July 26, 2023 • 26 mins
Wondering how to master the intricacies of underwriting deals in the real estate sector? How about a dose of insightful market analysis and investment tips from your friendly hosts, Andrew Hook and I? This episode is a melting pot of our experiences and knowledge, offering a well-rounded perspective on how factors like market trends, tenant expectations, and the right property management can significantly impact a property's value and potential.
We kick off with a deep dive into real estate deal analysis, looking at various metrics to determine a good investment, along with potential appreciation prospects. We emphasize the importance of understanding the local climate, population growth, and industry trends. Moving forward, we explore how to gauge investment opportunities and potential growth, emphasizing tenant expectations and the value of a reliable property manager. The episode concludes with our thoughts on the importance of staying updated on market trends and acting based on in-depth research. So, plug in your headphones and let's embark on this insightful journey into the world of real estate!
Onward!
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 2 (00:22):
Hey guys, welcome back to another episode of the
Legacy Wealth Code podcast.
As you can see, sorry for thedelay, but the reason is we are
redoing the podcast studio.
So here we are, live on TV.
A lot of people have said wehave faces for radio, but now
you're going to have to see usgoing viral here on the interweb
so yeah, I got my partner here,andrew Hook, and today we want
(00:46):
to talk to you really aboutunderwriting deals, what it
looks like, how it can varymarket to market.
We get a lot of questions abouthey, is this a good deal or a
bad deal?
So we're going to walk throughone that was just presented to
us about a week ago that we'regoing to likely move forward on
and just go through how we lookat it, what we're doing when
(01:07):
we're underwriting it and how itmight vary from the area that
it's in versus like Miami orTampa or an area that has huge
growth on the appreciation side.
Speaker 3 (01:19):
Yeah, I think you know and I'm excited for this
podcast because I feel like oneof the things we talk about with
investors, and in the coursethat we do too, is people get
reticent about moving forward ona deal and it's almost like
they're excited, they're excited, they're excited now they get
presented and they're like getscared to pull the trigger right
.
So, and I think it's natural,you know you want to make sure
(01:43):
that what you're doing is a goodinvestment course, and so I
think it'll be helpful forpeople to see kind of, what are
the metrics we look at?
Because, at the end of the day,what we trust is our numbers
right, and that's the only thing, that's the constant that you
can trust.
And so I think it'll be helpfulto kind of walk through this
and see the things that we lookat.
You know what's important andwhat's not important.
(02:04):
What are good breaks versus badbreaks for us in the deal?
Speaker 2 (02:09):
Yeah, and I mean I think for me, you know, one of
the best parts about dealing youknow 99% of my business now in
the investment space is thatit's not emotional.
So, like the numbers is prettymuch what we rely on.
You know we're looking at thisdeal and I, you know, I would
say the first takeaway onanalyzing a deal is
understanding the market.
(02:29):
Is this a market that fiveyears from now you might see a
20 or 30% appreciation in thevalue, or is it a market where
you might see 2%?
You know there's a ton ofplaces in the country the deal
we'll talk to you guys abouttoday is based out of Indiana
and there's a ton of differentplaces in the country that are
similar to rural Indiana.
(02:49):
You've got Cleveland, kansasCity.
You know these markets aregreat from a cap rate
perspective they're not greatfrom.
You know it's probably going tobe worth about what it's worth
now, 10 years from now.
Speaker 3 (03:02):
Well, it's having a conversation with a lady the
other day who is she's got she'sgot a couple of single family
properties here in the Tampa Bayarea and she wants to sell
those, pull her equity out andbuy something that's a little
larger that she can.
You know she's recognizing herequity.
She also wants to make surethat she's getting good cash
flow off it.
And one of the things we weretalking about was I said you
(03:24):
know you can go to some of theseareas where you might see a
deal that we were talking aboutwith Aaron the other day was
literally a 40 cap when you ranit on a gross number.
That is an incredible amount ofcash flow, but you may not see
appreciation in that market andthat property may increase in
(03:44):
value 3% a year, if that youknow, and you may even see them
go backwards in some markets.
It's not typical.
Speaker 2 (03:51):
Which is crazy too, because, like we're talking
about 40,000-hour property togetting $1,200 a month in rent.
Yeah, but remember, I ran thecrime statistics and there's two
more dangerous neighborhoods inthe country.
Like two out of a hundred aremore dangerous than the
neighborhood we're talking about.
So you kind of you know that'sreally the driving factor of
(04:14):
you're not going to see a lot ofappreciation unless you see
those things change.
Speaker 3 (04:18):
So you have to kind of think about what you're
buying, right Like you're buyingeither appreciation in certain
markets are really hot, oryou're buying cash flow in other
markets that aren't.
But where you really hit thesegrand slams are where you can
get in front of where's a marketthat is starting to take off or
that is going to take off,because now you're getting not
only the cash flow but you'vealso got the benefit of the
(04:39):
appreciation, and that's how youreally hyper accelerate your
wealth.
Speaker 2 (04:42):
All right, so, and I totally agree with that.
So what do you think?
You know, I know what my answeris, but I'm curious to hear
what yours are when you thinkabout trying to find those, the
unicorn, the diamond in therough, those areas where you're
going to get a, you know, 12 capor 13 cap, but you're also
going to see a pretty solidamount of appreciation.
(05:02):
What do you think the couple ofmajor factors are?
Speaker 3 (05:07):
I mean, to me it all comes back to the number.
One thing I think it comes backto is population growth.
Right, and what I look at whenI see trends of population
growth are what's tax friendly,because that's a big promotion
of population.
Where's the climate?
(05:28):
Good, I mean, that seems to be.
Especially as the boomergeneration is retiring out, that
seems to be a big one.
Where industry is going, I meanthat's huge as well, because
whether you follow the techindustry or whether you follow
manufacturing or auto, any ofthose, that type of stuff is
going to drive population and iswhat's going to ultimately
(05:51):
create the economics 101 ofsupply and demand, which is
going to increase your prices.
What about you?
What's your?
Speaker 2 (05:59):
answer no.
I was going to say I thinkthat's the old faithful supply
and demand idea.
I mean, I know it's crazy, butI think that when you look at
some of these, I know years agoone of our real estate mentors
had mentioned buying inHuntsville and being from Auburn
, I know Huntsville fairly well,been there a few times, and I'm
like man Huntsville, why in theworld would you do that?
(06:20):
But I think it was a Kia or aHyundai factory going in there
and on SpaceX.
So now you have this area whereyou're able to buy single
family homes.
I think they were like in thelow 100s that were renting out
for over $2,000 a month, so hugecap rate.
And then on top of that they'renow worth $300,000, $400,000.
(06:40):
This is only like five yearsago, six years ago.
Speaker 3 (06:43):
And again, those are the honey holes, those are the
grand slams you're going to find.
I mean, I look back at theconversation we were having
about Arkansas about a year agowhen we started digging into
that market a little bit.
And what's the town thatWalmart's in?
Speaker 2 (06:59):
Yeah, it's like Northern Arkansas.
Speaker 3 (07:01):
They have the huge Bentonville, yeah, bentonville.
Speaker 2 (07:05):
That's where Walmart's based on everything.
Speaker 3 (07:06):
Yeah but I mean, you look at a market like that and
it's those you have, walmart,you have I can't remember the
trucking company that's theretoo and you've got like three
multi-billion dollar companiesthat are headquartered in this
area and they're putting so muchmoney back into that market to
draw.
Speaker 2 (07:25):
That's the world's longest like mountain biking
trail.
So, now Airbnb there is goingcrazy because people that are
into mountain biking they gothere and I think it's the
Walton family that's behind alot of that.
You know the trail being grownout.
Speaker 3 (07:39):
And it's I mean, it's that idea of you put money back
into the community that you'rein.
You're going to attract moreand more people that want to
live there, right, and so thoseare kind of the characteristics
I would say are so important tolook at when you're thinking
about.
You know location and at theend of the day, I mean I think
you're right location, above andbeyond anything other than your
(08:02):
numbers, is the number onething I think you can look at
with real estate.
Speaker 2 (08:07):
So let's go through this deal that we're looking at.
It's rural Indiana.
Andrew and I flew up there onSunday night.
It was a delightful experience.
You got your couple hour delay,thanks to the it was a wild 24
hours.
Speaker 3 (08:19):
The.
Speaker 2 (08:20):
Florida, afternoon thunderstorms and then a couple
hour delay on the way back.
But I feel like we got a lotaccomplished and it's the what
we got accomplished.
I think I made the joke to you.
I felt like we're on one ofthose reality shows where we
have like 30 days to make amillion dollars and we have
Somebody gave us 50 bucks tostart with.
So we're going door to doortalking to people because that's
really what we were doing.
(08:41):
We knew no one in this townexcept for the acquisition guy
bringing us the deal, but weknow what to look for and I
think that that's probably themost important part.
Going into an area blind is onething, but if you don't know
what you're looking for, goinginto that area, that's where I
think you can run into some risk.
And when I say risk to yourpoint, I think a lot of people
(09:03):
end up backing out of deals whenthey get to a hurdle that they
don't feel comfortable movingpast, and a lot of times that
might not be a hurdle thatshould have killed the deal, but
now you just oh, I don't knowabout that and I'm out.
Speaker 3 (09:16):
Well, I think some of it also.
It's your threshold right, Likewe kid about the fact that you
would gamble on almost anythingand I'm the other way, and
together we have a pretty goodvoice of reason that meets in
the middle and that's part ofour success.
Speaker 2 (09:29):
What's all that?
One in a million talk.
Speaker 3 (09:30):
Exactly.
But I think some of that's yourthreshold.
But I think you're right as faras, like you know and you got
to have your line in the sand asto what it is, that is a deal
killer for you, because notevery deal is going to work
right and so you have toestablish that.
But I think as you get a littlemore sophisticated and as you
do more and more deals, thatline in the sand can move and
(09:53):
that's fine.
I mean it can be a little bitof a moving target, but because
you can get comfortable withsome of those things.
But I think maybe the mosthelpful thing is let's start
with the numbers, because I feellike the numbers is where we
started on this deal and said,okay, the numbers look good.
Now let's dig into thesecondary pieces of, let's see
the property, let's figure outwhat the surrounding mechanisms
of it are.
Speaker 2 (10:13):
Yeah, well, we have management.
Well, we have insurance.
You know the basics that youwant to do the numbers.
You want me to do the numbers.
Speaker 3 (10:19):
So this is a package of 28 single family properties
that were under contract onMarket rents right now are not
excuse me, not market rents.
The existing rents right noware very low.
This is a single owner of theseproperties, self-manages the
properties, hasn't raised rentsin a number of years, deferred
(10:40):
maintenance on these properties,and so the property is spinning
off currently just over $12,000a month in rent.
So our and as is, I believe itcomes out to somewhere around a
14% cap.
Speaker 2 (10:55):
So our goal based on the 820 purchase price.
Speaker 3 (10:59):
Correct.
So our goal is to and yeah, andthat's where that number is
coming in but our goal is to goin improve these properties, do
some maintenance on them, bringthem up to a condition that we
can increase rents, to marketrents, become a better landlord
probably than what's existing,and then have these are month to
(11:20):
month tenants and have peoplethat are rolling on its annual
long-term leases and hopefullycontinuing to renew annually.
Speaker 2 (11:28):
Yeah Well, and I, you know, driving around the town
and that's kind of the humancomponent that was secondary.
You know this checked out onpaper, now let's go look at it
and I think driving around.
Speaker 3 (11:39):
Before we jump there, let's finish out the, the, the,
the, the, the, the, the, the,the market rent ARV, though,
because that's what, that's whattook us, I think, stamped it to
say let's go look further,right?
So, from what we're seeing, wethink we can increase rents um
somewhere probably on an averageof about three to $400 a door,
depending on the door, and sowhere that would take us is, if
(12:01):
we can, if we can do that acrossthe board, we'd be somewhere
between $20 to $22,000 a monthin rent um, and our improvement
costs are we're averaging about$15,000 a door to do that.
So, um, the numbers work on itpretty well.
Um, it's something that uh isalso enticing to us from a
(12:22):
standpoint of there is umopportunity to buy more doors
behind this and grow and growthat portfolio there, so that we
some of these secondary itemsthat we'll talk about, we can
kind of potentially either bringin house or we can, uh, you
know, from an economy of scaleperspective, get, get at a
better rate.
Speaker 2 (12:41):
Well, unlike we talked about the other day, like
my big vision on this is thatHallmark movie where the town
has a Christmas parade and we'rein it because we've now taken
these properties.
That were in such duress andgiven people an actual the most
famous person.
Speaker 1 (12:56):
So, stay tuned, We'll see if that uh, if that happens
.
Speaker 2 (12:59):
But yeah, I mean, these are, you know, driving
around.
I think what what stood out tome is we're looking at a lot of
different properties, um, inthis portfolio that are all
fairly similar, but drivingaround the town when we know the
market rent is almost doublewhat these are getting right now
.
The other properties weren'tthat much different looking.
(13:19):
You know what I mean.
So we're not having to pour in,you know, 20, 30, 40, 50
thousand dollars to get these tothat market rent.
We're having to, in some cases,replace a roof which in Indiana
is a fraction of what it costsin Florida.
We're having to, you know,paint things just to make it
look a little bit nicer, replacea few windows.
(13:40):
But you know this, you knowpeople aren't expecting to walk
in and see shaker cabinets incourts.
I mean, this is, you know,somebody that's paying six,
seven hundred dollars a month.
You know that expectation isthat it's just somewhere that's
nice to live, that's safe tolive.
But they're not.
You know their requirementsaren't these crazy high-end
(14:01):
finishes?
Speaker 3 (14:02):
Yeah, no, and I think I mean it's important too,
because I feel like, you know,everybody always says, oh well,
I'm just going to increase rents.
But how realistic is that?
You know and I think that'sthat was a big, a big thing for
us here on this opportunity isthat the likelihood of that is
actually very reasonable.
It's not a stretch to say youcan jump these at a minimum 200
(14:23):
dollars a month and probablymore, like three to four hundred
dollars a month.
And so you know, that'ssomething I think you really
have to look out for, because Ialmost every single property
that I see marketed sayssomething about increased rents.
But then you dive in and youstart looking at it and you're
like, you know, maybe they'realready at market rent, maybe
they're above market rent, ormaybe there's no opportunity in
(14:44):
that market for rents to gohigher anyways, right?
Speaker 2 (14:47):
So yeah, and I mean, I think that this is one of
those that, not knowing anyonein particular in that market,
luckily, you know, for us havingthe industry knowledge of, okay
, this deal checks out on paper.
Now, how do we make sure thatwe can pull this off?
Yeah, so you know that's.
Speaker 3 (15:04):
Yeah, and that's exactly why the trip became
necessary, right, because youknow, ultimately, at the end of
the day, you know before, it'stough to make a decision without
actually setting eyes on andseeing and feeling it a little
bit.
And so, and I think it alsogave us an excellent opportunity
to go up and try to forge someother relationships that are
important and so yeah, pullingover, hey, you do electrical
(15:25):
cool here, you know, you know,and that's really what you got
to do.
Speaker 2 (15:28):
And luckily for us, we just happened to kind of
arrive upon a few of, like thepeople that have been in the
neighborhood for years and yearsand they, you know, very well
established in the community.
So for us that's a great youknow great contact that'll at
least allow us to take it tothat next step, which, you know,
the couple items that areextremely important in this is
(15:49):
property management.
You know we're 1200 miles away.
You know, venture to say mostof these people are probably
paying cash.
The current landlord is notgreat with paperwork and you
know organization.
So I would venture to say thatcash is probably, most of these
people at least, what they'vebeen used to.
So, having somebody there thatcan collect the rent, make sure
(16:10):
that you know, in the case ofemergency situation, they're
there.
Speaker 3 (16:14):
Well, I think you also bring the fact to that it's
local trust right, like I mean,there's definitely an element
of like small town USA whereit's like you're an outsider
versus you're an insider.
And so you know there's, andthe goal, of course, is that you
get to know all these peopleand they become very comfortable
with you, but we're still anoutsider to them, and so I think
(16:35):
you have to evaluate it from aperspective of local management
and this type of scenario isvery, very important.
And so you know having theright fit as far as, are these
people going to be responsive?
Are they going to have goodcontacts to use from a vendor
perspective?
Are they going to be good aboutreporting, or are they going to
be timely?
(16:56):
But I mean, as we've experiencedin talking to probably 10
different management companiesthere, everybody's got a
different rate, everybody's got.
You know, either we're have adistance problem or it's not
really our bread and butter ofwhat we do.
You know there's always goingto be some of these answers and
(17:17):
you go into some of thesesmaller towns that are not like.
It's not like going to Miami orNew York where you're saying,
open a phone book and scroll forseven pages as to how many
property management companiesthere are you know.
But that's a huge piece of notonly.
Not only is it a huge piece offinishing your crunch your
numbers out to make sure thatyou know your cash flow positive
(17:40):
, but it's also a huge piece ofyou know if you're doing
improvement work, you know thatthere's going to be a lot of
hands on with that.
Speaker 2 (17:49):
Yeah Well, and you know, what's funny is like this
last week has been frustrating,I think, for both of us, with
calling these different guys andor guys, girls property
managers and them being, oh, youknow, I don't know if that's a
little too far.
And you know, it's frustratingbecause we're trying to get to
who is going to actually do this, but in the same breath it's
almost kind of like a freshbreath of air, like they're just
(18:11):
staying in their lane.
So I kind of appreciate thatportion of it.
Sure, it's like no, I don'twant to overstretch, whereas,
like in these in the biggercities, I feel like people will
just take on, you know,absolutely I can do it, and then
they just epically fail Well,and then you're mad.
These people are veryreputation based.
Speaker 3 (18:29):
Yeah, and that's what we kept hearing was my
reputation is all I have and Ican't tarnish that.
Well, I mean, that's to berespected, right?
Yeah, it takes a lifetime tobuild it and a few minutes to
lose it, you know.
So I think those are importantthings.
But some of the other things Ithink we talked about while
we're up there is insurance.
So we've got local insurancepeople working on these deals
(18:53):
versus we're a little taintedbeing in Florida.
Exactly.
Speaker 2 (18:56):
You know, insurance scares the crap out of all of us
because we're like whoa,they're going to pull out?
Is there going to be ahurricane?
You know, there it's not.
It doesn't seem like it's asbig of an issue, which for, I
guess, for both of us, it'sprobably a little bit of a.
You know, it's a relief, butwe're also still like I don't
know.
I don't know, you know, becausewe're just so used to insurance
being a nightmare.
Speaker 3 (19:14):
Yeah.
So I think you know, again,trying to find it on a localized
level, they understand theproduct better, they understand
the issues better.
It's not like you're getting.
I mean, could we find aFlorida-based insurance agent to
write a policy on these?
Probably so, but they're notgoing to understand the dynamics
of that town that needs whatthose people run into from a
(19:36):
standpoint of what claimsactually look like on a regular
basis.
So the localized insurance is,to me, is a big thing as well,
and I mean I think you end upwith better quotes, you end up
with more realistic coverages.
But again, I mean that all fitsback into your numbers too, of
course, right.
Speaker 2 (19:54):
So Well, I think for us you know, just to kind of
bring this full circle as to whythis deal makes so much sense
for us is the purchase price, iswe're buying at like a 13 cap,
which is good?
And going back to the verybeginning of this episode, where
we talked about markets thatare appreciating at a very high
rate usually have lower caprates, and that's why, when
(20:17):
you're analyzing deals andmarkets that may have a slower
amount of appreciation, youdefinitely want to have a higher
cap rate.
So going in at a 13 cap withthe ability to raise it into the
20s is awesome.
But for us, I think, one of thebiggest factors is the fact
that there's a lot of like EV.
No motors has something goingon there.
(20:39):
Solantis is 15, 20 miles away,so you start seeing these huge
companies putting in a ton ofinfrastructure.
That's a driving factor.
That could be, you know, thatdrives the property values to go
up over the next five or 10years.
Speaker 3 (20:54):
Yeah, and I mean again back to that point as to
you know, you now have not onlythe cash flow, but we've got the
opportunity for appreciation asthe areas stabilize, or whether
they're already stabilized andthey remain, you know, a
flourishing area to come.
(21:14):
Either way, you would imaginethat your prices are going to
increase as your populationincreases, and so I mean that's
the best case scenario on it,and I think this deal, you know,
obviously for us greatopportunity.
Speaker 2 (21:30):
But these deals, I think, do come around quite
often for people and as you, youknow, whether you're a seasoned
investor or fairly newunderstanding like okay.
So these are some of thefactors I really got to look at
and I think there's really onlya few that are extremely
important, which is the numberspenciling out to whatever.
You know everyone might havetheir own you know box.
(21:51):
You know just like a buy boxfor a hedge fund they have.
This is the cap rate I'm goingto get or I want.
This is, you know, I want to buyin a market that has some type
of you know whether it's amanufacturing or tech company.
You know where there is anupside.
But then you know understandingthose other variables that,
like the insurance the propertymanager, do I have a good roofer
(22:12):
?
Can I get a good handyman?
Because those are the thingsthat could ultimately be a deal
killer.
Yep for sure.
You might already have boughtit, but your profit margin gets
sucked out because you don'thave a trustworthy contact
that's doing something for youand they're siphoning money,
which happens all the time.
Speaker 3 (22:28):
Yeah, yeah, I mean, and especially in some of these
that have deferred maintenance,you know up front those costs
are going to be front loaded andit can bleed you heavy early on
if you're not prepared for it.
You don't have the right peopledoing it, because all it takes
is one bad contractor and you'rereally in the red on your deal
(22:54):
out of the gate.
So I mean that's important, butyeah, so just to kind of recap,
I mean, yeah, again, we alwaysstart with numbers and, as we
said, the numbers vary a littlebit depending on the market and
where we need those rates to be,but the numbers are always kind
of the leading point for us.
And then, as you getcomfortable and solidify your
(23:17):
numbers, now we're looking atsort of some of these secondary
things that play into yournumbers to a certain extent,
because they're operating costs,but also, you know, getting to
know your locations and gettingto know your providers and the
people that you're going to leanon.
You know whether it's insurance, property management,
(23:37):
maintenance, whatever it is.
I mean those relationships atthe end of the day are going to
be very important and then haveyour exit plan.
Yeah, exactly, and yeah, wehaven't really talked about exit
, but I mean, that's the otherthing that I like about this
deal is there are so manydifferent exit plans and I think
that's the one thing that youknow, not the one thing we've
done.
Well, but when we do vet a deal, I think I can think of maybe
(24:02):
one or two deals we've donewhere your exit strategy is
limited to like one option.
Yeah, because normally I meanfor us, I feel like we look at
it and we're like we could flipthis thing multiple ways,
whether we do a long-term rentalor short-term rental, whether
we sell or finance it, whetherwe end up selling it outright.
I mean usually there's avariety of different exits on
(24:25):
those properties and this is oneof those that has numerous
different ways that it can beexited out of and they're all
beneficial.
Speaker 2 (24:32):
Yeah, I would think that you know, looking back, we
definitely sucked in thebeginning.
Speaker 3 (24:36):
Well, in the beginning, the only exit was to
resell Holy cow.
We can make 40 grand in a month.
This is awesome.
Speaker 2 (24:43):
Sell it and then now those are worth.
You know twice what we wouldhave what we paid for it.
But that's just.
I think that's part of thelearning curve.
Which is why we're doing thispodcast is just to try to you
know, as we've tried, and Iwouldn't even say failed,
because I mean you buy somethingand you sell it a month later
for 40k more than you bought itfor and you didn't do anything
to it, is not a that's not aloss, especially when you're
(25:04):
talking about, like a hundredthousand-hour property.
But we were laughing about itwhen we were up in Indiana
because those same propertiesnow are trading at 300, 350,000.
So now it's a 3x return versus.
And you know, those are justsome of the lessons that we I
think we've learned over theyears.
But yeah, I think this is goodbecause for us, I know that
there's probably been a handfulof deals we've passed on because
(25:27):
we were scared off by somethingthat we didn't have any
experience doing.
So you know, obviously you gotto get the experience by doing
things, but I think at leasthearing from people that are
doing it maybe it'll give someconfidence to some of our
listeners that you know, as longas you know what you're getting
yourself into from.
You know a list of these arethe things that I need to figure
(25:47):
out.
You don't have to necessarilyknow that market inside and out,
as long as the numbers makesense and you know what you're
looking for.
Speaker 3 (25:54):
Yeah, I agree and I mean hopefully this is helpful.
I mean I think you know whenyou break it down and you look
at, these are the items that wereally look at and how we
dissect a deal and hopefullythere's some good takeaways for
you.
Speaker 2 (26:11):
Yep.
So now that we are here instudio, stay tuned for,
hopefully, weekly episodes.
That's our goal, so we're goingto try to film a couple have
like a little.
Speaker 3 (26:22):
I feel rusty right now.
Yeah, I know I was going to say, but it's good to be back, so
we appreciate everyone'spatience and until next time
onward.
Speaker 1 (26:30):
Thank you for joining us for another episode of the
Legacy Wealth Code podcast.
If you enjoyed this episode,click subscribe now and never
miss an episode until next timeonward.
Hey guys, welcome back to another episode of the
Legacy Wealth Code podcast.
As you can see, sorry for thedelay, but the reason is we are
redoing the podcast studio.
So here we are, live on TV.
A lot of people have said wehave faces for radio, but now
you're going to have to see usgoing viral here on the interweb
so yeah, I got my partner here,andrew Hook, and today we want
(00:46):
to talk to you really aboutunderwriting deals, what it
looks like, how it can varymarket to market.
We get a lot of questions abouthey, is this a good deal or a
bad deal?
So we're going to walk throughone that was just presented to
us about a week ago that we'regoing to likely move forward on
and just go through how we lookat it, what we're doing when
(01:07):
we're underwriting it and how itmight vary from the area that
it's in versus like Miami orTampa or an area that has huge
growth on the appreciation side.
Speaker 3 (01:19):
Yeah, I think you know and I'm excited for this
podcast because I feel like oneof the things we talk about with
investors, and in the coursethat we do too, is people get
reticent about moving forward ona deal and it's almost like
they're excited, they're excited, they're excited now they get
presented and they're like getscared to pull the trigger right
.
So, and I think it's natural,you know you want to make sure
(01:43):
that what you're doing is a goodinvestment course, and so I
think it'll be helpful forpeople to see kind of, what are
the metrics we look at?
Because, at the end of the day,what we trust is our numbers
right, and that's the only thing, that's the constant that you
can trust.
And so I think it'll be helpfulto kind of walk through this
and see the things that we lookat.
You know what's important andwhat's not important.
(02:04):
What are good breaks versus badbreaks for us in the deal?
Speaker 2 (02:09):
Yeah, and I mean I think for me, you know, one of
the best parts about dealing youknow 99% of my business now in
the investment space is thatit's not emotional.
So, like the numbers is prettymuch what we rely on.
You know we're looking at thisdeal and I, you know, I would
say the first takeaway onanalyzing a deal is
understanding the market.
(02:29):
Is this a market that fiveyears from now you might see a
20 or 30% appreciation in thevalue, or is it a market where
you might see 2%?
You know there's a ton ofplaces in the country the deal
we'll talk to you guys abouttoday is based out of Indiana
and there's a ton of differentplaces in the country that are
similar to rural Indiana.
(02:49):
You've got Cleveland, kansasCity.
You know these markets aregreat from a cap rate
perspective they're not greatfrom.
You know it's probably going tobe worth about what it's worth
now, 10 years from now.
Speaker 3 (03:02):
Well, it's having a conversation with a lady the
other day who is she's got she'sgot a couple of single family
properties here in the Tampa Bayarea and she wants to sell
those, pull her equity out andbuy something that's a little
larger that she can.
You know she's recognizing herequity.
She also wants to make surethat she's getting good cash
flow off it.
And one of the things we weretalking about was I said you
(03:24):
know you can go to some of theseareas where you might see a
deal that we were talking aboutwith Aaron the other day was
literally a 40 cap when you ranit on a gross number.
That is an incredible amount ofcash flow, but you may not see
appreciation in that market andthat property may increase in
(03:44):
value 3% a year, if that youknow, and you may even see them
go backwards in some markets.
It's not typical.
Speaker 2 (03:51):
Which is crazy too, because, like we're talking
about 40,000-hour property togetting $1,200 a month in rent.
Yeah, but remember, I ran thecrime statistics and there's two
more dangerous neighborhoods inthe country.
Like two out of a hundred aremore dangerous than the
neighborhood we're talking about.
So you kind of you know that'sreally the driving factor of
(04:14):
you're not going to see a lot ofappreciation unless you see
those things change.
Speaker 3 (04:18):
So you have to kind of think about what you're
buying, right Like you're buyingeither appreciation in certain
markets are really hot, oryou're buying cash flow in other
markets that aren't.
But where you really hit thesegrand slams are where you can
get in front of where's a marketthat is starting to take off or
that is going to take off,because now you're getting not
only the cash flow but you'vealso got the benefit of the
(04:39):
appreciation, and that's how youreally hyper accelerate your
wealth.
Speaker 2 (04:42):
All right, so, and I totally agree with that.
So what do you think?
You know, I know what my answeris, but I'm curious to hear
what yours are when you thinkabout trying to find those, the
unicorn, the diamond in therough, those areas where you're
going to get a, you know, 12 capor 13 cap, but you're also
going to see a pretty solidamount of appreciation.
(05:02):
What do you think the couple ofmajor factors are?
Speaker 3 (05:07):
I mean, to me it all comes back to the number.
One thing I think it comes backto is population growth.
Right, and what I look at whenI see trends of population
growth are what's tax friendly,because that's a big promotion
of population.
Where's the climate?
(05:28):
Good, I mean, that seems to be.
Especially as the boomergeneration is retiring out, that
seems to be a big one.
Where industry is going, I meanthat's huge as well, because
whether you follow the techindustry or whether you follow
manufacturing or auto, any ofthose, that type of stuff is
going to drive population and iswhat's going to ultimately
(05:51):
create the economics 101 ofsupply and demand, which is
going to increase your prices.
What about you?
What's your?
Speaker 2 (05:59):
answer no.
I was going to say I thinkthat's the old faithful supply
and demand idea.
I mean, I know it's crazy, butI think that when you look at
some of these, I know years agoone of our real estate mentors
had mentioned buying inHuntsville and being from Auburn
, I know Huntsville fairly well,been there a few times, and I'm
like man Huntsville, why in theworld would you do that?
(06:20):
But I think it was a Kia or aHyundai factory going in there
and on SpaceX.
So now you have this area whereyou're able to buy single
family homes.
I think they were like in thelow 100s that were renting out
for over $2,000 a month, so hugecap rate.
And then on top of that they'renow worth $300,000, $400,000.
(06:40):
This is only like five yearsago, six years ago.
Speaker 3 (06:43):
And again, those are the honey holes, those are the
grand slams you're going to find.
I mean, I look back at theconversation we were having
about Arkansas about a year agowhen we started digging into
that market a little bit.
And what's the town thatWalmart's in?
Speaker 2 (06:59):
Yeah, it's like Northern Arkansas.
Speaker 3 (07:01):
They have the huge Bentonville, yeah, bentonville.
Speaker 2 (07:05):
That's where Walmart's based on everything.
Speaker 3 (07:06):
Yeah but I mean, you look at a market like that and
it's those you have, walmart,you have I can't remember the
trucking company that's theretoo and you've got like three
multi-billion dollar companiesthat are headquartered in this
area and they're putting so muchmoney back into that market to
draw.
Speaker 2 (07:25):
That's the world's longest like mountain biking
trail.
So, now Airbnb there is goingcrazy because people that are
into mountain biking they gothere and I think it's the
Walton family that's behind alot of that.
You know the trail being grownout.
Speaker 3 (07:39):
And it's I mean, it's that idea of you put money back
into the community that you'rein.
You're going to attract moreand more people that want to
live there, right, and so thoseare kind of the characteristics
I would say are so important tolook at when you're thinking
about.
You know location and at theend of the day, I mean I think
you're right location, above andbeyond anything other than your
(08:02):
numbers, is the number onething I think you can look at
with real estate.
Speaker 2 (08:07):
So let's go through this deal that we're looking at.
It's rural Indiana.
Andrew and I flew up there onSunday night.
It was a delightful experience.
You got your couple hour delay,thanks to the it was a wild 24
hours.
Speaker 3 (08:19):
The.
Speaker 2 (08:20):
Florida, afternoon thunderstorms and then a couple
hour delay on the way back.
But I feel like we got a lotaccomplished and it's the what
we got accomplished.
I think I made the joke to you.
I felt like we're on one ofthose reality shows where we
have like 30 days to make amillion dollars and we have
Somebody gave us 50 bucks tostart with.
So we're going door to doortalking to people because that's
really what we were doing.
(08:41):
We knew no one in this townexcept for the acquisition guy
bringing us the deal, but weknow what to look for and I
think that that's probably themost important part.
Going into an area blind is onething, but if you don't know
what you're looking for, goinginto that area, that's where I
think you can run into some risk.
And when I say risk to yourpoint, I think a lot of people
(09:03):
end up backing out of deals whenthey get to a hurdle that they
don't feel comfortable movingpast, and a lot of times that
might not be a hurdle thatshould have killed the deal, but
now you just oh, I don't knowabout that and I'm out.
Speaker 3 (09:16):
Well, I think some of it also.
It's your threshold right, Likewe kid about the fact that you
would gamble on almost anythingand I'm the other way, and
together we have a pretty goodvoice of reason that meets in
the middle and that's part ofour success.
Speaker 2 (09:29):
What's all that?
One in a million talk.
Speaker 3 (09:30):
Exactly.
But I think some of that's yourthreshold.
But I think you're right as faras, like you know and you got
to have your line in the sand asto what it is, that is a deal
killer for you, because notevery deal is going to work
right and so you have toestablish that.
But I think as you get a littlemore sophisticated and as you
do more and more deals, thatline in the sand can move and
(09:53):
that's fine.
I mean it can be a little bitof a moving target, but because
you can get comfortable withsome of those things.
But I think maybe the mosthelpful thing is let's start
with the numbers, because I feellike the numbers is where we
started on this deal and said,okay, the numbers look good.
Now let's dig into thesecondary pieces of, let's see
the property, let's figure outwhat the surrounding mechanisms
of it are.
Speaker 2 (10:13):
Yeah, well, we have management.
Well, we have insurance.
You know the basics that youwant to do the numbers.
You want me to do the numbers.
Speaker 3 (10:19):
So this is a package of 28 single family properties
that were under contract onMarket rents right now are not
excuse me, not market rents.
The existing rents right noware very low.
This is a single owner of theseproperties, self-manages the
properties, hasn't raised rentsin a number of years, deferred
(10:40):
maintenance on these properties,and so the property is spinning
off currently just over $12,000a month in rent.
So our and as is, I believe itcomes out to somewhere around a
14% cap.
Speaker 2 (10:55):
So our goal based on the 820 purchase price.
Speaker 3 (10:59):
Correct.
So our goal is to and yeah, andthat's where that number is
coming in but our goal is to goin improve these properties, do
some maintenance on them, bringthem up to a condition that we
can increase rents, to marketrents, become a better landlord
probably than what's existing,and then have these are month to
(11:20):
month tenants and have peoplethat are rolling on its annual
long-term leases and hopefullycontinuing to renew annually.
Speaker 2 (11:28):
Yeah Well, and I, you know, driving around the town
and that's kind of the humancomponent that was secondary.
You know this checked out onpaper, now let's go look at it
and I think driving around.
Speaker 3 (11:39):
Before we jump there, let's finish out the, the, the,
the, the, the, the, the, the,the market rent ARV, though,
because that's what, that's whattook us, I think, stamped it to
say let's go look further,right?
So, from what we're seeing, wethink we can increase rents um
somewhere probably on an averageof about three to $400 a door,
depending on the door, and sowhere that would take us is, if
(12:01):
we can, if we can do that acrossthe board, we'd be somewhere
between $20 to $22,000 a monthin rent um, and our improvement
costs are we're averaging about$15,000 a door to do that.
So, um, the numbers work on itpretty well.
Um, it's something that uh isalso enticing to us from a
(12:22):
standpoint of there is umopportunity to buy more doors
behind this and grow and growthat portfolio there, so that we
some of these secondary itemsthat we'll talk about, we can
kind of potentially either bringin house or we can, uh, you
know, from an economy of scaleperspective, get, get at a
better rate.
Speaker 2 (12:41):
Well, unlike we talked about the other day, like
my big vision on this is thatHallmark movie where the town
has a Christmas parade and we'rein it because we've now taken
these properties.
That were in such duress andgiven people an actual the most
famous person.
Speaker 1 (12:56):
So, stay tuned, We'll see if that uh, if that happens
.
Speaker 2 (12:59):
But yeah, I mean, these are, you know, driving
around.
I think what what stood out tome is we're looking at a lot of
different properties, um, inthis portfolio that are all
fairly similar, but drivingaround the town when we know the
market rent is almost doublewhat these are getting right now
.
The other properties weren'tthat much different looking.
(13:19):
You know what I mean.
So we're not having to pour in,you know, 20, 30, 40, 50
thousand dollars to get these tothat market rent.
We're having to, in some cases,replace a roof which in Indiana
is a fraction of what it costsin Florida.
We're having to, you know,paint things just to make it
look a little bit nicer, replacea few windows.
(13:40):
But you know this, you knowpeople aren't expecting to walk
in and see shaker cabinets incourts.
I mean, this is, you know,somebody that's paying six,
seven hundred dollars a month.
You know that expectation isthat it's just somewhere that's
nice to live, that's safe tolive.
But they're not.
You know their requirementsaren't these crazy high-end
(14:01):
finishes?
Speaker 3 (14:02):
Yeah, no, and I think I mean it's important too,
because I feel like, you know,everybody always says, oh well,
I'm just going to increase rents.
But how realistic is that?
You know and I think that'sthat was a big, a big thing for
us here on this opportunity isthat the likelihood of that is
actually very reasonable.
It's not a stretch to say youcan jump these at a minimum 200
(14:23):
dollars a month and probablymore, like three to four hundred
dollars a month.
And so you know, that'ssomething I think you really
have to look out for, because Ialmost every single property
that I see marketed sayssomething about increased rents.
But then you dive in and youstart looking at it and you're
like, you know, maybe they'realready at market rent, maybe
they're above market rent, ormaybe there's no opportunity in
(14:44):
that market for rents to gohigher anyways, right?
Speaker 2 (14:47):
So yeah, and I mean, I think that this is one of
those that, not knowing anyonein particular in that market,
luckily, you know, for us havingthe industry knowledge of, okay
, this deal checks out on paper.
Now, how do we make sure thatwe can pull this off?
Yeah, so you know that's.
Speaker 3 (15:04):
Yeah, and that's exactly why the trip became
necessary, right, because youknow, ultimately, at the end of
the day, you know before, it'stough to make a decision without
actually setting eyes on andseeing and feeling it a little
bit.
And so, and I think it alsogave us an excellent opportunity
to go up and try to forge someother relationships that are
important and so yeah, pullingover, hey, you do electrical
(15:25):
cool here, you know, you know,and that's really what you got
to do.
Speaker 2 (15:28):
And luckily for us, we just happened to kind of
arrive upon a few of, like thepeople that have been in the
neighborhood for years and yearsand they, you know, very well
established in the community.
So for us that's a great youknow great contact that'll at
least allow us to take it tothat next step, which, you know,
the couple items that areextremely important in this is
(15:49):
property management.
You know we're 1200 miles away.
You know, venture to say mostof these people are probably
paying cash.
The current landlord is notgreat with paperwork and you
know organization.
So I would venture to say thatcash is probably, most of these
people at least, what they'vebeen used to.
So, having somebody there thatcan collect the rent, make sure
(16:10):
that you know, in the case ofemergency situation, they're
there.
Speaker 3 (16:14):
Well, I think you also bring the fact to that it's
local trust right, like I mean,there's definitely an element
of like small town USA whereit's like you're an outsider
versus you're an insider.
And so you know there's, andthe goal, of course, is that you
get to know all these peopleand they become very comfortable
with you, but we're still anoutsider to them, and so I think
(16:35):
you have to evaluate it from aperspective of local management
and this type of scenario isvery, very important.
And so you know having theright fit as far as, are these
people going to be responsive?
Are they going to have goodcontacts to use from a vendor
perspective?
Are they going to be good aboutreporting, or are they going to
be timely?
(16:56):
But I mean, as we've experiencedin talking to probably 10
different management companiesthere, everybody's got a
different rate, everybody's got.
You know, either we're have adistance problem or it's not
really our bread and butter ofwhat we do.
You know there's always goingto be some of these answers and
(17:17):
you go into some of thesesmaller towns that are not like.
It's not like going to Miami orNew York where you're saying,
open a phone book and scroll forseven pages as to how many
property management companiesthere are you know.
But that's a huge piece of notonly.
Not only is it a huge piece offinishing your crunch your
numbers out to make sure thatyou know your cash flow positive
(17:40):
, but it's also a huge piece ofyou know if you're doing
improvement work, you know thatthere's going to be a lot of
hands on with that.
Speaker 2 (17:49):
Yeah Well, and you know, what's funny is like this
last week has been frustrating,I think, for both of us, with
calling these different guys andor guys, girls property
managers and them being, oh, youknow, I don't know if that's a
little too far.
And you know, it's frustratingbecause we're trying to get to
who is going to actually do this, but in the same breath it's
almost kind of like a freshbreath of air, like they're just
(18:11):
staying in their lane.
So I kind of appreciate thatportion of it.
Sure, it's like no, I don'twant to overstretch, whereas,
like in these in the biggercities, I feel like people will
just take on, you know,absolutely I can do it, and then
they just epically fail Well,and then you're mad.
These people are veryreputation based.
Speaker 3 (18:29):
Yeah, and that's what we kept hearing was my
reputation is all I have and Ican't tarnish that.
Well, I mean, that's to berespected, right?
Yeah, it takes a lifetime tobuild it and a few minutes to
lose it, you know.
So I think those are importantthings.
But some of the other things Ithink we talked about while
we're up there is insurance.
So we've got local insurancepeople working on these deals
(18:53):
versus we're a little taintedbeing in Florida.
Exactly.
Speaker 2 (18:56):
You know, insurance scares the crap out of all of us
because we're like whoa,they're going to pull out?
Is there going to be ahurricane?
You know, there it's not.
It doesn't seem like it's asbig of an issue, which for, I
guess, for both of us, it'sprobably a little bit of a.
You know, it's a relief, butwe're also still like I don't
know.
I don't know, you know, becausewe're just so used to insurance
being a nightmare.
Speaker 3 (19:14):
Yeah.
So I think you know, again,trying to find it on a localized
level, they understand theproduct better, they understand
the issues better.
It's not like you're getting.
I mean, could we find aFlorida-based insurance agent to
write a policy on these?
Probably so, but they're notgoing to understand the dynamics
of that town that needs whatthose people run into from a
(19:36):
standpoint of what claimsactually look like on a regular
basis.
So the localized insurance is,to me, is a big thing as well,
and I mean I think you end upwith better quotes, you end up
with more realistic coverages.
But again, I mean that all fitsback into your numbers too, of
course, right.
Speaker 2 (19:54):
So Well, I think for us you know, just to kind of
bring this full circle as to whythis deal makes so much sense
for us is the purchase price, iswe're buying at like a 13 cap,
which is good?
And going back to the verybeginning of this episode, where
we talked about markets thatare appreciating at a very high
rate usually have lower caprates, and that's why, when
(20:17):
you're analyzing deals andmarkets that may have a slower
amount of appreciation, youdefinitely want to have a higher
cap rate.
So going in at a 13 cap withthe ability to raise it into the
20s is awesome.
But for us, I think, one of thebiggest factors is the fact
that there's a lot of like EV.
No motors has something goingon there.
(20:39):
Solantis is 15, 20 miles away,so you start seeing these huge
companies putting in a ton ofinfrastructure.
That's a driving factor.
That could be, you know, thatdrives the property values to go
up over the next five or 10years.
Speaker 3 (20:54):
Yeah, and I mean again back to that point as to
you know, you now have not onlythe cash flow, but we've got the
opportunity for appreciation asthe areas stabilize, or whether
they're already stabilized andthey remain, you know, a
flourishing area to come.
(21:14):
Either way, you would imaginethat your prices are going to
increase as your populationincreases, and so I mean that's
the best case scenario on it,and I think this deal, you know,
obviously for us greatopportunity.
Speaker 2 (21:30):
But these deals, I think, do come around quite
often for people and as you, youknow, whether you're a seasoned
investor or fairly newunderstanding like okay.
So these are some of thefactors I really got to look at
and I think there's really onlya few that are extremely
important, which is the numberspenciling out to whatever.
You know everyone might havetheir own you know box.
(21:51):
You know just like a buy boxfor a hedge fund they have.
This is the cap rate I'm goingto get or I want.
This is, you know, I want to buyin a market that has some type
of you know whether it's amanufacturing or tech company.
You know where there is anupside.
But then you know understandingthose other variables that,
like the insurance the propertymanager, do I have a good roofer
(22:12):
?
Can I get a good handyman?
Because those are the thingsthat could ultimately be a deal
killer.
Yep for sure.
You might already have boughtit, but your profit margin gets
sucked out because you don'thave a trustworthy contact
that's doing something for youand they're siphoning money,
which happens all the time.
Speaker 3 (22:28):
Yeah, yeah, I mean, and especially in some of these
that have deferred maintenance,you know up front those costs
are going to be front loaded andit can bleed you heavy early on
if you're not prepared for it.
You don't have the right peopledoing it, because all it takes
is one bad contractor and you'rereally in the red on your deal
(22:54):
out of the gate.
So I mean that's important, butyeah, so just to kind of recap,
I mean, yeah, again, we alwaysstart with numbers and, as we
said, the numbers vary a littlebit depending on the market and
where we need those rates to be,but the numbers are always kind
of the leading point for us.
And then, as you getcomfortable and solidify your
(23:17):
numbers, now we're looking atsort of some of these secondary
things that play into yournumbers to a certain extent,
because they're operating costs,but also, you know, getting to
know your locations and gettingto know your providers and the
people that you're going to leanon.
You know whether it's insurance, property management,
(23:37):
maintenance, whatever it is.
I mean those relationships atthe end of the day are going to
be very important and then haveyour exit plan.
Yeah, exactly, and yeah, wehaven't really talked about exit
, but I mean, that's the otherthing that I like about this
deal is there are so manydifferent exit plans and I think
that's the one thing that youknow, not the one thing we've
done.
Well, but when we do vet a deal, I think I can think of maybe
(24:02):
one or two deals we've donewhere your exit strategy is
limited to like one option.
Yeah, because normally I meanfor us, I feel like we look at
it and we're like we could flipthis thing multiple ways,
whether we do a long-term rentalor short-term rental, whether
we sell or finance it, whetherwe end up selling it outright.
I mean usually there's avariety of different exits on
(24:25):
those properties and this is oneof those that has numerous
different ways that it can beexited out of and they're all
beneficial.
Speaker 2 (24:32):
Yeah, I would think that you know, looking back, we
definitely sucked in thebeginning.
Speaker 3 (24:36):
Well, in the beginning, the only exit was to
resell Holy cow.
We can make 40 grand in a month.
This is awesome.
Speaker 2 (24:43):
Sell it and then now those are worth.
You know twice what we wouldhave what we paid for it.
But that's just.
I think that's part of thelearning curve.
Which is why we're doing thispodcast is just to try to you
know, as we've tried, and Iwouldn't even say failed,
because I mean you buy somethingand you sell it a month later
for 40k more than you bought itfor and you didn't do anything
to it, is not a that's not aloss, especially when you're
(25:04):
talking about, like a hundredthousand-hour property.
But we were laughing about itwhen we were up in Indiana
because those same propertiesnow are trading at 300, 350,000.
So now it's a 3x return versus.
And you know, those are justsome of the lessons that we I
think we've learned over theyears.
But yeah, I think this is goodbecause for us, I know that
there's probably been a handfulof deals we've passed on because
(25:27):
we were scared off by somethingthat we didn't have any
experience doing.
So you know, obviously you gotto get the experience by doing
things, but I think at leasthearing from people that are
doing it maybe it'll give someconfidence to some of our
listeners that you know, as longas you know what you're getting
yourself into from.
You know a list of these arethe things that I need to figure
(25:47):
out.
You don't have to necessarilyknow that market inside and out,
as long as the numbers makesense and you know what you're
looking for.
Speaker 3 (25:54):
Yeah, I agree and I mean hopefully this is helpful.
I mean I think you know whenyou break it down and you look
at, these are the items that wereally look at and how we
dissect a deal and hopefullythere's some good takeaways for
you.
Speaker 2 (26:11):
Yep.
So now that we are here instudio, stay tuned for,
hopefully, weekly episodes.
That's our goal, so we're goingto try to film a couple have
like a little.
Speaker 3 (26:22):
I feel rusty right now.
Yeah, I know I was going to say, but it's good to be back, so
we appreciate everyone'spatience and until next time
onward.
Speaker 1 (26:30):
Thank you for joining us for another episode of the
Legacy Wealth Code podcast.
If you enjoyed this episode,click subscribe now and never
miss an episode until next timeonward.
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