BiggerPockets Real Estate Podcast - 61: How to Succeed in Multifamily Investing – A Unique Conversation with Josh, Brandon, and Ben

Episode Date: March 13, 2014

Change is good, right? We hope so – because in this episode of the BiggerPockets Podcast, we change a lot of things up and invite you to come sit in the BiggerPockets digital coffee shop and listen in on a fascinating discussion! For the first time, we bring back a previous guest on the BiggerPockets Podcast to move beyond “their story” and dig into the dirty details on a very popular and important topic: multifamily rental properties. Today Ben Leybovich, who shared with us his powerful journey almost a year ago on episode 14 of the BiggerPockets Podcast, is going to talk with us about what it takes to succeed as a multifamily investor – looking beyond the numbers and truly investing in the right kind of properties. As I said- this show is a little different. Rather than just an interview, we decided to make this episode more of a “conversation” between Ben, Josh, and myself – discussing (and often loudly debating) everything from “what kind of properties to buy,” “what kind of location someone should buy in,” and a long debate on one of Brandon’s most recent purchase- the ugly purple triplex. Although this is our longest show, at almost two hours in length, I think this is one of the most powerful podcasts we have ever done because it’s totally unfiltered, deep, and raw. Come be a fly on the wall in our “digital coffee shop” and discover everything you ever wanted to know about investing in multifamily rental properties. In This Show, We Cover: Managing single family versus multifamily properties Why cash flow is not enough to base your decisions on Brandon’s “Waldo” property: good, bad, or something else? (Leave your opinion on the debate in the comments below!) The Validity (and Problems with) the “Rental Property Rules“ The 13 Steps to Analyzing a Multifamily Property How valuation differs between single family and multifamily Dealing with studio or one bedroom apartments Why Ben doesn’t like 2 bathrooms in an apartment Ben tells Josh to “shut up“ How to really learn what expenses will be And a lot more!  Links from the Show BP Podcast 048: Duplex Investing, Finding Great Properties, and Tips for Managing Tenants with Darren Sager BP Podcast 060: From 0 to 68 Rental Units in Just Four Years with Serge Shukhat How I Found, Analyzed, and Bought an Ugly Purple Rental Property (Waldo) by Brandon Turner Should I Buy a Rental Property with Great Cash Flow in a Bad Location? by Brandon Turner How to Buy a Small Multifamily Property by Brandon Turner Bigger Pockets Rental Property Calculator Bigger Pockets Fix and Flip Calculator The 50% Rule: How to Quickly Analyze a Multifamily Investment Property BiggerPockets.com/meet  (Find Local BiggerPockets Members) Books Mentioned in the Show Landlording on Auto-Pilot by Mike Butler 13 Steps to Valuing Your First Multiplex – A Step by Step Guide [Kindle Edition] by Ben Leybovich Tweetable Topics You can put lipstick on a pig all day long – but if you have a pig, you still have a pig. (Tweet This!) We don’t put money into property- we put money into location. (Tweet This!) If you wanna fly – you need to hang with people who fly. (Tweet This!) Stumbling blocks and stepping stones look very much alike. (Tweet This!) Our job as an entrepreneur is to produce cash flow out of thin air. (Tweet This!) Connect with Ben Ben’s BiggerPockets Profile Ben’s Website: JustAskBenWhy.com Learn more about your ad choices. Visit megaphone.fm/adchoices

This is the Bigger Pockets podcast, show 61. You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small. If you're here looking to learn about real estate investing, without all the hype, you're in the right place. Stay tuned and be sure to join the millions of others who have benefited from biggerpockets.com. Your home for real estate investing online. What's going on, everybody? This is Josh Dork and hosts of the Bigger Pockets Podcast. here with my co-host, Brandon Turner.

And the crowd goes wild. How's it going? What's up, Brandon? How are you? I'm good, Josh. I'm great. I was actually just outside because it was like 65 degrees today. And I was trying to remove stumps and it didn't work real well.

Yeah. I ended up my yard with my truck. That was awesome. I'm really not interested in. I don't know how to tear out stumps apparently. You don't pull it with a rope in your truck. No, you do it with a chain and somebody else's truck. There you go. And your neighbor's yard. Exactly, exactly. Well, so today, Brandon, we've got a little bit of a different show, don't we? I believe we do, because we've got a special guest and a first-time repeat. We've never repeated a guest before.

We have not. And this repeat guest, for those people who are watching, watching on YouTube is actually giggling, sitting around wiggling right next to you there. It's Ben Labovich. What's up, Ben? Hi, guys. How are you? We are good. We are good.

This is a totally different show that we've ever done. People are like freaking out at home. Like, you know, where's the quick tip and all that? I don't know. Thank you. Thank you for the invite. You know, it's going to be different show. I think from what I've been told is going to be a different format.

And I'm looking forward to it. I think it's going to be a great show. Yeah. No, we are too. We are too. Well, so for everybody who's listening to today's show is going to be, we're testing a new format and we're picking a topic. And today's topic is how to buy a multifamily property. And we thought Ben would be a great person to join us in today's conversation for today's show.

So, yeah, we're very much looking forward to it. And I think with that, we might as well just kind of kick into this thing. What do you say, B? What do you say, B? B, of course, referring to both of them. Sounds great, Josh, Jay. Here's the thing about traveling. If you buy food at the airport, burrito, salad, bag of peanuts, you start wondering if you should

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Steadily, landlord insurance designed for the modern investor. All right, well, let's do this. Why don't we kick this off at the, you know, beginning? Why, Ben, why should somebody buy a multifamily property? I don't know why somebody should. I can tell you why I do. Okay, we need a new guest. The reason I think most of us buy multifamily property is for the income.

That's the bottom line is we believe that we can get more income out of multifamily, can out of SFRs. There are also efficiencies in management and financing options that are available in multifamily. They're not available in single family. It's kind of a loaded question like everything else in real estate. Why multifamily is opposed to single family. But there are a number of very good reasons. Yeah, for sure.

For sure. Really quick, you know, and I did forget to mention something. Ben was previously on episode 14 of the podcast. You could check out that show at biggerpockets.com slash show 14. Definitely go check it out and listen. And, you know, for those of you guys who are listening, we're not really looking to cover so much on the specifics today, like the financing, dealing with brokers, things like that.

We're going to talk about things like what makes a good deal. Why multifamily? You know, the type of stuff that more of a novice is really looking to understand before they jump in and make that first or second or third by decision on an income property. Yeah. And also just to point out, when we talk about multifamily, you know, a lot of people might wonder, is that mean two units? Does that mean 100 units or 1,000 units? And I think, at least from my perspective, we're going to cover everything. It kind of all applies. But I, I mean, for those who know me, I'm much more focused on anything smaller. So 2, 3, 4 up to, you know,

I think I have a 24 unit. Like that's kind of my range. And Ben, you're probably about the same right now. I am the same. I've been the same, although right now, most people know from my articles and what I write, I am looking at syndication. And so that's 100 plus. Yeah.

So we're going to cover probably kind of a full gamut here. And really quick, you know, on the topic that you're talking about the two, three, fours, and then the bigger ones, there is a distinct difference, right? I mean, a two unit, a three unit, a four unit, those are generally considered what? Those are considered residential properties still, correct? In relative to the financing options, yes, you can finance them on a 30-year mortgage, a conforming secondary market, sellable kind of mortgage, Fannie Mae, Freddie Mac type of mortgage. Obviously, you can't do that with anything five units and above.

But there are a number of differences going from smaller to larger. Sure. Aside for, and I think we just want to focus for the most part on the smaller stuff. Yeah. Today, because I think most people listening would derive more value. Wherever, you know, if I happen to chime in and say, hey, it's not so different when looking at 100, you're hearing my dog. Nice.

let me take care of that. Hang on just a minute. Wait, are you literally going to leave in the middle of the podcast? You know what? This is a live show, Ben. You can't just bounce, man. You might be able to dog again. I'm sorry.

I'm sorry. I'm sorry. So listen, we're, we talked about SFR. We're talking about single family properties. What's the difference between a single and a multi? I mean, other than there's more than one door, more than one unit. Is there any other differences? there's more than one rent, which means you're managing more than one person.

Most people, and I think Brandon will agree with this, most people think they're managing property. No, you're not, okay, you can fix a few things here and there. You can call it pro plumber or whatever. But by and large success in this is a function of managing people. So the more people you have to manage, the more kind of the learning curve becomes and the more you have to know as a manager. And that's probably the biggest learning curve. Gotcha. Would you concur, Brandon?

I feel like I'm interviewing the both of you. It's actually kind of fun. I would concur. I like the word concur. It sounds like something a doctor would say. I would concur. And one thing I've noticed, and I think I maybe even said this last week in the podcast, but when you're managing a house, like, I would rather manage 50 houses than 50 units in an apartment building.

I don't know if you feel that way, Ben. But I feel like apartments and multifamily, I feel like that just, I don't know, it's more work. It's more hassle. They're more needy. Maybe that's the case. I don't know. Do you feel that way, Ben? I feel completely differently about managing 50 houses versus, yeah, you're wrong.

We need a new sound effect, by the way. That would be the awesome sound effect. I would much rather manage a 50-unit apartment building than 50 houses. And Brandon, you say the opposite, right? Well, just from my experience, like, I have half my units are single family and half are multifamily. And my multifamily take up 10 times more work for me than my single family, even though I have roughly the same number. So let's talk about that. Why do you think that is, Brandon?

And then I'd love to hear Ben's take on that. You know, if I had to guess, I would say that the single family houses I have are generally fixed up already. Like, I bought them to flip and then I put tenants in them is how I got a lot of them. So it makes sense that the maintenance isn't as big of a deal there. The people actually have good jobs and good income, a little bit higher quality tenant maybe than the multifamilies are a lot more. Not necessarily Section 8 because I don't have any of those anymore, but just a lot lower income, which then they, I don't know. They break things more. Is that bad to say? So you take care of your single family rentals and you're slow-in-lawers when it comes to the multis. That's great.

Now we know it's on the record. Let me jump in here because what you both said bears a lot on this conversation. The ease of management is a function of desirability. It's as landlords, we cannot attract tenants. It's our properties that attract tenants. When you talk about single family versus multifamily, yes, the common wisdom is that people stay longer in a single family that are more desirable because of privacy, because of the garage, because of more space, because of climate control systems that are, you know, dedicated in a single family. You can achieve this in a multifamily. The problem is that when most people look at multifamily, they see the big.

big price tag. And so they automatically assume they have to step down one or two notches in terms of quality of the building. Well, when you do that, you end up with quality of the tenant, which is one or two nudges. Yeah. So, and I think Brandon and I talked about outlining some of the bullet points for us to talk about. And this is going to come up. The whole aspect, the whole issue of desirability as a function of success in this business. Can you explain real quick? What is desirability for those people who don't know? I know you use that term a lot and I like it, but what does it mean?

Okay. So is that when you two talk privately or? No, in his blog post on Bigger Pockets. Oh, okay. Yeah. And when we probably talk privately. Me and Ben talk a lot. Like, we text like like 15 year old girls all day.

Anyway. Hey, I'm a 15 year old boy. You're my girlfriend. It's not confused things, okay? Wow. Don't tell my wife. Let's look at this. And this is crucial.

Throughout the lifespan of a real estate investment. So you are looking for it. You are identifying it. Now you bought it. Now you manage it. Now you sell it. Either 1031 or just flat out sell it or hold on to it for the rest of your life. But eventually, you have to sell that bag.

You know, you're not going to take it with you. That's the kind of the thinking. Well, throughout that whole process, you're asking yourself questions around desirability. As you're managing it, you have a product on your hands. Who wants it? Why would they want it? If you're going to improve the value of that product in multifamily space, of course, and we need to talk about this, probably value is a function of income.

So improving value, creating value in a transaction as a function of creating income. Well, why should you be able to buy a fourplex whereby rents are 500 a unit and drive them up to 600 and a quarter? Why should people pay more? What is so special about your foreplex that people would agree that it's worth 625? And the reason you bought it is because it was undermanaged and you saw value in being able to drive, if I call it expandability, and they're able to drive it. but it's a function of desirability to the potential tenants. Yeah. And your managing is a function of desirability to you.

So, you know, if you have to pay everybody's water bill, well, that's thumbs down for the durability as far as you're concerned. If it's a 125-year-old bill, if it's a, if it's Waldo that Brandon and I wrote about back and forth on the blog, whereby it was a single family house and it was split up into the three units, there is some inherent to that problems. So management-wise, the desirability to the landlord suffers, and that has to be reflected in the value. Well, now, my thought is, you know, people, and I think I see this with investors, and I know I'm a victim of it, and I say victim, and it's actually really the wrong word.

You buy a single-family house, you, even as the investor, particularly newer, investors think, oh, this is a house. Let me clean it up. Let me shimmy it up, fix it up, and then get it rented. When you're dealing with a multi, there's so many more pieces involved. And I think it's very easy to overlook the need to jump in and fix up the building up front. And I think that's where a lot of this comes from. Again, I know I was a quote victim. I wasn't a victim of it, but, you know, I experienced this myself where, you know, I bought, I bought some multis and, you know, I put money into the units themselves, but, you know, in the building as a whole, I wasn't necessarily doing as much as I could have. So, you know, in the end,

everything kind of suffered because of that. Now, there were a million other factors involved in the whole situation, so you can't really look at any one particular thing, but I think I'm probably being fair when I generalize and say that when newer investors jump into a multi-property, they're less inclined to go and spend the money to do the fix-up up front that they might otherwise do on a single family. Would you guys agree on that? I would agree on that. Darren Sager talked about that on his podcast back. I'm not sure what number I'll have to look that up later and I'll put in the show notes. But Darren talked about on his rentals when he takes over one, he goes through and fixes everything.

I mean, top to bottom, remodels the entire unit perfectly and with a plan to never touch those things again. And I think that's rare. Even in my own case, like, I mean, I, I, let's talk about Waldo. Okay, so Waldo, for those who don't know, and Ben just mentioned it, was what he labeled my triplex that I bought. I wrote an article called how I bought an ugly purple triplex. And I kind of outlined my whole thing.

And so Ben called it a Waldo. And we went back and forth on the blog for a couple weeks, just kind of writing articles about it where Ben said he wouldn't have bought that property and I said I'm perfectly glad I did. And the reason why is because it was different. It stood out. It wasn't a normal property. It was a big, huge house that was split. They put a basement apartment in. They put a garage apartment in. And when I took over that thing, my original budget, I said I was going to spend between 5 and 10,000. I'm actually, to give people an update, I'm at 15, 16, 17, somewhere in there right now on repairs, largely because of actually something Ben had said. He said,

the plumbing system in a place like that isn't necessarily designed for a triplex. Now, that wasn't the problem. The problem was somebody flushed rocks down the toilet. Oh, that was the one with the rocks. By the way, Brandon spent like an entire weekend, like hammering out the plumbing because he lives in the middle of nowhere and you can't get a good plumber on the weekend in the middle of nowhere, which is why, you know, as a warning, it's, you know, be aware of those things because you buy a property in Lima or in Montessano.

You know, I mean, you may not have somebody to help you out in the middle of the weekend. You may be doing your own work. No, no, no, no, no. We have people to help us out. I want to add something to this conversation, though. And maybe you'll take it the wrong way. All right, let's hear it. I don't know if he's going after you or me, but he's gunning up.

People need to know this. You can put lipstick on the pig all day long. If what you got is a pig, then what you have is a pig. And people aren't stupid. They're going to see through the lipstick and they're going to know what you have. And how do you define, how do you make that distinction, location? We can talk about upgrades. I'm going to disagree by the way, but keep going.

We can talk about making upgrades all day long. We can talk about cleaning up, trading up carpets, everything else. location drives desirability. People know where they want to live. I never advertise. I don't buy anything that I have to advertise. People drive the neighborhood where they want to be, and they see my forensicine in the ground.

Now, I'm a small-time investor at this point with 28 units or whatever it is, but whatever it is, it's 28 units. I got so many I don't even remember. When I do this syndicate, I mean, I got people moving out of this house right now, and their friends are calling me because they want to be in this house. You know, it's because of location. Yeah, the house is okay. It's fine, but it's location.

But Ben, if you have the best house in the neighborhood, so say you're in a blue-collar neighborhood and you put in the best, you know, it's mixed, there's multis and there's singles, and you've got, you know, the average rent on those, well forget average rent i mean your your building is desirable you've got this pimped out building that's really really nice and you're a great landlord that cares about your tenants and who takes care of this building that's going to drive folks right yes and no because you can't afford to be that guy the valuation is driven by the marketplace so as much as i want to make it nice for my tenants

and as much as I want mine to be the best rental, unless the marketplace supports my expenditures in terms of the purchase price and fix-up costs, relative to both rents, I don't have to charge more rent than somebody else. I just want to charge the same rent to somebody else, but have the best property. And I can't do that if I am in a lesser location

fixing property up because I'm not going to get my money out. Well, again, I'll agree on that partially, but again, you know, you buy the, how much was the purple monster, whatever the... 70,000. 70,000, you're 15 in. What are your rents? We just rented the main unit out for 900, the basement for 500, and the garage should be rented out, hopefully this week for another five. So, 50% rule right there, right? Yeah, easily, yeah, easily cash fills out the 50%. I mean, it's actually beats the, it's more than the 2% rule.

Yeah, it's a good, I mean, it's a good cashful property. Even with the 15 that I'm in instead of five, because of the stupid plumbing issues, which, you know, Ben, you were right about. So there you go. Publicly, you were right. But even with that, it was still an incredible deal. And largely because it's in a great location. It's in the best street in that town.

It is. Okay. And so, like, the location, I think will pull me out. Now, if I had bought that, if I bought that same thing over. in a bad location. I mean... You wouldn't throw good money after bad. You wouldn't go and put $15,000 into a bad location.

We don't put money into buildings. We put money into location, period. That's a tweetable topic right there. And the thing of it is... It's the professor. I'll give an example. Right now, I'm looking at 100 plus units, okay? And the basic formula that everybody looks at, buy a C building in a B location and do what you're going to do to bring up the quality of the building from C to C plus to B minus to B because the location substantiates you doing that.

But if you bought a B building in a C location, it doesn't matter what you do. You couldn't finance it out. You can't sell it for enough to get the money out. and it's very questionable if you'll get the stable rent out of that just because the place is nice. I think you're right when you're looking at a larger property. I think when you're looking at a two, a three, a four. And I'm not saying that somebody should go and buy a property that's going to lose money. That's obviously a bad thing.

But it's easy for somebody to look at a property and say, oh, well, this fourplex is, you know, in a not so desirable area. And the numbers look good. The potential rents look good. Why don't I jump in and buy this property? And again, I think that's where a lot of people fail when they jump in on these properties. The numbers make sense, right? I mean, you take Brandon's property.

No, I disagree, though. I disagree that the numbers makes. But you're not letting me finish. Let me finish. Hold on. Wow. I'm sorry, man. The box is right here.

So the numbers make sense on paper, right? So hold on to you. The numbers, oh my God, Ben, slow down here. Okay. The potential rent for the Brandon's Purple Monster, whether it's on that really desirable street or say it's three blocks over where the rents are comparable, okay,

are going to be the same. Okay. But if you look at and you compare it to the property that's on that really desirable street versus the property that's over there, that's the intangible. Okay. And that's something that has to be evaluated. And that's something that a new investor isn't so, isn't experienced enough to be able to evaluate. And Brandon may disagree with me. And we had an argument on one of my posts.

What you argued with somebody? Shocking. Then we argue in every one of your posts, whether or not we agree or not. But I think that if I was to quantify or qualify what you just said is because when you talk about numbers, when you investors talk about numbers, all they look at is cash flow. Correct. Or perhaps cash and cash return. The intangible is I buy this not just for cash flow. I want it to appreciate because the equity that's created allows.

me additional leverage opportunities. It allows me additional exit opportunities. It allows me to be very creative with private money financing against the equity that I have. It allows a lot of options. So while cash flow makes a lot of sense on something doesn't mean I'm going to buy it because I'm not, yes, cash flow is everything. And this is why we buy income property. But there are a multitude of other subheadings under the topic of should I buy this or should I not, above and beyond the cash flow.

And the cash flow, exactly, they're much more difficult to comprehend, to wrap your head around to understand. The cash flow is simple, black and white numbers you can add, you can subtract, you can even do the cap rate. Well, so really quick, and then let's move on to the next topic here. So what do you tell, and this is to both of you guys, what do you tell the new investor who's looking at a property whose numbers look pretty good? And we'll talk about the numbers in a little bit here, but the numbers look pretty good. How are they to know what those intangibles are? You know, can we define those intangibles beyond location? Well, I don't know what that means.

You know, I'm a new guy. What is a good location? I mean, so what are these things that we need to look at, you know, definitively to kind of protect these folks who are looking at these multifamilies? And I leave it to Brandon first, and then I know Ben will put them up afterwards. We probably disagree a little bit on this. And let me tell you a quick story. So there was a property a year ago, no, probably two years ago, back that I wrote on the Bigger Pockets blog, one of my very, very first blog post I ever wrote for you guys. and it said, it was called, should I buy this sixplex or something like that?

I'll look it up and put it in the show notes. The idea was it was a sixplex that came on the market for like $90,000 in my town. And I looked at it and it was in kind of a bad neighborhood, not like I'm going to get shot in that neighborhood, but one that I wouldn't feel comfortable sending my wife probably alone to go show a unit to. So I asked the question. I put the picture on there. I showed all the numbers. I said, would you buy this?

everybody said no in the comments said no no no no no don't buy it and ben if you were on i don't know if you were even on bigger pockets that time but if you if you were you would have told me no and today you would still tell me no so one of my best friends bought that property after i decided not to he went after it and he went and bought it and he's had zero vacancies in two years now on that zero vacancies he's had a total of like fifty dollars in repairs in two years he's had i mean the most smooth perfect rental of all time. I mean, like, it's the easiest cash cow ever, and he makes a ton of money on it. So he's, my friend has another sixplex in the same neighborhood, same rents. He loses money on that property. I mean, every month, he loses money on that. For there's no in, so I don't

exactly know my point here, but I guess my point is how do you know, maybe I'm just asking Ben this question. How do you know that how do you know you get the one and not the other? Do you avoid both? Assuming you're not going to get that. That's, that's it. because everybody gets lucky once in a while. We're not talking about one-offs here. We're talking about developing a systematic approach to valuating and determining what is good and what is bad. Yes, there's God feelings involved. Yes, you can overrule maybe even yourself in the way that you analyze things.

And once in a while, everybody gets lucky. But by and large, which is what we're talking about, tell them about the other six-plex that just happened, you know, weeks ago. Well, that's that same. That's the same one. This is probably a good time to tell this story. So, this is the second sixplex that loses money. I didn't know it lost money. All right. So my, my buddy never told me this. So basically the story goes. And wait, let me, let me just clarify. You call him your buddy. And he is my buddy. And yet he almost sold you a pig with lipstick all over it, huh? Well, let me tell it. So the story is, he asked me if I wanted to buy it. He said he would finance it. I said, that sounds great. I said, well, how do the numbers look? He said,

well, I don't have them all in front of me. My partner takes care of that side of things, but it's good. We cash flow around $800 a month. He said, we're looking to make, you know, an extra couple hundred, you know, on that. So you'll be making $600 a month. I'm like, oh, great, $600 a month for a sixplex zero down. Great, I can take that. And so we went through the entire process, almost divine it.

And I kept asking for the numbers and I never really got the numbers from it. It was always, yeah, I talked to my partner, he'll get them to you sometime. So then like five days before. By the way, anyone listening, That's a big fat. There's a big red flag. But I mean, like, he's like my mentor and my like closest friend. So like, like I learned a lot of stuff.

I thought I was. Well, after this deal, you might be. So anyway, so Ben calls me. I don't know what we were talking about. But I mentioned that I was buying this property. And what did you say, Ben? I don't know. I don't think I can repeat it.

Yeah. So, I mean, basically your point was you need to get these numbers specifically. Do not just trust this guy. And even if you. had the numbers, you still shouldn't buy this. But at that point, I'm like, you know, I really, really need to get these numbers before I move forward. I was just trusting this, you know, because I just trusted him to be a good deal. So I started doing the numbers. I plugged them into the bigger pockets. This sounds like a terrible plug, but it's totally true. I actually plugged

them into the bigger pockets, a rental property calculator, like the exact everything. And it came out to like, I would make $40 a month. Not $600 a month, $40 a month. And that's if things, that's if there wasn't a roof leak or a window broken or whatever. That's not taking effect CAPEX at all. It was just normal wear and tear, normal repairs and normal vacancy. I was going to make $40 a month. So over the long run, I would have been losing thousands a year on that property probably. And so I owe it to Ben for saying, you know, Brandon, don't be an idiot.

Go look at the numbers better. And it worked. So I didn't buy it. So, yeah. Well, really, really quick. let me pull out something that jumps out at me from that and then I'll let you guys box over it. The big thing on this was the numbers, right? So if ever you're looking at an investment property and you don't get the numbers and somebody,

the seller is hesitant to provide those numbers for you, really you have to look at that as a big fat warning sign. It doesn't mean don't invest in the property. there may be a legitimate reason why they may not have it at that moment in time. But if you get any kind of pushback at all on getting the numbers, and I mean every number, it's time to move. And I'm guessing you guys would agree. And I think we're going to spend probably sometime at least talking about the numbers in the podcast

because of the next thing I'm going to say. I'm going to say that it's almost better when they don't give you the numbers than when you do receive the numbers. because you assume they're lying. It's just, it's, it's ridiculous. I am looking at these big, okay, so I'm looking at bigger projects at this point, but the numbers I'm seeing are out of this world. I mean, you just, you just scratch your head and you go like, how do you even arrive at the purchase price looking at these numbers?

And, you know, they'll give it to you with a straight face. So I hate to be cynical, but you have to be. to be cynical. More than that, you have to know the marketplace. When you are looking at the schedule of rents that you are given, you have to know how it fits into what you know the marketplace to be in this location. And that's probably I'm jumping ahead a little bit, knowing the marketplace. Well, we might as well just, you know, tie into that because it's crucial. Analyzing a building is completely useless. unless you can place it into the fabric of the marketplace.

You can't know the truth, by the way. Explain that. Go into a little more detail. Okay. I am looking at a fourplex whereby every rent is $600 a month according to the pro forma that I receive from the owner or a listing agent or what happened. I know this marketplace and I know the two bedroom units. of this age, of this quality, of this approximate square footage and amenities, rent for approximately 475 units.

I just know it because I've studied my marketplace and I know it. So the question I'm asking, first of all, is this valuable? I am looking at a performer that proclaims that there are four units renting for 600 a pop. And I know that talking from other landlords, everybody else in this style of building, this style of unit is getting 475. Is that valuable? Yes, something is off. What is so special about these units in this particular foreplex? But they should get $600 a unit, whereas everybody else is getting $475. Are you really going to get that? Maybe you can get to the bottom of this question. Maybe you can't. Vice versa, $600. rents on the pro forma, and I know that units like this in this marketplace, rent for eight, is that valuable? You bet, because I want to buy based on current income. And if I can negotiate a price based on current income and then push the income up, then good for me.

The catch is that if I cannot do that, then gas, who's laughing? Yeah. So I have to know the marketplace. So on that first case where they're proclaiming in the performer that it's $600, and ultimately your research tells you it should be $475, you know, the average guy might come and say, well, this building is getting $600. That's awesome. And, you know, what if the landlord could then verify with rents?

Hey, you know, this building is getting 600 a unit, 600 a unit. 600 a unit, 600 a unit, 600 a unit. You got the leases, you're presented with everything. Well, again, I think for the novice investor, they're going to look at it and say, wow, well, I got to get in on this thing. This looks awesome. I'm going to get 600 a rent on these units. Right. I have proof of it. And in the end, it's probably some kind of anomaly is what you're saying that's happening here. And in the long tail, they're probably going to end up losing out because there's rents will probably, they have to come down to market. Right.

And you're presumed, so for instance, and I'm just telling you some of the tricks that people do, you write up a lease for 12 months, but you give a month free, and you divvied the numbers up into 11 months. That drives up your monthly rent. So on paper, it looks like 600, whereas in reality, per annum, they're paying much less than what, you know, what it looks like on the P. NL, for instance. Also, it could simply, you know, that's when people...

Which is fraud, by the way. Which is fraud. And, you know, but not to say that people don't do it, which is why it's so important to look at every piece of this puzzle, which is why I was on Brandon, to look at everything, you know, because it's, you know, you just, you just don't know. You know, if I could have a building, I would have told them not to buy anyhow, even if everything was cool and cash flowing. You would have been, and we can have that debate, but I want to, I want to point out just

for people listening, they might be wondering why were the numbers so off? So just to give specifics, first of all, there was flood insurance required there. And they wanted to, I mean, it was like $200 a month for flood insurance. So I was not aware there was flood insurance. The power, this is an interesting one. The power bill, when I ran the numbers on my own, I was like, well, there's a light bulb in the hallway and there's a washer and dryer out back. That's not going to use very much power. I think I estimated $75 a month when I did like my numbers the first time. When I find out the actual numbers, it was $350 a month. And I thought like, you know, it's huge.

Well, why is that? Well, I found out the wiring was like when they wanted to add a baseboard heater into one of the bedrooms, they would just grab whatever the nearest wire was and plug it in. So the hallway light was getting fed was, I mean, the hallway, like the hallway power was feeding a lot more than just one light. It was feeding a lot of different things all over. And, you know, it was reasons. Like that, that drove the power bill at $300 a month.

That's why I say that my recommendation to you, even if it looked like it was cash rolling, to still not buy it because this kind of junk was going on at this building and you could smell it from a mile off. Well, how did you smell? I mean, besides the fact that Brandon's got sucker written on his head, I mean, how did you? I mean, seriously, this is something that people and whether it was Brandon coming close and Brandon's got a bunch of units, he's been doing this a long time. there's people who come in. How the hell do they know whether they're getting

the wool pulled over their eyes? How do they know whether that's happening or it's not happening? What do they do? Well, unfortunately, I have to tell you, some of it is school of hard knocks. You just have to find this stuff out for yourself. You have to get burned once, twice,

however many times it takes. I mean, bigger pockets is a fabulous resource, but you still have to experience certain things in order to develop the big picture, the foresight. You know, going back to the rent, you know, I didn't finish with what might happen. I'll tell you, Brandon's Waldo building, the Triplex, one of the apartments is in the basement. That to me always rings a bill because... It's a daylight basement, though, but...

It's a daylight. It's like above. Some basements are worse than others in terms of safety, egress, all that kind of stuff. So just because this particular landlord lucky enough to rent this unit for $600 doesn't mean that when you take over the building that you are going to get lucky too. And if you know that the market is $475 for this building, are you going to plan on getting lucky? you're going to plan and getting real. Yep. Yeah.

And that's the bottom line. Yeah. It doesn't mean necessarily that they're lying. They may not be lying. They just might have gotten lucky. Yep. And that happens. Or they might have bought this building, remodeled the unit.

And, you know, for four years, it's the same person paying $600 because it was overmarket back in the time. But the unit was so nice for this location. They agreed. A sucker is born every day. day. Yeah. Right. No, for sure. For sure. All right. So really quick, this is show 61 of the Bigger Pockets podcast. Brandon, Josh, and Ben Labovich here talking about buying a small multifamily. And why do we move on really quick? By the way, you know, it's funny because over 60 shows, you always get the

people who leave us good reviews about our show and think, you know, hey, you guys are doing a great job. you're really trying to dig in and get to the bottom of things. Like we said, we're trying a new format today where it's very much more conversational than our typical show. And I'm sure we're going to get a lot of people who are going to say, well, you guys don't have an agenda and you're just going off in different tangents. And to that, I stand up and I say, you know, it's part of a discussion. You know, we're, this is how people talk.

And, you know, as our virtual coffee shop right here. Yeah, as your mind, you know, as things, as you get into, questions, you just start going off in different ways. I was going to say, we do have an agenda. We just can't follow it. Yeah, and we're trying very hard to follow this thing. So I'm going to try and jump on to the next thing here, which is rental property rules. And this is something that I think, you know, if you're familiar with bigger pockets at all,

you've heard us talk about, you've seen on the site, you've seen argued in many directions. But let's kind of cover those really quick. So I'd say that the big two that we hear most often are the 50% rule and the 2% rule. And Brandon, why don't you jump in on those two? What are we talking about here? Sure. So the 50% rule is a way of quickly estimating what your potential cash flow might be. All it says is if you take half of your rent and then subtract out your mortgage payment,

that's what your cash flow is going to be. So it's a really, really quick, rough way of saying. So again, going back to the fourplex, that's $600 a unit like we were you talking about before. That's $2,400 a month total. Divide that in half, and that half covers all your expenses except for the mortgage. You have $1,200 left. You pay your mortgage. I'll say the mortgage, you know, principal and interest ends up being $800.

It means you're left with $400 in cash flow. That's what the 50% of rule says, whether or not that's right or wrong, I guess, is up for debate. And Ben, what are your thoughts on that? Should I say 2% too? Well, before you go there and before you turn to Ben, I'm going to cut off and say, we've actually talked about this in the past couple days, you and I, the 50% rule. And we've always talked about, you know, the 50% rule is generally a safe rule for screening properties. And one of the things that you and I've talked about, Brandon, and I think Ben,

you might have been part of these conversations too is on some of these multis, 50% isn't safe. 60% you want to look more towards. Yeah, we talked about that last week with surge a lot too, about that sometimes 50% isn't even close to enough, especially the larger you get. So would you agree? Labelage?

I mean, I am in it, okay, so when you are going to be a small guy, you're going to buy the place, you're going to manage it yourself. So that's a cost savings to you. Now, we can have a wonderful discussion about whether or not to include management into the operating car. That 50% or not. But the fact of it is that I manage my own portfolio. I think I can do it better.

But when I buy this 140 unit, I'm sure as hell not going to manage it. So it has to be included. Because I don't want that job. Then it becomes a job. Right now, my managing my portfolio is, you know. So 47 units isn't a job, but 147. is. Where's the line? Okay, when I say manage, I'm different

from Brandon. I've seen Brandon. You don't clean toilets? I don't clean toilets, but I climb on roofs. I've seen pictures of him on the roof. By the way, it was the six flex that he thought about buying it didn't buy. That was the roof. Oh, was that the one with the roof with the flashing scene? Yes, that was that one. I don't do that.

So my manager is on the phone, yeah, and the wife sitting in the car, that poor girl. I did that for a friend. He needed help. I wouldn't fix it. This is the friend who almost sold that. We have a good friendship. Yes. I think 50% doesn't really work in the bigger buildings.

I think if you get 60% you're lucky. That meaning that the operating costs, taxes, insurance, upkeep, cap. you know, water, sewer, trash, lawn, you name it. Everything include, and in a larger projects, of course, you have payroll. You have, you know, units you're giving away to people living at the complex. You have a lot of that. If you can get that within 60%, and you are still looking at a building that's not completely trash, you're doing really well. So, 50%, you know, I'll give an example, that 10%.

complex I bought a year ago. On day one, the gross rent was, I think, $5,800 plus or minus. The N.O.Y was $3,400. Can you define N-A-Y really quickly for those people listening? Net operating income is, and I think we're going to come back to this in a bit, but net operating income is gross income, combination of all income streams in a multifamily asset minus all of the operating costs.

And you have variable operating costs and fixed operating costs. But essentially it's income minus all of the expenses not including the cost of money. So not including your first mortgage, your second mortgage, however many mortgages.

I like to say it's the cash in your wallet to pay the mortgage. It's whatever you have left. I mean, like to pay the mortgage. Is that how, am I looking at that right? I feel that's like the layman's term of it's like that's how much cash I have left that I can pay the mortgage with. Right. I think so.

And then you get into, and I think we need to as part of this podcast, we need to talk about debt service coverage ratio, which is what the banks look at. I think we need to look at. And we don't often talk about it at all. And cash flow, of course, is that NOI net operating income minus your mortgages. I call it cost of money, I call it debt service, you can call it mortgages. Whatever mortgage payments, meaning monthly expense. Okay. And so this N.O.I is very important number because we use it to base our valuation on.

And the reason we use it as opposed to anything else is because, you know, the mortgage payment varies with the type of financing you are attached to the property. And Brandon may do it one way. and I may do it another way, and somebody else may put 40% down on this property, and their cost of money is going to be a lot less. But we need a way that's uniform to analyze and place value on property. Everybody's going to have to pay sewer. Everybody's going to have to pay garbage. Everybody will have to pay property taxes, insurance.

Everybody will have to pay capital expense, you know, fixing the rule. We all have to do that. And so we isolate these expenses. that everybody that apply to everybody equally, and we subtract those expenses from the income, which is the same for everybody. And we arrive at this magical number called net operating income, NOI. And that gives us kind of the apples to apples foundation to then say, okay, well, if I'm willing to deploy capital at 10%, then if I base this on this net operating income, how much am

going to be willing to pay that's going to give me 10%. And that would be the next step, you know, in the progression where you go from figuring out the center lot. Got it. Got it. All right. Well, so I'd say in general, then 50% rule kind of designed to help people do a quick screen, nothing more than that, of a property to see, hey, does this make sense? Generally, as we're talking here, it sounds like this 50% rule doesn't necessarily work that well as we expand out to the bigger properties because the expenses are going to be a lot higher, potentially on the smaller properties, particularly on single families. It works as a pretty decent first screen, but that's pretty much what it is, nothing more.

Well, you know, what I like to do is what I like the 50% rule for is, is anything, you know, four units are smaller. I'll always run my numbers two ways. I always run them the real way, right? I put in all the numbers in like the rental property calculator or just on a spreadsheet. What rental property calculator? Plug, plug. Yeah. Yeah. So like I will, I'll run it through that or my own spreadsheet or on a piece of paper, like

on our napkin, right? Like just how much cash I'm going to get minus the expenses. Then I will also run it through the 50% rule in my head. And I want to take whatever's worse because I assume like I want to be conservative in this. So I always do my calculations both ways and then pick the. the worst off one, assuming that at least then I'd be safe. So if I'm running a single family through, single families typically aren't 50% expenses, but I'll still run them through that way just in case. Gotcha. Gotcha. All right. So let's talk about this 2% rule in just a second. And I am

going to say, because it's my show and I have the prerogative to do so, the rental property calculator that Brandon's talking about, something we build here on bigger pockets, go to biggerpockets. Go to BiggerPock.com slash calc. We've got a rental property calculator. We've got a fix and flip calculator on there. Check it out. It's a great tool for folks who need something who don't have a really good Excel spreadsheet to kind of help them manage.

And I would even say it, I mean, this sounds, I hate it sounded like a commercial. But honestly, I swear, like, as soon as we built, because we built the rental property calculator off of like my spreadsheet, I have not used my spreadsheet one time since then, because it's just easier to use the computer than it is to use a spreadsheet. spreadsheet. I don't know. Spreadsheet is on a computer, though, Brandon. Yeah, but it's not a spreadsheet. Well, okay. It's easier to use the calculator than it is a spreadsheet.

All right. All right. Yeah, yeah, yeah. Move on. Anyway, it's great. Check it out, bigger pockets slash calc. All right, so 2% rule. What is the 2% rule? Ben, you wanted me.

All right. So 2% rule basically says that you should not pay or you should try to pay for a property. I'm guessing I'm saying this backwards. Let's say properties worth $100,000 the rent should be $2,000 a month. It's 2% of whatever the purchase price is. Right. The rent of the property should be 2% of the value.

Yeah, or the monthly rent times... Correct, yeah. So is that a good number to go by? Does that number insure cash flow? Or is that kind of another one of these semi-safety nets? I'll tell you, there's a term we call yield. yield is the kind of the first degree of looking, the most bird's eye view of looking at the property.

Yield is what it throws off. It's the gross revenue. What the 2% rule says is that the gross revenue from the property, all income streams combined, should be 2% of what you pay for the property or of the value of the property. I like that rule because it's, there's no average. ambiguities. I don't per se think of it as 2% rule, but I look at yield specifically because of what we talked about with the rents. I know my marketplace. I know how much I should pay for what rents. Brandon and I always talk about this. I know that if there's $500 of rent in this marketplace,

because I know what sewer costs, I know what water costs, I know what garbage costs, I know what taxes run, I don't know specifically, but I know pretty well what they are. That means that I can look at a rental of $500 a month and know that if I pay $30,000 a door, I'll be fine. If it's $550 a month, I can pay maybe $40,000 a board. If it's $625 a month and I pay $40,000 a door, I'm doing great. So that's kind of the same concept as a 2% rule. I'm sure it will work out to pretty much. Well, I paid 373-5 for the 10 units. And the gross income was $5,800.

So that's very close to the 2%. I mean, and it cash flows well. Well, I want to ask something that's really interesting that I think. The 2% rule, people often think, and we've even said on the show before, If you can get the 2% rule, you are going to cash flow. You are going to do really well. It's almost a guarantee that you're going to do really well. The sixplex that my friend tried to sell me a couple weeks ago, gross rents were $3,000 a month.

The purchase price was $150,000, which means it perfectly met the 2% rule. Exactly. It perfectly met it. However, it didn't work out. So, yes, it's helpful. If you can say this is a 2% rule, it's a way to screesome. green. When I'm looking at 100 properties, I can run through each one of those

in a matter of 10 seconds apiece, and over the course of a few minutes, I can look at 100 properties and decide which ones I don't pursue. But when it really comes down to it, these are just rules of thumb, because if I would have followed it, I would have bought a bad problem. Don't make a buying decision based upon one of these rules

is the bottom line. Use it as a filter. Make sure if it gets close to it, if it's right around there, great, then move to the next filter and run the numbers. to find out what the true numbers are. But Ben, really quick, I know you want to jump in here. You know, we've kind of talked about, you know what the sewer should be. You know what whatever should.

But do you? So, and I'm not saying this to kind of pick on you, but I think it's an important distinction. So I, say, what's your sewer in your 10 unit building? $200 a quarter, $200 something. All right. So is $200 a quarter? is $800 a year. Is the sewer on a 20 unit going to be $1,600 a year?

Is it a multiple? Or are you basic, you know, because you don't know, you can't trust the numbers of the seller. So how do people figure this stuff out? Right. It's not the seller. It's the sewer. It's the company. That's what I did on the Sixthplex.

I called the city and asked him what the water sewer coverage bill was, and I was shocked at how high it is. Right. I mean, when I say I know what it is, I know a problem. approximately what it is because I know this specific marketplace. For instance, I know on the 10 flex I'm paying county, but on the fiveplex or a six flex, I'm paying the city. I know those numbers are going to be different,

but I know what they are in each case approximately. You're looking at the 100 unit building. What do you go on? I mean, is this, again, trust but verify? Where do you get that information? Well, again, you determine whether or not to do, research based on the numbers that you receive.

But the way you do research is certainly not by asking the seller. You ask the company, the provider. Can somebody just call up so I'm going to go and buy a building? Somebody can't. You have to be under contract. There has to be some kind of relationship whereby you can say, hey, I'm under contract to buy this building. Can I find out this and that?

Unless you're in a small town and you call the lady at the front desk like I did and sweet talk your way into her telling you. It's Brandon. Oh, Brandon, you look so handsome. That's how we're all in. Well, Brandon owns his town. Yeah, not quite. Not quite.

But so there's nothing wrong with, my point, and nothing wrong with calling and asking. You never know what you might find out. It's not illegal to ask. Yeah. But no, it's not illegal to ask. But again, go into this whole knowledge of the marketplace. And I know that newbies are listening to this.

They're going like, holy crap. I mean, you know, I've never bought a unit. Not here, not there, not anywhere. How am I supposed to know what those numbers are going to be? You know, I hate to tell you, we can teach you all day long until you start taking action. You're not going to learn certain things. It's just a matter of fact. Yeah.

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All right. Well, trying to keep this thing on schedule where I know Ben is trying to make this the longest Bigger Pockets podcast. My goal is to stop him. I'm competing with Serge. I'm competing with Serge. And citing Green Eggs and Ham is a good way to doing it there, Ben. So let's move on to, you know, in our outline, we've got the 13 steps in analyzing a property.

So let's start digging into those. And, you know, not that I want to gloss over it, but we're already an hour into this sucker and we got a long way to go. So let's. You got 30 seconds per step, Ben. Let's be concise and see what we can do here. So step one, research going cap rates. What does that mean? Okay, what most people think of capitalization rate is a number that somehow represents the value of the building you're looking at.

What people need to understand is capitalization rate represents the psychological behavior of the marketplace at large. It is the answer to the question of what rate of return are the majority investors willing to deploy capital, in this marketplace for this particular building. Can you say that name? I literally dumb that down for us. Like, what the heck does that mean? Okay, if I do a market analysis on 10 fourplexes, and I realize that each one of them was bought at between 9 and 10 cap,

then that tells me that a 4plex of this style, this quality, this age, is going to be valued somewhere between a nine and a ten count. That's the behavior of the marketplace. What that gives me is two things. One, I now know what I have to do to beat the average return in the marketplace. And two, it gives me a starting point to analyze anything in this marketplace. What does that mean in terms of like, I know what I have to do to beat the, Can you give us an example?

Okay, so take NOI of $1,000 a month at a $12,000 a year. At a $10 cap, somebody would have to spend $120,000 to buy this building. Well, if most people are doing that, if most people are expecting to receive a 10 cap, to receive an NLI consistent with a 10 cap against the purchase, then I know that if I pay consistent with an 11 cap, so if I pay less than 120, I'm ahead of the game. I just gained instant equity as far as the marketplace is concerned. Gotcha.

So you're saying that if the average cap rate is X and you can buy the property basically at a discount. Right. And that discount is being evaluated based upon the multiple that the market is getting. That's right. And that's part A. And part B, of course, is we buy property, and Brandon will tell you the same thing. We buy it because we hope for something we lovelingly call expandability.

We hope to take those rents of 500 times four and get rents of 575 times four. And we do that hopefully without increasing ongoing costs, without increasing operating costs. And if we can do that, then this whole increase flows through to. to our NOI. What do we hope? Explain that, explain that again in layman's terms. Okay, okay.

So, so I'm looking at a fourplex. I know that units like this should be renting for 600. But this one is rented for $400 or $500 because the owner is out of town and is being managed by a broker

and just, you know, whatever. They're not, they want consistent rent and they're not going to hike rent on anybody. Yeah. Well, I analyze this property. I determine its current NOI. I place a valuation on it based on, let's say, I want to buy it for at 11 cap or 10 cap, whatever. And I pay that amount.

Now I start managing it. And since I knew before I bought that these units with a little upgrading can rent for 600, what I'm doing is creating $400 of extra income into the building. Now, income is nice, but if it's offset with extra expenses, then at the end of the day, it means nothing. However, maybe I have to spend $15,000 just like Brandon did on his Waldo, but it's a one-time expenditure, right? Yeah. There's no monthly recurring cost associated with that. So it doesn't show up on the balance sheet on the income statement of the building.

You spent the money. you know you did, but when the next guy or an appraiser or a buyer analyzes this building, there is no additional expense. So basically what they see is the income that you started out with plus an extra $400. So what they're doing is they're taking the tent cap that is consistent with what people expect in this marketplace, and they're capitalizing a value based on a higher NOI. and what happens? You started out with $1,000 a month, $12,000 a year.

At a 10 cap, even if you paid $10,000, you paid $120,000. Right. Now that you improve the N-O-I by $400, now it's $1,400 a month, times 12, whatever that's going to end up being, you know, 19,000 or whatever, right? Yeah. Not even close. And that's the value that you're going to pay. Somebody messed out a calculator

Yeah, seriously Yeah, get your calculator You're the one telling the numbers Where's your calculator? Yeah, I wasn't told I'd be doing the numbers I told to just look pretty And be here

By the way, you look very nice With your jacket And you know All I need are glasses And a goate And I'll look just like the two of you You know, something to strive for Did you say 1400 times 12?

1,400 times 12 So 168 16,800 6,000,000. 168. Capitalized the 10th percent, that gives your value of 168. So you paid 120 for this building.

You spent 15 to get the NOI to go up by $400 a month. $32,000. Right. You're into this at 135, but the building is now worth at the same 10-Cal. You're not asking anybody to pay a capitalization lower, resulting in a higher value, than that which is the marketplace. You are still working with the same capitalization rate as the marketplace. Now, I have to qualify all this.

We're talking about small multiplex in here, and it doesn't quite work that way in a small multiplex. Because of them being residential properties like you started out in the beginning, residential properties, SFRs, single-family residence, duplex, triplex, fourplex, are typically valued with what is called comparable market and houses. Comps. Comps. And they look at the solds and they make adjustments and they value this way. That doesn't have anything to do with income.

So while it's hunky d'ory for us to talk about a triplex or a fourplex being creating this kind of, you know, it does and it doesn't. When you get up to 10, 20, 30, these are investor. purchases. Investors are buying these things because of income. So income is key to everything. They determine how much to pay based on income, which is different from a duplex, triplex, fourplex. So we have to make that distinction that while for us as investors, yeah, we have to know what we're doing and it works the same way with a fourplex as it does with a 400 unit apartment community. But in reality,

If you were to go to a bank and say, hey, my building is worth more now, can I refinance or cool some money out? And they say, sure, we'll send the appraiser out. That appraiser is going to place. They will look at the income, although they will use the GRM formulas, gross rent multiplier, if you want. We can talk about that. Basically, the younger brother of capitalization rate. but they will look at income, but fundamentally, they're still looking at how can I justify. Has anybody bought a fourplex for this and that?

Can I make adjustments upward because the rents are higher a little bit? It's better quality. You've done some upgrades, things like that. But it's difficult proposition in a small multifamily. To get to put what Ben just talked about for, I don't know, long he was talking into terms that you'd understand. Basically, you can use these cap rates in five plus units, but in a four and under. It's not, you can't, you know, raising the rent by X isn't going to necessarily increase the value unless you've done some additional work than

just raise the numbers up. So, my triplex is only going to be worth what the other triplex in the area sold for. No matter how much income I raise on it, it's not going to be worth much more. But your explanation was very good. And your triplex, the other problem with it is that it's Waldo. It's a single family. No, seriously, that's an issue. It's not quite. It's not quite.

I know you say that. What is that called? There's a word that describes it. It's a non-conforming building. It wasn't, the electrical wasn't run for, to accommodate three separate units. The plumbing wasn't. The foundation was built to accommodate a single family structure. You know, the evaluating process is very upset.

I know. I agree. We can, you know, we've debated this a lot on the blog and so we won't rehash it totally here. We'll kiss and makeup. Yeah, you know,

yeah, but I will say that it may have been built as a triplex originally, because, I mean, it's got full height ceilings in the basement. It's a daylight basement. It's off the ground. The other one's 12 feet in the air.

It's, I mean, the main house. But, but, anyway, they put force in the basement when they built. It wasn't meant for people.

You never know. You never know. All right. Moving on. That was like a half hour. 30 seconds turned like a half hour. Exactly. All right. Now you've got 10 seconds.

You have 10 seconds for the next 13 steps. All right. Next step number two. Oh, by the way, these came from your, I stole these all Ben from your Kindle book, the 13 ways to value multiplex. So if people do want to learn more, you can, I don't know, go to the show notes and get Ben's book for whatever, two bucks or whatever it does on Amazon. So we're moving on.

All right. Moving on. Research the socio-economic dynamics. What does that mean? Okay. What that means is that if you're buying a forplex with four two-bedroom units and you're buying it in a neighborhood whereby predominantly people living there and wanting to live there are retirees who only need a less expensive unit by and large with one bedroom,

then whatever value you think you're getting, you have to discount for the fact that two-bedroom unit that's more expensive is going to be tough to rent. Gotcha. Because in this particular neighborhood, that's not by and large what people want. The same applies if you buy one-bedroom units with, you know, young professionals having one-child, you know, what are they going to do with the one-bedroom? I would agree for the most part. I mean, like, obviously, we don't need to, obviously spend too much time on this.

But I do want to bring up, somebody asked me the other day, they sent a private message to me and said, you know, I'm thinking about buying this property. However, it's studio apartments, and I'm concerned that this area doesn't have a huge demand for studio apartments. And the area was like Tacoma, Washington, which is, you know, hundreds of thousands of people. So I told him, yeah, it may not be the biggest demographic for studio apartments, but they will always be a person who wants to rent a studio apartment. Like, I mean, so to a degree, I mean, yes, you need to take that into account, but it's not like his duplex is going to be sitting vacant for six months a year just because he's got a studio instead of a, instead of a two-bedder in which most people want. It might, though.

It might. I agree with Josh. I would have recommended them to stay away because, again, we are looking to open up our market. We're not necessarily looking to niche ourselves out. That's dangerous unless you're Donald Trump. You're at the very top of the market and you're dealing in a totally different demographic. That's a completely different game. And I'm going to disagree with you on that.

And that goes back to the last show, a good friend of your surge, Sir Chukot, and the show was phenomenal. So show 60, biggerpockets.com slash show 60, if you haven't heard it. It was phenomenal. Phenomenal.

One of our best shows, we've had over 20,000 listens in less than a week. Insane. But, you know, we talked about building a niche and being an expert in that niche. But so I think,

just because we talked about, it doesn't mean it's true. But the point, being, you know, if you can become an expert in what people desire, which does go along with what you're talking about, and become the niche player who differentiates yourself from everybody else in a way where you've got that superhero advantage, so to speak, you're going to then thrive, whereas everybody else is fighting for the same three-toes that they're all fighting for. What do you say about that, Ben?

That's true up to a point. I mean, the fact, the matter is that, look, your tenants can do a lot more with a two-bedroom. They can do that they can do with a studio. A studio apartment is going to work for one specific type of a person. If you want to be looking and appealing to that specific demographic, fine. But understand, nobody that's married with a child, not too many people. people who are young professionals who need an office space. You know, you are just, you're plugging yourself out of a bunch of demographic.

This is why I don't like one bedrooms. Because a two bedroom, you can have, you know, a married couple with a child. You can have two unmarried people. You can have roommates, specifically, you know, in college towns. you can have a person with a TV room, a retiree with a TV room. You are appealing. You're giving yourself a bunch of ads and as far as I'm concerned, investing is about options. I think you're right.

And I agree. I think on a large scale, it's exactly you're perfectly exactly right. I just think like if you're trying to buy a duplex and there's a studio, don't not buy a duplex because there's a studio apartment there. If the numbers work out, it's not. it's not going to be impossible to find one person to rent your studio apartments. That was my gist to him. But like I could tell it, last week I looked at a apartment community that was 70% one-bedroom units.

I didn't even look at it. Yeah, exactly. That's just stupid. I mean, you know, I can't, what am I going to do with that? Yeah, because that'll drop your averages over like year after year, which is tens of thousands or hundreds of thousands of dollars, maybe even millions because of that. Yeah, so I agree on a big scale. But anyway, we got to move on.

Yeah. So number three on this is research about. availability and makeup of units, which I think is really part of number two on the socioeconomic dynamics. I think they kind of go hand in hand. Now, as a quick note to those people listening, even though you're buying a property, say you're looking at two-bedroom units, keep in mind while you're opening your options, you may not advertise these units as family-friendly. You have to be very, very careful on the marketing side of things because there are laws in place that say you cannot. There are HUD laws, fair housing laws, licensees, we know about those.

This is why, you know, I don't like three bedrooms. Why? Because three bedrooms accommodate larger number of people. Do I want larger number of people in terms of maintenance of my unit, wear and hair? Do I want? I don't. But I can't turn away somebody because they have one more child than what I think is reasonable. It's not up to me to decide how many children are.

I'm just curious, though, because, you know, how many is reasonable? Let's hear. What's the number? I want to know, because, you know, I have three kids and I don't know if that's unreasonable. I'm just curious, is that number unreasonable? I'll tell you something. I wouldn't let you into one of my units. Because of you.

What's the number? No, I'm just saying. We got to move on. Moving on. Let the property itself to qualify and disqualify because you can't do it. You can't legally do it. You can get into a lot of trouble. But you know what?

And you made a really good point there. I know we're busting each other's balls here. But, you know, when you said you wouldn't rent to me, you didn't mean you don't you wouldn't rent to me the the white guy who's who's this this this this all my all my demographics you wouldn't rent to me because you think I'm a jerk and and that's okay that is you don't have you're allowed to not rent to somebody because you think they're a jerk you're allowed to not rent to somebody because you know they've got tattoos on their there's a there's a line in a mike butler's landlord in an autopilot book that it's like my

favorite line from the book said dirty is not a protected class I love that line yeah Jerk is not as a protected class. Smoking is not a protected class. Anything to do with illicit drugs is not a protected class. Yeah. I like people. And I think we have to, if we're going to be in this business, we have to be able to deal with people.

We have to like people. We have to, you know what? The important thing is we have to believe in basic goodness of people, although we get burned every day. Yeah. And just really quick, I think, and the reason I brought that up was, It's important that, A, people understand protected classes, but B, that they understand that

there are a lot of segments that are not protected, and it's perfectly within your rights. And in fact, as a landlord, you want to make sure to screen out undesirable types of tenants, and that's not based on race, on sex, on gender, on any of that stuff. So do your homework. We've got a ton of articles on that stuff on Bigger Pockets. If you don't know it, if you don't understand it, you better do, you better know it before you start renting to people because you can, A, get yourself in a lot of legal trouble for screwing that up, and B, you could get yourself in a lot of financial trouble for

screwing it up. Correct. And let me just add one more thing. We talked early on, we talked about desirability. And the important thing, and this is what I keep telling people, the important thing is you have to balance what's good for the tenant with what's good for you. I'll give an example. A two-bedroom duplex would be very nice if it had two bathrooms. You know, for people. People use bathrooms. That's right. Yes, people.

And cats. They like that. Shut up, Judge. It's the first time I've been told to shut up on my podcast. But on my end, as a landlord, that's two sets of plumbing. I have to clean up. That's two sets of faucets that when they start to drip, I have to worry about replacing faucets. That's two sets of toilets.

I have to lift in order to replace wax rain. Hold on. Those are two sets that you hire a guy like Brandon to do because you don't do that stuff yourself. That's correct. I don't do toilets anymore. So I have to pay him. So my operating expenses because of the two bathrooms go up over time. CapEx.

No two ways about it. Yeah. Are you saying you wouldn't do a two bathroom then? or if it didn't have to. I'm not saying I wouldn't do it, but it would have to justify itself and rent. And frankly, I look at a two-bedroom, one bath that I can rent for $6.50. Then the question I asked myself, I know you are very nice tenants and you would love to have two bathrooms because, you know, your wife can have one and you can have one. I get it.

How much more are you willing to pay? And they're going to say to me $25. And I'm going to say to them, it's not worth it to me to provide you with that kind of comfort for $20. $25 a month. Yeah. Because I'm going to spend more than that in the long run worrying about the plumbing and the extra electrical and the fan and the ceiling and all that stuff. So the rent has to justify those two bathrooms.

Right. And even then, even if I can get much more money still, I'm thinking because I'm looking for as much passivity as possible in all this. So how many moving parts do I want? It really has to be worth my while to get in. to something like two bathrooms. Right? I mean,

really has to be worked in a while. Gotcha. Makes sense. Now, this works a little different in SFR. Because just single family, single family. It works differently. But in an apartment setting, you know, it just, you know, if you take 100 apartments and you extrapolate it by two and a half bathrooms, you've got a lot of plumbing to worry about.

Yeah. You know. And if people are okay with one and a half, one down, one up, hey, you know, you know, That's good enough for me. I'll lose the extra $50 because in the long run in rent a month. Because in the long run, it's going to be a lot less active, a lot more passive. I have to do less managing this. It costs me less in cap tax.

So I think it's important. And that's one of those perspectives, the newbies, we were talking in the beginning. They wouldn't have because they look at two units and they see one with one bathroom and one with two bathrooms. And they think, that's great. I would love to have two bathrooms. My tenants would love to have two bathrooms. But until you've owned property for a decade and you know how much it costs to have two bathrooms as opposed to one, you don't gain that perspective. And I think that's why it's just helpful to have conversations like this and why this podcast is, you know, why I'm pretty obsessed with it.

It's because we get to hear from guys like you who can explain those things and we don't have to go through 10 years of owning that bathroom to know those. So thank you. Moving on. Moving on. All right. All right. All right. All right.

All right. All right. Transition, Brandon. Thanks. 10 seconds apiece. All right. All right. Next one.

This one is this one to be an easy one. Research going rents. What does that mean? Yeah, well, that's that yield, right? So you look at the fourplex and you see, you see four rents of $500, $2,000 of yield. And that's pretty right on to you because, you know, two bedrooms in this unit, in units like this location should rent for, you know, $4.75, $4.95, $500, $5,500, $5.15, $5.5.5. somewhere in there.

So you're like, oh, good. It's what we talked in the beginning about. What about something actionable? How can somebody actionably check a... Call the numbers. Very good. I mean, everybody talks about, oh, it makes sense to have the MLS. It makes sense, you know, to have a license because, you know, I can know this.

Call, pick up the phone. If you're too afraid to call, too intimidated, to call the number, the Forentine to go in there and to check it out. Funny story about that. I call numbers a lot of times and just for fun, just, I always use like an English accent. What I call people and ask them like how much of units for rent? I just think it's funny to do because nobody expects a British person in the middle of, you know, Hick Washington to be calling about a property.

So anyway, yeah, verify. I would just call the numbers on the foreign signs. I can't do that because I can't hide my accent. Let's hear it, Brandon. Let's hear the voice. I'm not going to try here. No, that's too embarrassing. Step number five, research.

Type of building. Research the type of building. There's various types of apartment buildings available, correct? I mean, we're not just talking. I mean, high rise and low rise. I mean, there's a lot of stuff, right? Yeah, there are good apartment buildings and then there are Waldoz. Okay, can you explain to me what in hell is a wall?

I mean, like, I know how you're defining it with this guy, but is it from the little guy with the red and white hat? Is that the Waldo? I mean, where do we come up with this? It's just something that sticks out. It's kind of like a sarcastic take on the opposite of what Waldo really is, which is if you get flussed and this thing sticks out like a sore thumb, right? So here's the deal. Yeah.

If somebody did an addition onto your building, let's say you had a house and they did an or they subdivided it into a triplex, what are the chances they didn't pull permit? if they didn't pull permit, has their work, had it been checked out when they completed? If it wasn't checked out, then are you running a greater chance that you're walking in to some lemons? Absolutely. Now, here's where we, we disagree. And we just rehash this all the time, right? But real quickly, this is where we disagree.

I say if you're- with me and we're wrong. You say if you're a newbie, you should not do this. You even said in that post, you said, Brandon will do really well at Waldo because I can handle those things. I can handle the extra 10,000 that I've spent on plumbing because I, you know, I'm experiencing this. So you say newbie shouldn't do it. I actually go the other way and I say newbie should do it. As long as you can, you know, reasonably, you got to have some kind of leeway to be able to afford those big messes. But honestly, this sounds maybe terrible and people are going to to yell at me for saying this.

If a newbie would have bought that and put that $10,000 on credit card just to pay for those extra repairs, I still would say do it. Because here's why I say that. Because the experience they would gain from that, it's far worth more than that $10,000 would cost them. That's why I say it, because you would learn so much off buying Waldo that whether or not it became the best investment, it's better than not buying anything. That's my theory. Well, there's, okay.

And I think, I think you have some. somewhat of a very, very, very small point located in there. There's a lot of contingencies, right? If you're a guy who's got a million dollars in the bank and you buy Waldo for $50,000 and you put 10 grand and you lose 10 grand, okay, it's a learning lesson. But if you're somebody who's working their butts off at a full-time job and you're trying to do this, you can't afford to lose the $10,000. You can because your 10,000 drops to 2,000 when you spend your nights and weekends. fixing that plumbing yourself like I do. Oh, God.

Now, I know this is where you disagree with me, but this is what got me to where I am. And so I can't knock what got me to where I am. And like, people will sit in their couch when they're 65. But you're encouraging people to go through the hell that you've gone through to get where you are when they don't have to. I'm encouraging them to do something. And too many people will be sitting on their couch when they're 65 and they'll be like,

man, I wish I would have done something. And they won't. Now, if they can do without doing that great. That's all the things you can do, baby. I think they should. I mean, I just think like, I obviously don't buy a bad deal, but this was not a bad deal. This was an amazing deal in a good location that had some unknowns like the plumbing. But, you know, you just roll with the punches, make it work.

You know, I stay by what I said. We'll agree to disagree. It will do very well at that because you are able to do the plumbing. but I only did some of the plumbing. I hired the rest out. I got to tell you, hang on. An email I received two days ago from a woman who read up about me knows my circumstance. And the first statement in the email was, I'm living your nightmare.

She is not able to work. She at a young age, became disabled. And she is looking into real estate as a way of helping to offset. said some of the burden from a husband who is the only one working at the moment. Are you going to recommend that person to buy Waldo? I would recommend that person. Now, again, it's different for everybody. But I would recommend that person, yes, to buy Waldo.

But that might be after making their husband work a part-time job delivering pizzas for six months to save up 20 grand as a reserve fund to buy Waldo. That's what I would do. I don't care what they do. but you got a hustle, and that's a way I hustle by doing plumbing. If somebody can hustle by delivering pizzas or by getting a partner to buy that property that could afford that, I don't care what the hustle is. They got a hustle.

Listen, the thing of it is, the thing of it is your talent is worth very considerably more than the pay that you are receiving for your hustle. I keep telling you that because I love you. I actually agree with Ben here, by the way. And you think you are doing yourself a favor? You are not. You could be spending your time in terms of both dollars and personal fulfillment, doing something else and being much farther, I think,

than where you are with Waldo. And that thing is just, you know, and you have other. A big startup. But it doesn't have to be that. way and I wouldn't recommend to anybody that it would be that way. I just, I just wouldn't. I just can't. And I think, I think that just, I think this is helpful for people to hear both sides of it. Because I mean, I'm not necessarily, I'm not changing my opinion. I don't know if I ever will. But I understand exactly where you're coming from. But I want people to like know that, I guess, like, it got me to where I am today.

And I'm, you know, I'm pretty happy with where I am today with rental wise. So I can't knock what I've done. I'm going to cut you off here. We're going to move on. But before we do, I'm going to just kind of consolidate the argument here. And here's what Brandon's saying. Take away the details. What Brandon is saying is get off your backside and do something. He's saying you got to, you can't just, you know, think forever and analyze and analyze and analyze. At some point, you got to kind of get in, get a little bit of dirty. There's something wrong with every property. Right. And I think Ben is going to agree that that's the truth. because otherwise, you know, you're going to be 65 and you're never going to have done something. So, you know, real estate is dirty. Problems will come. You will experience them. You will have to learn how to deal with problems.

Moving on. God, what do I need you guys for? All right, step five. We did that. Six. We did that. Step six. Research vacancy factor.

Yeah, 10 seconds, Ben. Why don't you do it? I can't do 10 seconds. The vacancy factor is the rate by which you're going to make an assumption that this property is going to have X amount of vacancy every year, correct? Sure. Okay. So how do you research? I mean, your building is going to be vacant at some point.

Your unit is going to be vacant at some point. You're just making a guesstimation of how often. How do you guess that if you don't know the property? How do you get that information? Well, personally, I have a friend who owns 600 units. And when I want to know what the vacancy rate is in this subdivision or that subdivision, you ask who I ask. And pretty much with that many units, you are setting the market.

You know exactly what it is. So how do you get access to these people? We don't even have a RIA. So I can't say go to your RIA and talk to people, although it's probably a good idea. But in Lima, we don't have RIA. You have to pick up the phone, which goes back to if you want to, if you want to, You got to hang with people who fly. So where do you find people who fly with real estate?

Bigger pockets. But it's very important to be market-specific, guys. I mean, you were talking about bigger pockets. Hearing what vacancy rates in California is going to do exactly nothing for me in Lima, Ohio. It just doesn't do anything for me. And you're right. You're right. Absolutely.

Absolutely. In principle, we can agree on what it means, but in reality, in order to understand the market behavior, I have to know locally what it is. You know, you ask an appraiser. You ask a commercial banker. You can ask a commercial banker what the galling cap rate is or an appraiser. You can ask them what the GRM is. You can ask them a lot of things. And it's their job. They're getting paid to know this. Do you recommend calling up a property management company to ask them the vacancy rate? Or do you think there'll be too peach because they want to sell you something? No. I would recommend, in fact, I do this now, somebody that manages a thousand units. Yeah, a professional property management. A brokerage that manages SFRs and duplexes and a few units, you're not really going to get a fair representation of what it is anyhow.

You got to talk to somebody. And the drawback is that they're not going to take your business. Unless you're bringing them a syndicated 120 unit, they don't want your foreflex. And you couldn't afford them in the first place. All right. So that's great. Really quick. You know, you say real estate is local and I've got to defend us some way, shape, or form.

A, you are correct. A, you are correct. A thousand percent. I agree completely. Real estate is completely local. And that's why we have tools on big. BiggerPockets to let you network locally with a lot of people. Our fine users page lets you look in your zip code to see other people,

biggerpockets.com slash meet. We got a lot of tools on there that let you do that for that very purpose because we want people to be networking and getting that information, doing business together, helping each other out to be successful. And so, yes, in the case when there's not a RIA, you might be able to use us, but there are plenty of other ways that you talked about to find other folks. Next section of this, and we really got to fly on this, is, Ben, you're winning the battle against us. He's the Darth Vader over here.

The dark side is crushing us. Analysis of income and expenses and value calculations. And looking good doing it too. If you do say so yourself, right? If I do say so myself. Yeah. All right. So step seven is research and verify gross income.

We talked about gross income. How do we research and verify it? Well, gross income is add all your rents together. If you have a laundry mat facility on premises, you can't really know how much it makes. But you can guesstimate how many tend to have. How much laundry do they do? You know, that kind of thing. But by and large, what I'm talking about is what does a two-bedroom, one-bath unit,

in a 1960 construction brick duplex with a garage go for in your neck of the woods. You need to know that in this particular neighborhood. I know that. I know that over here and, you know, this area is going to be between 6 and 650, depending on the condition. But in that area, it's going to be between 7, 25, and 8. I know those things and I have to know those things in order to be an effective landlord. What if there aren't reasonable, you know, this is the issue that people have on comps.

What if there aren't reasonable comp properties in the area that are of similar make, model, age, so on and so forth? How do you go about doing it then? Then I guess you just have to stay away because then you're talking about a wildo. Makes sense. It's an outlier at that point. Okay. Right. Right. And the problem with that is selling it because nobody wants an outlier. That's just human psyche. You know, we don't want an outlier. Unless it's cash flow in LA, $1,200 a month on Waldo and if you understand cash flow. If you understand cash flow, if you understand if you're an experienced investor, if you are Brandon, how many Brandons are in the marketplace? You're talking about a triplex, which is a Fannie Mae Freddie Mac.

If you guys are fighting on this freaking property. Every time we go there, I'm just, cut, cut, cut next question. I'm serious. The whole point, listen to this, this is an important point. The whole point of buying under four units is that you can sell it to a homeowner occupant. And that's what I'll do with Waldo someday. I mean, because it's a four-bedroom house with two extra units. I'll sell it to a homeowner who wants a beautiful big, huge house.

and they will pay extra because it's got those extra income units. That's my exit strategy someday. Well, nobody's going to buy for the beautiful big house that wants a beautiful big house and two extra income units that they have to then convert to be part of the extra income house unless they want to have their tenants living. That's what they want.

They want income property because they'll live for free. They'll buy the thing for $150 from me and their tenants will pay their entire mortgage. That's my exit strategy. As long as that's an exit strategy that you have lined up, I don't have an issue with it. Ben does. No, no, no, no, no, I don't.

That's exactly it. That's why you buy four units instead of five. Because a four unit will qualify for a regular person with a regular 30-year mortgage. A five unit will not. And so the added bonus of having a duplex, triplex, fourplex, is you can sell it to an investor or you can sell it to an owner-occupant who's going to live in one year. So it opens up your market. The problem is that if what you are buying is cash flow and great, but for one reason or another, it's not going to be appealing to an owner-occupant.

Then you are destroying the whole segment of desirability that was supposed to be present in this deal, and it's now not present. My concern with Waldo, in general, quote-unquote, is that there are aspects of it that are going to disqualify it as a desirable. acquisition for a home owner. And if that's the case, you got a problem. And if you saw it, you would change your mind. You got to fly out to Washington. But anyway, moving on. And I'm going to kindly ask my co-host and my guest to refrain from talking about

Waldo going forward so we can actually get the show done before people are, I don't know. No more. Just come on and see you. All right. Number eight, research and verified operating costs. How do you do that? Okay. And that's one of those things where you call the garbage company and find me.

out for a four-unit building how much they will charge you to have four bins or, you know, whatever. You need to kind of have an idea. You call the electric company and you find out what approximately usage to expect on an apartment of, you know, 800 square feet that's heated with baseboard and, you know, what's typical. So it's a little bit of work, but it's work that has to be done because, yeah, we need to verify what the information is given to us in specifics, but before you even place an offer, you set foot into this thing or you even drive up to this forefront. You kind of have to know what you're dealing with.

Hey, I've got a really, really quick follow up on this, and that's, you know, the debate of as a landlord paying utilities versus not in the last show. And I do want to keep it brief. but in the last show we talked about, you know, submetering things like that for some of the utilities, which makes sense in certain cases. But in other cases, you know, you really, if the market says you're paying the rent,

if you're paying utilities for your tenants, then you're paying utilities for your tenants. Is there a, is there, you know, how do we go and discover this information? Well, this 10thlex, for instance, was individually metered for water. And yet the seller was including water with rent. Well, with it being individually metered, I wasn't going to do that. Because I called the water company and I saw the bills from the property that I requested

as part of my due diligence process. And I knew that the bills are going to run between, you know, $12 and $20 a month. Well, that's important why, because $20 a month times 10 units is $200 a month, times 12 is $2,400 a year. At 10% capitalized, that's a value of $24,000 that he was giving away and I wasn't about to give away. So the next question is, am I going to accrue a bunch of vacancies? because now I go in and tell everybody that guess what, party is over and you got to pay your own water. Maybe, maybe not. That's where you have to know your marketplace and what people will and will not do for this kind of unit in this location for this kind of building.

Is there any kind of a standard? Is it kind of the last question? You know, when you hit, say, 50 and over units, 50 units and more, you know, are you, are landlords generally paying for these, not paying for these? There's no general across the board, is there? We never want to pay utilities. Correct. That's a blanket statement, right, Brandon?

I mean, we never want to pay utilities. I mean, poor guy spending $1,000 a month. Let's stop picking on Brandon. God. Oh, no, good, but he posted that in a threat. I know. Yeah, we could go on. We can spend forever on that, but, yeah.

I mean, we talked about it last week quite a bit, too. And I mean, if we can avoid paying expenses, obviously that's the best. But sometimes, like, when you buy them especially, like, you're kind of forced to do whatever the building was set up for. And that's exactly. We're coming back to that. And so then maybe you shouldn't buy it in the first place. Correct. When you are converting a single family where the systems were designed to be single family, right?

All right. I never said the word. Yeah, you didn't have to. Step nine, assess the NOI. We talked about NOI earlier. How are we assessing the NEO? No. Gross income minus operating costs.

Fabulous. Ten. Assess the cash flow. NOI minus the cost of money and this is a function of how you're going to finance. So if you're going to pay all cash, you won't have cost of money and your cash flow basically is your NOI at that point. Oh, go ahead. So I was going to ask, there's an argument that I've seen when you're, you know, you're

seen when you value a property, well, it's not even an argument. When you value a property, you know, your debt service, is that something that you include in the numbers or do you calculate the property based upon 100% financing? Because I know a lot of people will go ahead and say, well, always go that way because that's going to, you know, give you a certain type of response. You know, so that would be me. In a small multiplex, you should always kind of of imagine you're going to finance at 100% and look for cash flow $100,000. That's kind of a rule of thumb, at least with possibilities to drive it up. The more kind of scientific way of looking at it is something called DSCR.

Sometimes they call it DCR debt service coverage ratio. And that's what the banks use. And basically what that says is they look at your net operating income, which is your income, gross income minus all of your expenses. They take that number. And then they juxtaposed it against your mortgage payments, your cost of money. Basically, they're trying to see how easily you're going to make your mortgage. This is for their safety.

So, for instance, if your NOI is $1,200 a month and your mortgage is $1,000 a month, Well, that tells them that the only thing left the cash flow after you pay your mortgage is 200 bucks on this building. You know, that's 1.2 ratio, debt service coverage. That's not enough. And most banks now, it used to be, we had a bubble. It used to be they would give out money at 1.1. As long as you're making 10% more than your mortgage payments, they would finance the deal. Of course, we know how that turned out.

So nowadays, most banks won't do anything under 1.25. And for a newbie, I would tell him 1.4, 1.5, 1.6, just to be safe. Of course, Brandon, on his triplex, is getting like, you know, 2 or above 2. That's an anomaly kind of situation that he's generating very high cash flow. he's paying with his time and his labor. So if you're willing to do that, then look at that. Number 11,

wow, this is, I mean, we're having a real hard time here following instructions, Ben Labovich. Step 11. He's very jealous of W-A-L-D-O.

Yeah, apparently he is. Step 11, capitalized value. Well, Brandon, you wouldn't take that? I feel put on the spot.

This is based upon I'll let if you take it. You take the NOI and you apply whatever capitalization rate and you arrive at evaluation. We had talked about these with the few examples. We don't need to rehash that. Step 12,

adjust for physical condition, liens and management. Right. And so like you're, But this is kind of looking at those numbers and saying, okay, I have this building. How easy is it going to be to manage it? Well, if it's going to be a pain, then I'm going to want it to reflect in how much I pay for it. So I'm going to want to pay less for it, right?

Because there's got to be a trade-up of some sort. If I'm buying this thing and I know that within 18 months, I will be replacing a roof and it's going to cost me $6 grand, well, you know, I probably want to reflect that in the purchase price to adjust the purchase price. So even though the numbers right now, see, that's the problem with the numbers. The numbers, that's a snapshot. Here's this building. Here's a snapshot. Five minutes later, something else is going to happen.

Yeah. And so that's where you have to have perspective that comes with time and owning buildings and all of that. To take those numbers and then to extrapolate what. they mean and in reality over time. And that's really what we're stuck with that. And I think that's where a lot of newbies also really, really blow it because it's very easy to say, hey, here's the numbers today.

I got, you know, A, B, and, you know, I got these units filled. Everything looks great. And I'm getting kind of a deal. They don't see the CAPEX. They don't see all the maintenance that comes with these multifamilies or even with a single family property. You know, they don't look at the roof and they don't calculate that in.

you know, extrapolate that over time and what that's going to do to your NOI. You know, you've got to include all these things, all these maintenance items into your valuations. Because, you know, if you assume everything's peachy, you're, you're going to be in for a lot of trouble as as things go along when your first AC gets stolen or broken or the roof falls apart or the walls crack or whatever the heck happens. You know, this whole conversation, I have a mentor. His name is Ted. I learned a lot of things. Did he try and sell you a really shi deal?

Oh, did I say shiwops? No, no, he didn't. He didn't. But one of the things he told me that stuck a long time ago is he said stumbling blocks and stepping stones. look very much alike at first. And so what this podcast is really all about is getting past that at first, this entire conversation of take the numbers. That's the snapshot.

Now, how do you get past that? What's the perspective to get past the numbers to understand? Is this really a stepping stone to get you from here to there? or are you going to pay for it in some way, shape, or form that you don't know yet? Yeah. That's what this conversation is all about. Wow. That's really deep. I didn't realize that was what I was talking about for the past. Is it two hours? Wow. Tick, tick, tick. Time is ticking. Step 13. We got to finish it up. I do agree, by the way.

Yes. And I like the quote from your mentor. I'm going to make that a tweetable topic on this show. Yeah, I advise finding mentors like Ben's versus Ted. Ted, Ted, as opposed to one who's going to. No, actually, let me. And I'm sure he's a very nice guy. No, let me actually say what's wrong here. You mentioned Ben, like remember I said earlier, I didn't think my friend actually knew he was losing money.

Like, I don't actually think he lost money because he was even had experienced landlord. He's experienced at this. I don't think he realized it because he wasn't accounting for the capax and the vacancy and the repairs. But when I put all those numbers into the equation, he was losing money. So in his mind, he just thought, you know, income minus the water bill minus the insurance and taxes, there's my profit.

And so that's even experience guys are guilty of the same thing. Yeah. But that is the whole point of this show, I think. You know, in looking back over what we've kind of bloviated over and over and over, you know, the property is not a snapshot. You know, there's more to it than just that, that singular picture that you're going to get. And you've got to understand that. And if you don't understand that, you know, you're going to experience it at some point and it's going to hit you.

And, and again, not to disparage, you know, Brandon's guy or his buddy, you know, that's a mistake that a lot of people, a lot of people have. And so if this show teaches you absolutely anything beyond the trust but verify, realize, that there's always going to be more of the picture and go into any deal, go into any property, keeping that in mind is going to give you somewhat of an advantage over somebody who may not be doing that. Yeah. Right. It's what you don't know.

That's going to get you. And there's, you know, you don't know what you don't know. Yeah. I don't know what I don't know. I, you know, that's why I call people and ask people. I got you. Awesome. All right.

Step 13. And the final step here, adjust your price relative to financing package. Well, you know, most people on BP know me as creative finance guy. I know you as the argumentative guy, actually. Very opinionated, creative finance guy. And basically all that says is this. If you have an opportunity,

to get into a deal that cash flows but requires you to bring $93,000 down. Would you be willing to pay a little more for that deal in exchange for only needing to bring $5,300 to close it? Would that be okay, presuming that it's still cash flow? and I think the answer should be yes because the single greatest barrier to entrance into this game this is a cash intensive game real estate is having money

a lot of people don't have money I certainly didn't have money when I started and so I had to approach it from a standpoint look if I have to hold the hammer in my hand like Brandon I can't do it I'm a violin

no this is this is serious I cannot do it. I can't do plumbing. Who am I kidding? If this is what's necessary and this is what's required, then this game may not be for me. Same is true with bringing back then. Might have been $10,000. You know, might have been $100,000. 10 and $100 made no difference because I had neither at that point. Right. So would you pay more? I know you did the number. You evaluated the whole thing. The thing is just worth $120,000. Would you pay $140,000 and would you still cash flow it if it meant you got in with nothing out of pocket or very minimal out of pocket? And that's a call, a judgment call that you have to make. Whatever your minimum N.

No.I requirements, whatever your minimum cash flow requirements. Because obviously, if you finance more than your cost of money. money goes up, then your cash flow goes down. So you have to make that call. But fundamentally, if I needed to bring that kind of money down, I wouldn't be in this game. So, and that's exactly what happened with this template. I mean, the purchase price in this thing was 393.5 and, you know, 20 normal, 25% down payment would have required almost $100,000.

And that would have put it completely out of reach. And I wouldn't have done it because it's stupid to bring $100,000 down on a 10 unit in Lime, Ohio. I mean, it carries an awful lot of risk, right? So I was able to avoid doing that, but I've done it in such a way that I'm cash flowing really well still, even having financed the entire purchase, essentially. I think that's difficult because, I mean, one of the reasons people finance is to bring down the payment so that they can get more cash flow. I'm not saying they should, but that's what people do. And so what you did is you found a property that was such a good deal that you could afford creative financing because that's what it's all about.

You're exactly right. But more than that, I think it's a huge mistake to put more money down to create cash flow. We're not in the business of buying cash flow. We need to be creating cash flow, literally out of thin air. That's our job. We're entrepreneurs. It doesn't take a lot of brains to throw cash on the table. That's not intelligent investing.

Yeah. Yeah. So you could, I mean, ultimately the bottom line is you can make any property cash flow by putting money down. I mean, I could put 75% down on a property and say, oh, this thing cash flow is great. but dude you got 75% down. Hell yeah, it better freaking cash flow at 75% down. If you can find a property that cash flows at zero down, you know, suddenly you found something that's fantastic.

Really quick, along with this and then we got to start wrapping this thing up is, I think it's really important that while creative finance is fantastic, it's a great way to go. You have to have some cash on hand. You know, buying property with no money down is great. It's doable. It's possible. You cannot be a real estate investor with no money because expenses come up and things happen.

And you need to have reserves. And if you don't have reserves, you're going to be out of business very, very quickly. I would agree. But I would add that if you have a partner who has the cash, you could do it. That's one of the only ways I think I would recommend doing it. And I would agree further. But I would qualify. You have to have access.

to money. You have to have access to the reserve. So that would be like a partner or a line of credit. Yep. You know, it's it or maybe even a credit card if you really, you have to be, I have to tell people you have to be extremely, I've used them, but you have to be extremely cautious. Yeah. When you use a credit card.

We can do a whole show on credit cards because I've got good and bad stories on them. But anyway. Fantastic. Well, I, I don't know. I hope I hope we covered the 13 steps of analyzing a property. Our goal was how to buy a multifamily property. I don't know that we walk through finding the property. I don't know that we walk through a lot of those things.

But I think we did a pretty decent job of covering. And I think there's so much information out there of how to. I mean, like what I've written two articles called How to Buy a Small Multifamily Property. Like that's the mechanics, but this was more important than the mechanics, I think. Absolutely. Absolutely. So, you know, with that, I think it's official. we are at right about two hours. Ben, you did it. You manipulated Josh and Brandon. I'm getting

offline with you guys. I'm calling search right now. I'm telling you flat out, honestly, because you know, he's a few hours behind me. So it's midnight his time. Yeah. You can tell him. Yeah. Good luck with that. Well, listen, I definitely want to thank you very, very, very much for being here for joining us. I think this is a fantastic show. I think, you know, if you could get past the Waldo debates, There's an incredible amount of value in what we covered. So I do want to thank you very, very much for everything. It's my pleasure. And, hey, it's bigger pockets, home away from home.

That's awesome. Really? Okay, so here's a thing. I'm a nice guy, but I'm difficult to get along with. Really? So to find two gentlemen, one of whom is wearing such a wonderful tie who like me. That's huge. For me, I mean, you know, you got, you got, you got, you got. All right. I love it. I love it. That's great, man. That's great. Well, listen, thank you. Thank you,

for everybody listening. This was the Bigger Pockets podcast show 61. Definitely check out the show notes at BiggerPockets.com slash show 61. Ben will be there ready to fight and argue with you. I expect the comments and the show notes to be a little longer than usual this time. I do as well. I do as well. So definitely go there and check it out. Otherwise, if you haven't listened to the previous 60 shows, I really strongly recommend

you do that. We've covered such an incredible amount of volume of information in these 60 shows. And it costs you nothing. get in there, check it out, learn a thing or two from every show from these amazing guests that we have. And otherwise, if you're not already a member, I strongly encourage you to jump in, get involved, participate, engage. If you're not doing that, you're definitely missing out on the biggest value that you can get from bigger pockets. There's way more value in that interaction than there is from reading. I guarantee it, I promise it.

otherwise check us out on Facebook check us out on YouTube Twitter we share stuff all over the web on other channels so definitely be sure to follow us on those and with that that's the end of the show so hopefully you enjoyed this format

don't beat us up too much if you do yell at the other guys and I'm Josh Dorkin host of the Bigger Pockets podcast with my co-host Brandon Turner signing off You're listening to Bigger Pockets Radio, simplifying real estate for investors large and small.

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