WHY 2022 IS MORE IMPORTANT THAN EVER TO STICK TO YOU NUMBERS

[Jason Malabute]

It is more important than ever to underwrite deals conservatively and stick to your numbers in today's market. The federal government printed so much stimulus money that society is paying the price of inflation. With so much money floating around in the marketplace, people are looking for assets to invest in. People buy stocks, crypto, and real estate without properly evaluating the deal. “Investors” are looking to park their money in assets and most times are overpaying.

I am looking at C vintage properties B and C+ neighborhoods in Indianapolis and KC. We can push up the rents to $800-900 after rehabbing the units. It will cost $12k per unit to raise the rents to $800-900. My underwriting shows I can pay $40-60k per unit. I submitted a few offers and every time, the seller laughed at me and said they had offers for $100-120k per unit. Sellers have told me I should use a 5% vacancy and 5% operating expenses ratio (this is not a typo) to make deals work. Other investors have suggested using unrealistic rent growths or rent projections for future years to make the numbers work. I’m here to tell you not to do it. Stick to the rules of conservatism. Being conservative means using data that is probable. Remember that real estate is cyclical, and there will be a day when the market will punish those that disobeyed the fundamentals of investing.

Even I doubted myself. After being rejected deal after deal, I questioned whether I was too conservative in my underwriting. I stopped doubting myself after I got off the phone with several more experienced investors, and even they said my underwriting was not the problem and they don’t know how other sponsors are making the numbers work. My advice is to trust the process and not let society pressure you into a bad deal. Remember these two mottos:

• “Men lie, women lie, accurate numbers don’t”
• “Be fearful when others are greedy. Be greedy when others are fearful”

[Tonya Weathers]

@Jason Malabute Thanks for the encouragement! If you don't mind sharing, what ARE your numbers? I've had so much back and forth on this, my head is spinning.