How to Structure Debt Financing on Cash Flow AnalyzerMar 25, 2018
Charles examines an Owner Forum member's CFA and delves into how to structure Debt Financing. He ask his students to send him over property packages of deals they are currently working on. Then, he choose one and analyze it live during his weekly Owner Forum Coaching Call.
This is a summary of Charles' tips for analyzing a deal.
Here's one: Never, never, never share your analysis of a deal with the broker!
With all the members of the OWNER FORUM that are all on the call, I just want to kind of give you an overview of some of the fun stuff we talked about - kind of giving us some great tips on multifamily investing and how it works. I have a bunch of students and I ask them if they want to see me analyze a deal online and we can take a look at it. They send me a property package and I will choose one. I will analyze it while we're on the call so that you can take a look at it and see how I analyze a deal.
We did a little small 9-unit property, not a big property. It was an easy one to take down. And we just went on - decided and figured out what the valuation was and what the real valuation was for that property. But leading into that. I kind of want to tell you some of the tips that I give my students as they go through the process. And this is the first tip : Never, Never, Never, (I really wanted to stress these up, saying it three times. And he was from South Boston. So he had a wicked Boston accent) share your analysis of a deal with a broker. Just don't do it! It's none of his business. It never benefits you. He's going to use it as a club over your head. It's none of his business.
What your cash on cash return requirements are for your investors. It's none of the broker’s business what you buy your cap rate or what cap rate you buy your properties at. Any time I give out the way I analyze a deal to a broker, they've always used it against me. So why do you give it to your enemy? He is your enemy and is on the other side. Why do you give your enemy bullets for his gun? Just don't do it.
So that was one of the first things we talked about. And the reason why that came up is because one of my students was getting beat up by a broker.
Why did you send me over your analysis? So I can figure out where you're coming up with these. There's one time I did that and the broker came back. “So you know what? What if you change your vacancy rate from a 12 to - what if we made it an 8? Ok, that's gonna be fun doing it an 8.”
We went back and forth and before I knew it. The analyzing software that I was using matched the purchase price and the broker said, “See, it comes out. So you should make an offer at that price.”
In other words, the offer I made wasn't good enough for the guy and he just used my numbers against me and believe me, the selling didn't move an inch. This purchase price didn't change. So it never works out well. Make the offer that works for you and just move on if it doesn't work.
The next thing we talked about - oh, I love this one. This was beautiful. In the OWNER FORUM, I have certain monitors that I use. I teach people when I say one of them is the biggest lie in multifamily is the asking price. Just don't believe it.
I have so many students that says like, “Charlie, I just did the analysis. And I'm not coming anywhere near the purchase price anymore. I just can't get there. I'm never going to make it in this business because the guy wants 4 million. And I can only come up with 3 million on the cash analyzer that we use.” Don't worry about it. When you understand the biggest lie Multifamily is asking price, you're going to be fine. Just make the offer. Just make the offer that works for you.
I love this one because it came in from a student. I really, really want to see her get that deal, or a deal under contract. She's just doing great and should make a ton of offers. She said, “I originally wanted to offer a 3.5 million. And now they're OK with 3.5 million. The original list price was 4.4 million. So within a month, the property just lost a million dollars of value. Seriously? I should wait another month.” Her numbers were right the first time. It's the seller that didn't understand it. So make the offer that is right for you.
Now, the other thing is the final thing that we talked about. We had a whole bunch of stuff. And that's typically what we do every Monday night is. We get on the call with the OWNER FORUM with all the members and we want to form a group. It's a phenomenal great group of people. I love them so much. There's so much fun. And we're going to get deals done. I am at their back when called or if they need me they call. And that's the benefit of being in the OWNER FORUM. But the most fun is the camaraderie that we have on Monday night because when we all get together, we all talk about what's going on.
And the next thing is - Interest rates are changing. But as a result of the fact that interest rates are changing, that means prices are changing because we're just buying cash flow. I could care less about the property. We'd just buy cash flow. And if the cost of the cash flow goes up. We've got to take that into consideration in our price. So it means that our returns are lower. Then we've got to adjust our price. Sorry, that's just the way this goes. Please don't use it as an excuse why you should not be getting into this business because think about the person who was your success, your mentor, your hero growing up and how they ended up owning a huge portfolio of multi-family deals. Did they quit the business because interest rates went up? Hell no. They went out there looking for the best deals. That's the time to do it.
More millionaires were made during the depression than any other time because there were deals. Just keep that in mind because that's how you're going to be a success in this business. So what we talked about was - as you're starting to look for more of these properties and as interest rates start to go up, you've got to begin to stress the property and the deal. You've got to put more weight on the back of this property to make sure that the numbers camp out and you're buying it at the right price.
You can fix anything on a multi-family deal except overpaying for it. If you overpaid for it, you might as well go drop the keys back in the bank’s desk. So make sure that when these interest rates are going up, that you're still stressing the property the right way.
That means don't put 20% down, put 25%.
Don't do a 30 year, do 25.
Don't do a 4.5% interest rate, do 5%.
To a C class property, do 5.75%, do 5.50% or maybe even 6% depending upon the size of the deal.
But stress the property and make sure that the deal still works when the numbers change. I'm telling you right now, I've got some students that are under contract and then they're finding out from some of the Lenders that they're not able to get the interest rates that they were trying to get when they analyze the deal for. Therefore, the deal might not be as good as they originally thought.
Well, that's why we have a financing contingency in the deal. That's why we put that in there. That's why we have an inspection period, when the due diligence comes back and it's not what we said it was, we get out of the deal. If the financing comes back and it is not what we said it was, we get out of the deal. We protect ourselves.
So thank you very much and if you want to find out more about the Multifamily Investing Academy or our OWNER FORUM and how you can get involved in any one of our programs, just go to www.MultifamilyInvestingAcademy.com and you can find out more about it there.
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