017: The 9 Numbers You Need to Know
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You don’t need to be a financial expert to be in real estate and start your passive income journey. Just remember, money is math, and math is money. The two go hand in hand. 😌😌
Like Kourtney and Travis.
Truffles and fries.
Us, and a decadent slice of 🍰 red velvet cake. Some things you can never separate.
We know numbers and math have a tendency to make people’s heads spin 😵💫😵💫, but look, you’re here and you’re not alone. That’s why you have us, to help you through it all and break down the numbers in a way that makes sense.
The important thing to remember here is, this is all with the end goal to make some SERIOUS money. Whenever we talk about these nine numbers, people’s eyes tend to light up. That’s because this is one of the final pieces to create the confidence you need to successfully build and grow your passive income empire.
You will also understand why these numbers are so important in helping you make decisions when investing in real estate deals that multiply super fast. Remember, money grows at a rapid rate in the right investment. ✅
All of a sudden, we’re in the business of making math sexy again. 💃 Admit it, it was definitely a flex in school when you nailed that timed multiplication test. Now, multiplication has a whole new meaning.
One of the best parts about real estate and passive income is that you can always go back to the numbers. There is nothing more truth-telling than a calculator and a reliable spreadsheet.
And that should be an encouragement! To know that no matter what, you can always crunch the numbers again to give you the most accurate depiction of what you’re making.
Purchase Price
The first number we’re diving into is the purchase price. Simply meaning, it’s the price an investor pays for an investment. We mean, you know you had to buy a piece of real estate to make an investment, right?!
There’s a saying that goes, “you make your profit when you buy, not when you sell.”
You are the number one advocate of your investment. You will back that thing up 100%, it’s your ride or die asset knowing you did all you could, the research, the paperwork, the money all started with you. So the confidence you feel in purchasing it should start when you buy. And then watch that confidence skyrocket right to the bank once it sells!
The most important thing is choosing the right team to partner with. We have a whole episode dedicated to knowing your SQUAD when it comes to passive investment because it’s a lot to shoulder on your own. To reiterate, you need a team of people who all have each other’s backs and who can work together to find incredible opportunities to invest in together. In the 🏢 syndication model, you along with other investors will be pooling your financial resources to invest in apartment complexes that are much bigger than you could afford or manage on your own.
So you will all have your own slice of the purchase price pie.
Gross Potential Rent
The second number you will need to identify is the Gross Potential Rent also known as a GPR.
The GPR is how much income you are going to make if the apartment complex was 100% leased year-round at the market rental rates. This will require some research on your end (which, spoiler alert, anything in apartment syndication and passive income land is a necessity) to know what the going market rental rate is for the area you are investing in.
The way to determine the GPR is by multiplying the number of units times monthly rent per unit times 12 months. Now pat yourself on the back for putting that 🧮 calculator to use.
Economic Vacancy
Have you ever seen an apartment complex be fully 100% occupied? Probably not, and that’s completely normal! How many times does life take us in and out of spaces? People are moving in and out all of the time!
It would be unrealistic to expect 100 units to be 100% fully occupied all year round. After all, it’s an apartment complex with, in our case, over 100 families, couples, or individuals. Something to consider as well, if you’re complex is 100% vacated 100% of the time, that might mean your rates are too low, and we don’t want that, right?
The third number is called economic vacancy, which is generally defined as a unit not collecting rent. It can be currently physically unoccupied like a model unit or there’s a tenant occupying the unit but they aren’t paying rent. Hey, it happens and it’s a part of the calculated risk factor that we love to talk to you guys about. No worries, we’ve accounted for this well.
In general, the one basic rule of thumb that we tend to use is around 10% economic vacancy in our underwriting. So many times, we see General Partners aggressively put only a 5%-7% Economic Vacancy rate to win deals. However, we like to keep things real and know that oftentimes, that simply isn’t true. We’re not putting on our name, or our investment team’s name, on anything that doesn’t sit right with us.
I mean, you should see how selective we are with our 🧋 boba choices, so picking the right contract with the right general partner who gives realistic economic vacancy rates is a must.
The same applies to you. When you review the investment opportunity with your general partner, pay attention to what they put as economic vacancy. If they put something below 10% ask them why. What do they know about that building or tenants that you don’t? Do they have market data to prove this number? Don’t be afraid to ask questions‼️
Net Operating Expenses
Up next is Net Operating Expenses. These are expenses that are considered “above the line” which are also commonly referred to as just basic operating expenses of your apartment. These are routine, regularly occurring expenses. Operating expenses include:
Property insurance, real estate taxes, and property management. For properties of 65 units and up, you will have to hire a property management company.
Other routine expenses include payroll, monthly repairs ⚒️, maintenance, and utilities. Don’t forget accounting and legal, such as eviction fees. And of course, advertising to attract tenants.
Other Outcome
Continuing with our favorite numbers game, we have other income.
Other Income would be exactly what it sounds like, other ways money comes out of your apartment complex, such as pet fees, laundry, reserved parking spots, etc. One person’s self-proclaimed “hidden fees” are now your other streams of income. It’s called, perspective.
We ❤️ love other income because it helps us improve our net operating income number. The more other expenses there are, the more money will be in our overall net operating income. When ✏️ underwriting the deal, other income will be given to you by your sponsor team. They should be able to tell you exactly what fees are associated with the complex.
Once we have the other income number, and we know the gross potential rent and economic vacancy, then we then can determine the next number that we need to know, which is net income.
Net Income is net earning, which is the amount an apartment complex earns after subtracting all factors.
Net Operating Income
The next number you’re going to need to know is Net Operating Income, often referred to as NOI.
NOI is all revenue from the property minus operating expenses, excluding capital expenditures and debt service.
If you have ever heard the term “above the line” it means any expense otherwise known as the operating expenses. This money delegated is all about keeping you in business. Above the line, above board, above anything else operating expense-wise, these are your bigger numbers.
There will always be certain expenses in apartment syndication that are not a monthly routine, it’s a one-time cost. These expenses can be annual debt services, nonroutine leasing commissions, or any reserves. Reserves would be the money you set aside for any future CAPEX (Capital Expenditures) that we don’t know. It’s always a good idea to keep some stash of cash to the side in case life decides to have its way with you and keep you throw you for a loop. Cause that’s never happened, right, 2020?
These expenses are called “the bottom line.” It’s a one-time occurrence. A lot of lines are being referenced right now, but the important thing to remember here is that you’re either above it or below it, never walking on it.
Now, we know we just threw a ton of numbers at you and for some of you, it may have felt like we were speaking a foreign language. And we get it, cause when we were first starting out we were overwhelmed with numbers, ideas, and various lines. Not to mention the math.
But rest assured you’ll be moving from real estate rookie to vacations sponsored by apartment syndications in no time. Plus, that’s why we’re here. Your financial BFFs, guiding you every step of the way.
Capitalization Rate (CAP) Rate
Now, let’s talk about the next number you need to know, the capitalization rate. Also known as CAP.
This number is like looking into a still 🖼️ photo, it’s a simple snapshot in time of what a multifamily apartment real estate asset’s return is before financing. Imagine looking into a photo and seeing a picture of you, looking fondly at your return of investment. Not a financial worry in sight.
With this number, you are calculating the ratio of how long it will take to get your money back in investment on an all-cash purchase. ✌️
Look, you have done too much work up until this point to not know how much you’re going to make back over time.
Normally when you’re making your deals, the CAP rate is given to you. However, since you’re all calculating Queens, (and Kings!) you can determine that number for yourself by taking the NOI divided by the value.
This is why we love apartment syndication because unlike single-family homes, multifamily apartments are valued based on the property’s income. So between whatever the building is making, and how many tenants are paying their dues, you’re also making money 💰 on. It’s not a fixed price, it can go up and up and up!
This also means that the property will be assessed based on income numbers, not based on comparative market analysis that is done like with single-family homes. So there are more factors involved in how you can generate income on your apartment other than just location.
In the apartment investing world, many would argue that the CAP rate is just as important as the net operating income and even as important as the purchase price itself. No cap.
Future Value
Okay, now for the big number— the future value. This is this number equivalent to the series finale after a beloved comedic series, the big show number at the end of a musical that brings the house down and you on your feet in a standing ovation. This is the number that is going to tell you how much your asset is going to sell for. We’ll always cheer for that.
Once the NOI and CAP rate is calculated (we know, a lot of acronyms, but hey look at you, sounding all financially literate n’ stuff), the future value can be determined relatively easily. ✨
Simply divide the NOI by the CAP rate. You and that calculator are going to be joined at the hip after this but for good reason and a lot more dollars in your pocket.
The Super Nine and Feeling Fine
And that’s it! You did it! Now you know the nine most important numbers, it should give you all the confidence. Think of these nine numbers as your grandmother Willow from 🌬️ Pocahontas, guiding you to make the right decisions when you are investing in apartment deals.
Now, remember, these nine numbers must work in conjunction with your Internal Investment Criteria that we went over in the previous module. Yep, you still gotta go back and make sure everything checks out, remember numbers never lie to you. Truly the most reliable relationship in a lot of our lives.
Another piece of advice, don’t go for deals that could have a super appealing return if you’re not vibing with the General Partners. We get it, the bottom line number can be tempting but it means nothing if you’re not feeling confident with the people you’re investing with. 💪
Also, this one should go without saying but we’re going to say it anyway: don’t invest in a market that is not going well. Like in Detroit, Michigan where they’ve had a negative population growth for the past 20 years.
No matter how sexy the numbers look, if it doesn’t fit with your Internal Investment Criteria then it isn’t a good deal to you, right? And trust us, we have seen some smokeshow, Chris Evans-looking numbers in the past that we have turned down.
Anyways. Always refer back to your Internal Investment Criteria, use it as your compass, your ⭐ North star if you will, in conjunction with the 9 Numbers You Must Know. Which, yes, can be found in the show notes of this podcast.
Yesterday was the time to start creating a solid foundation that allows you to follow the path to achieve financial freedom early and permanently. But, today works too and it’s definitely not too late.
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