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Dec. 12, 2022

TLP46: Definitive Guide to Underwriting Multifamily Acquisitions with Rob Beardsley

TLP46: Definitive Guide to Underwriting Multifamily Acquisitions with Rob Beardsley

In today’s podcast episode we interview Rob Beardsley, Founder of Lone Star Capital and Author of the book, Definitive Guide to Underwriting Multifamily Acquisitions. Rob’s firm delivers superior risk-adjusted returns through diligent sourcing and selection, vertically integrated property management, and rigorous reporting. Today’s topics are focused on the definitive guide to the underwriting process, and things that a Limited Partner should be aware of as they go through deals in the real estate markets.

Read the FULL EPISODE SUMMARY HERE

Visit us here at: https://www.thelimitedpartner.com/

If you'd like to say hello, you can find Jake at @JJakeWiley on Instagram and Twitter, and on LinkedIn.


You will hear quite a bit of real estate terminology in every episode. We've aggregated the most common questions for you in the link below!

Transcript
RB:

I'd say focus is one of our themes and differentiating factors in our business. And in line with that, last year we launched our in-house property management business. And this year we're currently in the process of bringing construction in-house. So that focus vertical integration really allows us to find differentiated deal flow and then be able to execute upon that with economies of scale with our in-house capabilities.

JW:

The limited partner shares in the potentially outsized returns of a well planned and executed investment, but as a passive investor and has the maximum leverage on their most precious their time, and that is why we're here together. 90% of the millionaires out there built their net worth with real estate. However, 0% of the billionaires are hands on managing the real estate assets because there simply isn't enough time. My name is Jake Wiley, and for the past 16 years I've been investing in real estate and I've learned a thing or two. But the most important lesson is how to leverage the expertise and time of others to maximize your investment potential. Welcome to The Limited Partner Podcast. [Jake] All right, welcome partners back for another week. I'm really excited. This week I've got Rob Beardsley, so he's the principal of Lone Star Capital, Rob, welcome to the show.

RB:

[Rob] Yeah. Thanks a lot for having me.

JW:

[Jake] Yeah, this will be great. So, really to help set the table, set the stage who is Rob Beardsley? Tell us about you, tell us about Lone Star Capital and maybe a little bit about your journey.

RB:

[Rob] Sure. So, I started Lone Star Capital with my business partner a little over four years ago. Lone Star Capital is a multifamily owner operator focused on, value add acquisitions in Texas. Our entire portfolio is in Texas. So I'd say focus is one of our themes and differentiating factors in our business. And in line with that, last year we launched our in-house property management business. And this year we're currently in the process of bringing construction in-house. So that focus vertical integration really allows us to find differentiated deal flow and then be able to execute upon that with economies of scale with our in-house capabilities. And prior to forming Lone Star, my business partner was a tax attorney at MetLife. So he had about 12 years of corporate experience dealing with mergers and acquisitions from a tax perspective and private equity. I, prior to Lone Star, worked in my family's real estate businesses on the residential side as far as buying and selling luxury homes for their clients and construction development.

JW:

[Jake] Very cool. So you got your bones in the resi space like most of us did. Let's dig in a little bit on, you know, some of the things that you mentioned one would be getting really focused, so you guys have focused on Texas, so let's talk about that.

RB:

[Rob] Yeah, so I think there's a lot of great markets out there, so there's no one right market. And I wouldn't even wanna say that necessarily. I mean, sure there are some markets that you could probably make the case that they're objectively better than others. But at the end of the day, a market is the market. And even if it has really high growth, that's gonna come with a lot of competition and high prices. So, it's not like there's a free ride anywhere, right? If you want to go to a tertiary market, price will be a little bit better, but the growth isn't gonna be there. in my opinion, there's really no secrets out there. So it's less about spending millions of hours trying to uncover that secret market that nobody knows about. And I think it's more about actually picking a market and putting in the effort to then becoming an expert in that market so that way you can actually get the better deal flow and the real looks from the brokers rather than just their bad deals or, you know, they won't take you seriously through the bidding process, right? It's in a way you're better off going to a mediocre market, but being the king of that mediocre market and every broker's dying to share your deals and they're giving you the first look and the last look and you'll be more successful that way than trying to go and chase the new hot market every year too.

JW:

[Jake] Awesome. So what is it about Texas in particular that, that drove you there?

RB:

[Rob] Yeah. So Texas is a big market in particular where most of our assets are in Houston. Houston's the fourth largest city in the country and the growth numbers are always at the top of the charts every year as far as population growth and job growth. The unique part about Houston, we really used our advantage is that it's less institutionally owned. You know, the factors being energy exposure and the flood risk kind of causing a lot of institutional investors to want to back away from the market. Certainly there's a lot of institutional investors in the market, but it's a less institutionally owned market compared to Dallas and Austin, even though the growth prospects are very similar. So, I think you get a bit of a discount in Houston, and as long as you know what you're doing, you can really make the most of it. But high level outside of those factors, you've got just, you know, no state income tax, landlord friendly state. It's winning in the migration trends as far as people leaving the coast for a lower cost of living. Houston in particular is a lower cost of living than the average in the US and lower than Dallas and Austin. So it's, I think it's a really great place to be, especially right now in light of what's happening in the current economy.

JW:

[Jake] Houston's one of those interesting cities like Atlanta, where there's like zero geographic boundaries, I guess, to expansion. So there's an opportunity to go to Houston and like what does that really mean? It is a massive city, isn't it?

RB:

[Rob] Yeah, it's huge and the suburbs is what we like a lot is like you said, you kind of alluded to the fact that it's very easy to build and that's largely the case for every major city in Texas. So, because it's easier to build. It's harder to invest where there is a new supply, right? If there's new supply, you have to be careful about that and really watch the rent growth. But if you're playing in a space like class B and C multifamily, which not to say we don't love Class A space, that there's a lot of opportunity there as well. But when you're in that workforce housing segment, they just can't build new product of it. So you're really insulated from the supply risk much more than you are if you were to be acquiring, you know, newer vintage assets.

JW:

[Jake] and I wanna poke on what you just said just a little bit, because I've heard that several times in the podcast recently. And you know, in this kind of Class B property, you're saying you really can't build any, like, tell us why.

RB:

[Rob] Yeah. It's because the cost of construction is so high that well and even if the cost of construction weren't so high, the reality is a developer's cost to develop a luxury asset versus an affordable workforce housing asset is largely the same. So, if they're going to take the time, effort, and money to build something new. They may as well build it to its highest and best use where they can squeeze the most rent per square foot. And that's going to be by building Luxury class A, which caters to the renter by choice or renter by lifestyle segment, rather than the renter by necessity and workforce housing segment. So that's really the reason why. And then the cost push there is that it is getting more and more expensive to build when you're buying existing multifamily at a hundred thousand per unit, or 150,000 per unit on the high end, whereas new product is, you know, cost developers to put it out there for 250, 300, 350, that is an insulation from a value perspective as well.

JW:

[Jake] Yeah. So, I think that's just a really great point for you guys that are looking at investments out there where there's some value in Bs and even maybe some like potentially Cs that can turn into Bs because the cost to build is so high that like you're not gonna build a B, right? So there's this community and like you said, renters, by necessity versus renters by choice, right? And the luxury market is a choice. The supply is going down, right? So a lot of this stuff is actually coming off the market, right? It's, you know, being redeveloped highest and best use might be a new class A or something like that. So, the selection is going down, so there's insulation there. So, I think that's a really great point when you listen or you're thinking about making an investment, why working in the B space might be really a great play.

RB:

[Rob] Yeah. And to be devil's advocate we know this, you know this, A lot of people know this, so the secret's out, and so prices reflected, right? It is a competitive market. So, you have to be careful to not get too excited by something like this trend and overpay for a Class C asset, right? At the end of the day, we have to be diligent about our underwriting and how much we're paying for an asset. And one thing we've seen as far as this trend has gone for the last few years is that really the pricing difference between a B and a C is not very big, and so it's leading smart investors to recognize that and say, well, if the cap rate is roughly the same for B asset and a C asset, why would I buy the C asset? I'm taking more risk because it's probably an inferior location. The construction is older, so it has more deferred maintenance risk. So, I'm better off buying the B and every investor has to make their own choice for that, right? Because obviously if the cap rate and the opportunity is the same, then it's an easy choice. But what if it's a little bit different? What if you have to accept a slightly lower return for that newer B plus asset? You know, you as an investor have to decide, am I willing to take that trade off where I'll accept a lower return, but it's gonna come with lower risk?

JW:

[Jake] Yeah those are great points. I mean, 'cause a lot of the people that I've talked to on the show. And even offline have had talked about that trend. You know, the cat's out of the bag. It's like, hey, I used to buy Bs and it was a very value add strategy, right? And now like cap rate compression is a, B looks like an A. It's like, well it'll just buy As, right? And you know, it's very tough. So it'll be interesting to see how the market kind of evolves over the next you know, 12 months, 18 months, even six months in that space. Because there's been a lot of, you know, Bs that are really kind of being neglected, right? Cause you're like, I have a choice of an A property, like a new build, a development, like the, it's kind of bulletproof versus something that like, you know, it's been around for a little over a decade and that's gonna be a real choice. But you wrote a book, right? You saw a need in the marketplace for education. So, I wanna dive into that a little bit more because I think that's always something. I want to highlight on the show is, you know, what was the need that you saw and like tell us about the book.

RB:

[Rob] Yeah, so I'm the author of the Definitive Guide to Underwriting Multi-Family Acquisitions, and that's a big mouthful, but basically, that is just a straightforward laying out of our underwriting process. And if you don't know what underwriting means, it means the financial analysis of an investment opportunity. So it was the easiest book in the world to write because I just pulled out my spreadsheet that we use to underwrite deals, which is available to download for free on our website as well, which we could talk about later. But I pulled out my spreadsheet and I looked down every input right from as basic as purchase price, age of the property, rents, expenses, debt. And I just went one by one down the inputs and wrote about it. And just a straightforward guide of, okay, for this is the general guidelines. This is how we think about it. This is how we think about risk. This is how we think about partnership, structures, the waterfall. And so, that it's really the most comprehensive guide to really underwriting whether it's your first deal that you're looking to underwrite or you know, your hundredth deal. I've heard positive feedback from people who have you know, more experience than me in the business. So that's really great.

JW:

[Jake] Yeah. And I think what's worth pointing out, right, is that like, you started off with your spreadsheet, right? And you went through it and it turned into an entire book. Obviously that means that the spreadsheet itself is not like just some simple calculator. There's a lot of inputs and we talk about this a lot on the show. Specifically is that there are certain things on that spreadsheet that could change by like decimal points that make a big difference for example, cap rates right in and out. Cap rates, like decimal point changes there have a big impact on valuations of the property. Rent growth, you know, interest rates. All of these things make a big difference. I guess as you wrote the book or one Jake you're doing due diligence or the underwriting yourself, what are some of the things that we should be looking out for?

RB:

[Rob] Yeah. If you're wearing your limited partner hat and you're looking at a deal, and even if you're looking at the sponsors model that's a really great place to start. You don't necessarily have to go out and do your own underwriting. You can, and it's really great to do that, but, at the end of the day, a limited partner or passive investor is looking to leverage their time and not, you know, create a side hustle. 1.) But I think step number one, as I mentioned, is looking at the sponsors model and that could be even a problem, right? There are some sponsors out there that are protective over that, and they won't let you see that. I view that as a red flag. So that would be kind of step number one and for me, at least, a disqualifier, I would say, well, if you're not willing to show the model I think is potentially indicative of other bad traits that I'm not interested in. So, but beyond that, looking at the model, I would like to see really zoning in, honing in on rent comps, and, which is really hard to do because they're so time consuming and so specific. But if you can look at the projected rents and understand, okay, how are we going to get to those projected rents, right? What is the business plan to get this, to get us there. Is it interior renovations? Is it simply that the market has grown so much that there's an opportunity there just to mark rents to market really without renovations? That understanding what the play is and then seeing the feasibility of it based on rent comps, and so looking, okay, well, the deal down the street, right? The home run situation is the deal next door has the rents that you're projecting, and it's based upon the fact that the deal next door has updated kitchens, new paint, new flooring, and then you're gonna do the same thing, right? That is such a understandable business plan that you can wrap your arms around, and that's what you wanna see. If you are looking at the rent comps and you know, the renovated assets are lower or the business plan don't match up or even something that could work but a bit more speculative is, let's say none of the other properties in the neighborhood have the renovation scope that you're planning for, and you want to go and dial in these units and do a big renovation and seek these top of the market rents. It could work, but it's more speculative and therefore more risky. So just understanding what the business plan is and how is it supported by the rent comp. That's, I think is a very sensitive thing, like you said, decimal points or basis points can affect the outcome of a deal dramatically when it comes to exit cap rates, for example. Well, even just $10 on your projected rents one way or the other can really have a big impact as well.

JW:

[Jake] Yeah. And we really hit this point a lot and I will keep hitting this point, is that you should, if you have questions, you should get in and look at these things, right? To your point, if the sponsor's not willing to share the full model with you and I get it, there are some sponsors that have created kind of like the condensed version of the model, right? Is like, you don't need the 50 sheets. You know, here's a couple that are the output of all of those. So you can see. I'm not saying that's not an unreasonable way to look at it, but there are a lot of assumptions that go into the value add play or how you're gonna operate this thing, or like why you think there's value in it, right? Cause if you're just gonna buy it and do nothing, like, you know the value's effectively the same, right? There's not a whole lot of play. And that's a more of a class A play, right? Like you're just gonna hold it for a while. But you should get in there and ask questions. And I think that like when you understand some of these things like rent growth, cap rates and all these things, you should be able to use some of your common sense to be like, does that even make sense? Like, okay, you're showing rent growth. Okay. And then they, you know, clearly highlight like next door, like this is what we're looking to do. Very similar property. They did renovations, they're getting this. That makes a ton of sense. And to your point, if they're like, nobody's getting this type of rent growth, but man, we were really gonna upscale these renovations and we're gonna go in hard, like there's nothing to support that. Doesn't mean it won't work. But I think I would look at that and take that with a little, a healthy dose of skepticism and say like, is that the best plan? And then like, if you start seeing those things like keep peeling back the onion, right?

RB:

[Rob] Yeah. I mean, like you said, it could work and it's something that I'd absolutely be potentially willing to invest in, but I would need to see a return that is commensurate with that risk, right? If I can invest in kind of that straightforward play and get a 14, 15% return, well, for kind of the more speculative deal, I need a 16, 17% return, right?

JW:

[Jake] So let's take it at a different level. Same thing. We're still underwriting, but we're looking at debt, right? Debt is a really key component of the way these deals pencil out, and we're in an interesting situation now where like the debt markets are, they have no idea what's going on. So, I'd love to get your perspective on if you're looking at a deal from a debt perspective what we should be eyeballing?

RB:

[Rob] In my opinion, debt is the single largest source of risk in a deal. So, you could take the same exact deal. You know, by putting two different debt structures on it, you could make it really risky. You could make it not risky at all. So, debt plays a major role in risk. And like you mentioned, in today's changing environment, debt's changing every week and that's really putting a lot of stress and pressure, I'd say on sponsors. It's affecting investors, of course, but sponsors are the ones that have to bear the responsibility of the delta. So, if the changes in the debt market from when the deal was originally put under contract and agreed upon to actual closing you don't want to get stuck having yesterday's assumptions and then having to execute on today's debt. So, that's a scary thing that we've been dealing with. But we've been creative and diligent, been working with a lot of lenders. It's caused us to really expand our universe of lenders tremendously to go and find the right product for us. And, you know, something that we're executing right now, we just closed a deal last week and we're doing another deal with the same lender and it's a unique you know, bridge loan out there where it's a fixed rate loan, but it's a bridge. So we have the flexibility for exiting and that's important to us because we generally don't like to lock ourselves in to long-term financing with an expensive prepayment penalty because we like to opportunistically exit, whether it be through a sale or refi. And if you have yield maintenance, that can be almost impossible, that can be impossible at times. So, those are some of the factors at play. Obviously, floating rate debt is affecting our existing portfolio, right? We have floating rate debt in our existing portfolio, and then it's causing us to be more thoughtful about putting new floating rate debt on acquisitions.

JW:

[Jake] So, one thing you said that I want to make sure that we dive in a little bit deeper on is the sponsor's really responsible for the delta and the change, right? So, if you had an assumption based off of yesterday and things change, you know, as a limited partner, you'd be like, oh, that's great. You know, I've got my pref return and all this stuff, and basically the sponsor's gonna have to eat that. One, I want to kind of explain what that means a little bit and why the sponsors responsible for it too, and then two, maybe kind of dive into like why that adds risk to the deal.

RB:

Rob] Sure. Well, I'll give you an example of the deal that we closed last week is we put it under contract at, you know, right at the time everything started changing in the debt market. So we had made, just to keep things simple, we had made an assumption of a 4% interest rate on that deal, and by the time we closed, the interest rate ended up being four and a half percent. So, that change affected the cash flows and the returns. Also, on top of that, the amount of debt that the lender was willing to provide went down and we were already projecting. Bringing the debt amount down was not the worst thing ever because it lowered the risk of the deal. So that is a good thing and that's a change in strategy that we've been doing across all of our deals, which is just lowering leverage. You know, in times of uncertainty. Using less leverage is a great way to mitigate risk. But on this deal, having that change, right? Obviously we know that leverage cuts both ways. And so, when you have projections to the upside, leverage amplifies those projections and makes the returns even greater. And then as you reduce leverage in your model, it's going to reduce the returns. Long story short, the changes in the debt structure resulted in our projected returns for investors to go down. And the reason why I mentioned kind of that the sponsor being responsible for the Delta, is we went out to our investors and said, Hey, here's how the numbers have changed since you know, you've originally committed to this investment and in light of this, we're going to adjust our partnership structure to give you more share of the profits so that we can get you as close to being back to where you were on our original projections. And you know, of course we didn't have to do that necessarily, but it is just something that we felt that we needed to do in order to be true to our investors and think long term. You know, this is one deal that we're doing out of a hundred that we will do in the next hopefully 10 years or 20 years. So, I don't want to get caught up on making as much money as possible. And this deal, it's about building these long-term relationships. So I guess that's a long explanation about the, you know, being responsible for the Delta.

JW:

[Jake] But I guess let's talk about why that, you know, could be potentially risky for your partnership with your sponsor. Well, let's just say you didn't, right? Like you just said, okay, look, I mean, the world has changed and we're all gonna have to share in this. There's some downside to just pushing it all on the sponsor and hoping for the best, right?

RB:

[Rob] Yeah. I mean, it's their choice to invest. So you could look at the situation and say, well, hey, you're a big boy and the world changed and we're all going to deal with it together. I think that is sometimes that's what has to be done, right? The sponsor can't always save the day. So investors, of course, bear risk. Like, it would be unsophisticated for a limited partner to just assume that the sponsor can protect them from everything at all times, right? It's a real world out there, and the economy, if it's changing it's a tsunami and it's difficult to be insulated against it. So I think it's important for limited partners to understand that. You know, the game that we're in is heavily market dependent and making sure kind of, it goes back to that risk factor. Making sure that the sponsor and the deal are in a position to ride out downturns is really the key because if your downside is okay, well we have to hold the deal longer and eventually be able to sell for our profit, that's fine. But if your downside is being forced to sell in a down market and potentially losing capital, that's not fine.

JW:

[Jake] Yeah, I think, I mean, you hit the nail on the head, right, is that it is a business, it is a partnership and like you said, like you know, for you, you made some decisions because you were looking at the long term relationship value. But it works both ways, right? Like you don't want to just assume that like, Hey, I'm just gonna punt this off on the sponsor, or the sponsor's willing to take it. That's great. You know, again, like part of your diligence is if I'm looking at a sponsor, I wanna know that they're gonna make it right. Like there's gonna be some ebbs and flows in market cycles, that's gonna happen. And I don't want everything to be by the skin of the teeth and like hoping that like, okay, well the next deal, right, we'll get we'll make it up on the next deal. Like that. The deal needs to work by itself. Right? And I think that you as a limited partner need to be thinking about like, okay, how is the sponsor gonna survive? I don't mean that in like a bad way, but like, you want them as your partner. They're the ones that are, you know, they have a lot more upside on the back end for doing a great job, but they bear a lot of risk during kind of the early phases of a deal, and you want them to be successful and that is really important. So, I kind of wanted to call that out, is that yes, it might be great that you can just say, hey, we'll just, we'll absorb it on our side. You're the limited partners. You are expecting this, you know, an 8% pref and a 15% irr and we've remodeled it and it's gonna work. But if you remodel it and you look and you're like, oh man, the sponsor's like, well, that's razor thin over there. Like how they're gonna support this thing with cash flows and everything like, you don't want that either, right? So it is a partnership. You know, you've gotta look at the way the markets and the cycles are gonna work and if you have a great relationship with a sponsor, they're gonna take care of you and vice versa, right? Like there is a little bit of give and take 'cause you are partners in the deal.

RB:

[Rob] Yeah that's a good point. And I think a lot of that has to do with, for example, the asset management, right? If I'm a limited partner, I wouldn't want to go to a sponsor, say, well, you know, you should subordinate your asset management fee until I get my return that I'm happy with. Or you should just cut it in half to make the deal look better because sponsors need cash flow just as much as investors need cash flow. And arguably sponsors need cash flow more than investors because hopefully an investor is investing, you know, excess savings that they don't necessarily need at that time, but for the sponsor to keep the lights on, to be able to afford to pay the salaries of their asset management team and to grow their business right, that it's really hard to do without that. So, on the promote side, on the backend, when you sell, you know that's a different story. Everyone's winning and maybe you could decide how to share the profits there. But as far as fees you know, of course fees can range and they need to be reasonable, but they do need to support the business.

JW:

[Jake] Yeah, I mean the key point is I want to see a good business plan that keeps the asset, like, I want there to be asset management. I want somebody looking over that. I don't want my sponsor being so razor thin that they have to go do the next deal to keep this one afloat. And that is a potential risk, if you're looking at deals, the market is competitive, I guess, for investors, and there are sponsors out there that will do whatever they can. And again, this even gets back to the underwriting of like small percentage tweaks. And some of these spreadsheets can make a big difference. A projected return could look a lot better with one guy versus the other. And one is saying like, look, we've got a conservative plan of how we're gonna operate this asset. And that's how we feel comfortable operating. So like we can absorb some of the downturn and we'll share in the upside and everything's gonna be great. And then some guys will just be like, Hey, we're gonna run it razor thin. And another good example would be, let's say you have a renovation plan for a project. If all that money isn't capitalized at the outset, like where's it gonna come from? That's kind of like hopes and dreams, but like when you do that and you're saying like, well, hey, I didn't pull it down in debt. I didn't pull it down in equity, so therefore right now I'm not having to model it out. And those returns going back out, like all the, yeah, of course the returns are gonna look better, but like, How you gonna do that? Especially in today's market where like there's no certainty that you're gonna be able to go out and get debt and you surely don't wanna do capital calls . RB: [Rob] I mean, we're talking up a couple of other good points. If you give away the farm as a sponsor on a deal and you've got a portfolio of other deals, you're gonna say, well, why should my asset management team slave away on this one deal that we don't really have much upside in because we gave it away. Right. So that's to add on to your point about that you want your sponsor to be incentivized to succeed. That way it aligns interest. I think that's where you were going with that as well. [Jake] Yeah, that's exactly right. So I think, you know, as we kind of get to the end of the show, is there anything else that you think is worth sharing that would make this episode complete for you?

RB:

[Rob] Well, you brought up something that I'm really passionate about, which is this idea that, you know, you and I could maybe be doing the exact same deal, but I could be showing numbers that are way more aggressive and you're showing conservative numbers that are much more reasonable, but it's the same exact deal, right? The deal's the exact same, but investors, I hate to say this, are more likely to invest in my deal than your deal. Because I'm showing them what they want to hear, which is these big aggressive numbers. And so, my pet peeve is when investors tell me, oh, thanks for sharing this deal. You know, I'm looking at other deals that, where the return is higher, so I'm gonna pass on your deal. I get that and appreciate hearing that. If I know that the investor is sophisticated and knows the business better than I do. But if I'm hearing that from a past investor, I know that they're just being lured in by sponsors who are willing to be more aggressive with their numbers. And it doesn't have to be egregious, but it could just be on the fringes with, you know, like you said, small tweaks and then underwriting. So, I really don't know how to combat that, but that's just the reality of the market and I think we are underwriting and putting deals together in with the mind to under promise and over deliver. And that's, again, that's really long term thinking because in the short term you're penalizing yourself, but in the long term you're saving yourself hopefully from having those conversations where, hey, you've promised us the world and it's not working out.

JW:

[Jake] Yeah. And I'm gonna try and frame this up and you can hold me accountable on this too, is that, let's just say like, we both have the same deal, right? And like, literally it's the exact same deal and we're both saying, Hey, I'm gonna give you an 8% pref and it's gonna be a 70-30 split. Same exact deal, however, You could model out numbers on your spreadsheet that just show a much more aggressive IRR and return and all of these things along the way where at the end of the day, like when we finish the project, it is what it is, right? Like the returns are gonna be what they're gonna be, and like you and I are gonna pay the exact same thing to our investors. It's not because my spreadsheet had lower numbers. I modeled it conservatively. You modeled it aggressively. Your show higher numbers. Maybe you were right. Maybe I was right. But like, when it's all said and done, like it is the exact same deal. Is that what you're explaining?

RB:

[Rob] Yeah, exactly.

JW:

[Jake] Okay. Yeah. Cause I mean, I think that is super key. And to your point is like how do you bring things to some level of reasonability. You know, between looking at deals and saying like, okay, is it a 8% pref, 70 30 split? Same thing. And then you're looking at the numbers. It's like, okay what are the cap rates? What are the in cap rates? What are the out cap rates? All of these different things you as an investor should be looking at. And hopefully, you know, with a framework, you can look at it and say like, okay, well, I see why it's different. But at the end of the day, it's not like you're gonna be like, well hey, you know, I get to say, well good, I'm gonna pay you less 'cause the deal performed better. It's like, that's not how it works.

RB:

Rob] Yeah. And it's a bit of a market dynamic where if a sponsor is projecting certain numbers, but they're not getting as much investor capital as they'd like, and they see the guy down the street projecting higher numbers, they might then, Feeling the pressure and say, well, we need to get more aggressive with our numbers and show higher numbers so that we can get some capital. And then this other person comes into play and says, well, I need to get aggressive too. So then you see the sponsors creep creep and how aggressive they're being with their numbers to kind of appease investors. So it's something that I think is really important, which is exactly what you and I are doing right now, which is educating your investor base to get them to understand reality and what is reasonable as far as return projections. You know, when I hear someone say, oh, I've got this conservative deal, yada, and it's 20% irr, it doesn't exist. I don't know what you're talking about. So I think it's super key to be educating your investor base so that you don't have to play that game of trying to compete on higher returns when we know that's not realistic.

JW:

[Jake] Well Rob, thank you so much for being on the show. I learned a lot. I love getting into the geeky stuff, you know, really talking about spreadsheets and everything, so thank you for sharing. You know, guys, we'll put it in the show notes, but check out the book. Like Rob said, there is a free download, like you can actually get his underwriting model. Rob, do you want to share how they can get that?

RB:

[Rob] Yeah. Check it out on our website, lscre.com. It's on the homepage you can find the underwriting model download. There's also links to more resources like our monthly articles that we post as well as the book on Amazon.

JW:

[Jake] awesome. Well, Rob, thanks again for being on the show.

RB:

[Rob]Yep. Thanks a lot.

JW:

[Jake] I hope you've enjoyed today's episode and I'd actually love for you to contribute to a future episode. If you have a question you'd like answered or a topic or a guest to bring on the show, please email me at jake@thelimitedpartner.com. Now, I realize there is a lot of lingo that's thrown around on these shows, so I've created a cheat sheet for you with the top 26 terms that come up most often. Head on over to thelimitedpartner.com/lingo for the list. Enjoy and we'll see you next time.