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People want to do a quick turnaround yet don’t want to spend much time with underwriting. However, doing an extensive underwriting is vital if you wish to receive the right returns for the dollars you invested. Having done and managed fifteen years of multifamily syndication and 3500 units, respectively, Vinney Chopra is back with us to talk about underwriting. Vinney describes why underwriting is a significant part of defining the life of syndication for investors who want to gain equity. Moreover, he shares the four important things a buyer must be mindful of in underwriting – taxes, insurance, management fees, and payroll.
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The Importance Of Underwriting In Syndication with Vinney Chopra
Our guest on this episode is Vinney Chopra. Thanks again for being on the show, Vinney.
Thank you, Whitney. Thank you so much for inviting. I take a lot of pleasure in coming to your show.
If you’re a daily reader of the show, you know who Vinney is. Just in case you’re reading for the first time, I encourage you to go back to show WS01, the very first one, also WS161 to learn more about him. He came to the US with only $7 in his pocket. Now, he has over 35 years of experience in real estate, fifteen years in multifamily and syndication and managing 3,500 units. Is that right, Vinney?
Yes.
All those units himself and starting that company over $220 million real estate assets under the management. Vinney, thanks again for being on the show. We’re going to cover underwriting. Get us started, Vinney.
Underwriting is such an important part of defining. In the life of syndication, I have been observing it for years. The thing is we want to give the right returns to the investors because investors are entrusting their dollars, their $100,000, $200,000, $500,000 and giving us experts to invest that money. In the back of their mind, they want to make sure first, “Would I get my money back?” Secondly, “Would I get my returns?” Definitely, they want to make the equity gain and everything. The biggest thing on our shoulders as syndicators is to find the right market.
First of all, to find the right job market because if the jobs are there, then the property will increase in value. The neighborhood will get a little bit better. It’s good to buy a C class in a B neighborhood or B minus. Buying a C plus in an A neighborhood is a beautiful place to do. We were able to do that in San Antonio and some of the places. Alamo Heights is a very nice place, the brokers told us. We bought six properties there. We sold them all now and we made a lot of money. It’s the same thing I’m doing in Houston. I bought years back properties like $3 million, $4 million and sold for $8 million. All of those are because of the jobs. We were able to increase the rents. We were able to do the underwriting conservatively. That’s the other thing I would like to talk to the investors about. Please don’t buy anything and everything because you’ve got to underwrite it well. We’ve got to go deeper and deeper into the underwriting.
The biggest thing is to set the mind right that we’ve got to have an emerging market where you’re going to look for brokers, letter campaigns or whatever you’re doing to find the leads of market deals preferably. Then you want to underwrite them well because if the numbers don’t work on the paper, they won’t work otherwise. You’ve got to marry the numbers, not the buildings. Never marry that nice-looking building and then you come and you say, “Let me throw something here, something there.” You fix up the underwriting. You never should do that. Don’t fix up the underwriting. Let the numbers speak.
In underwriting also, a lot of people say, “I don’t want to spend time in underwriting too much.” I hate that. I don’t like that because you cannot underwrite it and put an LOI in five minutes. You should not, because what if your property got accepted and then your numbers were wrong and so forth. The thing is you want to do quick turnaround definitely but go for a very extensive underwriting. What are the factors which determine it? You’ve got to look at the P&L, profit, and loss for twelve months. Sometimes you get eleven months, sometimes you get thirteen months. You’ve got to make sure that you are not looking at wrong numbers first of all.
The other thing I like to look at for underwriting sake is the rent roll. I need the current rent roll. The current rent roll is very important. Many times, they are not giving the later on P&Ls because they look bad maybe. The other very good trick I would like to tell your audience is Apartments.com. If you go to Apartments.com, try to look for the property there because those are the most current trends that they are giving yet. It’s called the current rent sheet. It’s the rent sheet with all the assumptions and all the things. How much is the administrative cost, how much expected allowance, this and that, deposit and lab system. It tells you all there in that frame. If you find out like, “Other properties, money properties,” you’ll see all that.
[bctt tweet=”The property will increase in value if there are many jobs in the area.” username=””]
The thing is you’ve got to take the real rent role as of now, plug it into the comprehensive underwriting tool. My mentor gave me one page of sheets years back. Over the years, I’ve expanded it and added more because I’m an engineer. I like to make things so that the things work from here, it changes here and changes there and all that. That’s what that underwriting is now. You could control the rent increases each year. You can control the concessions, the delinquencies, the lab systems, the cap rates, everything is changeable. It speaks out quick reports. The big thing is as a buyer, three things are very important in underwriting. The number one thing is your taxes. The seller might have purchased that property five years back, ten years back or even a few years back. Their tax amount is going to be different than ours because we are going to pay a higher amount than what they paid over there.
The mill rates change, that’s the other thing. We like to tell our team members to go to the mill rate right away to the assessor’s office, find out and then we should have that number correct. The second thing is insurance. We should have an insurance broker in multifamily especially and you build a relationship with that person. You tell them, “If I give you a pocket listing on an address, can you tell me if I tell you it’s thirteen buildings or twelve buildings or whatever, can you give me a ballpark number of the insurance amount?” That is the other one. I see in underwriting in all the P&Ls sometimes very low numbers for insurance because the sellers might have a master policy of insurance as I do now for money communities. We save almost 25%. We saved money that way. We need to see how much is real insurance.
The third thing we want to talk about and look in the underwriting when we are doing is the management fee. The management fee is very important because many times the P&Ls don’t show management fees. They say, “We are doing ourselves. We are managing ourselves,” or they tell the management company to reduce the charge. We have to be a big detective to be truthful in looking at the P&Ls and looking at the rent rolls. You cannot take the total given to you as the real truth. You’ve got to question, “Why is this tax low? Why is this insurance low? The management fee should be $50,000? They put $23,000 in there.” Sometimes the payroll is the fourth one, which is a big one.
In the payroll, you have to look at where you’re buying the property and what’s the going rate to pay the community managers, the benefits package, the insurance and all those stuff to find out how much is the money per unit. We need to take $1,000 per unit or $1,400 per unit for the payroll because it’s going to come from us, from the property. Marketing costs, we have to look at what the salary is telling us. You have to see, “Where is this property? Is it right on the thoroughfare? Are you going to be designing new brochures to get people to have the traffic coming in? Are you going to be advertising on Apartments.com, Craigslist and local websites and things like that? The more the property is not discoverable, the more marketing costs will be there.
Then the administrative costs. Look at what the numbers are showing by the seller, but we need to look at what will it take for us to do it. A lot of our investors are starting out and we are promoting them to get a property management company. That’s the other one. They need to have confidence in this property management company and find out what their charges are. How much do they charge per unit or they charge a percentage of the total rents collected? That’s how the majority of them get paid. The lower the number of units, the higher the percentage. It could be 6%, 7%, 8%, 9%, 10% for twelve units, fifteen units like that. The higher like 100 units or like that, it gets to be about 4%. Higher than 150, 200, maybe even less than that maybe 3%. The underwriting is such a great blueprint for us to see and look under the car. We should never buy a car like that. We’re going to look under the hood. We’re going to look under the wheels, the transmission and all that.
The same thing is true in buying multifamily. Once, we buy multifamily, we cannot get rid of it right away. We have a commitment of at least five to ten years, maybe even longer. If the market takes a downturn, you’ve got to be able to sustain that property for a longer period of time. Underwriting is so important. That is the real crest. I talk about spinning five plates. The one is the teams. You formed the teams. We have the investors and that’s a big plate to spin. The other one which is a big plate is this one, the underwriting, the deal finding and working with the brokers and getting the deals, that’s a bigger plate. The loan qualification is a smaller plate. Property management, which I say in the fifth plate is also a small plate. Deal-finding and underwriting are very important.
If I’m underwriting a property before we go into the weeds with that property and doing our investigation, what are some high level things that you are initially going to look at to do a quick underwriting to see if this property is worth spending another two or three hours on or more to underwrite it in more detail? What are some high-level things that I need to know so I know if it’s worth spending more time to underwrite it in more detail?
You could do that by looking at the LOI. Please look at these three, four things. If you look at the P&L came to you, I look at the total twelve-month, first of all and try to get it in Excel if it’s possible. Excel is great because you could do so many formulas that can be done you could do it quickly. The big thing is the NOI. Look at where it is. Expenses, are they at 50% or 60%? That’s where you can tell if it’s a value play or not. One definitely is with managing the asset correctly, reducing the expenses that will increase the NOI.
The other thing you have to look at is the RUB System. I like to look at the P&L if they are collecting money for RUBS or not collecting. I go right down to the expenses and look at it how much utilities they’re paying. “They are paying $120,000. They’re collecting only $40,000 on the top.” That’s a value play. I put that gap on the sideline. I’m going to increase that NOI right there. I look through their taxes number quickly. I’m not doing it in a big comprehensive way, but I’m still looking at those items. I also figure out what the occupancy and all that. The properties which have high delinquencies and bad debts are problem properties. I try to spend a little bit more time in those properties. Do I want to even go up further? You cannot change the demographics that quickly. That’s what I’ve found. It’s better to do due diligence.
You might ask me, “Vinney, would you do the underwriting before doing the physical inspection of the building?” My answer will be no. We never do underwriting right away. We do the police report right away. It’s totally very beneficial to do a police report. I’m telling you, you’ve got to look at Apartments.com. Look at that address on Google and try to look at the links below. I even put the name of the property or the address at LoopNet because I want to know as much as I can about that pocket listing. That has been a sure winner. I was sharing with one of my students and we were recording it. We saw the same property was bought many years back. They told us how much he paid for it. We had a big gap right in between. How can they be charging this much? The more research we do and electronically on the internet it’s so easy.
[bctt tweet=”If the numbers don’t work on the paper, they won’t work otherwise.” username=””]
How much weight are you going to put on like price per door or cap rates and things like that?
I would say that the cap rate usually doesn’t come in my equation that much to be truthful. I’m more worried about the cash-on-cash. How much would it cost me to buy this? How much cash I’m going to make in a year, the first year, the second year, the third year, the fourth year? That is the big thing. The other factor in my mind is, “Is this the right neighborhood?” That is very much in my mind first. I have walked away from properties because I don’t want to buy in a declining neighborhood. Even though the property price was good, the numbers were great but it didn’t make sense. Because my business model doesn’t allow me to and doesn’t call that I get into these troubled areas, which there are very good people who do that. I am on the other side where I feel, “Let’s find out what needs to be done.”
If the jobs are not coming, it’s going to be tough to bring the neighborhood up. That’s a big thing. I like to do a physical inspection. If a broker sends me a packet, I’m zooming into the buildings. On my computer, I want to see the deferred maintenance. I want to see the ducts coming down the roof. I want to see if there are patches there. I want to see the cracks right there in the foundation. I want to see the railings going up balconies. I want to go closer to it so that I could feel and see, “This is a not well-taken up property or it’s a great one.” You could tell a lot of things.
Once we liked the numbers and if we liked the property also and we know the crime rate and everything, then it’s a quick decision to say, “Let’s put LOI. You’ve got to do the police report and then we’ll live with it, a block away from a property there, somebody was shot. It’s got a stigma and it was in the newspaper all over and things like that. Those kinds of things come up. Also, I teach my students to put the address of the property space Facebook because lots of properties now are leasing to Facebook. It’s a new and cutting-edge way. Community managers do it very successfully. We are so happy that they are doing Apartments.com.
We did a promotion. We were giving $100 gift cards to our community manager and leasing agents because we own our whole company. Whoever gets five or more testimonials from their establishment, from the communities through the residents who are happy to live there, will put their name in the hat and things like that. We got almost 99 testimonials and that was amazing because people come to the community to live in there if there are positive people and good testimonials. I was sharing with my team, “What you did, all these testimonials, it’s going to make your job easy because more people will come and they will read more about it. You will have an easy time closing them and so forth.”
What is going to be the most common mistakes you see when underwriting or some of them that’s going to mess up the fastest with underwriting or something we’re going to look over often or something like that.
The CapEx budget is something that can put a great deal into a bad deal right away. With CapEx, you will go for a higher bridge loan if you’re getting the money from the third party, from the bank or outside hard money lender or you will be raising money from the investors. The money has to come from somewhere and that’s what that amount COC, cash-on-cash. If you need more cash to buy the building, the numbers go berserk. That’s one thing. Sometimes I find people think, “I can get 80/20 loans. I’m going to get 20% down loan,” but many times they are not available in that area or the property, life or whatever.
It always is good to talk to a loan broker simultaneously as we get the properties to check with them. Would it be twenty-year schedule or 30-year amortization because some banks will only give you twenty if the building is very deteriorated? The other part is the interest rate, how close you want to get to the one that is available that time plus 0.25. I try to put it a little bit higher because it takes 90 days to close or 120 days. Dates can go higher or anything like that happens. I would say in the underwriting, I look at the income first. Because sometimes people will fabricate their P&Ls. They will tell you more. If you look at their rent roll, it’s a little different. Their pride can put the market rents on the top. Market rents, anybody can change in the software to market rent being so high. It’s the real rent that you’re getting. That’s what you want to look into. That will tell you disparity also. If it’s a value play, it’s increasing the rents also. Please ask your broker, whoever you’re working with to give you market rent study right away. Market rent comparison we call it also because you want to see how the investment that you’re trying to buy stack up? Has it already peaked for the rents or is there more room for it?
Vinney, are there other documents that we should ask for that maybe the broker or seller is more hesitant to give to you but something that we need to get?
In our due diligence list, we have lots of stuff. I like to get three years of P&L and see if I can and three years of rent rolls also. It’s also good to have the T3 and T6 also, which a lot of lenders look at T3, T6 more than the previous history. History can speak a lot about what they did. I also asked for CapEx, capital improvement, the amount that the seller has spent. I like to ask that right away. I say, “When were the boilers changed?” That’s the number one question. “When were the roofs changed? I need that right away. Do you have any foundation issues?” That’s third. “Give me the CapEx, how much has the seller put in in the last three to five years in this property? I need to know how many appliances have been replaced within the units, what percentage and how many air conditioning units, the condensers have been replaced?”
[bctt tweet=”The more the property is not discoverable, the more marketing costs will be there.” username=””]
Those are very salient things that we could ask because we don’t want to get into a property where we didn’t think through all those things. Those should be our always asking questions ideas. The broker will provide you because they want to close the deal and they will not lie. They cannot lie professionally. They will give you all that. Sometimes it’s good to again ask for tax returns. Some people give it. I don’t find tax returns. People can fabricate those too. I’ve heard about some people who paid more taxes to increase the rent collections and all, but they were falsified but they paid taxes. Now it’s in the tax return. People say, “That’s gold.” When they picked up the property it was not that. All that stuff happens.
Are there any other rules of thumb when we’re looking at all this to do the underwriting that’s going to let us know right away? We’ve all heard 50% for expenses. Are there any other rules of thumb where so we could say, “That looks high, this looks low,” that you go through when you’re looking at all this information?
I would say payroll is one amount line item that I find. Lots of time, we have increased the payroll because they have put it low. The management fee is another one. We need to look at that right away. The other one which I would like to ask is the utilities because if the utilities are way high, that also tells us that we have a value play. They might have leaky faucets. They may not have done the flappers. It costs $0.75 to do the toilet flappers. Sometimes the operators are not that savvy. They don’t go through right after the best control goes through because we manage. We do all that regularly. The maintenance people go on right behind them and they are able to look at the leaks and other things. Put their card there or a flyer for the resident. The other rule of thumb would be insurance. Usually, it’s per door or per building in a certain area, you have to have hurricane insurance, flood insurance, property, fire, vandalism and everything we have to have. Those things also help. In my underwriting, it does have a rule of thumbs, which is good. The main thing is you’ve got to try to find again in the neighborhoods that you want to spend more time in. That’s the best part. Don’t flounder around all over. That will not get you where you want to go.
Thank you again for being on the show, Vinney. Tell the audience how they can get in touch with you.
They can reach my Multifamily Academy by texting the word, LEARN from Vinney Chopra, to 474747 or they could text to (925) 766-3518. My team members will get to them right away and we’ll provide whatever information they need.
Thank you so much, Vinney. I appreciate your time and your expertise, 3,500 doors, 26 syndications. I appreciate your being on The Syndication Show and providing your expertise. I appreciate the audience who has been with us. I hope they’ll go to Life Bridge Capital and connect with me and also go to the Facebook group, The Real Estate Syndication Show where we can all learn from experts like Vinney and grow our business together.
Important Links:
- Vinney Chopra
- WS01 – previous episode
- WS161 – previous episode
- Apartments.com
- Multifamily Academy
- The Real Estate Syndication Show
- LoopNet
About Vinney Chopra
Vinney (Smile) Chopra, a founder and Chief Executive Officer of 3 companies and President of 2, came to USA with $7 in his pockets. He has over 35+ years of Real Estate experience and 15+ years of Multifamily Syndication Investing & Managing experience including overseeing the management of $220 Million in real estate assets. MONEIL PREMIER COMMUNITIES are all Self-MANAGED by Vinney’s well trained 67 full-time professionals along with thousands of contractors and vendors!
His expertise includes picking right markets, underwriting well, raising $5 million to $8 million in a couple of days, negotiations for Win/Win/Win, driving corporate growth strategy, investor relations and asset management, and business & culture development.
Vinney is passionate to coach and mentor and teaches his skills to other investors so that they don’t make the mistakes he made. Vinney has an undergraduate degree in Mechanical Engineering and a Master of Business administration degree from The George WashingtonUniversity. He lives near San Francisco, married 39 happy years to Kanchan and have two great grown-up children.
If you want to learn or invest with Vinney, text “Syndication” to 47 47 47‼️
