JF1837: Investment Spreadsheet Mistakes, Monetizing Hotels, & BRRRR Key Models #FollowAlongFriday
Joe has another round of Best Ever Lessons to share with us today from doing the podcast interviews last week. Theo has another trivia question, be the first to answer correctly and receive a free copy of their first book. The lessons this week are coming from Peter Knobloch (http://www.pknobloch.com/), Nicole Stohler (https://www.therichergeek.com/), and Ali Boone (https://www.hipsterinvestments.com/bestever/). If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast, where we only talk about the best advice ever, we don’t get into any of that fluffy stuff.
We’ve got Follow Along Friday today, with Theo Hicks. Theo Hicks, hello sir.
Theo Hicks: How’s it going, Joe?
Joe Fairless: It’s going well. Follow Along Friday, as a refresher, Best Ever listeners, we’re gonna go over stuff that I learned through the marathon of interviews that I did last week, on last Thursday; that’s when I do all my interviews, one day of the week, and that is on Thursdays usually. I’m gonna pull some things from those conversations and talk about them, because I think they’ll be helpful for you, and because those episodes won’t be airing for a handful of months from now.
The first one was with Peter Knobloch. He’s a third-generation real estate investor, and he’s got experience in multifamily office space, hotels, restaurants and sporting clubs… And one thing he talked about – because he’s really honed his expertise on underwriting – is he built his own underwriting analyzer from scratch, and he said one mistake make when they’re creating those spreadsheets, and even one thing you should look out for when you’re purchasing the spreadsheet… I don’t think his is for sale either, so it’s not like he was trying to sell his or anything, I don’t believe… He said make sure that you have the ability to put in when leases expire for each of the units that you have.
This is assuming we’re talking about an apartment community, but the same principle applies for office and retail. And he said the reason why is a lot of calculators have an assumption that when you increase rent by X amount for renovations, you’re gonna renovate units, it assumes that you’re gonna do all of them at the same time, but in reality everybody listening to this conversation knows – and Theo, you know – that it doesn’t happen magically overnight, it happens incrementally, as leases expire. And it’s important to be able to plug in when leases are expiring into your calculator, that way you can have a true staggered approach for what reality looks like, versus what you would ideally like, which is all at once at the beginning of the year.
Theo Hicks: Yeah, one hundred percent. Another way to go about doing that without having to plug in all the lease expiration days in the cashflow calculator is to have in mind how long you think it’s gonna take to renovate all these units – 12 months, 18 months… Obviously, it’s not gonna be zero months; it’s not gonna be you buy the property and instantaneously every single unit is renovated [unintelligible [00:04:44].20] when you’re underwriting in the beginning – obviously, you wanna do this eventually, but it’s to assume however long it’s gonna take, let’s say 12 months or 18 months, and then make sure that the rent is gradually increasing from day 0 to month 12. If it’s 12 months, by one-twelfth, so if the overall rent increase is gonna be $12,000, then each month it goes up by $1,000, rather than $0, $0, $0 and then all of a sudden up $12,000… Because that will mess your model up.
I did wanna mention too that that’s kind of an advanced underwriting tip. Me and you did do an episode where we talked about some other advanced underwriting tips. That’s episode 1445, and then we continued at 1480. So we did ten tips — I think we did two episodes; the first episode was the first five tips, the second one was the next five tips. I don’t think this was one of them, so I guess now we have 11 advanced underwriting tips.
Joe Fairless: Theo, I love how prepared you are. Busting out with the episode numbers…?
Theo Hicks: I just pulled that while you were talking about it.
Joe Fairless: Man… You’re the man, nice job. We’ve got a professional show going on right now, I love it.
Theo Hicks: We do, we do.
Joe Fairless: Let’s keep going and see what else Theo has in store for us. The next insight I got from last week’s interviews – Nichole Stohler. She’s the founder and host of The Richer Geek Podcast. She’s got over 90 units and has a 64-room hotel under contract. Her focus is not multifamily, it’s hotels. I don’t know a whole lot of people who are focused on hotels, and I wanted to talk to her about why she likes hotels. She gave some examples or some reasons why, and she said you have higher profitability per room versus multifamily, with hotels.
She elaborated more on that and she said “Because you can monetize hotels, because they have a different clientele than, say, C-class apartment communities.” She said you can offer free Wi-Fi, but then you can have an opportunity to upgrade that Wi-Fi. And as most of us have noticed on planes, when you go buy Wi-Fi, a lot of the times it says “Here’s free Wi-Fi, or here’s a set price for Wi-Fi if you just wanna browse the internet, and here’s a higher price should you want to watch movies or download larger files.” Same concept here.
She said other ways to monetize hotels – when someone logs into the Wi-Fi, you can have a splash page, and then sell advertising to local restaurants on that splash page.
Then she got to other examples, like there’s a breakfast space that you can rent out for events when it’s not being used… She gave a list of things. But one thing it made me think of is some of these concepts don’t just apply to hotels, they also could apply to multifamily. For example, the splash page example made me think of – well, okay, most hotel guests are logging into Wi-Fi, and they’re being exposed to this advertising… What about apartment communities? What do most apartment residents do? Most of them pay their bills, so how is the rent presented to them, and is there a way to incorporate some sort of advertising component to that and sell that space? So if it’s an online bill, does it have to just be an invoice, or something that is sent to the tenant on some accounting type of template, or can it be something that also has a local restaurant?
This isn’t gonna be big bucks, unless you have a large apartment community, but you could drive some incremental revenue, and you could also be giving your residents some exclusive discounts to these restaurants, so it could help with your retention, which I would argue would be more valuable from a bottom-line standpoint than any type of advertising dollars you’ll receive for selling that space.
Theo Hicks: Yeah, it’s always interesting to hear how other seemingly completely disconnected real estate niches are able to – in this case – monetize to make money… And then try to pull the underlying concept of how they’re doing it and see how you apply it to real estate. You did exactly that. The free splash page – the underlying concept is just advertising. So what ways can you incorporate advertising into your apartment to make more money? Your example was to somehow have an advertisement on maybe the portal that is used to collect rent.
Another example I remember from the podcast way back in the day was someone put up a billboard on the decor of one of their buildings and leased that up for advertising dollars.
So for these three right here – the Wi-Fi upgrade is offering some sort of upgrade, so what can you offer at your apartment that’s typically free or not expensive, and then something else on top of that. Maybe it’s a regular unit and a furnished unit. Maybe you can somehow offer a free Wi-Fi upgrade or a cable upgrade, or something like that.
Then the other one was the events. If you have a big apartment community, you might have a really nice clubhouse, or a really nice business center, or a conference room that you could rent out to people who live there – for not a lot of money, but for whatever event they want to put on… So kind of looking at these types of things at a deeper level I think is good, and it’s exactly what Joe just did.
Joe Fairless: Yeah. Even if it’s $1,000/month extra, which might not seem like a lot… But $1,000 at an 8-cap, that’s $150,000 worth of increased value that you created for your apartment communities. $1,000 times 12, $12,000, divided by 8 (8%), is a $150,000. So you can see how by doing a handful of these extra things you get well into six figures, and even into seven figures, just by being more intentional about it.
Lastly, Ali Boone, founder and owner of Hipster Investments – she was interviewed on our podcast five years ago. Episode 40. Four zero. Craziness. Just craziness. I remember interviewing her… I was in New York City in my East Village apartment, in my bedroom, which was the size of a shoebox; my bedroom only had space for a bed and a dresser where I put my clothes, and I had a closet… So I either did my interviews literally with my head sticking into the closet, with pillows all around me, that way the noise from the city – the windows were right there – wouldn’t distract listeners, or I would just do it sitting on my bed, because I didn’t have a desk, and there was no living room in that apartment that I lived in for nine years… So it just brought back memories…
But the thing that I learned from this episode with Ali – five years now since the last time I spoke to her on the show – is she has an idea for doing a combo of a BRRRR and turnkey deal… So BRRRR Key could be a term; I’m not sure about that, but just combining those two, that’s what I came up with… Or maybe she came up with it.
The way to do it is talk to turnkey providers and say “Hey, can I fund the renovations? And I’ll be at risk if the renovations go over”, but at least this way you’re getting some of the upside on these renovations. And my question to her was “Well, I thought that’s where the turnkey companies made their spread.” If I’m a turnkey company, I make the money by finding deals that are undervalued or distressed, renovate them, make the spread on the construction, and then whenever I sell it retail to the investor… And she said I’d be surprised by how low those margins are for turnkey companies. So they don’t really make their money as much on the spread, but more on the management.
So there’s that… If that’s helpful for anyone who’s working on those types of deals, then perhaps look at doing a turnkey/BRRRR Frankenstein approach.
Theo Hicks: Is this something she has done, or it’s just an idea that she had in her mind?
Joe Fairless: I should know the answer to that question; I don’t remember, during our conversation… I’m 90% sure that she has multiple people who have done this. I’m 90% sure, because I think we talked about it… But for some reason I can’t 100% recall.
Theo Hicks: But definitely an interesting strategy, and just kind of another unique, creative investment strategy. It’s always interesting… Something else I wanted to say, too – just kind of off-topic a little bit, but I love the titles you had on your earlier episodes. They’re great. [laughs]
Joe Fairless: Oh, yeah… Yeah, you’re referencing what I titled episode 40, which was “Love is in the air…” [laughs]
Theo Hicks: I love the show notes, because I remember for the first book we went through the first hundred episodes, and the titles are great. [laughter]
Joe Fairless: You really have to think long and hard about what I’m actually talking about when I wrote those titles. They’re not intuitive for what it is… But yeah, that was me doing titles.
Theo Hicks: Heck yeah, I like it. Alrighty. Great lessons, as always. So this week’s trivia question – if you’re the first person to get these trivia questions correctly, we’ll give a free copy of our first book. Submit your answer either on the YouTube comments below if you’re watching on video, or if you’re listening to this on the podcast, you can just email us at email@example.com.
Last week’s question was “What is the best city to work in tech in 2019?” This was based on not just how much money you get paid in tech, but it was based on the cost of living in that location, the tech employment concentration, so the proportion of the population who’s employed in tech, unemployment rate, ratio of average pay to tech pay… And the answer was, surprisingly, Columbus, Ohio.
Joe Fairless: Huh. Alright… What did I say, do you remember? It wasn’t Columbus. Oh, I said Pittsburgh.
Theo Hicks: Yeah, you said San Francisco first, and then you said Pittsburgh, because I mentioned all the caveats.
Joe Fairless: Yeah.
Theo Hicks: This week’s question is “According to the most recent census data, what city grew its millennial population more than any other city?”
Joe Fairless: Okay, so it’s percent increase, not total number, right?
Theo Hicks: It’s actually total number.
Joe Fairless: Okay. Grew millennial population, total number… I’m not gonna say anywhere in Florida. There’s a lot of people moving to Florida, but I think they’re a bit older. Although millennials – hell, I’m a millennial and I’m 37 years old, so I’d say I’m old, too…
Theo Hicks: [laughs]
Joe Fairless: Let’s go with Dallas-Fort Worth.
Theo Hicks: Dallas-Fort Worth. Alright, so the first person to get this correctly will get a free copy of our first book. YouTube comments, firstname.lastname@example.org.
The last thing – very apt, because we talked about underwriting earlier in this episode – is the free apartment syndication resource of the week… And this week’s resource is related to underwriting. Series number 14, 8-part series – so eight different episodes where we talked about how to underwrite a value-add apartment deal from start to finish… I really enjoyed recording that, because I like underwriting… That starts at episode 1653, and then the eight Syndication School episodes after that as well, and the free document is the Simplified Cashflow Calculator. This is — we’ll call it a basic, standard template to underwrite a value-add deal. So you can underwrite a value-add deal to completion, but some of the assumptions are locked in, and we’ve got those assumptions on the cashflow calculator.
The purpose for it is to, firstly, give you something to start with, so that you can underwrite a deal starting today, but secondly, it’s recommended for you to create your own model, and customize it based on your specific business plan, how your mind works, your experience level with Excel, things like that… And it’s also something you can use as a starting point, without having to input every single thing yourself.
So that’s the simplified cashflow calculator, available for download in any of those episodes. But I would just go to episode 1653, or you can just download it in the show notes of this episode.
Joe Fairless: Best Ever listeners, I hope you got a lot of value from our conversation, and we will talk to you tomorrow.