy the property cash,what would your return be?
And uh and I think as aninvestor, understanding what cap
rates are for certain types ofasset classes, if it's you know
commercial uh or if it's youknow small multifamily or or
(24:24):
whatever, and then you know,depending on the asset type, if
it if it's A class or B class orC class, and then even looking
down to certain areas, you know,something in in Springdale, the
cap rates in Springdale um areobviously going to be a lot
different than your cap rates inin Biddenville or your cap rates
in Fayetteville.
And so I think as an investor,as you are underwriting deals,
(24:47):
um, it's gonna be reallyimportant to kind of understand
what those look like so you canknow what your exit could be um,
you know, with that businessplan.
So yeah.
Um Brian, just as we wrap up thethis piece, I think we could
talk about this all day.
Uh uh underwriting is is such anart, and I think a lot of
investors need to reallyunderstand it.
Um but what what are some commonmistakes that uh that you've
(25:10):
maybe seen in business thatyou've done in the past or or
maybe others around you um, youknow, that you feel like they
underwrite a little bit tooaggressively, what do you
normally see as the are thosekind of shortcomings?
SPEAKER_02 (25:22):
I would say um three things underestimating expenses,
um overstating rent growth andoverstating that rent growth too
fast, you know, saying, youknow, I think we can turn this
property around and get rents toX, making sure that's that's
spread out a little bit, andthen um your end sale price
(25:48):
assumption uh being too high.
Making sure you want to stresstest different cap rates, making
sure even if the cap rates do goup that your deal still makes
sense there.
SPEAKER_01 (25:59):
Yeah, absolutely.
And I think uh I I really likewhat you said about
overestimating rent growth.
I think um, you know, obviouslyif you're if you're just getting
started or maybe you've been inthe game for a little while, we
have seen some outrageous, youknow, rent increases over the
past five years.
And uh and just for those thatare looking to do deals in the
(26:21):
future, I think it's gonna beimportant to understand
historically what rent growthhas looked like.
It's not gonna look like thewhat we've seen in the last five
years.
Um, but it's a result of youknow, we've we've seen the the
government print 40% of ourmoney supply in the last five
years, which is insane.
So you can imagine that that'sobviously going to have an
(26:41):
effect on our rent now.
Um, and it's probably safe toassume it's probably gonna be
closer to what the inflationrates are today, you know, two
to three percent in there,something like that.
Is that kind of what yeah?
SPEAKER_02 (26:54):
I I would say for me, like I I want to make sure
this deal makes sense at today'srents.
Like if it makes sure uh if weassume that rents aren't
increasing and it's just themarket rate, I want to make that
the deal needs to make sense ofthat and then push rents from
there.
SPEAKER_01 (27:07):
Yep, agreed.
I like what you said down here.
Good underwriting keeps you outof out of trouble.
I think uh really understandingthe best case scenarios and and
worst case scenarios and beingable to live with those
worst-case scenarios if theyhappened and it wouldn't put you
in a bad spot is reallyimportant.
Um I think even on top of that,nowadays, especially I think now
(27:29):
is about is uh you know, morethan ever is the is the time
where I think it makes sense notto be fully leveraged to the to
the nines.
Um, you know, it with the waykind of the economy has
continued to fluctuate up anddown and and uh what we've seen
and and how kind of how howrates may look in the next few
(27:50):
months.
Um I think it's probably a smartplay to you know 25% down, 20%
down.
A lot of these banks are arerequiring that nowadays.
And uh and so I thinkunderstanding number one, not
being too leveraged, but numbertwo, understanding
conservatively, um, you know, isthe deal a good or is it, you
know, do you need to pass andnot being emotional about those
(28:12):
things?
That makes sense.
SPEAKER_02 (28:13):
Yeah, 100%.
Leverage is a whole nother topicwe could get into as far as you
know, what's the right amount ofleverage?
I think it's just make sure yourunderwriting is sound and make
sure whether you're doing theunderwriting or whoever you're
working with is doing theunderwriting is getting real
mark like real-time feedback.
Where are they getting as thathave they talked to these
insurance agents?
(28:34):
Have they talked to any taxconsultants?
Have they talked to propertymanagers?
Have they talked to other ownersand making sure that's real
time, not too hypothetical?
SPEAKER_01 (28:42):
Yep.
Love it.
Well, we uh I think this is sucha good episode.
We could go on forever aboutthis and underwriting and kind
of um kind of continue to gointo that.
But if you have any questionsand want to reach out to Brian
or I on what you know how weunderwrite, what tools we use,
we're happy to to help um youknow send out the tools that we
use, and uh, we're happy to kindof be a be a uh sounding board
(29:07):
there for for anybody that needshelp there and and is just kind
of thinking about wanting to uhkind of go in here.
So thanks for listening toanother episode of Northwest
Arkansas Investing Podcast, anduh, we'll see you next time.
SPEAKER_00 (29:19):
Thanks, guys.
Again, thank you guys for tuningin.
I'm gonna go ahead and uh listsome sponsors off here.
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Welcome to Northwest Arkansas Investing Podcast, your
go-to source for real estateinvesting in Northwest Arkansas.
SPEAKER_02 (00:12):
With your seasoned investor just starting out, we
bring you expert insights,market trends, and practical
strategies to help you buildwealth through real estate.
SPEAKER_01 (00:20):
From buying and selling to property management
and long-term investmentplanning, we cover it all so you
can make smart, informeddecisions in this fast growing
market.
Let's dive in.
All right, welcome to NorthwestArkansas Investing Podcast.
I'm here with Mr.
Brian Wagers, my co-host.
And uh we just got done talkingthrough um deal structure and
partnerships.
And so if you if you haven'tlistened to that one, hop back
(00:43):
over there.
We did a quick uh 15, 20 minutesegment on that.
And uh our next episode, we justwanted to talk through you know
underwriting tips and uh justhow we're evaluating deals today
and with how the market hasshifted and with uh the effects
of inflation over the past fiveyears, um, and really just kind
of how how we look at deals.
(01:03):
And I think this is an episodethat I would have loved to have
in my back pocket if I wasgetting started.
Um, but even just as anexperienced guy and kind of
hearing Brian how you're seeingit, same thing with me and kind
of some of the smallermultifamily and stuff like that.
And so uh I think you knowsomething you'll hear from a lot
of uh you know big names alwayssay Grant Cardone because I used
(01:26):
I've watched him for years, butuh Grant always said that he uh
even when he wasn't able to buydeals that he was underwriting a
hundred deals just to understandit, you know, a hundred deals uh
a month or a hundred deals uhevery six months or whatever.
Um and so even you know, my Iwould say just starting out,
even my advice would be dealsthat come on the market in
(01:48):
Northwest Arkansas, a duplex oranything that you see out there,
I would just encourage you tounderwrite it and understand
like is is this a deal?
A lot of what come comes on themarket nowadays, especially if
it's smaller multifamily, is notgoing to make sense.
But I think it's important forum for an investor to understand
that and understand what leversare are being pulled today,
(02:09):
which we'll which we'll getinto.
But um, but yeah, I think justfrom a market it check, real
quick, a market reality check.
Um, you know, I just went to theSkyline report in uh Washington
County last week.
I know they've got the otherones coming up, and then a lot
of that data will drop, whichwe'll we'll talk about soon.
But uh everything you've seen,where where do you see rents
(02:32):
trending in uh in NorthwestArkansas?
SPEAKER_02 (02:34):
Man, that's a good question.
I think it depends on A, B, andC.
Um, and to really get a goodgrasp on that is to do exactly
what you just said isunderwriting deals that are on
the market and deals that havetraded.
You know, that's what I firstdid when I first got started in
commercial real estate.
I was on loop net and justanalyzing these deals that had
(02:57):
been sitting there for a whileand seeing what made sense.
Um and so same thing when I wasdoing, you know, this when I was
going after my first singlefamily, I underwrote, you know,
20 deals before I I got thatfirst one.
So it's a great practice.
Um as far as where rent's going,you know, A-class, there is a
lot, you know, anything that isbeing built is is A-class.
(03:20):
It's hard, you it's hard tobuild a C class product.
So there is a lot of A-classcoming online.
But at the same token, 36, youknow, people are moving here uh
I don't know, a day a day iswhat the last statistic has.
So those guys are usually movinghere for Walmart, Tyson, JB
(03:41):
Hunt, University of Arkansas.
So it's a lot of white-collarjobs, so they are wanting that
premium product.
They were they may not uh wantto jump into their first home.
They might want to get a feelfor the area.
They may only be here on a oneto three year stint, so they may
not want to buy a home and gothrough all that.
So they're wanting for a niceplace to live and they're
looking for a new build rental,whether that's a home or uh an
(04:04):
apartment.
So, you know, I think localinvestors see the cranes in the
sky and seeing all this newbuild come in.
It's you might think, oh man,there's a lot, but you know,
they're it's getting absorbed.
You know, I we'll see on theSkyline report.
Um, I think there was asoftening on the A-class rents.
Um, you know, where it was,rents were increasing, you know,
(04:27):
five to ten percent a year ormore um on some properties.
I think right now I wouldunderwrite for three percent
rent increases.
Now where you start that isreally just depends.
Um, you know, I think for Aclass product you're seeing
around two dollars a square footon uh rental, um, you know, for
(04:51):
C class, you know, and C classin Fort Smith, it's a dollar a
square foot.
Yeah.
Um C class and NWA, you know,anywhere from there to a dollar
fifty or more.
So it really depends on whatsubmarket you are in, if you're
in Fayville or in Rogers, andReno Rogers ranges quite a bit
too.
(05:12):
And so does you know, so so doesevery submarket.
So what are you close to?
I would really dive in on yourcomparables.
So I, you know, any kind of dealI'm doing, I'm doing my own
market survey.
So I'm looking at all thecomparable properties to me
within one to one to five miles,you know, preferably one mile to
(05:34):
three miles, you know, but I'llhave some comparables to go out
further.
Sometimes you might not have anapples to apples comparison.
You might, you know, be having ayou might have a 2000 year, you
know, something that's built in2000 and everything around you
is 1980s built, so you mighthave to go back, yeah, go a
little bit.
So I would suggest, you know,almost looking at okay, what are
(05:58):
these these older propertiesthat are renting very close to
me, and then what are thesenewer properties achieving that
are a little farther out, andtry to come up with somewhere in
between there.
So there's still a large demandhere and in WA.
You know, I've seen this uh theWhole Foods Apartments projects,
those are coming online.
Um it's like Alta or something,Vista at Alta.
(06:21):
You know, I I was looking at aRogers project here recently.
Um, you know, the the rents wereeverywhere from$1.60 to like
$260.
Um but that and and then there'sthe Northgate um new apartment
complex going by Ruth Chris.
Um that they had an advertisefor$260.
But if you dive in, they're conthey're offering a thousand
(06:44):
dollars off the first twomonths.
Yeah.
So that's gonna hurt youroverall, you know, you're giving
up a lot to concessions andleases.
So you're seeing a lot of thatwith the A-class product.
There's a lot of concessions andlost a lease.
So you have to factor that in onthe new new product.
SPEAKER_01 (07:02):
Yeah, absolutely.
And I've even started to see ita little bit in uh in like B and
C class stuff that just offeringmaybe first month rent-free um
on a 12-month lease, which whichI don't think we've seen in a
while.
So um still really interesting.
It went to the skyline reporttoo, which again we'll talk
about a lot of that data comingup, but uh vacancies still
(07:24):
continue to be really low, uh,especially in areas like
Springdale specifically, um,which I know you've got a deal
coming up there, and thenFayetteville is still very low
in that in those one, twobedrooms specifically, um, and
then even three-bed for the mostpart.
Both of those cities are superlow.
So um it'll be interesting tokind of continue to see, but I
(07:45):
know rents with vacancy being solow and there not being that
many units, um, and a lot ofthese units that are being built
are being absorbed, rents justkind of can you know naturally
are going to continue to climbuh slowly, and I think it's good
to have that conservative lookaround two to three percent.
So uh when it comes to expensesthough, so we talked we talked
(08:06):
about rents and kind of what youknow what we're seeing there.
When it comes to expenses andwhen you're underwriting a deal,
um and looking at what what thatlooks like, um a lot of times
you know you can use calculatorsout there.
Bigger pockets has a calculatorthat a lot of people use uh when
you're underwriting deals, andthey have like an insurance
calculator on there.
(08:26):
You can basically use the youknow, which obviously is not
going to be the most accurate,but at least give spits you out
kind of an idea of whatinsurance will be.
But um you can plug in detailsabout the property, maybe roof
age, uh, you know, unit age,stuff like that, and then it'll
spit you out kind of anestimated insurance quote, so
(08:47):
you can uh you can kind of beable to underwrite a little bit
quick more quick or quicker onthat.
Um and then property taxes,payroll, some other stuff like
that, property taxesspecifically, too.
Um how do you look at that whenit comes to let's just say
you're looking at a smaller dealfirst, and property taxes are
(09:07):
maybe showing, you know,$2,000 ayear.
How do you how do you look athow you input that into your
underwriting?
Because obviously when ittrades, it's gonna be reassessed
at some point in the next yearto two years.
Um, are you do you project thatin your underwriting or or do
you plug in what's what'scurrently there?
How how do you look at uh stufflike that?
SPEAKER_02 (09:28):
Yeah, 100% do not plug in what's currently there
on insurance or taxes.
Taxes and insurance are gonna beyour biggest you know deal
killers, I guess you could say.
Um definitely account for bothof them to come up.
I would get I would try to havea couple live insurance quotes.
I would I would get insurancequotes um on some properties
(09:50):
that you're looking at to get anidea of what what they're gonna
be at.
100% increasing that.
Um property taxes, anywhere from30 to 50 percent increase from
what the previous was, dependingon how long they've owned it.
They may have an incrediblebasis where their their property
tax is still based on, you know,hasn't really increased yet.
(10:11):
Arkansas is good for it, youknow, it's some other markets
where it's you know 30% of theassessed value.
You know, I think you know,maybe lowest 15%, uh size 30%.
So definitely increase ofproperty taxes, increase
property insurance, and you caneven get uh consultants on that.
SPEAKER_01 (10:30):
Yeah.
SPEAKER_02 (10:31):
I kind of smiled when you said the bigger pockets
uh calculated.
I used to use that.
I mean for our for developmentdeals, I I pay an analyst, you
know,$250 an hour to analyze,like an institutional analyst to
to go over all assumptions andto really build out a model for
(10:51):
each project to account for um,you know, the construction
period, to account for the leaseup period, to account to have
different scenarios ifconstruction costs are up or if
rents are at X, what happenshere?
You know, to run different leaseup schedules.
(11:12):
Um what happens if we're leasingfive up a month or ten up a
month?
So um your level of uhunderwriting can really change.
But there's a there's a lot ofgood um models out there.
I would use different ones.
I think um as far as forexpenses go, you know, insurance
and property tax are the bigones.
(11:32):
Definitely want to account whatI see very commonly for the
smaller ones is it's a mom andpop run property and their
expenses are very low.
They're not putting much intounit, they're not accounting for
unit turns, they're notaccounting for paying property
management or payroll, so that'snot on there.
So sometimes these guys arerunning it at 30% expenses, but
(11:56):
in reality, when you take over,you're gonna be putting more
towards these units as theybecome vacant.
Um, you're gonna be putting inprofessional property management
unless you're managing ityourself.
So, you know, as I've seen aslow as 30% for new but like
realistic new build, like brandnew 2025 build, you're not gonna
(12:17):
have you know turn like turn upfor that first year or so.
You know, it's gonna be veryminimal.
So 20 30% is seen in the marketas kind of the base for a new
build, anywhere from 30 to 35percent.
And then, you know, I I've seenexpenses as high as 55%,
depending if the owner is payingfor utilities.
(12:37):
In Northwest Arkansas, much morecommon for the renters to be
billed back for water andelectric and cable, or even set
it up themselves too.
So you definitely want to getclarity on that.
SPEAKER_01 (12:50):
Yeah, that's a great point.
Uh something that I've runacross a lot lately with uh some
older properties, uh, you know,C class for the most part, is uh
you know something that theytypically aren't like talking
about openly or have that onmaybe sometimes don't even have
it on their PL is is uh you knowlike water like utilities
(13:11):
specifically.
Maybe they are all they're notindividually metered on their
water or something like that,but they're you know, so the
owner pays for that, but theysometimes they charge back
tenants for it, sometimes theydon't.
Like that, those are things tobe thinking about as well.
Um and we'll get into some moreexpenses, but you know, things
to look out for, stuff likethat.
(13:32):
But I thought I I just thoughtof that kind of from that, and
and uh I think yeah, that takesus exactly to the next point.
SPEAKER_02 (13:39):
So what to gather for this whole underwriting
process.
And and the first thing is howthe property has performed the
last 12 months, and how is theproperty performing today?
And so what you're gonna get iswhat's called a T12, which is
the trailing 12 months uh ofprofit and loss, um, and what
(14:00):
the current income is today, andthat can usually be shown with a
rent roll or with leases.
So you're gonna see what it istoday and how it's performed the
last 12 months.
If you want to do a deep dive,you could even go 24 months and
36 months to really uncoversome, you know, maybe they had a
huge water expense.
You might find out there wassome plumbing issues if you go a
(14:21):
little bit further back.
Um but that's the first step ishow is the property performed
the past 12 months and how is itperforming today?
SPEAKER_01 (14:30):
Yep, and and again, just look into and and with some
of the calculators that you mayuse out there or models, um,
there will probably there willlikely be a section where you
can, you know, well what doesthe property look like at
current rents?
What does the property look likeat market rents?
Um if you don't have acalculator like that, uh email
Brian or I.
(14:50):
I've got one for sure I can sendyou.
I'm sure Brian does as well.
Happy to send that to anybodyfor free.
Um, but yeah, number one wouldbe understanding your rent cops,
comps, how the property'sperformed the last 12 months at
least.
And then from there, kind ofbuilding out a pro forma income.
Brian, for those that don'tknow, what does a pro forma
mean?
SPEAKER_02 (15:10):
Yeah, it's it's a projection of how you're going
to run the property.
It's pretty much a businessplan, you know, in an Excel
spreadsheet or whatever modelyou have.
It's how we expect to stabilizeexpenses, or, you know, in some
cases, what how are expensesgoing to go up and then how are
we going to boost income?
Yeah.
(15:30):
So you're going to want to lookat how you can look at how it's
being run today, and that can beyour start.
And you might see these guys arecharging an average of twelve
hundred dollars in rent, butmarket clearly says we can we
can charge fourteen hundreddollars for the same thing.
(15:51):
What I commonly see also is theysay, okay, all of these, you
know, 12 units or that's gonnahappen day one.
This commercial property now isuh all of a sudden at our pro
forma rent.
So you want to make sure that'sgradually coming in, whether
that's three months, six months,twelve months, you know, I think
twelve months is reasonable.
(16:12):
It depends on uh how long thecurrent leases are, how long the
current renters are in therefor, what's their current
agreement?
Is it month to month, or are yougoing to just be stuck with them
for a little while?
So you can't really push thatrent.
And sometimes you're gonna haveto make improvements too.
So once a resident gets out,then you have to come in and
make those improvements to theproperty, and then you have to
(16:32):
fill someone else out there.
So it's not gonna be day one,you close on the property and
they were charging$1,200, andnow all of a sudden it's$1,400.
You know, you want that proforma should show it being
gradually brought in.
SPEAKER_01 (16:46):
Yep, that's a great point.
And and then one other point tothat too, uh uh something to
watch out for, Brian.
I'm sure you've seen this allthe time.
But um, you know, what you'llsee out there, let's say a
property comes up on the market.
Um brokers will oftentimes bemarketing their pro forma.
Uh, maybe it's a pro forma sixcap or something like that, um,
(17:07):
or a pro forma, what the proforma would look like, and not
really, obviously, they want toshow what it could be and not
maybe it maybe you have aproperty that's way
underperforming in in rents andthings like that.
And that's really what you wantto dig into first and then kind
of start to to back into it,understanding market rents and
and look what a pro forma couldbe.
(17:28):
But just something to look outfor as you're through that
underwriting process.
And then just like anotheranother big item, this is gonna
be one of the biggest, in myopinion, is uh expenses and and
just kind of layering those inconservatively.
Some things that come to mindhere maybe are our management
fees.
Um, you know, maybe somebeginner investors will be
(17:49):
looking at deals with a 0%management fee because they're
gonna do it themselves.
Um, I I would recommend evenunderwriting it with management
fees because most people, youknow, maybe won't have the time
to manage it themselves andstuff like that.
So that could be something thatcould be anywhere.
There are uh shops out there Ithink that will do it for pretty
(18:12):
inexpensively.
Um I think it's an area that issuper important though, and you
get what you pay for here.
You could probably have a lot ofmanagement.
I've seen management fees outthere that will do it for four
to five percent, and others thatwill be up to ten percent, or
maybe maybe there's they gohigher than that.
But this is an area this isgonna that will be one of your
number one partners in the deal,um, and and that are gonna kind
(18:35):
of help you continue to stayupon those those market rents.
And typically, if they're a goodmanager, they're gonna they're
gonna pay for themselves.
And then just some other thingsthat that I think about, Brian,
you can add to this on theexpenses piece, but something
that I see I think a lot ofpeople don't underwrite for,
especially the beginners, are uhmaintenance fees or excuse me,
(18:57):
maintenance uh just I guess kindof a set aside money for
maintenance, uh just commonmaintenance that's gonna come
across units, and then samething for vacancy, reserves for
both of those.
Um obviously those aren't thingsthat are you know to you close
on the property and tomorrowyou're gonna have an expense
for, but I think having reservesfor maintenance and having
(19:19):
reserves for vacancy isimportant.
What are your thoughts on those?
Are those common items thatyou're also underwriting with?
100%.
SPEAKER_02 (19:25):
You're gonna have your day one CapEx, what we're
doing to spruce up the apartmentor commercial property or single
property, single family orwhatever it is, you know, um,
you're gonna come in, hopefullyspend money right away so the
residents know that you're theregetting new ownership.
Um but like you said, you know,the maintenance, also known as
CapEx, you want to set asidemoney for CapEx unforeseen that
(19:51):
that are gonna happen.
And that that's gonna be unitturns, that's gonna be HFACs,
that's gonna be, you know,possibly new roofs depending on
the age.
And you're wanting to set thataside um every month.
You know, it's not a bad idea tohave a maintenance replenishment
where a certain amount of yourincome is going towards you
know, a capex budget for thatrainy day where you might need
(20:13):
it.
Um hundred percent on what yousaid on the management, make
sure you're adding that anywherefrom three to ten percent
depending on the type ofproperty, you know, single
family being the highest uhpercentage, and then lowest, you
know, large tenant-based uhproperty.
SPEAKER_01 (20:30):
Yeah, that's a good point.
And then just some just someother items that we're looking
at typically in the underwritingprocess.
You know, an item that I thinkwill be really important to
banks typically is your DSCR,which would be your debt service
coverage ratio.
Um you know, a number thatyou'll see out there a lot is
1.25 debt service coverageratio.
(20:51):
I guess number one, Brian, justin layman's terms, how would you
explain that to a to a uhbeginner?
SPEAKER_02 (20:58):
Yeah, so debt service coverage ratio 1.25
means that you're you have 25%of income over all your debt and
expenses.
So if you're cut you're you'recovering your expenses, your
utilities, your management fees,um, and the debt payments to the
bank, how much extra are yougonna have at the end of the
(21:20):
day?
If all that's a hundred thousandand you're bringing in
twenty-five thousand dollars ofcash flow, that's a one point
two five DSCR.
So usually banks want to seethat you're able to cover all
the expenses and their debtpayments at least with a 20% to
25% gap is what I've seen.
1.2 to 1.25 is is going to bethe minimum.
(21:41):
So um same thing on the investorside.
You want to make sure that youhave that for you know, again,
for that rainy day cushion umand for cash flow for you, for
your investment.
You want that distributable cashto um get start getting your
money back.
SPEAKER_01 (21:57):
Yeah, absolutely.
And I think I think that's agreat, great point, and and
something that you're gonna wantto be able to go to a bank and
say, you know, here here's thefinancials, here's the pro forma
of kind of what we expect it toperform at once we have it
stabilized.
Um, and that kind of gives usthat DSCR, that debt service
coverage ratio that we talkabout, which will again will be
(22:20):
an important thing for thebanks.
SPEAKER_02 (22:21):
And that can change to from your day one DSCR to
your stabilized DSCR, where youhave once you've spent that
money and once you've increasedthose rents, that can jump up
quite a bit.
SPEAKER_01 (22:33):
Yep, absolutely.
And then uh I think kind of oneof the biggest last things that
we were looking at when it comesto the underwriting process is
is uh just looking at you knowwhat is our exit and and kind of
understanding, hey, this is thisis a business plan.
We're putting together abusiness plan to show the bank
and to show our investors ifthere are partners in it, and uh
(22:55):
and how how do we expect to getout of this if we you know is it
if it's gonna be in three years,if it's gonna be in five years,
if it's gonna be ten or moreyears, um understanding your
your cap rates and what thatexit looks like, I think is is
really important.
SPEAKER_02 (23:09):
Um yeah, cap rates definitely want to stress test
different cap rate scenariosthat you know a lot interest
rates have a lot of uh upwardand downward pressure on cap
rates, depending on what thenext buyer is going to have to
borrow at.
The type of asset is gonna behave a big factor in that.
If it's a brand new build, youknow, your cap rate is gonna be
(23:30):
lower.
If if it's you know right byWalmart's home office and it's
in Bentonville and it's brandnew, like you know, you're
probably paying a pretty low caprate.
I've seen this below four caps,you know, and as high as ten cap
in a you know market like uhMemphis, Tennessee, where it's
above that ten cap or where it'sa different type of asset where
(23:51):
it's uh mobile home park, youknow, those might, you know, the
appreciation is going to beharder there, but you should be
getting more cash flow on thosetype of investments.
SPEAKER_01 (24:02):
Yep.
And then you know, for thosethat don't understand, cap rate
would be your capitalizationrate.
And so if you were to whatreally what that means, if you
were to buy the property cash,what would your return be?
And uh and I think as aninvestor, understanding what cap
rates are for certain types ofasset classes, if it's you know
commercial uh or if it's youknow small multifamily or or
(24:24):
whatever, and then you know,depending on the asset type, if
it if it's A class or B class orC class, and then even looking
down to certain areas, you know,something in in Springdale, the
cap rates in Springdale um areobviously going to be a lot
different than your cap rates inin Biddenville or your cap rates
in Fayetteville.
And so I think as an investor,as you are underwriting deals,
(24:47):
um, it's gonna be reallyimportant to kind of understand
what those look like so you canknow what your exit could be um,
you know, with that businessplan.
So yeah.
Um Brian, just as we wrap up thethis piece, I think we could
talk about this all day.
Uh uh underwriting is is such anart, and I think a lot of
investors need to reallyunderstand it.
Um but what what are some commonmistakes that uh that you've
(25:10):
maybe seen in business thatyou've done in the past or or
maybe others around you um, youknow, that you feel like they
underwrite a little bit tooaggressively, what do you
normally see as the are thosekind of shortcomings?
SPEAKER_02 (25:22):
I would say um three things underestimating expenses,
um overstating rent growth andoverstating that rent growth too
fast, you know, saying, youknow, I think we can turn this
property around and get rents toX, making sure that's that's
spread out a little bit, andthen um your end sale price
(25:48):
assumption uh being too high.
Making sure you want to stresstest different cap rates, making
sure even if the cap rates do goup that your deal still makes
sense there.
SPEAKER_01 (25:59):
Yeah, absolutely.
And I think uh I I really likewhat you said about
overestimating rent growth.
I think um, you know, obviouslyif you're if you're just getting
started or maybe you've been inthe game for a little while, we
have seen some outrageous, youknow, rent increases over the
past five years.
And uh and just for those thatare looking to do deals in the
(26:21):
future, I think it's gonna beimportant to understand
historically what rent growthhas looked like.
It's not gonna look like thewhat we've seen in the last five
years.
Um, but it's a result of youknow, we've we've seen the the
government print 40% of ourmoney supply in the last five
years, which is insane.
So you can imagine that that'sobviously going to have an
(26:41):
effect on our rent now.
Um, and it's probably safe toassume it's probably gonna be
closer to what the inflationrates are today, you know, two
to three percent in there,something like that.
Is that kind of what yeah?
SPEAKER_02 (26:54):
I I would say for me, like I I want to make sure
this deal makes sense at today'srents.
Like if it makes sure uh if weassume that rents aren't
increasing and it's just themarket rate, I want to make that
the deal needs to make sense ofthat and then push rents from
there.
SPEAKER_01 (27:07):
Yep, agreed.
I like what you said down here.
Good underwriting keeps you outof out of trouble.
I think uh really understandingthe best case scenarios and and
worst case scenarios and beingable to live with those
worst-case scenarios if theyhappened and it wouldn't put you
in a bad spot is reallyimportant.
Um I think even on top of that,nowadays, especially I think now
(27:29):
is about is uh you know, morethan ever is the is the time
where I think it makes sense notto be fully leveraged to the to
the nines.
Um, you know, it with the waykind of the economy has
continued to fluctuate up anddown and and uh what we've seen
and and how kind of how howrates may look in the next few
(27:50):
months.
Um I think it's probably a smartplay to you know 25% down, 20%
down.
A lot of these banks are arerequiring that nowadays.
And uh and so I thinkunderstanding number one, not
being too leveraged, but numbertwo, understanding
conservatively, um, you know, isthe deal a good or is it, you
know, do you need to pass andnot being emotional about those
(28:12):
things?
That makes sense.
SPEAKER_02 (28:13):
Yeah, 100%.
Leverage is a whole nother topicwe could get into as far as you
know, what's the right amount ofleverage?
I think it's just make sure yourunderwriting is sound and make
sure whether you're doing theunderwriting or whoever you're
working with is doing theunderwriting is getting real
mark like real-time feedback.
Where are they getting as thathave they talked to these
insurance agents?
(28:34):
Have they talked to any taxconsultants?
Have they talked to propertymanagers?
Have they talked to other ownersand making sure that's real
time, not too hypothetical?
SPEAKER_01 (28:42):
Yep.
Love it.
Well, we uh I think this is sucha good episode.
We could go on forever aboutthis and underwriting and kind
of um kind of continue to gointo that.
But if you have any questionsand want to reach out to Brian
or I on what you know how weunderwrite, what tools we use,
we're happy to to help um youknow send out the tools that we
use, and uh, we're happy to kindof be a be a uh sounding board
(29:07):
there for for anybody that needshelp there and and is just kind
of thinking about wanting to uhkind of go in here.
So thanks for listening toanother episode of Northwest
Arkansas Investing Podcast, anduh, we'll see you next time.
SPEAKER_00 (29:19):
Thanks, guys.
Again, thank you guys for tuningin.
I'm gonna go ahead and uh listsome sponsors off here.
We're gonna start with WinstonePrivate Lending.
This episode is brought to youby Winstone Private Lending, one
of the top private and hardmoney lenders now serving
Northwest Arkansas.
Whether you need short-termcapital for flip, a bridge loan,
(29:39):
or creative financing, they'vegot you covered with very
flexible products to fit nearlyany deal, including one hundred
percent financing.
What sets them apart is theirdeep expertise, fast response
times, and ability to thinkoutside of the box to help
investors like us close quicklyand efficiently.
If you're looking for a reallending partner, you can check.
(30:00):
out Winstone Private Lending.
Link is in the show notes.
Is Advantage Title and Escrow.
They're a local company.
They do great work.
Specifically Kayla Phillips.
I can speak personally on thissponsor because I use Kayla for
all of my transactions.
It's been two, three, four yearsnow, and Kayla and I have done a
(30:20):
ton of deals.
We probably do between 65 to 80deals a year together.
And they do a great job.
The sit the SOPs, so systems andprocessing that they have over
Advantage Title is justincredible.
Clients love it.
They do a great job from startto end communicating.
When I give a deal to AdvantageTitle and escrow, I know that
(30:41):
it's going to be taken care of.
There's no second guessing.
I almost am able to treat themlike a second transaction
coordinator to my transactioncoordinator that I already have.
I know that they're going tohandle the systems and processes
correctly as an agent, as ahomeowner, as a buyer or seller,
they do an incredible job ofhandling your transaction and
communicating throughout theprocess.
(31:02):
They do a great job withcommunication, especially Kayla
Phillips over there.
I would highly encourage you ifyou're looking to close on a
home, buy a home, if you're anagent listening to use Advantage
Title in escrow, specificallyKayla Phillips.
So you're going to reach Kaylabest at 501 3581601 or you can
(31:25):
email her Kayla C A Y L A atgoadvantage title dot com.
Advantage is A D V A N T A G Etitle dot com.
Banks are about community andCentury Bank of the Ozarks has
been your community bank for 131years.
(31:47):
That's over a century sinceeighteen ninety four they've
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futures.
Because they're locally ownedyour loan approval happens here
not miles away visit theirlocations in Fayetteville and
Mountain Home, Arkansas, as wellas Gainesville, Theodosia,
(32:08):
Bakersfield, and Ava, Missouri,Century Bank of the Ozarks,
local bankers make localdecisions since 1894.
Member FDIC and Equal HousingLender.
If you enjoyed the show, makesure to give us a follow on your
favorite podcast platform so younever miss an update.
SPEAKER_02 (32:23):
Don't forget to connect with us on Instagram,
Facebook, and LinkedIn for morereal estate insights and behind
the scenes content.
SPEAKER_01 (32:29):
Have a question you want us to cover, send it our
way.
And if you're interested insponsoring the show, visit
NWAinvesting.com to get intouch.
Thanks for listening and we'llsee you next time.
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