Steve Olson: Welcome to the Build-to-Rent Show. I'm Steve Olson with Chase
Leavitt and Sherida Zenger, getting an episode out of the can for you that I think
you're going to find helpful, and we've got some good ideas too, to bring to bear
here about analyzing your build-to- rent deal. The whole purpose of topic is to
cover more of a back of the envelope analysis of a deal.
We don't pretend that you're going to go to the bank with this stuff, or that
you're going to close with this stuff. It's how do I vet something out. If you're
doing a lot of deals, you really must systemize that process.
I've got a guy right now that I'll tell you guys about, he's a financial nerd. And
so, once I get past the back of the envelope, then it's time to spend some money
with the nerd. Dig much deeper into this, build out all the complicated models
and your returns, and sources and uses and all this kind of stuff. But for our
purposes here, whether you're going to build a little house, whether you're going
to build 50 townhomes, this is a back of the envelope-- analyzing a deal quickly
kind of a formula
Chase from its most basic point, where do you start?
Chase Leavitt: The rents. Figuring out what the rents are in that market? It
could be a single-family hometown, home apartment building, whatever it is.
Just take it one unit at a time. And just analyze the rants by calling property
managers in the area of different assets that are currently being managed in the
location that you're looking.
So, look at the rents, take a real close look, understanding what product type, if
it's to be bill. And it's not there yet understood what you want to build there.
And then look at similar comps within that location.
Steve Olson: Similar comps being the key. Sherida, or what do you do? How
do you analyze?
Sherida Zenger: Well, obviously, if it's something that is existing, you're going
to call property management and get those rents. So, you can back into it that
Obviously, that's a quick way to analyze an existing property, but same thing as
chase. I'm going to look into the area, see what things are renting for. Visit some
property managers. You know, if I, maybe if I know someone I can call around
and ask them, hey, what are you currently getting for rent?
I know my kids bought some townhomes in American fork, Utah, and I had
asked somebody, Hey, what are current rents? It was one of our associates just
because she has leased a, quite a few units in there just to kind of see. So you
can ask around people usually are pretty friendly and will give you advice.
Chase Leavitt: Let's take it a step further besides the rents. Where else are you
getting income garages, um, washer and dryer. Pet fees. Uh, we have a tech
There's a lot of different ways you can get additional income. So, once you
understand the rents pallets, you're going to get income to really understand
your, your monthly gross income.
And then once you know, your monthly gross income, just times that by 12 and
that's your annual.
Steve Olson: That really is the jumping off point. And when we're talking about
build to rent, because the value, what you're willing to pay. What you could
potentially sell the property for, all com jumps off that.
What is the income? That's what somebody is buying, right? They want that
income stream with the property. So that's what the value is derived from. So, I
think we kind of get to the point where, you know what, what's a quick
valuation, what's a back of the envelope for one investor versus another, right?
On a high level.
You're just looking online. You might look at CoStar. We have a CoStar
subscription, which I kind of like. It's a rip off. Okay. They might cancel us
because they are kind of like the soup Nazi from Seinfeld. No CoStar for you.
We have it in the budget to pay Seinfeld royalty rights. Don't we on the show?
We don't okay.
CoStar has a lot of good information that you can see the typical rents for one-,
two-, and three-bedroom units in your area. You can pull comps at half mile,
two miles, five miles as big of a radius as you want.
You can sort it by their star rating 1, 2, 3, 4, 5 stars or so. Right. So, you can go.
Pretty deep in, in the back of the envelope and get some really good ideas. But
w once again, take it with a grain of salt. Cause like what chase was saying.
Um, I have, I haven't always found CoStar to be very good at telling you the rest
of the story.
Right. You know? Well, w is there a $50 parking fee? Some of the listings say
that some of them don't CoStar is only as accurate as the diligence of the
animal. Right. We, I know the three of us get calls. This is Bob from CoStar.
Hey, you got this property that just went to the city. Tell me about it. Or, Hey,
you sold this one and we have to give the information.
So, it can be a case of garbage in garbage out. Right? If somebody didn't give
the CoStar analyst, very good information. You got to take that into
consideration. So, it's a high level, but you're definitely going to need to drill
down onto it later.
Sherida Zenger: But if somebody doesn't have the funds right to pay for a
CoStar account, they can use resources like rendler.com, apartments.com.
Some of those I know locally different places have their own platforms that they
use as rentals. So that's a good place to start too. Usually those are a little more
detailed because they're looking for the tenant, right? So, they're looking at the
tenant saying, Hey, come rent from me. So, they'll give a little bit more
information. You know, maybe some they have on CoStar.
Chase Leavitt: This whole episode is doing it within five minutes or less. It's
the quick and dirty. And so, the way that you do that is yeah. The CoStar or the,
the Rentler, when you start to call different places, that's going to be more time
Steve Olson: We're probably off the back of the envelope and onto the
spreadsheet by then.
Chase Leavitt: Yeah. So, the quick and dirty Rentler, Zillow, any place where
you can just get an understanding of what the rents are going to. And then once
you understand what the rents are going to be, we can talk expenses and we're
not going to dive deep on those quite yet.
Cause this is the quick and dirty. Right. And so, you just take an expense ratio
for our performance. We're anywhere between about 30 -33%.
Steve Olson: Yeah. I've done a few 35s for what we do together. And we're not
claiming that that's the universal expense ratio either. Right. But you need to
come up with one that you feel like captures everything.
You add everything up and you say, okay, 35% of my monthly income is going
to be pushed over to expenses. We're not so concerned about the makeup of
those expenses yet. Right. Well, what percentage of that is taxes? What
percentage is maintenance? Right. We just need to know what's our, what's our
net operating income,
Sherida Zenger: We need aplace holder, so that, and that's a pretty
conservative placeholder that we found.
Steve Olson: Now I wanted, before we got into that for a second, what do you
guys think about Rentometer?
Sherida Zenger: I actually like Rentometer. I paid for the pro subscription, I
think, to rent a meter. I think there's some good things. I know I've used it when
we've analyzed a few properties or projects, I guess I should say. So, I think
they have some good information.
Sometimes not as detailed, like as a CoStar would be, but I think they all bring,
I guess, have their own benefit to it, but I found it useful.
Steve Olson: Well, CoStar would give you what, what big property managers
and apartment complex. Have listed or have reported as closed. Rentometer, if
you're in a market that has a lot like a hodgepodge of inventory, right.
Where people are listing it online through some of these places, Rentler or
whatever, it's a good way for you to see am I reasonable? Right? I love the little
diets, like a speedometer, right? When you, you say I have a three-bedroom
unit, uh, two and a half baths, here's the street address. And I want my rent at
Rentometer will tell you the little speedometer says very affordable, very
unaffordable, right? And they're analyzing everything that's listed and available.
So that's a good, valuable perspective because you go, if I'm a tenant and I
Google a property to rent, what am I going to see? And then myself as the
builder developer, what am I, what is my target going to see? In relation to what
Sherida Zenger: You must be competitive. You can't be the lowest rent, but
you can't also be the highest
Steve Olson: rent. What do you think? And we didn't talk about this before. I
don't think the listeners be despised. We don't talk about a lot before the show.
But what, what if you don't see a lot of comps at all mean? What if there isn't
any data? What, what alarm bells or what green lights go off in your heads
when you say.
Sherida Zenger: Well, obviously I would think if there's not a lot of rentals,
then maybe it's an area that doesn't need rentals. But again, you're going to have
to dive a little bit deeper to see, is there a need there?
It could mean that there is no need to, so right. Going to the red side saying, oh,
maybe this isn't like alarm bells, this isn't the right area. So, I mean, that's going
to be talking to the city. That's going to be a little bit more due diligence.
Chase Leavitt: But for the five-minute, take an estimate, take an estimate of
what you think it's going to be or expand to another city.
That's maybe one to two that's, five miles, whatever it is, your best next comp.
And then take that one. And then when you dive deeper beyond the five-minute.
That's when he started to call the city and say, okay, what's the need here in you
really dive into it?
Sherida Zenger: Well, it kind of reminds me of our Nampa project.
We didn't have anything where there were no comps, like literally nothing there.
And we thought, okay, we've got to be a little bit lower than Meridian. Where
do we want to be? And we kind of shot from the hip and luckily, we shot low.
And so, rents are quite a bit higher, which is amazing for our, but that was one
of those markets that again, we were like, what do we do?
We don't want to be overly aggressive.
Chase Leavitt: You bring up a good point. We estimated, but we were
conservative. We felt we were conservative. And at that time, I think we're
probably we're or spot on. And then over a period, we found out that there
actually about a $100-150 per unit higher.
Sherida Zenger: Now that brings up another point. I was running a proforma.
The cap rate was a little bit on the low side and my, the seller who is my client
said to me, Hey, what if we projected rents? And then this also came up in a
conversation I had with Steve Olso,n, where he said, Hey, right now where
these rents are for this existing property are a little bit on the low side.
Property management thinks when they renew, these are going to be a little.
Again, that's a gamble and a risk that you're hoping that the market is still
pushing up, which it should in the climate we're in right now. But again, it's
kind of an unknown. So some people may purchase something that's at a lower
cap rate knowing, Hey, I can hold for six months until these leases renew and
actually get a couple hundred dollars more in rent a month per door.
Steve Olson: True on that deal that you are, you're talking about. They have
existing leases getting signed for like 150, maybe 200. And where this particular
unit is at. So, it would take the market really suffering because we're not hoping
we know where they're coming in at. Right. And that's, uh, that's tricky based on
time of year there's some variables that, that can get you there.
Chase Leavitt: It's a value add. It's an easy value add if you understand and do
Sherida Zenger: And you figure out when the leases are up, right. Hey, when
are these Lisa's going to be up? Is it going to be up in December again? And
they're going to not get me as much as they could, maybe in a summer month,
depending on what market
Steve Olson: yeah, yeah. Do a six-month renewal and then take that thing all
the way up to full market.
I have a little bit of experience on this right now. You guys know I'm working
on a deal in Indiana, and I've pulled all the data on it and there's not a lot of
data. So, the question is, is there opportunity here?
Or is there not a lot of data for a reason, right? Because there is no opportunity
because markets are efficient markets find the money, right. There's nothing
they do better than that. But, uh, one thing that I did and disclaimer, kind of like
what chase said, we're getting off the back of the envelope to a certain degree,
but uh, if, if something is close on the back of the envelope, you're like, ah, I got
to dig deeper than it passed the initial smell test.
How many deals have we had on the back of the envelope. We don't need to
spend one more breath on this deal. It's dumb, but something that I found
valuable, and I think I've said this on the show before. Um, if I don't, if I see a
low vacancy rate, this market, I'm looking at as a 2% vacancy rate right now
that tells me, okay, there's got to be a need for more inventory.
I looked at comps, the newest apartment complex was built in the early nineties.
Right. So, I'm going okay. They got it there. Our unemployment rate is low
vacancies, low housing stock, old. Right. I'm looking at all these things. So,
what I wanted to be careful about is there fish in the pond?
Right? So, I used a website called neighborhood scout and I, and you can get
this information from a bunch of other places, but I use neighborhood scout to
find the median and. For the area. And you know, when we had lane Aldridge
on a couple of weeks ago, he would tell you lenders to gauge whether
somebody can afford a mortgage or a rent payment.
They like it to be what I think, 33 to 35% of the monthly gross income. So, I'm
looking, what is the, the, uh, median salary for the area and are the rents that I
think I can get that are a little fuzzy because I don't have a lot of. Are they more
than that? Are they more than 30 to 35%? And if they are, there's probably not a
lot of fish in that pond, right?
There's probably a reason why some other developer or builder hasn't come in
there and put up a bunch of units. But if the average salary can afford what you
want, I, to me, that might be a very bright green light where you say the market
is wanting more in inventory. What do you think about that?
Sherida Zenger: I agree, and I also think even maybe looking if there's. A lot
of data looking at what single family homes are selling for, what are people
purchasing? And then what would their mortgage roughly be on that now kind
of back into it that way and say, okay, so they're willing to pay this to owner
occupy something, right.
To live in this property and own this. And there's a lot of people that are tenants
that can't quite qualify, but they do make some good income. So maybe just
saying, okay, maybe we need to be a little bit below what that is or close to, but
I think, I mean, that's another avenue to go down.
Steve Olson: The MLS is good too.
Yeah. Now, now here our MLS in Utah for leases is garbage. Okay. It's
completely useless. But yesterday, I was doing a little secret shopping on a
property manager we use in Texas. And I had w well, John, one of our key
contacts pull the MLS data. They have a great MLS for leasing data.
I can see average days on market to rent. This unit in this project is 24. Right?
Here's the price you can see it's all right there. So, you might have a very robust
MLS in the market that you're looking at as well, that could tell you where these
rents are going to come in.
Chase Leavitt: Just talk to people as well.
Talk to the city. Talk to people in the area and see, they know their, they know
their market. They know what demand or need there is. And so just talk to them
and they can probably spill a lot of beans to you.
Sherida Zenger: Let's go back. So really what we have now is we have our
rents, we have our expenses, right?
So, we're going to try to do this in five minutes or less. So where do we go next
Chase Leavitt: Finding your NOI. If you can find your net operating income,
this is the formula net operating income. And then if you want to divide that by.
What you think the value is, then that's going to give you a cap rate, the cap rate
of what it, what it's performing at.
If you find your NOI and then divide that by the cap rate of where you want to
be, let's say it's five and a half or 6%. That's going to give you the value of the
property or what you should pay for it.
Sherida Zenger: Are you seeing a6% cap rate right now?
Chase Leavitt: No. And that's the other trick too, is you need to understand
what the going cap rate is for that market.
And there's ways to look into that as well. We've seen in, in know that it's about
a 4-4.5% cap rate right now. That's what things are trading or selling for.
Steve Olson: Depending on the market. Right. But most of where we operate is,
is yeah. I mean, that's not a Toledo, Ohio cap rate, Salt Lake, Phoenix Metro.
Even Boise, Boise might even be less crazy.
Chase Leavitt: Yeah. I skipped ahead a little bit. I want to back up. I said, NOI,
net operating income. We didn't talk about that. The thing that we talked about
before that was the gross annual rents, the yearly gross rents. Right. Let's just
take an example.
Let's make it really easy. Let's say we're looking at either a single family home.
Or a townhome one unit, one property, let's say it rents out for a thousand
dollars per month. Well, that's we know per month, it's a thousand dollars,
right? What's the yearly, you just times it by 12. Okay. So where are you at?
12 grand, 12 grand. We need to back out the expenses. What is our expense
ratio going to be? If it's newer, newer property, less maintenance, the expenses
are probably going to be lower. This is something that you'll dive into deeper
later. But for the sake of time, we'll just say it's 35%.
Let's go back to the one unit. Thousand dollars per month. Times 65% is $650
times 12 times 12. This is just a simple example. $650 is what someone's going
to be netting on that one unit per month. Times that by 12. 7800.
That's your yearly or that's the net operating income. So NOI is the secret. Once
you can estimate quick and dirty NOI, then there's a couple of different ways
you can, you can figure it out. Cap rate by just taking your NOI and divided by
the purchase price or what you want to pay for it.
And that's what your cap is going to be. Or if you want to figure out what you
should pay for it, you take your NOI divided by the cap rate. If you want. It is
six cap. Hey, I know what the net is. This is my quick and dirty. The what'd you
say seven grand 7800 7800. And I want to, I want to buy this townhome or the
single-family home at a six cap.
Then divide it by 6% and that'll give you a price.
Steve Olson: We'll get into this on the next episode, but just because you want
to buy it at a six cap, doesn't mean that's what the market will give you.
Sherida Zenger: That's right out of our "to be built" are between a five and a
That's to be built construction. You're going to have to wait a lot longer for that.
Let's just clarify that. Those deals are out there, but there's things that you're
going to have to wait for or in different markets, not the markets that we're
currently in right now.
Steve Olson: Well, that's the point.
If you want to do a cap rate better than what the market will give you, well,
what are you going to give the market? What risk are you going to take? Yeah.
Chase Leavitt: Once you understand that and say, okay, well this is going to be
a six cap or yeah, this, this is the value of my property, whatever you're looking
to do. Then just dive a little bit deeper and make sure you have all your facts
straight, the rents, the expenses, et cetera.
Sherida Zenger: And kind of like Steve and I were talking about, hey, if you
know that those rents are going to go up a little bit, you can have, Hey, this is
what my cap rate is right now. And this is what I projected at and maybe that
makes sense too.
Steve Olson: Excellent. That's it. That's all she wrote. We'll catch you next
episode on the build to rent podcast. Thanks for listening everybody. And
remember to subscribe on iTunes, Spotify, and the Google store.