The Tony Stephan Show · Episode #005

I Can't Believe This Apartment Is Only $1M! Multifamily Deal Analysis

With Tony Stephan · May 11, 2025 · 33 min

Tony underwrote this deal for one of his coaching clients, who let him share it. It is an 18 unit of two bedroom, one and a half bath apartments in a C class area of a city Tony used to own in. After negotiation, the expected price is about $1.07 million.

The problem is also the opportunity. At low end market rent of about $1,250, the building could produce about $270,000 a year. The seller collected about $105,000, charged no fees and had rents from $600 to $900. Tony explains that the bank only gives credit for collected income, which is why the price is low.

He underwrites conservatively: 75% loan to value, a 6.25% rate, two years of interest only, only a 5% rent increase in the first transitional year, 10% vacancy and bad debt at first, utility bill backs phased in over three years, and about $25,000 a year for unit turns. Stabilized, he estimates the property at about $2 million to $2.2 million, and he walks through a cash out refinance that could return more than the $267,000 put in. He also explains why he now takes the renewal instead of chasing top rent.

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Key takeaways

1. Big problems with big upside are where the money is made. No problems means no upside.
2. Banks and sellers only count collected income. A building that could earn $270,000 but collects $105,000 is priced on the $105,000.
3. When you inherit twelve month leases, plan for a transitional first year. Month to month leases let you start right away.
4. Tell the bank the most realistic plan, not the rosiest one. They will compare your results to it at the annual review.
5. Budget unit turns, vacancy and bad debt in a C class area, and pay for turns from the cash flow.
6. Once rents are at market, take the renewal. A move out can cost thousands to gain $70 a month.

Chapters

1. 0:00 Intro
2. 1:39 Big Problem, Big Upside
3. 3:24 The Price and the Debt
4. 5:41 Collected Income vs Market Rent
5. 8:05 Leases and the First Year
6. 11:23 Fees and Utility Bill Backs
7. 12:56 Vacancy and Bad Debt
8. 15:16 Expenses
9. 20:49 Value When It Is Done
10. 22:32 Turnover Costs and Renewals
11. 27:35 Stabilized NOI
12. 30:01 The Cash Out Refinance

FAQ

Why is this 18 unit priced around $1 million?

Because of what it collects. At low end market rent the building could produce about $270,000 a year, but the seller collected about $105,000 in the trailing 12 months. Tony explains that banks and sellers give credit for collected income, not for what the rent roll or the market says is possible.

What financing does Tony assume?

A 75% loan to value, which is about an $800,000 loan and $267,000 of equity, at a 6.25% rate with a 25 year amortization and two years of interest only. He says interest only would be warranted on a deal that needs this much work.

How conservative is Tony's plan for the first year?

Very. Assuming the leases run into the next year, he models only a 5% rent increase, adds fees and phases in utility bill backs over three years, and uses 10% vacancy and bad debt for the first two years. He says he would rather beat his business plan than miss it at the bank's annual review.

What could the deal be worth when stabilized?

Tony's model reaches an NOI of about $158,000 in year two of his plan, which is about $1.98 million at an 8% cap rate, or about $110,000 a unit. He says a nearby deal appraised at $115,000 a unit, and he estimates this one at $2 million to $2.2 million once stabilized.

Why does Tony say take the renewal?

Once rents are at market, a move out costs a unit turn, about two months of lost rent and marketing. He walks through spending about $6,000 to maybe gain $70 a month and says he learned that lesson the hard way. Keep the heads in the beds, with a small increase every year.

Underwriting an 18 Unit Apartment for About $1 Million

Big problem, big upside

Tony underwrote this deal for a coaching client and says he has not seen this much meat on the bone on a deal this size in years. "The money is made in any business in correlation to the size of the problem you're willing to solve," he says. Small problems have small upside. This one is a big problem with big upside.

The property is an 18 unit of two bedroom, one and a half bath apartments in a city where Tony used to own. After negotiation, they believe the strike price is about $1.07 million. He underwrites 75% loan to value, which is about an $800,000 loan and $267,000 of equity, at 6.25% with a 25 year amortization and two years of interest only.

Collected income is what counts

Tony knows the area and says a two bed, one and a half bath gets $1,250 all day, maybe $1,350 at the high end. At $1,250 the building could throw off about $270,000 a year. The seller collected about $105,000. That gap is why the price is low. "It's not about what's on your rent roll," Tony says. "It's about what do you actually collect." The bank will only give credit for collected income.

The seller, as Tony understands it, owned other businesses and bought the apartments thinking they would be hands off. There are no fees, collections are low and rents run from $600 to $900.

A transitional first year

If they went under contract now, closing would be around July, and leases that run into next year limit what can change. Andrea's phrase, which Tony says is worth a million dollars: it is not your deal until one year later, because you inherit the former owner's leases and the way they ran the business. That is why month to month leases are gold; Tony turned his 56 unit around in a year because everyone was month to month.

So he plans the worst case. Year one gets only a 5% rent increase, plus fees: late fees, a $5 admin fee, utility recovery and trash reimbursement. Utility bill backs are phased in until nearly all are billed back by year three. Market rent arrives in year two of the plan, then grows 2% a year. He tells a story about a client who wanted to show the bank the rosiest picture: at the annual review, the bank compares your results with the plan you submitted, so paint the most realistic one.

Vacancy and bad debt start at 10% because it is a C class area and he expects some skips and evictions. He sends balances to a local collections company and does not do cash for keys.

Expenses and turns

He keeps the seller's insurance of $13,500 and $5,000 for legal and collections, and thinks better handymen could cut repairs. Taxes are set to the uncapped amount the broker provided, about $26,000, though he still tells viewers to call the assessor. Water and sewer is about $16,000, most of which he plans to bill back. He adds reserves of $250 a unit, marketing and a 5% management fee because the bank will.

The real cost is turnover. Someone paying $600 is unlikely to move to $1,250, so Tony expects three to five move outs a year while rents reset. Some units have never been updated and could cost about $10,000 each; others $3,000 to $5,000. He budgets about $25,000 a year for three years and pays for it from the cash flow. Once at market rent, he takes renewals: spending about $6,000 on a turn to gain $70 a month takes years to earn back.

The value when it is done

Stabilized, Tony's model shows an NOI around $158,000 in year two of the plan, worth about $1.98 million at an 8% cap rate, or about $110,000 a unit. A deal nearby appraised at $115,000 a unit, and he estimates this one at $2 million to $2.2 million. At a $2.1 million appraisal and a 70% cash out refinance, he nets about $667,000 against the $267,000 put in. "I don't care about cash flow," he says. "I care about two, three years, my 267 had a baby and made 667." He expects temporary pain along the way, including a parking lot, and says this is the kind of deal that takes experience and confidence.

Transcript

0:00 We are back with another multifamily underwriting lesson. And today I underwrote this deal for one of my coaching clients. I freaking love this deal. There is so much value. There's so much upside. There's so much meat on the bone. Things I love to look for. So I underwrote the deal for him and he was cool enough to let me share it with you here. So this is how you learn the game. You learn underwriting. Two things for you though. Number one, if you want this spreadsheet that I give to all my coaching clients, this is the spreadsheet I've used to buy over $40 million of multifamily real estate. This is what I used to submit to the banks. I keep it stupidly simple and easy because success, love, simplicity. You can click the link in the description. It's like 29 bucks. I don't care about the money. I care about you getting the tool so you can do this alongside with me. Okay. Number two, if you have any questions about this, I do this to help you guys so you can get in a deal.

0:48 Post questions below. But number three, if you want to learn more about the one-on-one mentorship program where I work one-on-one with my clients to find deals, underwrite deals, evaluate deals, operate deals so they can refinance deals and repeat the process. Something I've done five going on six times now. Click the link in the description there. There's a page you can learn all about the mentorship program. This is where we will get you in your first small multifamily deal over the next 12 months as long as you're an action taker. So, you can learn more about that. Without any further ado, let's get into underwriting this deal. All right, what's going on, man? So, I want to show you why I absolutely love this deal. But I could see why a newer multifamily real estate investor would get tripped up on this deal, just like me four years ago, 5 years ago would have got tripped up on this deal.

1:39 But I'm going to show you what I've learned from veteran experience 258 multifamily units and buying some pretty heavy BRRRR deals. But I'm going to show you why I love this. Why I love this deal so much. This I haven't seen a deal this size with this much meat on the bone since damn near 2021. I mean, this is like when I used to go when I was broke, I would go to Chili's 2 for 20 and get them baby back ribs. This is like a Chili's baby back rib. You don't know like what kind of meat it is, what kind of pork, what kind of pig it is, but these are some meaty bones. I mean, this deal has massive upside. There's going to be what we call temporary pain and discomfort, but always remember the money is made in any business in correlation to the size of the problem you're willing to solve.

2:32 The same thing goes for multifamily. Small problems, very small upside, no problems, no upside. Big problems, not always big upside. But in this situation, this is a big problem with big upside. That is where the big money is made. Big problem, big upside. Cuz like I said, sometimes you have big problems, but you don't have big upside. So, let's get into this. The thing that is going to be the challenge on this deal, and I've already reviewed the OM, I've already reviewed the rent roll. I've already reviewed the T12. You should have all that as well. Remember, we only need an OM and a T12 and a rent roll to underwrite a deal. And you really don't even need an OM. You need a trailing 12 income and expense ratio, profit and loss statement, and you need a rent roll.

3:21 So, here's the problem with this deal. Right now, after much negotiation, we believe the strike price of this deal is 1.07 million. Not a whole lot. Million bucks to score an 18 unit. Not freaking bad. We're looking at a 75% loan value. Always make sure when you're using this form to update the debt in here with what debt you think you can get. I know if I'm going to buy this deal, and I might. I like this deal so much I might want to buy it. My wife doesn't want to buy cuz she says it's too small. But I'm like, hey, sometimes beautiful things come in small packages. Like her, she's 5'2. I'm like, "Hey, beauty comes in small packages sometimes. You got to be able to do that." So, we're looking at 75% loan to value, an $800,000 loan amount.

4:09 Peanuts, right? 267,000 in equity, 6.25% rate. This is where I've been getting terms at 25 year AM. Here's an interest only. So, if you're going to do interest only, here's where you would calculate it. If you would do a second mortgage or like a second line on it, you would calculate that there. So, I have this puppy set for two years of interest only, which I feel would be warranted on a deal like this. Now, these are two. So, then always make sure too, this is your little rent projection area. Make sure you update this. Two beds, one and a half bath. There's 18 of them. We know because I used to own in this area. I used to own in this city. I know all day long you can get 1250 for a two bed, one and a half bath. Probably highend is 1350. So you can just kind of in update this here.

4:56 And then if you want to know like your annual income, sometimes I'll do this. I'll be like, okay, so I know there's 1250, then there's 18 of these puppies. So it's 22,500. So then I'll just do 22500 and there's 12 months in the year. So I know, okay, cool. This building can throw off 270,000 when I get to the low end market rents. This is why I like to do. But as the properties get bigger, like I looked at 260 units, there were tons of unit mix. So it's really helpful just to keep organized. I made this spreadsheet as stupidly simple as possible. I don't want multi multiple tabs. I don't want multiple boxes. I don't want all these calculations. I want to know what's my down payment, what's my cash flow, what's my return on equity, and how can I get my money out of the deal.

5:41 That's what I want to know. So, here's the problem with this deal. Here's the problem. Here's the opportunity. He didn't collect a lot. So, his historical T12, so T12 is just that trailing 12-month income expense. I believe this was for 2024 like December 31st through no January 1st through December 31st. So let's just for say sake example here say this is 2024 which would make sense that we're getting a full year snapshot of the property. He didn't collect anything. So when you divide this out by the month he's barely collecting 8,000 bucks a month. We just said we know cuz I owned here. My wife's a broker, you know, she deals with this.

6:28 Why always work with a good broker so important because this is how you figure out how much money you can make here. We know he should he has the potential on the low end to be collecting 270,000. He only collected 105,000. Okay, that's why we're talking about a million bucks here because his collections are so freaking low, right? And this is a big lesson in multifamily. It's not about what's on your rent roll. It's about what do you actually collect. Collected income is what pays the bills, what pays the bank, and what's NOI. You could say, "Hey, we should be getting 270,000 based on market rent, but we only collected 105." The bank and a seller is only going to give you credit for what you've collected.

7:18 So, and for the sake of a example here, and I believe when I looked at the T12, he didn't have any fees. So, you know, I'm getting super excited. Getting super excited. He, this gentleman, from what I understand, owned several businesses. He just bought some apartments like most people thinking like, well, hey, it's not going to be super hands-on. It's not going to be super active and he just kind of took it. So I'm getting super excited here because I know his collections are way too low. I know his rent's way too low and I know he's not charging any fees. Okay, so we know, this is how I look at it. We know at the time of filming this is what, May 2025. Okay, let's say I go under contract today.

8:05 Realistically, I'm not closing this deal till July. So then I have call it August, September, October, November, December. I've got five months of the year. To me, the year shot if they're on leases that don't expire to 2026. I'm kind of just operating. My wife coined this phrase and it's worth a million dollars. It's not your deal until one year later. So, if we buy in July 2025, it's really not our deal until July 2026 because I am taking over the former owner's leases, I have to inherit the way they ran their business. That's why I tell you guys, month-to-month leases are gold because you can come in right away and make changes. You can come in right away and implement your business plan. 12-month leases are not bad. It just takes you more time to operate and to put your proven your blueprint, our proven process into play.

8:57 That's why my 56 unit I was able to flip that puppy in a year because everybody was monthtomonth. So you see month-to-month leases and stuff like this. Oh my god. If you don't buy the deal, I will and I'll slap you silly for not taking advantage of it. So I'm going to be super stupidly conservative and say that I know low-end market rent is 270,000. I'm going to say I will be there and full year collected on that in 2027. So, I drink my cold brew. Now, am I going to get there sooner on 18 units? Of course. But I always want to map out a worst case scenario. And when I explain this to the bank, I want to paint the most pragmatic picture possible because I was on the phone with a client the other day and he wanted to paint the rosiest picture possible.

9:49 I said, "Cool, dude. But this is business, not theory. Real world application. Nothing goes according to plan. So, if you're going to tell the bank you're going to be at 290,000 in year one because that's low and I want to go high, you better do it because you sure as heck don't want to do what's called your annual review where the bank looks at your collections and all that and you best believe they're going to pull this report up that you submitted and they're going to say, "Hey, you were off. Hey, why didn't you do what you said you were going to do? Hey, you said you were going to collect 257,000 total revenue. You only collected 111,000. What? Who did we just give money to? I always overexce my business plan because I do it like this.

10:35 This is what I'm teaching you to do. So, I'm going to say I just did a 5% increase off of the baseline. Now, that is stupidly conservative, but I just want to see like, hey, let's say they're all on 12-month leases. I'm not even going to be able to really change anything too soon here. So, let's just say I kept everyone there. I did a 5% rental increase because the rent I know they were renting anywhere from $600. $600, man. I can't even get cable and internet for $600. $600 to $900. So, 5% increase. No one's moving out. We've paid 600 bucks and now has to go pay 630 bucks. You know what I mean? 5%. Now, I did start to tack in fees that I feel like we're going to be able to charge.

11:23 You're definitely going to have late payers there. Rents due on the first, late on the third. If they pay on the third, boom, it is a fee. Administration fee, we charge a $5 admin fee on every lease. We charge administration fee on everything. Utility recovery, trash reimbursement. So, this is what I want to talk about when we get to the expenses, okay? Because while I may not be able to raise the rent or I may not want to raise the rent too aggressively, I want to start to build back utilities. My goal is by usually the second to third year of ownership, I want to build back all utilities. I'm not using the toilets. I'm not taking those showers. I'm not washing my ferret in the sink. They are. So why should I be paying for their utilities, right? I want to slowly build those back.

12:09 I give myself three years to do it. So realistically, like I said, 2026 is a transitional year in progress. So I put these little notes at the top. It's great to explain to the bank, too. 2027, I'm going to hit my 1250. 2028 is my full year. Crushed it. Full collections at market rent. And then see, I just did a two once I'm at market rent. Remember I said low end. And that's this year, 2025. So by 2027, I'm definitely going to be higher than 270,000. There's no way I'm not. Rent goes up, not down every year. But I want to be conservative. Then once I hit market rent, I usually just do a 2% increase per year. Ultra conservative. Rents typically go up much higher. I don't want to say much higher, but they typically on average, we see a 3 to 5% increase every year.

12:56 It's a rate of inflation, right? Like I said, let's be conservative. And then in 2028, I've got all my fees dialed in, got my vacancy dialed in. That's when we look to refinance. Now, I did 10% vacancy here for the first three years. Well, I'm sorry, for the first two years, and I dropped 7%. So, this all depends on the area. This is a bit more of a C-class area, low C-class area. So, I'm going to estimate especially as I take over 10% vacancy. And remember, vacancy is also bad debt. That is There you go. Bad debt. Bad debt is when a person owes 3,000 and then they move out and you don't collect that 3,000.

13:42 That is bad debt. That is income owed to the property to the to the asset to the business. That's not collected. So, I do have collections in here. Collection income. Where is it? Court cost reimbursements. Guess that could be it. I'm surprised I just don't have collection income. Forfeited hold fees. We do get these. Sometimes people will just put the deposit down then forfeit it. And that's just free NOI. So realistically, you would have some court cost reimbursement as well if you're having this high of a bad debt. But, you know, I'm just being conservative. Then I keep it at 7%. Most banks will only underwrite to 5% vacancy, but again, I know this area. I know it's a little bit rougher around the edges. I'm going to increase my vacancy and bad debt. Just coming from a real world operator.

14:30 You're going to have some bad debt on this property. People are going to do what's called skip. They're going to have two months left on their lease. They're going to have a little bit of a balance. They're just going to move out, which I'm going to tell you sucks. Send them to collections. Like we use a local collections company, but better that than you go through an eviction because an eviction in most states and like in the state of Michigan takes three months to get them out and then they still owe all that money. So, we don't do cash for keys because I don't incentivize criminals. I don't incentivize people who do the wrong things, right? I'm not going to give you a reward for not paying your freaking rent, but yeah, that's just part of it. So, all right, let's look at expenses. Now, this was taken directly off of their statement.

15:16 I'm just going to underwrite to where they're at. So, insurance 13,500. It's kind of high, but again, it's a lower income, lower socioeconomic area. It is what it is. Insurance is again cheap. My advice to you is always drive there in the morning. Drive there at night. Drive there in the weekend. If you would feel uncomfortable getting out of your car, probably not in the morning, but at night or on the weekend, don't buy the deal, right? Like if you if you would feel uncomfortable getting out of your car and walking around, why would you want to own that deal, right? So this is where the insurance at. I'm assuming my insurance is just going to stay where they're at, right? Might be a little bit higher. Legal and collections, 5,000 sounds about right. So, I kept it there.

16:02 Repairs and maintenance, this is kind of high, not going to lie. In historically, it's like a,000 a unit. So, actually, well, based on that, no, this is a little bit lower, but to me, this is a little bit high for 18 units, 14 grand in repairs and maintenance. But again, inefficient operations. I feel like if I ran this deal, especially with like my team and my handymen and all that, cuz this is not CapEx, this is not unit turns. This is like leaky faucets, all that. This guy might be, "Hey, the water's leaking. Okay, send an emergency plumber." That's where this gets really expensive. I feel like I could probably drop this isn't significant, but maybe like $10,000. I could shave a little bit off of this, which is great because it's $3,000 to NOI. So, I love that property tax. This is set, His is lower, but this is set to what it would be if it uncapped.

16:51 Okay? And this is from the broker. I didn't call the tax assessor. You know, I always push you guys to call the tax assessor. So, call the tax assessor and verify this. But this is what the broker said it would uncap, too. So, that's perfect. We're going to keep it 26,000. Kind of steep for 18 units, but not really. I've got a freaking 8 unit that's 21,000 in taxes just because of the city. So, not too bad. Gas and electric common areas he doesn't pay. So that's great. Water and sewer. This is a big one. So 16,000. Remember I said our goal is up here. Oh man, I only did half. Look at this. So we can tweak this water reimbursement. Our goal is to build back all utilities, man. Should not be paying for those utilities by year three. So that's three full years of ownership.

17:38 I definitely am going to be billing back all utilities. So there's my water reimbursement, which is about we could say 95%. Because I always leave a little delta there. So, if the bill's 17 grand and I build back 16,000, I'm happy. What else? Trash and recycling. You did see I did build that back here. Laundry income. Wait, trash reimbursement. Maybe I Maybe I was supposed to put that there. I don't think he has laundry. Does he have laundry? Maybe he does have laundry income. Okay, so whatever. Let's go. Trash reimbursements. Let's say I'm going to do half and then I'm going to go for the full shabami. Bam. And again, we do this on all of our properties. So, don't be like, "Oh, you can't do this." No, we do this on all of our properties. Yeah. I'm not talking about third part.

18:25 I'm not talking about theory. I'm talking about real world application. Contract services cleaning landscape pest. There's no way around this. Unfortunately, it's just part of it. You're not you're not able to build back cutting the grass. That's part of owning the building. So, that's not too bad. Reserves. Remember, 250 a unit. So, this should be 30. Yep. 3600. Perfect. He has zero for marketing. You're going to have marketing. If you're going to have vacancy, you're going to have marketing. So, you can do the Facebook marketplace in the Craigslist, but if you're going to put it on the MLS, if you're going to put it on apartments.com, you're going to pay money. So, I did I would probably even do 3500 just to be safe here. It's just part of it. Once you're full, let's say in year three, you're full and you're stabilized, you're like, "Hey, okay, I don't I don't need to pay for marketing anymore." Cool.

19:15 You could zero that out, but I'm just gonna I always keep marketing in the business plan because the worst thing to do is cut off your lead source because you could have six people move out to you have six people die. They all just die. Boom. And you have no marketing going. Not good, right? So, remember, you're always full until you're not. And then management payroll. This was directly off the broker. This is what they had. It's usually 5% of gross collected income is what the bank is going to underwrite for. So, let's just make sure we're dialed in here and see where he got that five cuz like I said, I just took that times 0.05. Oh, man. That's even lower. Jeez. So, 5,000 bucks. Now, you're obviously not going to pay a manager $5,000.

20:01 You're not going to find anyone to work for you for $5,000. But how we do is we built our portfolio. We would say this property will contribute 5,000 to the manager's $70,000 salary. That's the way we look at it. But this is what a bank would pay a third party management company. Oh, I see what's going on here to manage the deal. No, that is wrong. So, see, sometimes depending how I have this spreadsheet set, you got to play around with it. You got to just make sure it's not I'm telling you guys it's 5%. So, there we go. 12,000 13. Okay, now that looks now that looks better. So, yeah, that, you know, that adds up, but all good. You're not going to have a leasing agent here, so you don't need that. You're not going to definitely have a maintenance person. You're not going to have other payroll fees, and you're not going to have administrative fees.

20:49 Maybe like you're like, well, I file my LLC and whatever. So, okay, 250 bucks, fine. Fine. Here's the problem. So, like I said, this is the purchase price. This is an 8% cap rate. This is direct from the broker. So, I'm going to change this around. So, all I do is come in here and modify this. So, always if you're using the spreadsheet, just be aware. You got to come in and change these things. Change these things. Man, look at this deal. Look at this deal. Look at this freaking upside. Like I said, temporary pain, but long-term gain. Long-term gain. This deal is worth about I'd say 2 million 2.2 million dollars when it's done.

21:41 So, we're only paying a million7, right? Only paying a million7. Now, look at asis. This is the problem. This is the problem with this deal. This is where most investors will get hung up because they may myopically focus on where is the business and the building today and they say, "Oh, well, look at this. It's only making 94,000 and it actually made more than this cuz this had his vacancy and his bad debt in there." But sake of example, it's only making 94,000. And oh, before I get to that, I want to put this in here. I want to talk about this. So, turnover cost. Okay, to get this deal where it needs to be, you're going to have turnover.

22:32 It's highly unlikely someone paying $600 in rent has the financial means and I would even say the mental capacity to go from paying $600 in rent to,250. So, they're going to leave based on when we walked this property. So, you know how we do it. We go boots on the ground, baby. Some units are I believe my wife said three are classic, which means they have not have been updated. Three or four. She said very easily those 10,000 bucks to get them to market standard. The other ones, depending how bad the tenant leaves it when they move out, could be 3 to $5,000. Okay? So, I this is just how I ballpark it.

23:20 I said I'm gonna have maybe three to five move outs a year based on this methodical process because there's only 18 units. So once they're out, it's all good. You're done. You won't have to do these massive unit turns because I preach to all you guys once you're at market rate, you make your money on the renewal. Keep the heads in the beds because when you renew them, so let's just say this is such an important lesson. Let's just say you have someone at 1,250 bucks, right? And market rent is 1350 and you can renew them for what do we say 3%. Right? Cool. So they're going to 1287, but you're like but I want to go to 100 and they're like well I'm going to move out but you're going to pay $3,000 to turn a unit.

24:09 You're going to lose two months of rent. You're going to pay to market the building. So 350 bucks a month. So maybe another 350. Like look at how much expense you're incurring. $6,200 to get maybe $70 more a month in rent. It would take you years to recoup this. And ask me how I know because I made this mistake. I would say, "No. Look. We got to get the high rent. We got to get the high rent." Now we say, "Keep the heads in the beds. Take the damn renewal." I'll take $15 on a renewal. It's got to go up a little bit because you always have to condition them because our goes up, labor goes up, gas goes up, electricity goes up, taxes go up, insurance goes up. If you don't increase, you will get swept behind.

24:55 But this is the reality of what vacancy cost you. So just keep the heads in the beds. So I if I'm buying this deal, I'm just estimating 25,000 a year for the first three years. 75,000 for unit turns. Unit turns, unit upgrades could be a little bit more. Could be a little bit less. And I want to pay for it from the cash flow. Okay. Now, I put this in here and I highlighted it for an example. This is what's called a capital expenditure. If I'm upgrading a unit, that's a onetime cost that will fall below my NOI line. Make sense? Very important you understand that. A capital expenditure, roofs, parking lots, unit upgrades, appliances, things that you should only have to do every 10, 15 years falls below the NOI line, but I put it in here just to see, do I have cash flow to cover it?

25:50 Freaking year 1 and year two, I do have cash flow to cover it. I'm sorry, year two and year three, I do have cash flow to cover it. Year one, I might I might not, you know what I mean? It might be tight. But again, remember I said I'm barely increasing rents year one. I'm again I'm running my worstc case scenario here. Okay, so be aware. I would budget and then this would fall off. But I would budget for this turnover cost. But if you're doing unit upgrades, this would fall below the NOI line. So let me know if you have questions on that. So we're going to zero this out for right now, though. Okay, we're going to zero this puppy out. Oh, look at that. I didn't even have that adding in there, did I? Let's see.

26:37 Maybe I did not. Okay, cool. Perfect. All right. So, understand you're going to have to take some of this cash flow here and then maybe dude, maybe we just put the turnover cost right there. I mean, that's fine. Just so you're aware of it. Again, this is like a fluid thing. I'm not pretending to be a Harvard MBA with this spreadsheet, but then I know, hey, I'm going to have this cash flow here, and then here's my mortgage. And then you would just have to I'm not going to do all this right now, but you'd have to just for this formula to make sure it accounts for that 25,000 there. But just something to be aware of there. There's going to be turnover costs that's not going to impact your NOI line, but you're going to have to pay for it some way somehow. I like to use the cash of the deal. Okay. So, let's just zero this puppy out right now. So, all this to say, when we get to our fully stabilized numbers, great collections, we've got all our fees dialed in, we've got our taxes paid for, we've got our management paid for, we've got our admin fees paid for, we've got our insurance, all that.

27:35 We are getting a net operating income of $178,000. I don't Their net their NOI right now is not 6,000 because like I said, they don't have all these fees. His taxes are way lower. So, don't be thrown off by this, okay? You can look at the OM to see where his NOI is right now. I think it's like 40,000 or something like that. So, this deal on paper, I think it's like 45,000 maybe. So, this deal on paper, I don't know why it's Oh, 4,500. That'd be bad. Yeah, this deal on paper is worth like $500,000. $560,000. Okay. Whoops. But as you see again, year one would be rough.

28:24 It would be very rough if we only did this light increase. We're probably going to do more. But let's just run the worst case scenario. Okay. But then here you go. You get to year two, which was probably going to be like year one, right? If they're all monthtomonth, if you can get them out, if everyone's lease expires in 2025, this 2027 becomes your 2026. Now, your deal is worth 1.984 million because your NOI is 158,000. That's your interest only, but that doesn't count against your debt service. You're getting 108,000 bucks a month in cash flow. But no, you might have to put 25 30,000 of that back into the deal, but all goods CapEx doesn't lower your NOI.

29:10 So, at an 8% cap rate, we're looking at 1.984 million. Only $110,000 dollars per unit. Not bad at all. I have a deal right next to this that has appraised for 115,000 a unit. So, I believe in this number all day. This one might be a stretch based on the market out there, but I very comfortably feel like once this deal is fully stabilized and if you can hit these types of numbers, especially in freaking 2028, 2027 to when prices continue to go up, you're looking at I would safely say this deal would appraise between two and $2.2 million. You only paid a million. So, here's what I do. I'll say it's going to appraise for 2.1 million. This is maybe I can make this like a little formula on here, but this is just how I do it.

30:01 2.1 million I owe. So, let's say I go back to the bank, do a cash out refinance, the bur strategy, it appraises there. Cool. They're going to give me, let's just say to be conservative, a 70% loan to value on that. Why 70%, because it's still going to have to cash flow. It still has to meet this 1.2 to debt service coverage ratio, excuse me, based on principal and interest payments. Because remember, right in this example, we're just doing interest only, then principal interest. When you refinance, they're not going to give you interest only unless you go with a bank agency debt. But don't do that for a deal this size. Let's just say you didn't pay down any principal cuz you did your two years of interest only. You got there, you want to refi. You owe 82,000, right? So, here's your new loan amount.

30:47 You still have all this equity in the deal. Freaking over 600,000 in equity. That's what they will give you a new loan amount. They're going to pay off your old loan amount. So, they're going to go this will pay off this $82,000 and you are netting $667,000. You only put $267 down to buy the deal. It's a double. It's a whammy. It's a home run, dude. You doubled your freaking money. That's the potential on the deal. Now, remember, there's going to be some pain. I think the parking lot has to be redone, too. So, for me, and this is where people always like, "But cash flow, cash flow." I don't care about cash flow.

31:33 I care about 2, three years, my 267 had a baby and made 667. And if rates are lower than 6% in two years, it's even better. They're higher. This might be less because it's got a cash flow at a 1.2 death service coverage ratio, but we're not going to worry about that. We're going to just kind of assume I always just assume it stays about the same. So, just know some of this cash flow here, you're going to have to put into the deal. Like, you're going to have to reinvest it. You're going to have to do upgrades. You're going to have some vacancy. You're going to have some evictions. You're gonna have some court costs. There's gonna be some temporary pain. We just don't know. These court costs could be way higher. The bad debt could be 15, 20%. It could be way higher, but I am confident in 3 years you can get to this number.

32:20 That's why I still personally might buy this deal because I'm just looking at this cuz I know I can get there in like 18 months. It's how where else can you double your money and get tax benefits and you're not paying tax on this? This is zero tax. If you made that in the stock market, right off the bat, they're taking the I S is you and taking you 200,000 right off the bat. You if you made that money and sold, they're taking 200 grand. This they're taking nothing because it's debt. Hopefully, if this was helpful, let me know if you have any questions with this. I love this deal. This is, like I said, this is massive upside, but it takes experience. It takes confidence to do this type of a deal. And you know, that's what we're here to help for. So, let me know if you have any questions, man. Toxin.

Topics: Underwriting, Deal Review, 10+ Units, BRRRR, Property Management

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