What is up YouTube? It's Matt Faircloth. Welcome to the Mentorship Monday Show.
Okay. Fire away. Here's your question that you had written into us, but put
it in your own words. How can I help you? And Justin, too? How can we pick your brain?
Looking at a property, and I got this year's income and expense sheets. But I also have
last year's. Should I use this year's or last year's? I have up to September.
Is this a single family home? Multifamily? No, multifamily.
How many- Multifamily. It's 44.
44. Okay. A lot of folks use a trailing three,
like three months back. So, if you're September, you could look at September, August, and July. If
you want a real idea of performance and probably what it's going to do for you is to look at July,
August, September on financial performance. Make a judgment on value.
And let's just say NOI on a 44-unit, you're probably looking at an NOI of somewhere around
like 18, $19,000 a month. Right? Yep.
Am I right? Okay. Hey, pretty good guess, huh? Take it there and then extrapolate that back.
Do you have the data in Excel? Yeah.
Okay. Draw a chart of it. Graphically display it. If you can highlight it all, Excel should
be able to do the months on the x-axis and NOI on the y-axis. And just draw like a line chart.
You want to look to see where NOI is trending. Are we trending this way? Are we trending this
way? Uh oh. Are we just flat-lining? Have you done this already or-
Not yet. No. I have it in Excel, but I haven't done that.
Okay. And then, bottom line,
I mean, this is all negotiation. You're trying to determine your offer price, correct?
Yes. Okay.
I hate to be like this or say about working the numbers one way or another, but you got to
make the data work for you. And if you want to get the best deal, then you got to look
at the numbers a couple of different ways. Here are some ways that you could present the
numbers to the seller to say, "Hey, listen, this is how I valuate."
If they had a low couple of months, if they had a COVID couple of months, look
at how COVID affected the property. Forgetting about value for a second, say, "Okay, you used
to be at $20,000 a month in ally. Now you're at $17,000 and so I'm seeing a $3,000 a month drop
on NOI. And I'm attributing that to COVID." You didn't see that. That's good to know.
You want to kind of find out which scenario works best for you. I've seen folks value
properties on trailing 12. So, if you go back 12 months, that's going to bake COVID into it,
does that come up with an average NOI of less than $18,000 a month?
No. Okay. Above $18,000?
Yeah. $19,000 and change. All right. Oh, it is a trailing
three. What's the trailing three give you? Just the last three months?
Yeah. Just about around $19,000 each. So, it sounds like they're
pretty stable at $19,000. Yeah. And a lot of the units are Section 8.
They're small units. Oh, okay. Okay.
I wouldn't put a very low cap rate on that, if I were you given Section 8.
Because here's why: you can't really push Section 8 rent. You can't go and say, "Okay, I'm going to
do some value add and increase these rents by $150.
Justin, come on in. And increase these rents by $150 bucks.
Justin and I do a lot of big value add stuff. We're buying property. The deal we just did in
North Carolina, we bought it and I mean, he's got stuff that was producing f$549 a door and he did
some light renos to it. And he's getting us $650 a door and even $750 a door on the same units.
You probably on Section 8 can't do that. Am I right?
I'm not sure and this is a question for you. From what I understand, you can have Section 8 pay part
of the rent and the tenant pay the other part. You can. It has to go through the whole process
and your unit cannot be laced for more than market rate. So, let's say Section 8 approves them for
$600 and really they could pay $400. You can't set it at $1,000 if that's not market rate.
Right? You have to still follow that. No and I know the HUD has
established rates that they pay. I mean, from what I understand, say if it's $600, HUD pays $300 and
the tenant pays $300. It does.
So, the way that it works is, HUD's going to look at the market that you're in and say, okay.
We've done a lot of work in Trenton. So HUD will look at Trenton and say, "Okay,
a one bedroom in Trenton, the average market rate for an affordable unit in Trenton is..."
I'll make up a number. $800 a month for a one bedroom, right?
So HUD will say, "Okay, we're going to pay $800 a month for one bedroom."
That does not mean that that tenant can go out and rent a $1,500 unit knowing they can get $800
from HUD. And they owe you another $700. Here's the problem with that. That tenant
will no longer qualify for Section 8 if they have the means to pay you an extra $700.
So, what HUD will do is they'll look at it the other way. They're going to say, "Okay,
market rate's $800. But we happen to know that Jane Smith, your applicant, has a job."
Maybe she's working and not making a ton of money per hour, or maybe she's got a couple of kids.
And so they're upping her cost basis. And they're going to say, "She has a job,
so we're going to give her some supplemental towards that $800 rent. And the max you can
charge her is $800. And we're going to give you $500 and Jane Smith's on the hook for $300."
But the most you can charge is the market rent. You can't go above that.
And so nothing's wrong with that. It's just that your ability
to push rents heavy on a Section 8-heavy property is going to be on the low side.
All I'm saying is that, it's not a bad deal. I'm saying, make sure that your cap rate bakes that
in. And make sure that you're making the cashflow you want to make when you buy it
because it's going to be hard for you to squeeze much more cashflow out of the property.
Right. Mario, just going back
to an earlier point, as far as what time period you're looking at for evaluating the numbers.
It's great. It sounds like you have all of 2019's P&L number, which is great. And then you have 2020
through September, you said, correct? Yeah. Yeah.
So, the more data you can look at the better. If you can chart income and expenses against
what their occupancy was, you know- It's pretty much been full all the time.
It's been full all the time. Then the variable then is expenses.
How do the expenses change as you go through the year? Do the water bills spike in July because
everybody's washing their cars or whatever? There's a thousand things that could change.
Heating, electric, depends on utilities. You would want to look seasonally. So, if you're
just looking at the July, August, September, your numbers might be skewed because that's
heavy summer months. You don't know what happens in January at this property.
The more complete picture you can look at, that's why we look at a T-12,
generally. You want the 12 months of data. But you have more. So you can go back all the way
and see what were rents in January of '19? Now, data from January '19 shouldn't really
impact you too much when you're looking at your November of 2020. It's pretty
far away here. But it is good to know. But really your pricing decision is going to
have to be based on T-12, the last 12 months. Another question I have, and I know there's this
probably going to have financing involved- Financing what?
Financing involved, that I'm going have to get financing. It's not going to be a
cash purchase. Yeah. Okay.
So, I'm probably thinking that I'm going to need to look for investors.
Now, and I know there's 20 ways to skin a cat, how can I make it attractive for investors?
Okay. Okay. What's your buy? What do you think your buy price is going to be?
I'm thinking somewhere's around 1.3. Okay. So, if you're getting 19
times 12 divided by 1.3, you said? Yeah.
It's a 17% cap rate? Yeah.
That's awesome. Yeah. That's a really low price per unit.
That's awesome. You for real? If you think you'd get it for 1.3?
Well, there- I want to come hang out in your neighborhood, man,
if that's what we can get it for. Whoa, whoa, whoa.
Is that optimistic? Or what are they asking?
I'm being optimistic. What are they asking?
Because they said they were asking 1.6. But- That's not crazy.
But they said that they refused an offer for 1.2.
44 units, you said? Yeah.
What's the average rents?
Anywhere from $375, let's say, to $500. Oh, okay. Okay. There we go.
Yeah. They're all small units. They're all one bedrooms.
Yeah. Okay. But there's still rents are on the low side.
All right. But we can make that work. Okay. Have you run a financial performer yet?
No, but I was thinking that only maybe five or 10 units are around $500, $525.
So, I'm thinking that maybe I can bump up the rent to around $500-ish
for the rest of the units. Yeah. You should.