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now hey guys this is prashant kumar i am the owner of my realty games um and i am in long island new york uh today we have you know distinguished guest rob beatsley and i'm going to introduce him in a minute um but just a little bit about ourselves you know we are uh you know basically multi-family acquisition syndication company like probably what rob does similar kind of uh domain and you know i've been out there for approximately you know five years into multi-family i personally own about 100 doors for myself but in addition to that you know we were able to participate into about 1200 units in the gp kp capacity in projects with our few of our partners like deep level of uh partnership we have not we have bought few assets and we have sold them smaller assets you know 40 50 units but now we are ready to embark our journey into bigger projects uh i have been a realtor in past but i don't do that anymore along with me i have vast network of investors and i i know bunch of people in the industry you know proxy all over the country like every all of you but you know i'm into a growing mood like to connect with people and as of right now i'm underwriting few deals in midwest and i probably would like to connect with some of you on on that but stay tuned for that i'm gonna shift gears now from myself to rob i know rob for last maybe two years but i met him personally about a year ago in city in one of the events and i'm very impressed with the way he does his underwriting and that's an area all area of interest for most of us right and you know so basically i asked him you know why don't you come over into our webinars and and he graciously accepted that uh just a little bit about uh rob you know he oversees acquisitions and capital markets for uh lone star capital and has acquired lone star has acquired approximately hundred million dollar worth of multi-family real estate in last couple of years rob personally have has evaluated thousands of opportunities using his proprietary underwriting models and published number one book in multifamily underwriting and that book is available on amazon and uh you know we'll let you know the name of that book and he has written i mean he always writes good articles and he's written about 50 articles on underwriting deal structure and capital market and he hosts the capital spotlight podcast which is focused on interviewing institutional investors so this webinar is sort of a unique chance to know more about the general analyte underwriting best practices learn about conservative underwriting strategies and and to understand how these practices can help help us in uncertain markets or uncertain times what we are going through having said that rob welcome welcome to for this webinar and i'm sure this webinar would be very fruitful for everybody so so you all to you rob now all right appreciate the introduction uh you hear me okay i can hear you well i think everybody else can hear you well also if no so one more thing just one more logistics you have q a box you can type your questions in q a box and during this webinar rob has agreed that you know he will take questions during the webinar and we'll try to get deeper into deeper into underwriting practices that he's following so that the webinar actually is is fruitful for all of us um so rob you can uh share the screen now i mean you have the ability to share the screen um okay sounds good and like prashant said we've got a great opportunity to hopefully go a little bit deeper uh you know it's a big topic in terms of underwriting valuation and especially in the current economic times we're in so rather than spend too much time on the basics just let's quickly go over the basics so we're on the same page and then since we have a small enough group let's be interactive and you know dive into specific topics and uh questions that you may have so to start i'm going to share my screen on a just an example underwriting that i used for a webinar a few weeks ago and you know don't take these numbers too literally just because they've been manipulated and changed for presentation purposes um but we will refer throughout the webinar to these numbers and we can potentially uh you know make certain stress tests or changes and and kind of play out those effects through a hypothetical deal so to start out i just want to go over the high level underwriting components and what is underwriting and so hopefully everybody's on really knows what underwriting is but if you don't know underwriting is really the process of evaluating a deal from a financial perspective and it involves using some sort of financial model it could be in excel it could be in google sheets it could be argus just whatever you're using is fine and uh you know here today we're using the under underwriting model that my company uses uh that i created from scratch over many iterations and something that i'm very comfortable with and i will emphasize whatever you're using you have to be comfortable with it doesn't it's less important about the tool and more important about you and your ability to use it so um you know with that just let's cover the uh main points of the underwriting and what's most important so really looking at the the big pieces is the unit mix and so most of us here are value ad investors and we're seeking to create higher returns through either opportunistic or you know renovation business plans and so a big piece of that is what rents can i get on my renovated units and that has a big effect on the outcome of your result of your deal so just changing pro forma rents by 25 up or down could make your deal look amazing could make your deal look horrible and so you really want to make sure you get those right so that's a big component of underwriting which is the unimix and the pro formal rents and that ties into the revenue side of the income and expense equation so on the revenue side this unit mix flows to our gross potential rent here so all this is for example using the stabilized is we're just summing up the different units with the pro forma rents to get to a gross potential rent and so that's gross potential rent is assuming we had every unit full at the market rent we would be collecting uh you know that full balance but obviously we all know that never happens there's many different types of losses obviously the big one is vacancy loss we also have loss to lease concessions non-revenue units bad debt and so we take into account these here and we have other income and then going through expenses pretty standard expense line items again i don't want to spend too much time on just the the nitty gritty if you really want a step-by-step walkthrough of literally every single input on this underwriting model i highly recommend you go to amazon and buy my book sorry to shamelessly self plug but it's it's it is really important and a pretty easy first step to go a long way towards your underwriting success and trust me it is it is the money well spent you know so don't i mean whatever you spend is going to be worth whatever right hopefully you get a big roi and and also if you if you don't have this model already you want to follow along or you want to tinker with it so after the webinar head over to loanstartcapgroup.com and you'll see a banner at the top to pop your email in and get this model sent over to you along with some other um bonus materials so feel free to explore that as well um and you know let me know your thoughts so big piece of underwriting is we're making assumptions right pretty much throughout this whole uh process we're making assumptions and we live and die by our assumptions and so starting here the big assumptions are i'll just jump all the way to here which is the stabilization timeline so here i have it called stabilization months but what this means is you may have a plan to renovate 100 units and you're going to raise rents you're going to let's say you're buying a property that's 85 occupied and your plan is to bring it to 95 right that doesn't happen overnight and so you need to have some idea as to how long that's going to take and this is actually a really important input especially today with what we're dealing with with covid and something that i'd like to talk about more because a lot of people have been asking us how do you underwrite how have you changed your underwriting today in the midst of covet and i don't think anybody has the one right answer but one thing's for sure is we're really lengthening out our stabilization time because of the current uncertainties and a lot of investors that we're talking with and working with they don't really want to hear that we're buying a property today and we're going to raise rents 150 because they think you're going to do that right now with with all the economic uncertainties with the pandemic and all that so so investors you know they're also pushing for a longer stabilization time or essentially just taking a pause right you may find a good asset to buy and there may really really be a defensible value-add plan to raise rents a hundred two hundred but it just is is more conservative to take a pause so we'll we'll talk a little bit more about that later but that is you'll be surprised to see how much of an influence on your returns stabilization timeline has another big one is are these annual escalators so we have annual rent increase annual expense increase and property tax increase so some other models opt for a more detailed approach where every single line item has is assigned a certain growth metric and you can even assign a different growth uh percentage for a given year for me i like to keep it as simple as possible my goal is to have as few inputs as possible to still get the most accurate results so you know most bang for my buck for for for each input so for us um we focus on we actually truly don't focus on these that much because we like to keep these at two percent two percent and three percent and that's just what works for us in the markets we're in depending on what market you're in property tax increase can be uh very you know market by market um but but one thing that we feel very strongly about is to not really engineer returns through rent growth we want the deal to be able to stack on its own without using three four five six percent run growth i i was on a call earlier today with a manager who confidently said yeah we've been throughout our portfolio we've been experiencing what is eight and a half percent rent growth year over year and that's not totally organic it's including her value-add uh but still she's she you know she wants to put that into the assumptions and that's just that's just not the way that we want to look at deals and um we feel a lot more comfortable evaluating a deal with just essentially inflation with your expenses and your rents growing the same but as you saw i was three percent earlier because this deal in particular that this is loosely based on was in austin austin is a big growth market and you kind of have to part of underwriting is you have to play the game yes we want to underwrite conservatively we want to beat up the rents we want to beat up the exit cap rate beat up the rent growth but then the reality is we would never buy anything so it's this delicate dance of how do we be aggressive enough that a deal looks good because if i underwrote really pessimistically i would never win any bid so so it's the stance of how how do i get aggressive enough to really be in the ballpark for the price expectation yet not get myself into trouble and overpay over leverage and potentially you know have an outcome of you know losing money or not seeing the returns that you you really are looking for so so this is these are sensitive inputs like i said and then lastly we'll jump to the terminal cap rate so terminal cap rate if you're not familiar it's just really the way that you are valuing your sales price and since most deals are again value add you're really making the majority of your return out of the sale if you were buying something and you're let's say your business plan was to hold it for 10 years and you're going to generate 80 of your returns out of cash flow then your exit cap rate doesn't really matter because you made all your returns over 10 years through the cash flows and you're not really relying on any capital event so um that is a big indicator of the risk of the deal and um you know we look we look at that closely meaning specifically how much of the returns are generated from cash flow versus appreciation um and so that's something that actually i just wrote an article about that's going to be going out in my newsletter next week about kind of factoring in risk into your underwriting which i think is something that's not as much talked about but really important because especially for the uneducated investor kind of the more casual investor they'll look at a deal that's 12 percent irr projected and 16 ir projected and they'll just automatically go for the 16 assuming that that's the superior deal and you know so in that article i made made efforts to show examples of where the 12 is actually far superior than the 16 and i think it's a it's a really valuable skill to be able to actually figure that out so that's one way judging how much of the return is based on cash flow versus appreciation and then that determines how important the terminal cap rate is and the thing that's pesky about the terminal cap rate is especially if you're not really familiar with what it's doing or what it means if i tell you yeah this deal has a five and three quarters exit cap right here and then i i say well it really should be six percent that didn't really mean much to you and it doesn't seem like a big difference but if you look for example we'll just show this example at five and three quarters our sales price is 16.27 million and then if i just take the exit cap rate to 6 we went from 16 down to 15 and a half so 16 point i think it was 2-7 down to 15.6 so that's you know the exit cap rate moved a little bit and we lost a lot of value there so it just shows you that you know don't get tricked by kind of these these small numbers they have a big impact similarly with you know your performance rents if you change them by 10 15 25 it's going to have a big impact especially with the compounding effects so for example if my performance rents are going to be a thousand dollars but then i let's say i push them up to 1025 and then i continue to grow that thousand twenty five by three percent year over year and then in year five i value that income of the thousand twenty five rents that were then grown over five years compounded at a certain cap rate i've just compounded my error right if i were just underwriting in a one point in time that thousand versus a thousand twenty five dollar rent maybe isn't a huge deal but because i then grew those rents by three percent compounded and then valued the exit sales price based on the you know that assumption that's where uh you know you've compounded your error so so that's so we've walked through it's really all that simple it's all the assumptions are contained with just in this tab so everything you see here it you know maybe if it's your first time looking at it it looks messy and it looks like a lot but it is really those key things that you need to worry about and you know everything else is not super important so just as i showed you how sensitive the terminal cap rate is to your exit price and then to your resulting returns if i do something else like for example this deal right now currently has a nearly 15 return to investors and i'll just show you how let's say your capex budget let's say you underestimated your budget instead of 240 000 it's double it's actually 480 000. your return goes from 14.8 to only 14. so you can see that is not a sensitive input that is not something that you should be spending all your time focusing on to make sure that you get perfectly right i mean yes once you're under contract you should do your due diligence and you should build out a capital budget but understand that missing your exterior budget for example by you know you you thought it was 240 it's and it's actually double doesn't kill your deal but missing your exit cap rate by 25 or 50 basis points or your projected rents by 25 absolutely can kill your deal so that's an example that i love to show because it really illustrates uh that fact so so i want to take a pause there i know that i've been seeing a lot of uh messages come into the chat and let's see if we have any questions so yeah at this point i want to stop and kind of guide the conversation maybe take some questions and if if there's nothing really pressing on the question side then we'll talk about underwriting today and what are kind of the key metrics that we're looking at to make sure that we feel comfortable buying a deal in these uncertain times okay so i see james is mentioning the coveted reserve requirements from agency lenders such as 9 to 12 months of pni and it kills the deal so this is a great question because it's super topical and it's and it's what we're all dealing with right now so so agency financing from fannie mae and freddie mac are really one of the few uh positives and shining lights in the current very challenging uh capital markets environment right bridge lenders have been taken out of the game largely or they're they've increased their prices substantially pulled back proceeds life insurance has what you know has widened their pricing cmbs is you know very challenged the agencies have been doing very well but to protect themselves they've been asking for these really big reserves uh and so the way that this works i will actually show you hypothetically what this could look like so here i have interest reserve on the model hopefully everybody can see that and so to model out so let's just say here for example i'm getting a 75 loan to cost loan and we'll assume it's just a fannie mae loan about 10 million dollars however they're going to want let's just say on the rough side they're going to want 12 months of pni so i'll just go to year 10 because it's not even involved in my five-year-old period and i'll pull i'll match this to the debt service which is pni in year 10 to my interest reserve so now what i'm underwriting is 519 000 being held back by the lender as an interest reserve and what i'll do is i'll go back to year two and i can rename this capital expenditures to covered reserve refund right and i can go to year two and i can actually refund this like this so if i want to be you could say aggressive i'll just say well sometime in year two the full reserve is going to be released i didn't touch it during the first 12 months and and that's how that happens and then what you'll see is it kind of creates a lumpy cash flow event and and you see 21 cash on cash in year two that's not obviously exactly right it's a return of capital because it's coming as funded debt but this is kind of the simplest and easiest way that we've solved for this issue and how we've been underwriting these hold back requirements so to take it a step further now to get more creative and to you know so so that so because the next issue that comes up is now guess what i have to raise over half a million dollars more to get this deal done and that's what's really killing deals and killing sponsors right sponsor you're already seeing senior lenders pull back the proceeds and then they have these requirements these reserve requirements and now if i'm a sponsor and i want to do a 10 13 million deal i have to raise five million dollars before i could maybe raise two three million dollars so so that's a challenge so one way to combat that is instead of simply having that reserve escrowed and then refunded to you in year two what we can do is we can and this fits perfectly with the idea of lengthening out your stabilization timeline and pausing so for example in this environment we would rarely really underwrite to a nine month stabilization period right depending on what the business plan is and what i'll do here is let's just assume that i'm just going to switch up the business plan and assume that we're doing an interior renovation on 100 units okay so that's 500 000 and what i'll do is i will extend our stabilization timeline to 18 months right because it's covid it's uncertain our investors don't want us spending money on capex and we don't know if we're going to get an roi at this point so what we'll do also is i'll offset my capital budget by this amount so i'll go like this and so now it looks like my exterior budget's negative but all i'm doing is i'm offsetting the reserve and so it's getting a little confusing but what we're essentially doing here is we're taking our interest reserve that we're going to be refunded after 12 months assuming all is well with the property and instead of just returning that back to investors i'm simply just going to zero this out and now it's not going to be returned to investors it's going to be invested into the property to carry out the value add plan and now what we've done is we've reduced our uh equity requirement essentially by the reserve amount and i've smoothed out my cash flows for modeling purposes so as you can see this is how we deal with the covid reserves with agency lending it's this interest reserve here that then gets refunded but instead of refunded and returned back to investors we then use it to carry out the business plan so that's a great question um something that's very topical but the initial requirement to raise that 500 000 still stands right say that again my question here is rob the initial the initial requirement initial raise is still that 500 000 needs to be raised in addition to our original raise well no because if you are going to have that held back and then refunded and then returned back to investors that was just an extra 500 000 that you really didn't need to raise so instead if you're using it towards capex you're just rather than raising the capex budget up front you're just essentially getting it from the lender 12 months down the road and that's shown here by this uh you know this negative in our exterior budget i mean there's other ways you could show it in the model but just conceptually speaking um that's the way around it got it okay okay thanks yeah hopefully that makes sense so uh let's see if any other questions come in that that was a really good one so if not i will just dive into the kind of more high level business plan that we're looking for today and then how we're underwriting for that and and um adjusting our underwriting we already talked about the stabilization timeline talked about the covid reserves um so also just generally speaking what kind of business plans we're looking for so what we've seen is the value add deals that have low in place noi have been a big challenge especially deals that don't qualify for agency debt as i mentioned before if you're seeking any type of debt today for multi-family that is not agency the pricing is is expensive more expensive than pre-covet and the proceeds are not as favorable so a loan a loan that you could have gotten pre-covered that was 15 million today you might only be getting 12 or 13 million so it's really affecting gills negatively so so for us we're seeing you know value-add opportunistic you know deep value-added deals that require bridge loan are very difficult to do today almost impossible to transact on because sellers are still holding on to their price meanwhile your financing has gotten worse and obviously you've probably gotten more conservative on your assumptions uh just given what's happening today uh even if you think everything's going to go back to normal you're still probably going to underwrite a longer stabilization timeline and investors generally are less willing to pursue rent increases and lenders are as well if if you are doing a bridge loan and your your plan is a value-add a lender would much rather see you buy a deal that's maybe 80 occupied that you're going to lease up to 95 rather than a property that's already 95 occupied or 90 and your plan is to push rents and compete with newer product and and really push the top of the of the rental market uh just because that's a less believable thesis today than really just bringing a property to market rather than pushing market so there's just a lot more hesitation around that today so what we're looking for is we're looking for deals that underwrite well in a longer term hold period because as i keep talking about the uncertainties of today i still think 10 years from now multifamily is going to be a a lot better than what it is today in terms of rents in terms of you know essentially noise valuations etc so our long-term view doesn't change at all and we just need to be able to buy deals that are going to weather the storm that may come or may not who knows we've been waiting for it and it hasn't come yet uh it needs to be able to weather the storm and get to the other side and then continue to do well and make us money on the other side of that so really that pushes you towards deals that are maybe a bit newer uh in better locations so you're taking less infrastructure risk right because if you're buying a deal and you plan to hold it for 10 years ideally you know you don't you don't buy something that is for sure going to have plumbing issues roof issues electrical uh all that kind of stuff so a newer property if you can get it is obviously superior for a longer term hold and a better location where there's more growth makes a lot of sense as well right it doesn't make sense to own a deal long term if you're not going to benefit from the ongoing market growth in in the area so it's really it's fine to buy deals and you know call it tertiary markets or markets that are kind of slow and steady if you can val if you can create value right because otherwise the market isn't really creating value for you and then your only other real avenue to to create good performance is just to buy cheap enough so that your cap rate is high enough so that you can just cash flow like crazy and not even and not really care about the growth or your exit but as we all know today prices are high and you know such that it's very difficult to really do that so taking a pause here please explain how you select your exit cap rate so that's a great question exit cap rate is much more of an art than a science and it's really all about knowing your market knowing your deals and you know the only way to do that is through practice and and repetitions and this is one of the reasons um there are much bigger reasons but just one of the reasons why i preach i think it's important to specialize in one market especially when you're getting started um because if you can talk to the brokers on a daily basis and underwrite you know 10 20 deals a week in that market you'll really get to see what cap rates are in your view so capri is such a subjective term it's a very simple definition noi divided by purchase price but from there there's all this nuance and so so for us we have a very particular cap rate formula that we focus on and it's right here and as you can see i mean it's a little simpler than what this formula looks we're just taking the in place revenue so essentially what is the t12 or the seller's revenue and then we subtract it by our pro forma expenses because again if we're buying from mom and pop operator that let's say has you know fifty thousand dollars of payroll instead of kind of that full normal payroll on a professionally managed property that's going to inflate his cap rate as you can see i just took the seller's cap rate to a seven but he's not selling me a seven cap because market rate expenses which are going to be largely my expenses make it a six cap so so you need to not just hear cap rates and take them at face value you need to develop your own way of evaluating cap rates getting comfortable with them and really grooving that so that way because costar right if you if you get co-star data or yardy data or you get information from your broker and they tell you oh this deal is a six cap or i just sold that deal down the street and it's a five and a half cap that means nothing to you because you have no idea really what those numbers are so you really do have to underwrite the deal and then start seeing what your cap rate is and then comparing it and then once you know generally speaking what cap rates are you can then project your exit cap rates and so that's really the the magic and the important part the easy part that you're going to hear that's kind of the standard definition that everybody uses for how to calculate exit cap rate is i say oh i'll just take whatever cap rate i'm buying at and then i'll increase it by 10 basis points per year or i'll just increase it by 50 basis points so if i'm buying a let's just say here i'm buying a six percent cap rate and what i'll do is i'll just i'll buy the six cap and i'll increase it by you know 50 bips and i'm selling it at six and a half um so and that works pretty well but a couple problems with that so the biggest problem is if you're buying a value-add deal so for example let's actually just show you in real time so let's say this deal to make it really simple let's just say this deal had high vacancy right so it has 22.8 vacancy so now my cap rate is 3.85 that i'm buying at and so the conventional wisdom is telling you okay well you're buying at a 3.85 add on 50 basis points and you're selling at a 4.35 but you are horrendously overstating your sales price with this low cap rate right if we look at the sales price now 20 million right it just it doesn't make any sense um you know even if you don't really know the market or the deal that just doesn't make sense right so we can't really base our exit cap rate on our going in cap rate because our going in cap rate could be impacted by again a value-add plan where there's high vacancy or low rents driving a lower noi and so you're buying at a compressed cap rate in the hopes of adding value through your renovation plan and your management plan to then bring you to a higher cap rate and then your sales cap rate is just just another number in that mix so they're not always connected but what is important is you need to understand what would be the cap rate if you were to sell the deal that you're trying to sell what i mean by that is if today you're buying a value-add deal but you're stabilizing the asset improving the asset and then you're going to sell it as just a yield play as a cash flow asset what would be the cap rate for that today um because otherwise you're comparing apples to oranges so that's the important piece and and one way to do that is just to underwrite many deals and to actually underwrite deals that aren't value-added and see okay you know bid on them even if you don't want to buy them and just see where those end up selling for and then you can see what cap rate they ended up selling for and that'll help inform your exit cap rate so that's that's a definitely more of an art than a science and takes a long time to really groove it next question is what performance assumptions have you modified in light of the pandemic situation okay great so so the key assumptions that we've changed really to keep it simple because we've had we you know we've underwritten you know how many deals i don't know 100 or 200 deals you know in the last six months and we don't want to let's say they didn't trade and then they come back to us off market or something and we have a chance to bid on them again we don't want to just throw away the old underwriting re-underwrite it completely due to covid we just want to really pick those key metrics that we can modify you know to to to give that result so what we decided to do is we decided to change our stabilization timeline as i mentioned before for the for the reasons of you may not want to start your value ad right after you buy you might want to wait until you know is everybody saying the dust settles and then you can complete your value add and there's and there's other difficulties going on right now too for example you can't evict and that's just going to slow your ability to turn the rent roll and and cause your value add so stabilization timeline is a big one and we're we're we're increasing it anywhere from six to 12 months more than from what we were doing pre-covered and i think honestly that's even a bit aggressive let's just show an example so let's just bring our exit cap rate more normal and we'll show you so this deal is now well to make it make more sense i've just been changing a lot of numbers here just to give you a real example of how this affects the numbers let's just take this 14.4 percent project return and if i let's just say bring my stabilization back down to 12 it was 14.4 now it's 16.1 so there's your difference there and if you take it up to 24 you know taking that weight it you know continues to hurt your deal so that that has a big impact and it's one way to really bring down your returns um without even doing too much right so the next thing that we have been adjusting is our going in vacancy rate so we're just assuming that there's going to be in the short term right again we're still very bullish on multi-family long term we believe in the deals and the markets that we're investing in but in the short term there might be collection issues right bad debt eventually when you can evict you're going to have a lot of evictions and eviction costs and and just people that can't or are not willing to pay right now so we stress are going in vacancies so even if we see a deal that's currently at 95 vacancy we just assume that there is or are going to be problems and so we might instead of even though it's 95 we might go in at 90 for example so that's one great way to kind of better reflect potential risks [Music] today without going overboard and for example saying oh i think the world's coming to an end instead of stabilizing the vacancy on this deal to six i'm going to stabilize to 10 right because that will just completely crush your deal and as you can see we're in the single digits irr and it's just not going to make sense so and then the last one that we're stressing often is the hold period and i mentioned this before you know we're biased towards longer hold periods today rather than shorter hold periods because just the short term is more uncertain right the deals that return the best and and and do the best are the shorter term holds but that's usually because you're benefited by a growing market and you're able to sell you might have bought a deal that was a value-add renovated 20 of 20 of the units and then you're selling it again as a value add and so someone's going to pay a four or four and a half cap to you because they think there's still meat on the bone and so that's just when people are getting their 25's and 30 irrs over an 18 to 36 month hold period but we think that's a very challenging business plan to underwrite to today so you know really at a minimum we're underwriting things to a five-year-old period often a seven year old period maybe even a ten-year-old period if we think we really like the deal as a you know it's a good market good quality asset longer term play uh but just generally speaking let's just see i mean every deal is different in how it responds to returns but if i bring down the stabilization timeline and i'm showing a 13.4 return over a three year hold period if i go to five actually this deal has rent growth so it's probably going to get better but we typically don't show rent growth and that's that's an interesting piece there uh that i should call out because there i got you know kind of tricked into the longer hold period thinking that it was going to reduce my returns but it actually increased because it gave it more time for the numbers to grow because i was assuming rent growth so so be very careful because everything's interconnected so if you're going to underwrite a deal on a 10 year hold we will never do three percent rent growth over a 10 year old because it's very rare that you could point to a point in history and say here here was a a point in time that 10 consecutive years of positive rent growth three percent or more uh you know that's nearly impossible to find and and not very likely so the longer your whole period the more conservative you want to get on your rent growth but if you're going to do a three or five year whole period you can you know potentially increase your uh rent growth so let's take a look what else do we have so yeah that those are the three just to wrap up on the pandemic situation modified underwriting we've got stabilization timeline going in vacancy rate and the whole period what markets are you most bullish about long term i'm not really a market research kind of uh kind of person we're very much a bottom-up shop where we're really looking at a deal first and then you know going up to the market up to the sub-market in the market so we're really deal-driven rather than market driven but market's bullish about long term i think vegas i'm very interested to see how vegas crashes if it does so far we we own an asset in vegas and it's performed well and seems like generally speaking vegas has performed well which is very surprising it's experienced negative 20 job growth um so you would think that would result in some some pain there so in the short term not bullish there but long term i think it'll rebound well and then i think your classic growth markets are going to continue to do well and i think there's some people there on both sides of the migration fence but for example you know the more affordable uh markets that you have a lot of people migrating to kind of like your phoenix your dallas your denver's uh some people have pointed to data that shows that during recessions people don't move as much and that's going to stifle the migration and the growth to those markets because those markets are fueled by population growth which then fuels which is driven by the job growth and etc so some people are saying well a recession is actually going to stifle migration and then stifle those migration markets again you know uh phoenix denver dallas atlanta um but i'm kind of thinking more i'm more of the opposite which is the group that just thinks hey in a recession people want affordability they want quality of life with the pandemic they want more space so they're going to be continuing to leave new york city continuing to leave los angeles going to those more affordable dynamic markets that present more opportunity so i think bullish long term hasn't really changed uh so again it's kind of those name brand markets that i have mentioned a few times now unfortunately the pricing there is absolutely nuts and to really make a deal pencil there you've got to push and squeeze every single number and be very aggressive so there's really no free lunch i can tell you the best markets i can tell you the best deals but you're going to have to pay for them so that's a that's a big challenge physical or economic vacancy so because this is a spreadsheet you know we're dealing with economic vacancy and depending on how you define that we just are quantifying vacancy with numbers because we're working with numbers but also some people refer to economic vacancy as kind of a total economic loss which would encompass your loss release vacancy loss concessions non-revenue and bad debt and non-revenue units are you know let's say you're using a unit as a maintenance shed let's say you're using a unit to store something or you're a non-revenue unit could be a free unit to one of your employees so that would be your total economic loss so whereas physical vacancy would simply just be based on the rent roll heads and beds calculation so are you considering decompression of cap rates due to covid so decompression of cap rates so so cap rate's increasing going up which would mean putting downward pressure on values um no so it's been very interesting to see what's been going on with the market today and it's fascinating how much demand there is and how much capital there is so for example brokers are telling me yeah on on deals where we normally would get 70 confidentiality agreement signed in the first week or i'm not sure exactly what he said which first of all that's that's pretty crazy 70 people looking at a deal that scares me he says today they just launched a deal 200 cas were signed right so what that's telling you is there's less to look at but they're still the same number of eyeballs so that's going to keep prices up because less sellers are willing to sell right now just because they don't think it's a good time to sell which i tend to agree but that's just leaving buyers start for product and with even if we have a recession and even if there is distress right everybody's talking about this opportunity of you know deals underperforming and let's say you know a sponsor's in trouble they lack cash flow maybe they're lenders on them and you know there's going to be deals that are distressed and you can buy for cheap but the problem is for every distressed deal that may look like that that needs work that is underperforming it's mismanaged there's going to be 10 buyers and that's really going to keep prices high so in the end what needs to happen in order for there really to be a true buying opportunity is the supply of mismanaged and and you know deals going for sale needs to outweigh the demand from the buy side there needs to be just a delusional supply that overwhelms all these buyers and there's not enough buyers to take on all these you know value-add opportunistic mismanaged deals so i really struggle to see that happening and that's what's going to keep cap rates compressed also i know sean do you want to jump in i see you yeah i meant to sorry i mean i'll let you finish it then i'll say something okay so yeah just to finish the thought another thing that's really anchoring cap rates low is uh interest rates so you know the 10-year treasury bond has uh fallen and you know all-in financing is 30 or less for eight for for multi-family and you know typically the average spread between cap rates and interest rates is somewhere between you know somewhere around i'd say 150 to 300 basis points so right now we're in this healthy very healthy band in terms of valuation you'll see when things get very when prices get too crazy and unhealthy is when cap rates equal interest rates which is very much so off it's often the case in primary markets so you you will see that in you know la dc boston new york so the gateway markets you will see cap rates equal interest rates which is in a very unfortunate reality because then you're not getting any positive leverage from your financing and so essentially if you're buying a four cap and your interest rate on your debt is four your cash flow is going to also be four uh but if you have a situation today where your cap rate is five which is low but your debt is three and you have interest only your cash flow is going to be eight nine percent depending on your your fees and expenses so uh that positive leverage is important and that's kind of keeping the market healthy right now go ahead no so i mean i kind of agree with what you are what you are saying about a lot of people looking at the deal i mean more number of people looking at the deal than number of deals at this moment but at the same time i feel that you know a lot of sellers are not ready to put their deals on the market that's one thing second i feel that there are a lot more people looking at the deals but not everybody is ready to buy them ready to pick them up also i mean i i think a lot of people are sitting at home and you know they're sort of idle so they are starting to call brokers and so i mean we have heard that in last three four months broker phones have been drinking like constantly because everybody wants wanted to utilize their time and establish contacts with brokers so so broker now sending one deal to 50 people now they are sending deal to 200 people that's another phenomena that we are seeing and and that's just my observation obviously you are better patient in the market to kind of uh you know see that at a different scale but um you know i i've seen that uh the sellers are not there to sell i mean they are kind of holding their bets you know like you know like you they also think that you know maybe the market will correct a little bit but it will eventually go go back up so they haven't opened up the inventory and number of buyers are more because everybody wants to look at everybody wants to take a jump start in their business you know they may be thinking of buying in january 2021 but right now i mean i personally am talking to at least 510 brokers which i never do i try to do one or two calls a day to brokers right now i'm talking five to ten and and i guess a lot of people are doing that and that that probably is the reason why you know that distribution you know 70 cs to 200 cas but but trust me not not everybody out of those 200 not everybody is there to buy i mean they're like i mean half of them are flying kites i mean in my mind gotcha yeah and you know another thing that i'm hearing a lot and i'm reading articles about is that institutional investors just given the way their investment committees are set up and their mandates they are much more hesitant to buy put out offers etcetera right they have a much easier time especially with committed capital to just go pencils down um so you know i've seen those articles that say hey this is the time for the little guy to shine because you've got all these institutional buyers that are pencils down but we're not seeing that right we're seeing like you said the ca numbers through the roof and you know so i think even with that maybe like you said they're not as qualified of buyers which which may be true but it does still seem like there's a big supply there a big demand of buyers so so basic basic question i think everybody would have in their mind right now what is the what is coming right everybody is kind of thinking about that what is coming what is next i mean is it i mean are they gonna get um you know better deals three six months down the line so that's i think that's the fundamental question you know why why everybody kind of waiting in a waiting mode or those who are doing what they're doing like you guys are buying uh aggressively um i mean what are your thoughts on that i mean uh i mean i know you you said that yes it is going to go up but do you see any indication anywhere where you might we might see a uh you know sort of a dip little bit and and we see that in co-star reports all the co-star reports you know you pick up their cars are they're going down a little bit and then they're coming back up right i mean you must have seen it um so what are your thoughts on on that yeah so so i'm optimistic slightly that we do see over the next six months some decline in pricing um and at least more interesting opportunities right because we've just been seeing for the last few years just hundreds of deals that are just kind of your vanilla value add that really have already been picked clean and and there's really not that much meat on the bone so hopefully there's you know some of these poorly managed properties get shaken loose and actually do come to market and so even if the discount is only five percent or ten percent uh that's still going to you know get people excited and and allow us to transact right because right now there's a lot of reasons for their just to for the bid ass gap to be so wide and not be able to transact so hopefully we and over the next six months we get into a position of a much more transactable market and so that's what i'm optimistic about i think it's going to be very interesting to see what the government stimulus looks like that's coming if it does come how it looks how it impacts multifamily and to see that if the current performance of multi-family has been driven by the stimulus itself right are people paying rent because they're collecting unemployment or are they paying rent because you know we have a healthy job market of covet so it's it's going to be very telling if things don't get extended uh to see how we perform so i think that's really what everybody's looking for and will allow us to make future decisions uh really quickly before we i just want to go back real quick i have a question here about putting rent growth assumptions on the value at increases or only on the market rents so everybody does this differently right everybody has their own way of underwriting their own way of looking at the deal so the way that we look at it is a little more conservative so so what we do is that stabilization timeline that i talked about so much is the time that we take to go from those market rents that i had in the model i'll quickly share my screen again so our market rents here we're go essentially what we're saying is we're going to take this 12 month stabilization timeline to go from these market rents to these pro form arrays no rent growth no changes there once we've stabilized after the 12 months then we're going to begin growing at this two percent mark so actually for example if let's say i just kept these rents flat with the market um you know no value i plan and i held my stabilization timeline to 12 months that would mean i'm actually factoring in zero percent rent growth for the first 12 months and so a lot of people are doing that uh today just with the uncertainties of the market they're saying well we're not going to raise rents for the first 12 months or what have you and so that's one way that we're actually underwriting you know no rent growth is you know it still shows two percent rent growth here but it doesn't start until after the stabilization yeah so there is one more question here um um if you can you want me to read it or i i see it so it's about uh telling brokers passing on a deal about coveted restrictions so i'm not sure what that exactly means it could be about the ability to tour or to do due diligence which is another challenge today you know how do you if you have a 250 unit property how do you walk inside of everyone's home right 250 homes to inspect it uh so so lenders have to get flexible with this buyers have to get flexible with this and so we're seeing many creative deal structures and uh to to be able to come in and do your due diligence uh but looks like the question's actually about the numbers don't work well we're in the business of telling brokers that the numbers are crazy so we do that every day all day it doesn't matter if it's due to covet or due to the seller being crazy the broker's crazy the market's crazy everyone's crazy but us and that's what we have to say every day very good very good any more questions guys feel free to ask any questions i mean in the meantime yeah i would like to share one thing here you know i've been talking to a lot of mom and pop sellers what i have seen is even though some of the sellers have been in holding their bets till now and and i feel like some of them are opening up as we speak you know like in the last couple of weeks i'm seeing a lot more inventory coming uh at a smaller scale you know 50 200 units and sort of portfolio you know 30 units here 30 units there that kind of deals in the market and what i have seen is sellers are so smart they want to package the whole thing and they want to say they are saying that you know on their actual expense this is a seven cap deal and they are willing to give eighty percent uh uh you know seller financing at six percent uh interest you know those kind of deals are popping up uh you know it's just becoming you know i'm not seeing those maybe maybe i haven't looked in enough but i'm suddenly seeing those kind of deals in last one month or so where seller packages their portfolio and they they do the cap rate on the actual which is minimal um it kind of shows you know to your example it's a higher cap rate deal and at the same time they are willing to give it give the seller financing also so that they they get the highest price but for the next two years they keep getting the interest also on their money so just something which i wanted to share you know those kind of deals are popping up here and there you know uh mostly in in midwest you know ohio uh in those areas you know so uh that just a shift in in the seller's mindset that i'm observing all right so there's a question for you uh there uh rob yeah i don't fully understand the question but i think it has to do with markets that are hit now but still trending well uh if that's if that's the case then i think vegas is a good example of of a market like that orlando is a is a market orlando very interesting situation with orlando it was obviously one of the market darlings pre-covered you know a lot of investor demand tons of rent growth everything you want in a market and the agencies obviously love the market they're lending at 80 of purchase price and then now orlando is on fannie mae's pre-review list so orlando goes from you know a great market agencies love to finance it and now it's on its pre-review list along with you know um midland odessa houston um you know everywhere in michigan you know detroit for example so so now you go from 80 leverage in orlando to 70. 65 even so you're you know i actually got a deal quoted pre-covered for a loan 14 million and today it's coming in at 11 million so that's hitting orlando's value very hard and so i think orlando could potentially be a very interesting market to buy into if we see prices go down very nice half half of the investors here on this call are gonna start talking to orlando brokers tomorrow yeah they probably are already i know good good um yes i mean we are we are right about time right now uh we talked for an hour i mean i'm kind of open we and i'm sure rob you are too um if there are any more questions we should take them um you know guys feel free to ask any questions you know i don't have any more any questions from my side but uh let's see give a minute or so yeah looks like you know we are kind of drawing down on yeah we are drawing down on questions rob you know i think uh maybe maybe we will call you again after a couple of months you know to talk about uh the state of the market you know probably six months down the line uh to hear your thoughts but this was very informative very very informative um and we really appreciate you taking time i mean you are in california we are here you know doing this in our you know spare time nine o'clock in the night and but thank you so much rob appreciate your time and you know wish you luck for your deals that you are working on and hope uh you know you get some traction out of this for you too and uh that's great great again appreciate your time today thank you so much yeah thank you very much for having me yeah i had a great time and if anybody wants to connect further again you can check us out lonestarcaproot.com if you have any questions email me directly rob lonestarcapgroup.com yeah one and one more thing and i i think a lot of people have not caught my email id prashanth at my realtygains.com you know you see my my logo you know behind me myrealtygains.com or multifamilyrealtygains.com that two email ids i have