So you’re an eager new real estate investor ready to invest in cash-flowing multifamily assets. Where do you go? Who can you ask? Look no further, The Real Estate Runway Podcast has just the answer you need.
The Real Estate Runway Podcast had the privilege of interviewing Rob Beardsley of Lone Star Capital. Rob oversees the acquisitions and capital markets for Lone Star Capital and has acquired over $100 million of multifamily real estate in his career.
He has evaluated thousands of opportunities using his proprietary underwriting models and published the number one book on underwriting for multifamily properties: “The Definitive Guide to Underwriting Multifamily Acquisitions”.
Given his credentials, it would be natural to assume his vast experience in the field would make his educated opinions and advice truly invaluable. How wonderful it is that his experience is now to your benefit and learning. He starts off with the statement that multifamily real estate is not just the property business, it is the people business. People are your primary customer, and in catering to your customer you must be aware of their needs and wants. One major thing that Rob emphasizes is the importance of due diligence in all your work. These are the most important two words in real estate, and that includes doing diligence on your potential renter (customer) base.
When vetting deals and deciding whether a particular acquisition is worthy, in Rob’s opinion it is advantageous to pick a certain market or two then go deep and become an expert in that market rather than just looking at every single possible deal and hoping you find a good one. By narrowing your focus and looking at fewer deals you’re more likely to get more deals. It’s very easy to get caught in the “shiny red ball syndrome” mindset but avoid the temptation.
When choosing the quality of asset you are going to target, it is of course according to what suits your taste and risk tolerance. As in the example of Rob and his company, they prefer a balance between newer and medium-vintage properties.
His criteria for vetting deals start with age, location, and then resident incomes after which then go to preliminary underwriting. For them, there is no shortcut but just a blanket yes or no. If yes, every deal then goes through the full underwriting process.
A lot of this really does bleed more into due diligence than just underwriting itself.
For Rob, there is no one or the right way in vetting deals. Everyone has their own methods. According to Rob, no matter what your style is what matters is consistency. As you discover the best way that produces the best results then you consistently work on it.
In general, underwriting models are almost the same, they all account for the income of the property, expenses associated with running a property, the debt load that the property will carry, and any capital expenditures that must be injected to make the business plan possible. One of the biggest ways underwriting models differ is in the stabilization period assumed, that is, how long it takes for the business plan to be achieved and for the property to reach a steady state.
On the expense underwriting, you have your non-controllable expenses and your controllable expenses. Non-controllable expenses are just what they sound like, they are things that are really out of your practical control like property taxes, insurance, management fees, etc. Controllable expenses are really where you can make decisions to reduce spend and therefore add value to your project by increasing net operating income. There’s not a ton that you can do in expenses, but that is where you can create some value that maybe the market generally is missing.
When it comes to renovations there are certain standard pricing ranges for all the materials and labor needed so if you’re able to obtain costs regularly from the construction professionals on your team you can work from there when it comes to estimating. As it is generally harder to estimate the exterior, you could throw a rough exterior budget that covers all possible scenarios that you may encounter. Then as you go, you can start trimming the budget for those that were unnecessary. This method is definitely better than falling short and ending up in a re-trade (price renegotiation) situation.
Rob personally prefers deals that are on IRR-based hurdles because it offers more downside protection to the investor rather than with a cash flow promotion.
In scoping out prospects, the deal structure is indicative of kind of the sponsor's mentality so you can choose a deal that works in the best interest of both.
When underwriting lending scenarios, keep in mind the advantages of structures like floating rate debt vs. fixed rate debt based on your hold period and business plan. A variable rate with appropriate caps may be better for a shorter-term plan, while a fixed rate may be better for a longer-term hold.
A lot of underwriting relies on your own due diligence, consistency, and discretion. There really is no one way of doing things and you have to see what works best for you. But there have been established frameworks and methods which wouldn’t hurt to try out as a starting point.
Rob personally has provided a free download of his underwriting model used by Lone Star Capital day in and day out to underwrite over 500 deals a year. If you are interested to check it out, it can be found on their website- lscre.com.
Also, the manual that shows how you can effectively use it can be found in Rob’s book- The Definitive Guide to Underwriting Multifamily Acquisitions which is available both in paperback and eBook on Amazon.
Rob believes his superpower is his ability to make complex things simple which is indeed a very important skill to have.
In making deals, Rob believes that it is very important that you do your due diligence in researching who you are partnering with because relationships can be good one day and then bad the next. The advantage of real estate is that it is deal-driven so you don’t have to commit to a long-term relationship right off the bat. You can take your time. He believes when it comes to networking and meeting people you can go fast and talk with as many people as possible but when it comes to actually making the deal you should go slow and really take the time to consider and evaluate all aspects properly.
We really learned so much from our interview with this amazing individual.
If you want to catch the full-length video of this podcast, click the link below:
If you would like to connect with Rob through his LinkedIn, click this link:
You could also reach him through his email at firstname.lastname@example.org