May 2021

It is absolutely incredible how today’s bidding wars for houses has become so out of hand. Twenty, thirty offers? Twenty percent over asking? Where are these people coming from? And no longer just San Francisco and Seattle.

But look at what’s going on in U.S. markets today. People are fleeing the pandemic, moving out of the cities, sometimes just to nearby towns but often further away to communities in secondary, tertiary markets. Builders struggle with exploding lumber costs. And job growth, abruptly halted early last year, has resumed its upward trajectory.

Rental markets are seeing the results of this too. Vacancy is down in many markets, due to migration trends but also because people no longer want to live with several friends or in their family home.

Our apartment communities experienced Covid-related decline in income, just as most others did, but it is extraordinary seeing the demand today. In growing communities, very little is being constructed today. Vacancy is very low, and companies are expanding to try to keep up with demand. Our property managers tell us that their local businesses can’t find workers, limiting hours and services.

This market will be shaking off the blight of the pandemic for some time but it appears, finally, to be heading in a healthy direction.

Wichita, KS – Located in some of the most fertile grounds in the world, the heart of America’s bread basket, you would think Wichita is a center for agriculture. It certainly has been in years past but that’s not what it’s known for today.

Aviation! But how did it get there? It was settled as a center for cattle trading as it was located on a trail to Texas, but oil discoveries drew people so now it was a city. And with a growing population and money came what real estate investors look for – colleges. Several were built, education flourished, and smart people did smart things.

At around the same time Bill Boeing was building his first seaplanes in Seattle, Clyde Cessna was building his first airplanes in Wichita. Cessna grew, and naturally more aviation companies sprung up, including Beechcraft.

Boeing also moved in, buying another manufacturer, and all of these firms manufactured aircraft for WW II. Since then, more firms including Learjet opened plants here, because of the wealth of highly trained engineers. This continues today.

Although a healthy 600,000 people live there, I’ve been told by Kansas brokers to avoid Wichita because it has been stagnant. That seems to be old news, though, because just this year, Milken Institute identified it as one of the Best Performing Cities. It was ranked at #64 among the best 150 large cities. That included a ranking of #11 for High-Tech Concentration, which is a pretty awesome category to be ranked that high.

But look at how they jumped in this Milken ranking over just the last year. They jumped 86 spots since 2020, from 150 to 64, the biggest gain of all large cities! Isn’t that what we look for in an emerging market?

Underwriting Templates – pick the right one or create your own, what to
When you’re reviewing the finances for a property, numbers have to be reliable and informative. You have to understand the story of this property from its numbers, spot trouble, and predict the future. When you take the time needed to plug numbers into a spreadsheet, you need to know the calculations are correct and that it gives you a solid indicator to go or not go forward with this property.

You also need to share that information. For most of us, we work with partners, and partners don’t want to spend hours figuring out what your spreadsheet means. Simplicity rules the day, but certain details can’t be sacrificed.

An Underwriting Template is typically just a spreadsheet – Microsoft Excel or Google Sheets. It has been designed in a way that you can enter the numbers you receive from the broker or seller about the property. Your financial docs from the broker/seller will include a Profit and Loss statement and a Rent Roll. While it’s critical to understand how to properly use that information, what I’m focused on is the qualities of your Underwriting Template. Your job is to take the seller’s financials and move that data into your template. Then make a decision based on the results it shows you.

If you are just starting out, look for a highly experienced multifamily educational organization who has a template available, or ask what your friends in your real estate network use. These tools are probably free or inexpensive. Then start practicing with it. Call brokers to have them send property financials, and plug those numbers into your template. Get familiar with every line, every data element, every calculation. When you see a calculation such as total expenses or a return on investment, you should have a good idea of how it was calculated.

Test it out with friends. Show it to them, ask if they can figure out the information, and if they agree with your conclusions. You’ve been looking at it for a long time so just because you understand it now, doesn’t mean someone else will. If they can’t, maybe it’s too confusing.

Try others’ underwriting templates. Look for the differences. One includes a five-year projection and yours does not? One let’s you project rent increases with different scenarios? One includes an Internal Rate of Return? Maybe you want that, or maybe that’s more complexity than you need. Keep it simple.

Or are you comfortable creating your own template? I sure have been, and have made my own. I like it because I can enhance it when I come across new circumstances in the deal that I want to capture so I can see how it impacts the deal. For example, deal structure. I might pay a preferred return, then a percent of cash flow above that to investors and a percent to managers up to another level, and so on. What exactly will an investor make, given a certain amount of cash flow? I need to be able to calculate that. Also what happens to returns if we refinance the loan after a couple of
years? I’d like to know that.

But it was much more complex than I could easily explain to even experienced investors and partners. It had to be simplified, and simplifying can be very hard to do.

Whichever direction you go, keep in mind two top-line requirements:

• It has to provide you enough detail and reliable data for you to make a go/no-go decision.

• It has to be readily understandable by your partners.

Find one you like and stick with it but take the time to understand how they work, and look for good ideas from others’ templates.

Who We Are

Cardinal Oak Investments acquires, improves, and manages under-valued commercial apartments. We buy B and C class properties of around 100 units in the Southeast and Midwest. We look for properties whose amenities, aesthetics, and appeal have fallen into obsolescence, whose care reflects tired management, and whose location is where a stable workforce wants to live.

And we partner with like-minded investors looking for stable assets that produce good cash flow and strong appreciation.

Founded and managed by John Todderud, Cardinal Oak Investments has acquired properties on both coasts and in between creating annual double-digit returns.

For more information, schedule time with me or contact us.

Please note: Past performance is no indication of future performance.