The Ultimate Guide to Multifamily Deal Analysis

0:00 [Music] welcome everybody to another episode of multi-family University uh my name is Anna Myers I am so happy to be here with you today and with me is Jay Scott who has been with us before delivered incredible information and we were so happy to have Jay come back with us on the platform with a completely different subject but equally nerdy and compelling which I love so before he gets into his thing I want to let you know that yes this is being recorded and yes he will get a replay um I have to ask Jay will there be a deck a PDF of the deck that will be included I am absolutely happy to uh to

0:47 send over the deck for anybody that wants it great so the PDF will be included with the replay that will be sent out and in the meantime as you're enjoying the presentation feel free to type your questions into the Q a we will get to them at the end of the presentation and answers many of them as we we can and with that I'm going to hand over to Jay awesome thanks Anna thank you and I'm going to turn off my video just to not distract perfect I'm going to do the same thing so I don't have to look at myself okay well thank you everybody for joining I really appreciate this and as Anna mentioned I have uh presented here before and what a fantastic group of people I appreciate everybody coming out and I'm thrilled to be back um I'm I I tend to speak quickly and I

1:34 tend to pack a lot of information into my presentations so um tonight if I go quickly I know that there's going to be a replay made available I also know that uh that I will make the slides available and I'm also going to be available for questions both after this presentation and you're always welcome to reach out to me if you have additional questions that I don't answer here um tonight's discussion topic is multi-family return metrics The Good the Bad the Ugly um actually not so much the ugly more the good the bad the interesting but that just didn't flow as well um and so uh I think for some of you what I'm going to talk about tonight I have a feeling you might say some of this is is uh his old hat is uh is stuff you already know but I promise you if not I promise but I suspect that that

2:19 there's going to be some new stuff even for you folks that have invested in multi-family before um even for those who have actively run multi-family I have a feeling you're going to get some some interesting nuggets out of this at least hopefully so let's Jump Right In so about me my name is Jay Scott I'm a partner at bar down Investments we buy multi-family uh mostly in Texas but also in Ohio and and uh some smaller stuff in other parts of the southeast um we Syndicate we have about 110 million dollars in Investments right now I'm the author of Five Books the book on flipping houses estimating rehab costs negotiating uh recession-proof real estate investing and my newest real

3:04 estate by the numbers I currently own about 800 single-family and multi-family units and I've done about 150 million in transactions that's the the basics of me I do want to mention that uh I do have a new book out my fifth book it came out on October 13th on Bigger Pockets it'll be out November 15th on Amazon and in bookstores and um what I'm talking about tonight is basically about 70 out of the 420 pages of that book um so it's a pretty thick book pretty dense um but this will deal with uh one section of that book and if you're interested in learning more go to numbersbook.com okay let's jump into the presentation So for anybody that has uh purchased

3:51 multi-family real estate syndicated multi-family real estate or been a passive investor multi-family real estate deals this probably doesn't look too um too not familiar this probably looks familiar this is the basic information you're going to give if you're a multi-family syndicator to your passive investors this is the basic information you're going to get if you're a passive investor so to go over this really really quickly at the top typically we're going to talk about whether it's a 506 B or C offering which is informative to know what the what the SEC rules are around the offering the whole period is how long we typically plan to hold the deal member manager split we'll talk about that in the presentation and then the next five numbers Equity multiple

4:37 preferred return average cash on cash return uh average annual return internal rate of return those are all return metrics those are all basically the expectations you can get for a financial return on your investment into this particular deal and then finally uh we'll talk about or not we'll talk about the minimum investment for this deal this just happens to be a deal that we did many months ago was about a hundred thousand dollars or a hundred thousand dollars with exception to considered this is what we're going to be focusing on tonight so we're going to be focusing on these return metrics again this is the expectation of if you were to make an investment into this deal what you would get back financially and so a lot of uh a lot of both active and passive investors are familiar with these terms but I've talked to a lot of people who

5:24 don't know what each of these means or how to think about these returns with the benefits of these these return values are with the detriments or the drawbacks of each of these return values are and then also I'm going to talk a little bit about the um how we as uh as multi-family operators can sometimes manipulate or or I don't want to say manipulate in a bad way sometimes it's in a bad way normally it's in a good way there are ways that we can play with these numbers so that we can give better returns or Worse returns in certain areas um trade-offs in various areas in order to come up with a very creative deal structure now sometimes it's a way that that we can be nefarious and and try to manipulate our investors but generally

6:09 it's just being creative in ways that we can provide more creative and and interesting trade-offs to our investors I'll talk about that and so I refer to that as kind of the good the bad the good about the metrics the bad about the metrics and then something interesting that uh that you may not know if you're not uh a Seasons indicator okay this is kind of that same um presentation in the last slide uh this is all of the return metrics but this is something and basically this was exactly uh for the deal that you saw on the last slide this is what I gave to my investors when I did an overview of the deal and this is a more detailed overview of the returns that investors could expect this is an annual breakdown of returns and so

6:56 um in this presentation I'll kind of be using this as just a uh as a as an example project this is a fairly standard deal that you'll see in the multi-family space these days um and so if you've looked at any deals recently the numbers were probably not too dissimilar from this right here okay so let's jump in first one I want to talk about is equity multiple um this is a this is a very simple metric that many of you may have heard of but the purpose of equity multiple is to answer the question how much will my investment multiply over the hold period and again very simple metric this is an indication of how many times your investment is expected to multiply over the whole period so for example if you

7:43 were to invest a hundred thousand dollars into a deal where the equity multiple was a two you could expect that you would get back two hundred thousand dollars your hundred thousand dollar initial principal uh investment plus a hundred thousand dollars in profit if the equity multiple were a three you could expect to get back a uh three hundred thousand dollars again a hundred thousand dollars as the original investment two hundred thousand dollars in profit that's pretty simple so let's look at the math behind Equity multiple so Equity multiple is basically the ending value of the investment divided by the starting value of the investment again very simple calculation so here is our initial investment we're going to assume that a passive investor were to invest a hundred thousand dollars into

8:29 this deal that's the starting value and then we're going to assume that their return on this deal is ninety five thousand four hundred and change so the total amount that the investor would be getting back at the end of this deal or throughout the deal maybe not just at the end throughout the deal the total amount that the investor would be getting back is 195 437 dollars so that's the ending value the initial value the initial investment plus the profit plug that into our formula Equity multiple equals 195 000 and change divided by a hundred thousand dollars equals 1.95 so basically we're expected to just under double our initial investment in this deal that's a 1.95 Equity multiple pretty simple I imagine a lot of you are familiar with that let's talk about The Good the Bad and

9:15 the Ugly for Equity multiple so the good thing about this particular return metric is that it's pretty concise and it provides a very quick very easy indication to even the most unsophisticated unsophisticated of investor or what they can expect their investment to grow or how they can expect their investment to grow over whatever that whole period is so that's the good thing it's a very simple metric um even unsophisticated investors can typically understand it and a lot of investors actually ask for it now the downside of equity multiple is that a lot of us as more sophisticated investors we're used to seeing metrics that are more percentage based and so it can be difficult for us to translate a multiple into a percentage at least

10:03 taking time into account and so for more sophisticated investors Equity multiple basically doesn't give us a whole lot of information here's the ugly part of the equity multiple so typically we assume as operators then Equity multiple is applied to a five-year hold time so we assume that a 2X or a two Equity multiple um is a doubling of your money in a five-year time frame uh a three Equity multiple is a tripling of your money in a five-year time frame but here's the thing there's no definition there's no formal definition of equity multiple that says we're talking about a five-year hold period so there will be operators who will say you're getting a two-year a two Equity multiple without saying a time frame you don't know if

10:49 that two Equity multiple is in two years or five years or ten years and so it begs the question is a two Equity multiple better than the three Equity multiple not necessarily if that three Equity multiple is in six years or I'm sorry in ten years and the two Equity multiples in five years you're going to do better on a five-year investment that doubles your money than a 10-year investment that triples your money so uh operators can use equity multiple to distort the view of the return uh of the deal for unsophisticated investors so if you're a passive investor in uh in a in a syndication and you see an equity multiple number always ask the operator is that based on a five-year hold period if not what is the hold period that

11:34 that's based on so that way you can do an Apples to Apples comparison of equity multiple or or return multiple for different deals that you look at okay that's Equity multiple now let's talk about average cash on cash returns so this number right here average cash on cash return aims to answer this question what percentage of my investment will this deal return per year on average from property operations I'm not talking about what your deal is going to return overall I'm talking about what your deal is going to return from property operations so let's talk about what that means let's go back to our little return spreadsheet here this is what the passive investors can expect in terms of returns this line right here is your member cash flow this is your annual cash flow from

12:21 operations meaning on an annual basis your property is going to make a certain amount of income from rent from pet fees from parking from laundry whatever else uh you might be charging in terms of of of of fees to your tenants minus whatever expenses you're going to have so that could be property taxes that could be insurance that could be maintenance cost Property Management costs it's also going to subtract out your Capital expenses it's also going to subtract out your mortgage payments basically this is the money that's left over at the end of every year that's available for you and your investors to basically take a distribution this is only based on the on the operations of the deal this doesn't factor in any money that's coming from what we call Equity events an equity event is something like a sale or a

13:07 refinance where we get a big pot of cash by selling the property or refinancing the property and maybe the investors are going to get a big pot of cash back that's accounted for in this line right here so in this case our expectation is that we're going to sell the property in year five and investors are going to get this big pot of cash the sixty thousand dollars in year five that's an equity event and so when we look at the returns from a deal in some cases we're talking about overall returns but in other cases we're only talking about annual cash flow in other cases we're only talking about Equity events so it's really important to know whenever we're talking about a return metric is it related to annual cash flow or operations or is it related to these big Equity events or is it related to the overall returns from

13:54 the deal so going back to oops I'm sorry and so this would be this would be the uh the addition of both of those this would be our our annual um uh operations uh distributions and our distributions from Equity events that would be the total return on the investment so going back to our cash on cash return I mentioned the cash on cash return is only related to operations basically it's only related to the annual distribution or the annual cash flow that's generated through the income and expenses on the property so to figure out the average annual cash on cash return we need to start with what we call Cash on cash return and cash on cash return is in any given year so cash on cash return is is calculated based on

14:40 a single given year it's the annual cash flow generated so the annual amount of cash flow available for distribution to The Operators and the investors at the end of the year divided by the initial investment made um made to made into the deal so let's take a look here so again um our annual cash flow in year one six thousand six hundred and sixty dollars in other words investors can expect to get back about six thousand six hundred and sixty dollars for every hundred thousand dollars that they invest into this deal so determine our annual cash flow for year one simple formula cash flow divided by initial investment in this case six thousand six hundred and sixty dollars divided by your hundred thousand dollar investment in year one investors are getting a six

15:26 point six six percent cash on cash return we can do the same thing for year two and year two investors are getting uh six point two six percent cash on cash return you know for year three where we go up to about eight percent six point six percent year four six point nine percent close to seven percent in year five now again this doesn't count the um the uh income generated from the equity event in year five that Reef or that sale in year five this is only the income from operations so we've now figured out what our cash flow percentages our cash on cash return in each of the five years of the whole period we can now use that information to get our average cash or cash return shouldn't be a surprise but an average

16:11 is basically the summing of the individuals divided by the total number so in this case we're summing up the um the cash on cash returns in each of the five years we're dividing by five and that gives us our average cash on cash return over the entire whole period in this case those five cash on cash returns divided by five equals 6.9 percent in an average year we're going to receive about 6.9 percent return in cash flow from operations on our hundred thousand dollars investment or whatever our investment is now here's the interesting thing about cash on cash return um and uh I again I don't like the word manipulating because it implies something nefarious I probably should have chosen a better word there

16:57 um this is actually pretty common in uh in the multi-family syndication world and as long as it's disclosed to investors there's actually absolutely nothing wrong with it we do this ourselves but there's a way that we can manipulate that cash on cash return so that we can distort the actual return from operations and so let's take a look at two Investments syndication a and syndication B I'm going to keep this very simple let's assume syndication a we raised 10 million dollars for this syndication let's assume syndication A and B are essentially the exact same property maybe they are the same property um just we have two different investors or two different scenarios that we're running on the same property syndication a we decide we're going to raise 10 million dollars that's going to be enough along with our debt to buy the property to do our renovations to to

17:44 cover any of our transaction costs to get to the end of the project and to sell it so we raised 10 million dollars we sell chunks of hundred thousand dollar Investments for each hundred thousand dollars that an investor invests they get one percent of the deal so 100 000 divided by 10 million one percent of the deal that makes sense syndication B says I'm going to raise 11 million dollars instead of 10 million dollars now why would syndication B decide to raise more money than syndication a here's the reason when you raise more money assuming you don't need the extra money in which case here we don't need the extra money because we've already determined that for syndication a we can get by with 10 million and syndication B is essentially the same investment when we raise extra money we can use that extra cash to pay our investors cash flow

18:30 so what we're seeing on a lot of deals these days and again there's nothing wrong with this we do this in our syndications I know a lot of operators do this the key is that it's disclosed to the investors a lot of syndications these days are returning very little cash flow because with interest rates so high and Deals being thin we're seeing deals that just don't have a lot of cash at the end of at the end of the year the first year second year third year and so we're seeing naturally cash from operations coming back at maybe three percent in year one four percent year one maybe for Lucky five percent year one but by raising an extra amount we can take some of the extra amount that we raise and we can use that to bump up the cash on cash Returns the cash distributions in each of the years of the whole period now

19:16 there's good and bad about this the good is that investors who are investing for cash flow are going to see higher cash flow than they would if the operator didn't raise extra money the bad is that if we raise 11 million dollars every hundred thousand dollar investment is now only worth about point nine percent of the equity not the full one percent of the equity so we call this an over raise and again the good is the that it allows us to bump up the cash on cash returns generally in the first second third year until we start to uh to to build some Equity or we do a refinance it allows us to build up our cash flow and cash returns but investors are getting diluted they're getting a smaller piece of the equity for every share that they're purchasing so I would

20:01 highly recommend if you're investing in any syndications good operators will disclose that they're doing an over raise legally they're supposed to disclose that they're doing an over raise but it's always good to ask operators are you raising extra money to repay us and boost the cash on cash return are you doing an overrace and as an operator just know and again as long as you're disclosing this is fine as an operator know that this can be one Trick In Your Arsenal to be able to bump up those cash on cash returns again your investors are going to get diluted you're going to see a little bit less money at the end of the day because you're paying more um more return on a higher amount of of equity that that you're you're raising um but this can be a good way to boost the cash on cash return or the cash

20:47 distributions to your investors if they're naturally low from operations okay so let's talk about the good the bad the ugly for cash on cash returns uh the good provides an indication of how hard your cash is working to generate more cash um if anybody that watches Shark Tank has probably heard uh uh Mr Wonderful talk about how um he thinks of his money as little soldiers he sends them out to capture other soldiers and bring them back to him um and that's really a good metaphor for cash on cash um cash on cash return is a measure of how efficiently your money is going out grabbing more money and bringing it back to you so that's the good the bad is that cash on cash one it's not necessarily representative of what you'll actually receive remember this is

21:32 an average and if you were to receive let's say zero percent uh distribution in year one and ten percent distribution in year two that's an average of five percent distribution but you're not actually seeing five percent in either of those two years you're seeing an average of five percent for the first two years for the first uh for the two years but you're not seeing five percent in any given year so the average isn't necessarily a representation of what you'll receive and number two this is only indicative of how strong the operational performance of the deal is this isn't going to tell you how strong the equity of that may be and how much ultimately you're going to make from the overall investment this only gives you an idea of how strong the operations are and then the ugly and again I I don't like the word ugly because that implies something bad but it fit the fit the

22:20 phrase good bad and ugly if not disclosed this actually is ugly but operators can use an over raise raising extra money as we talked about to obfuscate the operational performance of the investment to boost cash returns and to dilute investors again not a bad thing as long as it's disclosed and full disclosure I actually go out to my investors and I ask them before we do a deal would you rather have a higher cash on cash return or would you rather have no dilution and lower cash on cash return and basically let my investors decide typically my investors would prefer to see higher cash on cash returns even with a little bit of uh dilution and so we've actually done this over raise a couple times now because that's what our investors want and it makes the deal a lot more beneficial for

23:06 both sides next let's talk about this number preferred return right here so preferred return answers the question what percentage what percentage of my investment will this deal return per year before the operators receive any profit so preferred return is this interesting um promise uh and it's more than a promise it's a contractual agreement but it's interesting promise that the operators make to their investors they basically say the first X percent of cash flow or cash on cash return that we make every year is going to come back to our investors before we take any so it basically sets the minimum bar that investors are going to receive before the operators are to receive any cash flow from operations so let's take a

23:53 look at what that means here um so in this particular deal we have a six percent preferred return so basically as operators we're telling our investors that they're going to get a six percent preferred return which means in year one while there's a six point six percent or 6.66 percent cash on cash return the first six percent is going to go directly to our investors we don't touch that as operators investors get that six percent preferred return and that remaining point six six percent preferred return is going to get divided up between the operator and the investor likewise in year two the first six percent goes to the investor 0.26 goes to split up uh year three six percent to the investor and then almost two percent get split up likewise in years four and five but here's the

24:40 interesting thing what happens if in year one we don't have a six percent return let's say our return in year one was only five percent but we told or we promised or we we contractually agreed uh with our investors that they were going to get six percent but the deal only delivers five percent well there's two ways that this can be handled the most standard way is that any shortfall on that preferred return is going to roll over to the next year so for example um if we promised the uh investor six percent we only get five percent in year one that extra one percent is going to roll over to year two and now the investor is going to be uh uh contractually obligated to receive seven percent before the operator receives everything if they don't hit seven

25:26 percent in year two the shortfall rolls over and rolls over and rolls over that's the standard way to do things here's the ugly some unscrupulous uh um not that I shouldn't have said it that way I apologize it's not unscrupulous but what some operators will do and as long as they're disclosing it it's okay but make sure you're asking this question some operators will not roll over any shortfall in that preferred return so they'll say if your one only returns five percent but the preferred return is six percent well that one percent is now lost year two is going to start over at six percent again if we don't hit that preferred return in year two we're going to start over again in year three again as long as it's disclosed as long as it's it's in the contract absolutely nothing wrong with that so I shouldn't have said

26:12 unscrupulous I actually apologize um there's nothing wrong with that as long as it's completely disclosed but it's important that you as passive investors uh ask this question does the preferred return do any shortfalls in the preferred return get rolled over into the subsequent years and generally the answer is going to be yes but it's always worth asking and always worth reading the docs so good bad and ugly on preferred return the good is preferred return is a great way to line align incentives between operators and investors operators don't earn any Capital unless their investors hit some minimum Target the bad is there's no guarantee that in any given year you're going to achieve that preferred return your expectations can be poorly set so this is another thing that's worth mentioning I'm going to go back real quick if you were not to

26:58 see this chart if you were not to know that we were going to hit six percent minimum in every year and the operator let's say the operator were to tell us on this deal that the preferred return were seven percent and we were never and we weren't and we didn't see this chart or we didn't watch the investor presentation we didn't read the docs we just saw that the uh preferred return was seven percent Well we'd probably be surprised in year one when we didn't actually get seven percent now nothing was being hidden from you that was all here but a lot of people here seven percent preferred return they assume they're going to hit that minimum in every year A lot of times that's not true especially in the early years of a value-add syndication cash flow is is uh a little bit thinner and a lot of times we aren't going to hit that uh preferred return in year one so don't assume in every year just

27:45 because a preferred return is six percent or seven percent or eight percent that you're actually going to actually receive that so again the bad is there's no guarantee that you're actually in any given year going to receive that preferred return um and if you don't know that that can be an issue with expectations being poorly set and then the ugly and again nothing wrong with this as long as it's fully disclosed um but operators don't always accrue preferred return if there's a shortfall in preferred return operators aren't legally required as long as they disclose it um to accrue any shortfall into future years and so when they don't incentives are no longer aligned if there's zero cash cash return in year one and um or the zero cash flow in year one and nothing accrues it's very possible that

28:31 you're just going to lose out on your your income from Year One okay um I am going to now kick this back over to Anna because she has some good stuff to share with you guys um Anna are you prepared up yes no maybe okay um I don't know sorry sorry I was muted excuse me sorry I was muted for a sec so I am going to um share and I'll be going getting right into it to right the right share right all right

29:16 can you see my screen Jay I can awesome so I just want to take a few minutes to let everyone know about a project that we're super excited about and it's a value adds I'm so glad you're here at learning about how to um look at Value ads um but we before I talk about it I want to talk about some of our last four exits which are pretty spectacular and you're going to see some of the that average annualized return which Jay is about to talk about um so yeah the data has been crazy for the last four exits and it's pretty much you know 103 annualized per year that's a real number achieved and any of the four exits the lowest average was just a jaw dropping 48.4 pretty high numbers as

30:05 you'll learn for average annualized return but we uh that that is not where the industry necessarily is now but last year I want you to know we slowed down our buying because we were seeing things getting a little overheated our data told us the market was way over hot and really you make money when you buy not when you you make your money when you buy the property and not when you sell it so you got to make sure you buy right now last year we only purchased one multi-family just one and many of our syndicator friends they purchased four or five but if we can't find deals with impressive investment potential like the ones we're seeing here we just keep hunting or we put down our pencils effectively well we waited very patiently for the market to cool down and now the prices are dropping and

30:52 buyers uh we're in the driver's seat so finally we have excellent conditions to swoop in and pick up some fantastic returns so what are we doing well we've got a value-add fund so we're adding three to four properties to our recently announced grow value add multi-family income fund we are using our proven data science strategy to Target the best metros and neighborhoods in the country uh so with U.S housing prices expected to fall 10 even 15 in the most overvalued markets home builders they're slashing their plans to build new homes and this is creating under production of single-family homes coupled with existing very sharp housing shortages it's like pouring gasoline on a fire

31:37 it's it's the fuel honestly for outsized multi-family profits in the future and very happy multi-family investors so bottom line we're buying because we're able to find fantastic deals and supply and demand they're completely out of whack so let's look at how we are cherry picking opportunities in the grow fund so on the screen we've highlighted some of the states where we're actively looking for properties Texas Arizona Utah Florida Georgia North Carolina Tennessee now we've already purchased a fantastic value-add property in Sandy Springs which is a terrific Market just outside Atlanta and we're continuing to look for outstanding deals both class A Class B multi-family properties that have True Value add potential and we'll

32:22 pick up these juicy assets at a discount because that's what's happening these days we'll Implement our proven value-add strategy to improve the property and raise rents we use data also to asset manage like Monsters and this increases the value of the property and that's what gets the investors those returns now it's important to note that we are buying cash flowing properties that have significant depreciation tax benefits that is really key so you got your metrics and you've got tax depreciation which I don't think we're talking about tonight Jay but that is a big part of of what investors get out of investing in multi-family so here we go value-add fund will have three to four properties that fit our highly curated requirements just like

33:09 the first one Monarch Villas so cash flowing properties the value-add fund uh it's a this this is Monarch Villas 130 unit property built in 1969 Sandy Springs near Atlanta metro honestly we're blown away by the data science numbers in this small City truly off the charts and no wonder it's Sandy Springs is located in Atlanta and Atlanta has a massive boom very low unemployment rates but it still has that small town mid density feel and many people are really craving that post covet so people who work in around Atlanta or from home they love Sandy Springs it is an affluent underlying affluent suburb located next to the Chattahoochee

33:54 River which is a little bit of a mouthful it's got lots of jobs and in fact it was the most fortunate 500 companies in per capita in the entire country which is kind of crazy that that's happening in Little Sandy Springs it's got lots of rivers Riverfront Shoreline it's got the number one Hospital density in the entire Atlanta and you know when the recession is coming Healthcare job those are very stable so we're really excited about that so our value-add business plan for Monarch Villas properties in terrific shape already has great bones 62 classic units just waiting to be primed so take a detailed look at the left that is an original un renovated unit would you like to live there no now look at the right this is what

34:41 happens when we complete the renovated unit you know we put in the full package the backsplash the sink the countertops the floors change out the appliances and with this type of change that's where the value add magic happens so spending 10 grand on an apartment makes a staggering 43 estimated return on cost and that sets it up our investors for really great return all right so the grow income fund provides excellent tax benefits for investors we're expecting Monarch Village depreciation and similar fund projects come in around 60k for every 100K investor and that is of course an estimate because we don't know the exact amount until we run the cost segregation study which we definitely will but we are all primed and ready as this is the

35:28 last year if you didn't know it for 100 bonus depreciation so here we go remember we're talking about achieved Returns on our last project remember 48 annualized was the lowest 103 was the highest well let me remind you all of those projects were conservatively underwritten and so is the grow income fund so this is what we're projecting again it's a fund simple returns of 17 to 21 irr 13 to 18 oh sorry simple as 17 to 21 irr 13 to 18 cash on cash five to seven percent close to what Jay was just showing you again these are conservative projections we of course hope to beat the pants off of those so for those of you that are

36:13 interested you can go over to growcapitus.com growfund g-r-o-f-u-n-d to get access to the investor kit you can also join a q a call with Andrew our investor relations manager and you can get the link on that page and there we go growfund Dash group Dash call to get you some of that bonus depreciation before it runs out so there you go back to Jay awesome and let me point out the example I'm using is a deal that is about seven months old um we're certainly starting to see returns uh uh thinner than what I'm presenting here and and uh what you just showed there

36:58 um all those look that looked really great and I'll point out I'm not familiar with those specific properties um but I lived in Atlanta not too far from uh from Sandy Springs for about five years and I absolutely love that area that area everybody does everybody does i i everybody love Sandy Springs anyone that knows Sandy Springs they're like that is a fantastic area the shopping I mean it's just a fantastic location so yeah we're super happy to to find it we think it's going to be a great it is a great foundation for the grow fund yeah that looks like a fantastic portfolio um okay um getting back let's talk about average annual returns um and so Anna was talking about average annual return so again this is a very

37:44 standard metric that we we talk about um and uh average annual return enters this question what percentage of my investment will the deal return per year from the investment overall now we talked earlier about average cash on cash return and we talked about how that's just the annual return the average annual return that we could expect from cash flow from operations um the average annual return is going to take into account not just operations but also those Equity events I was talking about whether there's a refinance or a sale of the property it's going to take into account any profits any Revenue that's generated uh from that Equity event as well so uh the formula for average annual return is basically the sum of all of

38:31 the annual returns not just the the uh returns from cash flow divided by the number of years held um so in this case that's these numbers right here so your number one is basically the same turn as we saw from cash flow because that's all we got in year one we got cash flow from operations year two same all we're getting is that cash flow from operations that we talked about earlier same for year three and year four but in year five not only do we get the cash flow from operations but we have a sale in year five and that sale in year five is going to net an investor who has put in a hundred thousand dollars about sixty one thousand dollars in additional income and additional profit from the sale so this is the total return in each of the five years we can easily turn these into percentages just dividing uh

39:18 just dividing by a hundred thousand and then if we add up the percentages for each year so again six point six percent in year one same as our cash on cash return same for year two three and four and then in year five our return is 67.9 percent uh total return um in year five add those up 95.44 is the total return on this deal that number right there and we divided by five year hold period one average we're receiving about 19.09 per year now one of the issues with average annual return just like with cash on cash return is that because this is an average you're unlikely or you're you're you're you're not necessarily going to see that exact return or anywhere near

40:04 that exact return uh in any given year and we see that here in years one through four our return is less than eight percent in year five it's over 65 percent and yet the average is around 20 but we're never seeing 20 in any given year so that's one of the limitations of AAR it's a good indication of what we can expect on average over the total hold period of the the property but it's not necessarily going to give us an indication of what we can expect in terms of cash flow or distribution or return in any given year so for investors who actually rely on getting money on an annual basis and we'll talk a little bit about this in a few minutes um this could obfuscate exactly how much money is being received in any given year let's talk about another issue another

40:49 limitation of average annual return and this is always an interesting little exercise let's say I have three Deals and on all three Deals I invest a hundred thousand dollars into the deal on the first deal I hold it for three years and basically I receive a 10 return in year one a ten percent return in year two a ten percent return in year three we've already learned about AAR and how we calculate it it's basically add up the ten percents divide by three so the average annual return on this particular investment is ten percent if we were to actually stick this into a calculator and and compound our hundred thousand dollars by ten percent a year what we see is our ending balance is a hundred and thirty three thousand one hundred dollars let's take a look at investment number two again we're

41:35 investing the same hundred thousand dollars but this time instead of getting ten percent per year we're getting 20 year one ten percent year two and zero percent year three stick this in our AAR formula we add 20 plus 10 plus 0 divided by 3 and once again our average annual return is 10 percent but we stick this into a compound interest calculator and we see that we're actually only receiving 132 000 because of we're getting the bulk of the money back in year one we have less compounding on the back end uh investment number three we do the same thing we invest a hundred thousand dollars this time we we get 30 percent in your one zero and year two and zero year three um as you probably suspect the average annual return is again ten percent and this time the total return on the back end is only a hundred and thirty

42:21 thousand dollars so in all three examples we're investing the same amount of money we have the exact same average annual return but you can see that the ending balance is a good bit different between the three Deals now this is a very simple example with uh with deals that have longer compounding periods with deals that have more disparate returns um these numbers can vary even more widely and so one of the limitations of average annual return is it doesn't necessarily give you an indication and it can be impossible without more information for you to determine how much you're actually going to end up with at the end of the deal just based on your average annual return even though it seems like it should be pretty obvious so let's talk about average annual return the good um it provides an easy to understand expectation for your

43:08 average return on an annual basis the bad is depending on the smoothness of the returns um using AAR to estimate your actual profit it can be difficult it can be impossible if you don't have more information and for the same reason looking at AAR and using that to try to extrapolate how much you're going to make on a deal you can end up underestimating or overestimating a good bit on your actual returns okay and that takes us to my favorite one internal rate of return this is one that I think confuses a whole lot of people um and I could probably do an entire two-hour presentation on this and and confuse you even more but I'm going to do my best to try and explain what internal rate of return is in uh in in

43:54 plain English so that's this number right here this 15 to 17 percent in this case and internal rate of return strives to answer this question what is the compounded return on our overall investment and let's talk about what that means so before I jump into what uh irr is and how it works uh let's do just a quick refresher on how simple and compound interests work let's say I invest a hundred dollars and let's say I invested for five years at a simple interest return of 10 per year which basically means I am getting a 10 per year return on my investment but the money I'm getting I'm either are taking out of the investment or it sits in there it doesn't actually work for me so after year one my Hundred uh hundred

44:42 dollars I get a 10 return so I now have a hundred and ten dollars the end of year two I generate another ten percent return on my 100 and now I have a total of 120 dollars as you can probably guess year three I end up with 130 140 and after year five I've generated ten dollars per year in interest 10 per interest per year for five years and I have a total of a hundred and fifty dollars right that's simple interest how about compound interest how about compounding our money what compounding means is that we take our money we invest it we receive a percentage return but instead of taking that money out of the deal or letting the money sit in the deal and that work for us we actually reinvest that money into the deal so that in the next compounding period in the next growth period our total

45:28 investment both what we originally invested plus the money that has been returned to us gets compounded for the next period and then any return on that period gets compounded for the next period and so forth so let's take a look so let's say we start with a hundred dollars and again five years same rate of 10 percent in this case we get after one year the same 10 percent return so we at the end of year one we have a hundred and ten dollars now instead of laying the ten dollars sit there or taking it out of the deal we're going to reinvest the ten dollars back in So at the end of the year one we're now going to reinvest the entire 110 dollars into the deal at an additional or the same 10 percent per year at the end of year two because we invested 110 and we're getting 11 in interest in year two so we

46:14 we now see that at the end of year two we have 121 total the end of year two we're going to reinvest that entire 121 dollars and we're gonna get about twelve dollars in interest after year three so now we have 133 dollars we reinvest all that we get about fourteen dollars fifteen dollars back um uh thirteen dollars back um in year four we reinvest that and in year five with the compound with the compounding we end up with a hundred and sixty one dollars in both of these scenarios we invested a hundred dollars but by compounding the money every period every year we end up with a whole lot more at the end than we did in the scenario where we're just using simple interest hopefully that that explained um and I don't think I need to to talk about

46:59 the power of compounding um when you ever you see uh a returns chart that kind of shows a hockey stick uh uh description of returns typically that's based on compounding the longer you have to compound your money the faster and faster it accrues and the more you get that hockey stick looking pattern uh in your returns where you're seeing exponential returns as opposed to just linear returns okay so I think we can all understand at this point that in this particular example to turn 100 into 161 dollars in five years we had to compound that money at ten percent per year to say that again to turn a hundred dollars into 161 dollars in five years we need to

47:45 Compound on an annual basis at ten percent what that means is that the irr for a deal that starts with a hundred dollar investment and ends with 161 dollars is ten percent irr is just the compounding rate that you need to use to get from point A to point B so if I were to have a and I'll add uh I'll multiply by a thousand just to make it more syndication like if I were to invest a hundred thousand dollars into a deal a syndication deal when day one and at the end of five years I was to be handed back 161 000 the irr the internal rate of return on that deal would be ten percent and there's no easy way to calculate it I can't give you a formula I could but it wouldn't help you uh we typically uh

48:32 calculate irr using a spreadsheet or or a financial model um but irr is just a reflection of what it requires to compound what the compounding rate is required to go from point A in this case a hundred dollars to point B in this case 161 dollars okay hopefully that was a reasonable explanation now unfortunately it gets a little bit more complicated than that in this example we started with a hundred dollars or here let's let's do a different example I apologize in this example we're going to start with a hundred dollars and we're going to turn that after five years into five hundred dollars so imagine an investment where you hand me a hundred dollars and in five years I hand you back five hundred dollars that money is compounded every year at what rate do we need to compound that

49:20 hundred dollars every year for it to turn into five hundred dollars turns out that that rate is 38 so if we take a hundred dollars we can pound it at 38 a year in five years we're going to have 500 so a deal that starts with a hundred dollars and returns five hundred dollars at the end of five years is said to have an irr of 38 percent okay same as the example we did before just using bigger numbers 100 to 500 instead of a hundred to to 161. we have to compound at 38 rate to get from 100 to 500 in five years now this is where internal rate of return can get messy in this example we've started with a hundred dollars and we ended up with five hundred dollars at the end of five years what if we started with a hundred dollars and instead of getting 500 at

50:07 the end of five years we get a hundred dollars for each of those five years now as you can see we're not ending with any more profit from this particular deal we started with a hundred we're ending with 500. the only difference is that we're getting money back sooner in this version of the deal we're getting a hundred dollars in your 100 in year two Etc up through year five irr assumes that if we get money back what are we going to do with it are we gonna go buy a car we're gonna go spend it on on dinner no irr assumes that if we get money back sooner we're going to reinvest it and we're going to reinvest it in a deal that's equally as good as this particular deal so the irr in this case assumes that that hundred dollars that we get back in your at the end of

50:52 year one we're going to reinvest into a deal just as good as this deal for the next four years if we were to invest a hundred dollars in another deal just as good as this deal for for uh the next four years that hundred dollars is going to turn into 1488 dollars irr is also going to assume that we're going to take the money we get at the end of year two and we're going to reinvest that for three years because we have three years left on this investment if we were to invest a hundred dollars for three years at the same return as we're getting on this investment we would end up with 757 dollars year three we had another hundred irr is going to assume that we're reinvesting that money at uh at the same rate as we're receiving here and we're doing it for another two years which would yield us 386 dollars and at

51:38 the end of year four we have another hundred dollars and irr is going to assume that we reinvest that for the final one remaining year to turn into 196 dollars at the end of year five we're getting our hundred dollars we don't have any time left so we can't actually reinvest that so we get our hundred dollars so irr assumes that if we get money back sooner we're going to reinvest it in this case we're taking that hundred dollars and we're turning it into as far as irr is concerned 2 921 irr is going to assume that because we got money back sooner and we reinvested it that at the end of the day we're going to end up with two thousand nine hundred and twenty one dollars now this deal is only returning 500 the 500 that that we we talked about originally a

52:24 hundred dollars per year irr is assuming we're going to find some place to put that money and we can turn it into two thousand nine hundred twenty one dollars now what is the compounding rate that we need to take a hundred dollars and turn it into two thousand nine hundred and twenty one dollars 96 percent we would need to compound a hundred dollars at 96 percent for five years to turn it into two thousand nine hundred and twenty one dollars so let's recap those two scenarios scenario one we have a hundred dollars we turn it into five hundred dollars that we get back at the end of the period our irr on that deal is 38 percent next we look at another deal where we take a hundred dollars and we turn it into five hundred dollars again but instead of getting it back at the end we get it back a hundred dollars a year for

53:09 five years because irr assumes reinvestment your irr on this particular deal is going to be 96 now here's my question can you necessarily take that hundred dollars every year and reinvest it in just as good a deal the minute you get it back for the next four years three years two years one year and generate that 96 percent probably not most of us don't have the ability to take every penny we get the second we get it reinvested in just as good a deal for the full timeline of the project so that 96 percent is actually a theoretical maximum that you could potentially get if you could have reinvest every hundred dollars the second you get it for that full time period in reality most of us can't do that and in reality if you don't

53:56 reinvest that money at all you're still getting the same five hundred dollars and both scenarios though in the second scenario the person that's running the investment is going to tell you that you're getting a 96 irr because that's what the calculation is going to come out to because again irr is assuming you're reinvesting and you're making more money by getting it back sooner hopefully I did a good job of explaining that let me show you how this can be used by multi-family operators to boost returns for their syndications let's imagine we have a deal where we invest a hundred thousand dollars and at the end of five years we get a profit of fifty thousand dollars So at the end of five years we get our hundred thousand dollars back and we get our fifty

54:41 thousand dollar uh we get our fifty thousand dollars in profit if you stick this into an irr calculator basically a hundred thousand dollars invested day one get back fifty thousand profit in your five you would see that your irr when this deal is eight point four four percent now we as good syndicators know that if we give money back sooner we can boost the irr so what if we were to say instead of putting uh instead of giving back the 500 at the end of year five we were to give back the 500 in increments just like we talked about in the last example um ten thousand dollars per year for five years because the money's coming back sooner your irr is going to assume that you're reinvesting it's going to boost the compounding return rate and in this case if you step that into a

55:27 calculator a deal that gives back the same fifty thousand dollars but ten thousand dollars a year is going to represent an irr of 15.2 percent now whatever what if we're really good multi-family syndicators and we say hey we can do that even better instead of giving back ten thousand dollars per year instead we're going to give back twenty five hundred dollars per quarter for the five years again same fifty thousand dollars just give them back sooner and more frequently stick that into an irr calculator about 18 percent and then finally let's say we want to start giving back money monthly instead of doing twenty five hundred dollars per quarter um we start to do 800 and some 833 dollars uh per month uh again the same

56:13 fifty thousand dollars but given back on a monthly basis more frequently um and earlier than the other scenarios our irr jumps to 18.7 percent in all four cases we've invested ten thousand dollars we've returned fifty thousand in profit plus our hundred thousand dollars we've just returned it in different time periods we've returned it more quickly and sooner in the in the bottom three scenarios and in the first scenario and that boosts our irr so one thing to keep in mind is if you're comparing irrs between two deals where one deal is returning a quarterly distribution and then other deals returning a monthly distribution and the irrs are exactly the same that's an indication that the quarter quarterly

56:59 deal is actually a little bit better just because you're returning money not as quickly but you have the same irr now I'm not saying there's anything wrong with this a lot of us we we we're doing quarterly distributions we're now doing monthly distributions we're the first to tell our investors that we're not doing it to boost irr we're doing it because our investors like monthly distributions but it is one way that we as operators can obfuscate the returns if we're not honest with our investors so keep in mind when you get these returns back your irr is going to look different now in each of these cases let's take the quarterly and the monthly uh case quarterly if money comes back quarterly our IRS about 18 monthly it's about 18.7 percent but realistically if you get

57:45 money back a few hundred dollars or even a thousand dollars uh per per quarter versus per month are you really going to reinvest it any differently at the end of the day you're probably going to be uh left with the exact same amount of money at the end of the deal because you're going to reinvest quarterly or monthly profits exactly the same but the deal sponsor the operator can boost a Higher irr by delivering that money back on a day on a monthly basis Okay so Good the Bad the Ugly on uh on internal rate of return turns out internal rate of return is literally the best tool to compare Investments if I were to compare um a flip to a rental or a syndication to a business investment or if I'm buying a racehorse and a piece of art

58:30 and I want to compare returns as long as I can make assumptions about the cash flow I can do a pretty good job of of of comparing the irrs to know which one is is a relatively better investment but the bad thing is the irr is typically going to be a theoretical maximum return if you hear that you're getting a 10 or a 20 or 30 percent irr what that typically means is in the absolute best case where you reinvest every penny you're going to get a 10 or 20 or a 30 irr now if you're looking at two deals um and they're both 18 irr you're probably not getting 18 on either of them so it doesn't mean that one of them is is better than the other you're probably getting lower on every deal

59:16 that you see in 18 irr again it's a good way to compare deals but don't ever assume that you're just going to get or that you're actually going to get back the compounded return indicated by the irr because you're probably not a good enough investor to reinvest it as quickly as needed to get those those returns finally the ugly like I mentioned um and and again I hate using the word ugly because a lot of us as operators do this we return monthly versus quarterly or quarterly versus annually we're not doing it to try and manipulate our investors or trick our investors but the reality is by returning money sooner we can change the irr and we can make the irr look higher by returning money sooner so it's just a good thing as a as an operator to know that you have the

1:00:02 ability to manipulate your irr again be honest with your investors and as an investor it's good to know because you can now ask questions and you can now uh run the analysis yourself to determine how much the irr is attributed to when the money is coming back versus how much is coming back and that is preferred return and I didn't do a good job of creating a slide that that summarized all of these I apologize um but if you want to connect with me if you have any questions I'm happy to send the slides to anybody that's interested um you're welcome to scan that QR code or just go to www.connectwithjscott.com and that'll link you out to my website and my social media and all of that okay awesome I am going to launch a poll for people

1:00:47 to answer well we're getting to these questions um so again um please type your questions into the question or the Q a box not the chat box and we will get to as many of these as we can so you're ready ready Jade oh somehow your your mic got turned off there is mute on mute off is that better that's better perfect um okay let's uh let's start so um this person is asking what metrics should we focus on Roi or r-o-e

1:01:36 um so typically I don't like to focus on Roi or Roe for multi-family or syndication or passive Investments um Roe is a great way basically um the ROI is not in a return metric that I like at all the problem with Roi is that it doesn't take time into account if I were to buy a deal let's say I buy a house for a hundred thousand dollars and I sell it for two hundred thousand dollars I've made a hundred a hundred percent return I think we can all agree on that now that Roi might be a hundred percent but it doesn't tell me if I made that Roi in a year or five years or 20 years so there are better metrics than Roi average annual return is a good one so let's say

1:02:22 um I made that hundred percent in five years I can say that my average annual return is twenty percent that's a bit more meaningful because it actually puts a time um a Time bound on the investment Roe is is a separate metric a good use of Roe and for those that don't know Roe means return on Equity it's basically where you are you're dividing whatever return you're making typically it's on an annual basis just like cash on cash return but instead of dividing your cash flow into your initial investment you're dividing your cash flow into the total amount of equity that you have in the deal and the thought is that the more Equity that you have in the deal the less that your money is working for you basically um five thousand dollars uh return on

1:03:09 the deal that has a fifty thousand dollar Equity is not working as hard for you as five thousand dollars on a deal that has ten thousand dollars in equity um that Equity is working harder for you

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