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#91 Multifamily Brokers vs. an AI Real Estate Quiz (We Got One Wrong) · Own More Doors

• 0:03
  SPEAKER_00: Did we want to get it wrong?
• 0:06
  SPEAKER_00: Cody and I spend all day analyzing deals, but today we're gonna go head to head, toe-to-toe over a seven-question trivia challenge that was created by AI.
• 0:14
  SPEAKER_00: Let's get into it.
• 0:16
  SPEAKER_01: Is a lower or higher GRM better for a buyer?
• 0:20
  SPEAKER_00: Lower.
• 0:21
  SPEAKER_01: I agree.
• 0:22
  SPEAKER_00: If you're a buyer, the lower GRM is gonna be better for you in most cases.
• 0:27
  SPEAKER_00: GRM stands for gross rent multiplier.
• 0:29
  SPEAKER_01: GRM is one of the metrics we use to analyze apartment buildings.
• 0:32
  SPEAKER_01: And uh it's a really simple metric, it's just the price divided by the gross rent seed collect in a year, and it'll spit out a number.
• 0:39
  SPEAKER_01: So if you had a million dollar property, bringing in 100 grand, divide a million by a hundred and spit out 10.
• 0:44
  SPEAKER_01: So another way to think about that is you're paying$10 for every dollar of income that your property generates.
• 0:50
  SPEAKER_01: So obviously, you want to pay less for that stream of income.
• 0:53
  SPEAKER_01: So the lower you can get that GRM, the better.
• 0:56
  SPEAKER_01: There's some nuance to that.
• 0:57
  SPEAKER_01: If a building has upside in rents, sometimes paying a higher GRM on the front end is okay because you can get it lower on the back end.
• 1:04
  SPEAKER_01: But in general, lower is better.
• 1:06
  SPEAKER_00: The GRM or the gross rent multiplier is gonna be market derived.
• 1:09
  SPEAKER_00: And so if you're watching this video from Ohio, we do appreciate our Ohio fans.
• 1:14
  SPEAKER_00: Um, your GRM is gonna be different, and you might say, well, what's the GRM in my area?
• 1:19
  SPEAKER_00: And we would say, well, see what properties are selling for.
• 1:23
  SPEAKER_00: Um, do the analysis.
• 1:24
  SPEAKER_00: It's a simple division.
• 1:25
  SPEAKER_00: It's just take the price, divide it by the gross rents, and you're gonna start seeing a number.
• 1:29
  SPEAKER_00: Now, in most areas, that number is gonna be pretty tight.
• 1:33
  SPEAKER_00: In a city like Long Beach, that's very big, and our areas do change in near our more desirable areas near the beach, that GRM is gonna increase.
• 1:42
  SPEAKER_00: And that's normal for that area.
• 1:44
  SPEAKER_00: Where in the less desirable parts of Long Beach, you're gonna see that GRM come down.
• 1:48
  SPEAKER_00: So typically, if you're a buyer, you want to go lower.
• 1:51
  SPEAKER_00: It just means that you're spending less for the amount of income because ultimately, really, what you're buying is the income stream that the asset is giving you.
• 1:57
  SPEAKER_00: But I could tell you this a lot of times when someone calls me and says, um, you know, they want to know what their eight unit building is is worth, sometimes I'll check with Cody and I'm like, hey, what would you say the gross rent multiplier is in the PCH magnolia area?
• 2:10
  SPEAKER_00: Cody knows the market very well and he'll he'll spit out a number.
• 2:13
  SPEAKER_00: And so although, although it seems very simple, it is very accurate.
• 2:18
  SPEAKER_00: So there you have it on GRM.
• 2:20
  SPEAKER_00: Question number two for strong cash flow, do you want a higher or lower cap rate?
• 2:26
  SPEAKER_01: You want a higher cap rate.
• 2:28
  SPEAKER_00: Higher cap rate.
• 2:29
  SPEAKER_01: Uh so if you're not familiar with cap rate, it's another metric that you use to analyze apartment buildings.
• 2:34
  SPEAKER_01: It's just the net operating income divided by the price.
• 2:38
  SPEAKER_01: If you were to buy a building all cash at a 6% cap rate, you'd basically be making 6% on your money from the cash flow that the building generates.
• 2:48
  SPEAKER_01: So in a city like Long Beach, you'll see a range of cap rates.
• 2:52
  SPEAKER_01: So we have very nice coastal neighborhoods, like A location, like film on shore, that'll trade at a lower cap rate.
• 3:00
  SPEAKER_01: And then we have other areas that are not as nice that'll trade at a higher cap rate.
• 3:05
  SPEAKER_01: You have to make sure you're comparing apples to apples.
• 3:09
  SPEAKER_01: Like uh just just because a building is spitting out a really high cap rate, um, you have to make sure you know what comes along with that.
• 3:18
  SPEAKER_01: So you'll be usually in a rougher location, um, maybe an older building.
• 3:23
  SPEAKER_01: But yeah, those are those are nuances that um take some time to understand.
• 3:29
  SPEAKER_01: And so why don't I look at buildings every day?
• 3:31
  SPEAKER_01: We we help guide people through that when we're looking at cap rate.
• 3:34
  SPEAKER_00: When it comes to cap rate, now we've done uh several long form videos that are that cover cap rate only, but just to give you guys a quick oversight, and some of the mistakes that I that I see is people sometimes will will uh not not subtract what should be subtracted from the gross rent income.
• 3:52
  SPEAKER_00: So the gross rent income is where we're gonna start.
• 3:54
  SPEAKER_00: And from there, we're gonna go through the your typical operating expenses.
• 3:59
  SPEAKER_00: So whether Cody owns it, whether you own it, whether I own it, the expenses should be the expenses.
• 4:04
  SPEAKER_00: So the property taxes should be the same.
• 4:06
  SPEAKER_00: The insurance, for the most part, should be the same.
• 4:08
  SPEAKER_00: Maintenance would kind of be the same that were property management.
• 4:13
  SPEAKER_00: The one thing that we don't include, and people make the mistake, is they want to include mortgage.
• 4:17
  SPEAKER_00: And that's one thing that we do not include that comes after what we call the net operating income.
• 4:22
  SPEAKER_00: And so those are some of the some of the basic operating expenses that go through before we get to the NOI.
• 4:29
  SPEAKER_00: And the NOI is the important part because that's what you're gonna divide by price or by the cap rate.
• 4:34
  SPEAKER_00: And so watch our video where I talk about Uncle Irv and I show you guys a simple formula.
• 4:40
  SPEAKER_00: Um, a lot of people like to complicate cap rates, doesn't have to be.
• 4:44
  SPEAKER_00: We will tell you from a perspective of what's easier to calculate.
• 4:48
  SPEAKER_00: Gross rent multiplier is easier.
• 4:50
  SPEAKER_00: And like Cody has said in the past, cap rates could be manipulated.
• 4:54
  SPEAKER_00: Brokers or owners, what they'll try to do to have a better net operating income is they try to minimize their expenses.
• 5:01
  SPEAKER_00: And if you're watching this video, I think a good rule of thumb in Southern California is if you're looking at an eight-unit building that is submetered for electric and gas, meaning that the tenants are paying those two utilities, the owner doesn't have to take that on.
• 5:14
  SPEAKER_00: It's safe to say that the operating expenses in most cases could be 35%.
• 5:19
  SPEAKER_00: There was a time when Cody and I got into the business and we were kind of the behind uh the napkin math was 30% expenses, but because insurance has gone up, maintenance costs, all that kind of stuff has gone up with an apartment building, we're now adjusting that up to 35%.
• 5:34
  SPEAKER_00: So for the most part, if someone, if you see a property and the broker is not getting back to you, they're ignoring your calls, a good rule of thumb is 35% expenses to be able to get down to that NOI.
• 5:45
  SPEAKER_00: But all in all, if you're a buyer, if you're a buyer, you want a higher cap rate.
• 5:50
  SPEAKER_00: If you're a seller, you want the low cap rate.
• 5:53
  SPEAKER_00: Because a lower cap rate will increase the price.
• 5:56
  SPEAKER_01: What does D O M stand for?
• 6:00
  SPEAKER_00: Days on market.
• 6:01
  SPEAKER_01: Yep, I agree.
• 6:02
  SPEAKER_00: So days on market is important.
• 6:04
  SPEAKER_00: Anytime that we list a property, uh, or if we're looking at a property, uh days on market gives us some some level of um uh it kind of gives us guidance.
• 6:13
  SPEAKER_00: Now, let me give you guys an example.
• 6:14
  SPEAKER_00: If a property has, say, three days on the market, are we gonna lowball that property?
• 6:20
  SPEAKER_00: Probably not, right?
• 6:21
  SPEAKER_00: It hasn't been on the market long enough for us to know whether they're gonna get that price or not.
• 6:27
  SPEAKER_00: I'm not saying you can't.
• 6:28
  SPEAKER_00: I'm just saying at that moment would probably be the bad time to do so.
• 6:32
  SPEAKER_00: What would you say, Cody, when you see a property and it's got 187 days on the market?
• 6:36
  SPEAKER_00: What would you advise your buyer to do?
• 6:38
  SPEAKER_01: Um, I would say, hey, look, you know, this one's been on the market for a really long time.
• 6:42
  SPEAKER_01: The seller might be fatigued.
• 6:45
  SPEAKER_01: Um, now would be the time to try at a lower price and see if we can negotiate and see if they really want to move this thing.
• 6:50
  SPEAKER_01: Because 180 days, um, the broker's probably getting fatigued as well.
• 6:54
  SPEAKER_01: They'll they're probably gonna be pushing to do a deal.
• 6:58
  SPEAKER_01: So um the high day on market properties, if you're looking to negotiate, are are often a good target.
• 7:05
  SPEAKER_00: Sometimes there could be red flags.
• 7:06
  SPEAKER_00: I mean, we've seen days on markets where it's 400 plus days, and sometimes there's legal legal disputes, sometimes families are fighting, uh, sometimes there's issues with tenants and there's eviction stuff going on.
• 7:17
  SPEAKER_00: And so days on market, really good indicator.
• 7:20
  SPEAKER_00: Although the question was simple, um, it does really tell us a lot about what's happening with the asset.
• 7:25
  SPEAKER_00: Oh, I'm glad you get this question.
• 7:27
  SPEAKER_00: Question number four: the 1% rule compares monthly rent to uh the purchase price.
• 7:32
  SPEAKER_00: The purchase price.
• 7:34
  SPEAKER_00: Cody, tell us about the 1% rule.
• 7:36
  SPEAKER_01: The 1% rule, um, this was popular several years ago.
• 7:41
  SPEAKER_01: It doesn't really apply anymore.
• 7:43
  SPEAKER_01: And I don't think it ever really applied in Southern California, but um, it's something that people will ask us or will tell us is one of their goals.
• 7:51
  SPEAKER_01: They'll say, hey, you know, I've been watching a lot of bigger pockets.
• 7:54
  SPEAKER_01: Um, I hear people talk about the 1% rule.
• 7:57
  SPEAKER_01: It doesn't really apply here in Southern California.
• 8:00
  SPEAKER_01: Basically, it's you want um the property to generate 1% of the purchase price in rent every month.
• 8:08
  SPEAKER_01: So I can do the quick math here to tell you guys what the gross rent multiplier would be on that.
• 8:14
  SPEAKER_00: As Cody's work working on that, we we currently have a client, uh, Cody knows who it is, and they will only buy if it meets this metric.
• 8:21
  SPEAKER_00: Now, what we've done, um, you know, we've talked about gross rent multiplier.
• 8:25
  SPEAKER_00: In order to get to the 1% rule, um, I think we've got to the point where the gross rent multiplier has to be under 9%.
• 8:33
  SPEAKER_00: It has to be like 8.6.
• 8:35
  SPEAKER_01: 8.3.
• 8:36
  SPEAKER_00: 8.3.
• 8:37
  SPEAKER_00: So so just to give you guys perspective, it's not that it doesn't apply, it's that it's almost impossible to do in Southern California.
• 8:45
  SPEAKER_00: Not, you know, our our friends out of state, this might be something that they get to all the time.
• 8:50
  SPEAKER_00: But a gross rent multiplier in Long Beach of 10 is really strong.
• 8:55
  SPEAKER_00: And to get something that's at 8.3, we would be shocked.
• 9:00
  SPEAKER_00: In fact, if someone told us that they had a gross rent multiplier on actual rents that was 8.3, um, we would question it very, very quickly and see where someone's fudging the numbers because it's hard to it's hard to find.
• 9:13
  SPEAKER_01: But yeah, no, I think you nailed it.
• 9:15
  SPEAKER_01: Good concept.
• 9:16
  SPEAKER_01: I think it probably works well out of state, just we don't use it here in Southern California.
• 9:20
  SPEAKER_00: Wait, before we go to the next question, make sure to hit that subscribe button.
• 9:24
  SPEAKER_00: We want to continue bringing you value, but show us your support.
• 9:27
  SPEAKER_00: Subscribe today.
• 9:28
  SPEAKER_01: To get approved, do lenders want a higher or lower DSCR?
• 9:37
  SPEAKER_00: They would like a higher.
• 9:39
  SPEAKER_01: I would agree.
• 9:40
  SPEAKER_00: Okay, so lenders do want a higher.
• 9:42
  SPEAKER_00: So let's talk about debt coverage ratio.
• 9:43
  SPEAKER_00: It's really important.
• 9:44
  SPEAKER_00: From a commercial perspective, if you've been watching our channel, you know that most commercial lenders are gonna require a debt coverage ratio of 1.2, in some cases 1.25.
• 9:54
  SPEAKER_00: Uh, DSCR came and and and they gave a a different type of ratio, which allows the the buyer to qualify when it's a 1%.
• 10:05
  SPEAKER_00: Um, for some of you who aren't following, I'm gonna leave it up to Cody to explain what I just said.
• 10:10
  SPEAKER_01: There's a couple categories of loans that Juan mentioned, uh, but to back up a little bit, uh debt coverage ratio, that equation basically is saying the bank wants a certain amount of net income for every$1 that you're paying towards mortgage.
• 10:27
  SPEAKER_01: So when Juan says the bank wants a 1.2 debt coverage ratio, they want to see that the property is bringing in a dollar and 20 cents for every$1 that you're paying towards the mortgage.
• 10:38
  SPEAKER_01: So they're forcing you to cash flow.
• 10:40
  SPEAKER_01: So this question, um, you know, I think the bank would prefer higher than 1.2.
• 10:45
  SPEAKER_01: Um, they have that threshold.
• 10:47
  SPEAKER_01: The metric is there just to um make sure that you're exceeding your loan payments with your net income, and it will change depending on what loan program you use.
• 10:57
  SPEAKER_01: So if you're doing a loan on a five plus unit apartment building, we call it commercial loan, most of those lenders are in the 1.2 to 1.25 range.
• 11:08
  SPEAKER_01: There's another category of lenders.
• 11:10
  SPEAKER_01: Most people refer to them as like non-QM loan programs.
• 11:13
  SPEAKER_01: You can use them on smaller apartment buildings, so two to four units, even single families, I think, or you can use them on five and up.
• 11:22
  SPEAKER_01: They're not really competitive on five and up.
• 11:24
  SPEAKER_01: The benefit with them is that they'll use a lower DSCR.
• 11:28
  SPEAKER_01: So you can go down to like a one where all of your net income is going towards the mortgage payment.
• 11:34
  SPEAKER_01: Um, the drawback is they usually have a higher interest rate.
• 11:38
  SPEAKER_01: So um it's great to work with a loan broker who knows all these programs backwards and forwards and can guide you there.
• 11:46
  SPEAKER_01: Um, sometimes it can make sense to use the higher rate program if it allows you to put less down.
• 11:52
  SPEAKER_01: But anyway, yeah, that's that's a little bit of a peek into the SCR.
• 11:56
  SPEAKER_00: Question six.
• 11:57
  SPEAKER_00: In a 1031 exchange, you defer taxes by reinvesting in a light kind property.
• 12:04
  SPEAKER_00: Correct.
• 12:04
  SPEAKER_00: Reinvesting in a similar property.
• 12:08
  SPEAKER_01: With a 1031 exchange, light kind, I think is a little bit misleading.
• 12:13
  SPEAKER_01: Um, if you sell a house, you don't have to exchange into another house.
• 12:17
  SPEAKER_01: It just has to be a rental property for another rental property.
• 12:21
  SPEAKER_01: So you can exchange from a house into an apartment building or into a triple net commercial property.
• 12:28
  SPEAKER_01: Um, there's there's a lot of different options there.
• 12:30
  SPEAKER_00: With a 1031 exchange, pretty much what the cut what the government wants you to do, it's let me give you guys an example.
• 12:35
  SPEAKER_00: Let's just say you have a triplex and you have$500,000 worth of equity.
• 12:40
  SPEAKER_00: You've been watching our channel and you're like, well, I'm kind of done with this triplex.
• 12:44
  SPEAKER_00: I'm I I need a new project.
• 12:47
  SPEAKER_00: We tell you, look, if we sell the if we help you sell the property, you're gonna come up with half a million dollars.
• 12:53
  SPEAKER_00: If you sell that property and don't buy anything else, the government's gonna make sure you pay taxes, right, on that amount.
• 13:00
  SPEAKER_00: However, the government will allow you to not pay taxes on that$500,000 on the condition that you buy something else.
• 13:07
  SPEAKER_00: Now, the next thing you buy, there's two requirements.
• 13:10
  SPEAKER_00: They want to make sure that it's more than what you just sold, and they want to make sure that the loan is bigger than what you just paid off.
• 13:17
  SPEAKER_00: And so there are some requirements, there's some timelines, but um, all in all, it's a way for someone to reinvest the money that they've already made on another property.
• 13:27
  SPEAKER_00: It's something that we believe in.
• 13:28
  SPEAKER_00: Both Cody and I have done both of these things, and it's a way to continue growing, call it your nest egg without paying taxes.
• 13:36
  SPEAKER_00: Ultimately, we'll all pay taxes, but for now, it's a way to continue growing.
• 13:41
  SPEAKER_01: A lower LTV means the buyer is putting down less.
• 13:45
  SPEAKER_01: Less money.
• 13:47
  SPEAKER_00: Oh, we got this question wrong.
• 13:49
  SPEAKER_00: Uh, instead of editing this portion out, we're just gonna tell you that we got it wrong.
• 13:52
  SPEAKER_00: I think we kind of quickly read the question.
• 13:55
  SPEAKER_00: The question was a lower loan to value means the buyer's putting down and it's either more or less.
• 14:01
  SPEAKER_00: And in this case, um we said less, but the answer was more.
• 14:06
  SPEAKER_01: Yeah, so it's it's kind of confusing.
• 14:09
  SPEAKER_01: So loan to value, um, you'll see people's or you'll see like uh lenders come up with loan quotes and they'll say, Oh, this one's at 70 LTV or 50 LTV.
• 14:21
  SPEAKER_01: Um, 50 LTV uh means that there's only a 50% loan on the property, so the buyer's putting down 50% as well.
• 14:30
  SPEAKER_01: So a 50% loan where the buyer's coming up with the other half for the down payment is less risky for the lender.
• 14:39
  SPEAKER_01: And if we look at it the other way, so if we get a loan quote and it says 70 LTV, that means the bank's putting up 70% of the money, buyer's putting down 30%.
• 14:48
  SPEAKER_01: So there's more risk there for the lender.
• 14:50
  SPEAKER_01: Um yeah, so the buyer usually wants the higher LTV because they can come in with less money down and control that property.
• 15:01
  SPEAKER_00: Most buyers that we work with, they want to put as little down and really do what we call like make money on the bank's money.
• 15:07
  SPEAKER_00: If someone has the luxury of putting 5% down, they're gonna choose five, even if it means that they're sacrificing monthly income.
• 15:15
  SPEAKER_00: Buyers, for the most part, I mean, and I'm the same way.
• 15:18
  SPEAKER_00: I mean, we're we're currently buying a building right now, it's an office building, and through an SBA program, they're allowing us to put 10% down.
• 15:26
  SPEAKER_00: Do I want to put more?
• 15:28
  SPEAKER_00: Absolutely not.
• 15:29
  SPEAKER_00: I'm perfectly fine with 10% down because the way that I look at it is I'm putting very little down and I'm financing the rest.
• 15:35
  SPEAKER_00: And in my mind, I'm gonna be making money on the bank's money.
• 15:38
  SPEAKER_00: And so in most cases, most buyers will want to put less down.
• 15:42
  SPEAKER_00: Every now and then we'll have a client who says, I'm I put 50% down or more on everything I buy.
• 15:48
  SPEAKER_00: That's great.
• 15:49
  SPEAKER_00: And we do have those people, of course, you need to have deeper pockets to be able to pull that off.
• 15:53
  SPEAKER_00: But for the most part, most folks, investors, people just getting started, borrowing as much as possible is the name of the game.
• 16:00
  SPEAKER_01: All right, so not bad.
• 16:01
  SPEAKER_01: We got six out of seven.
• 16:02
  SPEAKER_00: We weren't perfect, six out of seven.
• 16:04
  SPEAKER_00: If you like the show, make sure to like, comment, and subscribe.