This recap episode with Sophie and Derek centers on the numerous takeaways from the conversation with Aaron, specifically all about underwriting and mindset. They discussed how most active investors are actively trying to get over into the passive side, including us! Underwriting is the cornerstone of the business plan. Start with market, criteria, and then business approach. Underwriting is an art form, and some sponsors can abuse this or twist this, so be careful! The underwriting and business plan says much about the sponsor. We also jumped into the fact that using underwriting as a benchmark for the execution of the property is a key hallmark of success, and is also a predictor of trends for rental growth.
We thank you so much Aaron Wong for coming on the show!
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Welcome to the Elevate your equity podcast, where we, as married busy professionals, leverage real estate investing to unlock the three plus one degrees of freedom, help, location, time and financial.Derek Clifford:
Hello, everyone, and welcome back to the Elevate your equity podcast. This is Derek Clifford, and I'm here with my wife, Sophie. And today we're going to be breaking down the podcast episode that we had with Aaron Wong. And we have some takeaways from this conversation like we do with every other one. And the very first takeaway that we've got is that power couples usually take on the form of visionary and integrator to balance out the day to day and the high level needs. And I can't say that there's any other arrangement that's worked out really well for us other than this arrangement, Sophie is the visionary in the relationship, she helps Phil, like, basically create the business ideas, and then think about growth and create a team and then also attract other people into the business. So without her, there would be no way that we could do any of the things that we do. And then for me, I'm usually the face of the brand, or I'm the person that's out there, underwriting properties, talking with people and basically trying to execute the plan that we've both put together. But generally, Sophie has the big vision for so anytime there's a conflict of interest, or I'm talking about a big decision, I usually consult Sophie, like today, we were talking about funds and setting up funds and getting all that great stuff going. And so I think that's a really important part of the business relationship.Sophie:
Yeah, thank you. I think, like I say, I think he always gives me too much credit, because it's, I feel like it's always easy to have the lofty ideas, it's almost it almost feels like the the air and the ground game, right where it's like, it's nice, because Derrick kind of pulls me back to the ground. But I feel that I can help elevate and help you see like the higher level picture possibilities, possibilities. Absolutely. Because oftentimes, you know, when you have two personalities, and we've spoken to a lot of couples, when the couples that seem the most successful are the ones that integrate on the visionary integrator level, and it's such a nice combination of getting the service so many times the gas and the brakes, like you have to have the yin and the yang, the both dynamic and even the polarity. But it's the integration of the seemingly polar opposites that make for such a successful balance.Sophie Lorn-Clifford:
Yeah, I couldn't agree more with that. And I think that that's an important thing to remember for everyone is that, even if your spouse or you know, if your spouse or whoever your partner is, is working with you has a different perspective, that's a strength, you know, you've got to tap into that and use that. So whatever that looks like just having the conversation of around constructive comments in positive within the frame or context of positivity, you would be so surprised as to what you can accomplish. And then you never know who's the visionary and who's the integrator in the relationship until you start hashing it out and talking about who likes to do what you know, and, and what role makes sense and what you feel invigorated doing right. So that's why we've kind of naturally moved into these roles. And I think we both have a little bit of integrator and a little bit of visionary in us as well. SoSophie:
I think it just depends on the context. But because now I think we've kind of rubbed off on each other and we have a little bit of each, it's a little bit easier to transition. So when I feel like too in the weeds, then Derek can help pull me back out and say, Hey, this is the bigger vision that we're moving towards. Right?Sophie Lorn-Clifford:
Yeah, love it. It's a great thing to have in terms of power couples, and so highly recommended that that works. All right. second takeaway that we had is that most active investors that I know, are actively trying to get over into the passive side, including us. I mentioned in the podcast that truth be told, if we had the choice, and if we have the cash, we will be taking all of our money and being a passive investor. And you wouldn't even see us on this podcast. Of course, we love to be able to create value and add value to everyone else. But you know, for us to be able to invest passively in other syndications in deals, really unlocks a lot of freedom. Because you know, a lot of people, your partners are doing most of the work and you're deploying the capital for them to get it to work. So I think that if we could do that, that would be fantastic. That was one of the things that most active investors want to be passive. And a lot of them are in the process of converting over from active to passive. So there's always this in and out scene of operators who are going full cycle and then not doing deals anymore because they're investing in their buddies, right. So that's something to consider as well. Number three. We talked a lot about underwriting in this podcast, and underwriting is the main cornerstone of a business plan. Aaron recommended that you start with a market first to figure out whether or not what type of objective you're going for you're going for cash flow or appreciation. And that will help inform what type of market and criteria that you're looking for what size property you Looking for how much cash? Do you have those types of things? Right? What is the clear image of what you want in order to achieve your financial or your your lifestyle goals? And then after you have those things solidified, start working on your business approach? Are you going to look for a value add property, something that needs a lot of work upfront? Or are you going to look for something that's already stable, and you're just going to pick it up, and then just continue running it as a successful investment, okay. And this underwriting approach makes a difference in the world. And all of this is the underwriting approach, the market criteria, and the business plan, all that is wrapped up inside. That's why it's so important. And forth, underwriting is an art form, right? Basically a pure expression of what the sponsor is thinking about the deal, right? Some sponsors will embellish some numbers, or they'll put in some very liberal or loose assumptions. And that says something about the operator, right? So if they're making these grandiose promises, and then they have a history of not meeting those promises, that's a big red flag, right. And that's why we say that the underwriting in the business plan says a lot about the sponsor. I know that Sophie has been recently looking more into underwriting just because it's a it's a fascination to figure out whether or not we're going to be buying a property or not. But I know that like we've gone over a few things, as we learn here together this process where all you got to do is tweak one number and all of the returns just completely changed. So it's very easy for you to to have a property be perceived as going to be successful versus what it actually will do and what's realistic.Sophie:
And there's something to be said about the art form of underwriting in terms of looking at it as a story, I think that's when I would see Derek in front of the computer in front of his spreadsheets, you know, my eyes would glaze over my brain. Again, there's a story around my brain not wanting to work that way, or, you know, whatever the story we create for ourselves that we're not good at numbers, or I'm not analytical, but when Derek told me look at the numbers, like he said, It's an expression of the deal. It's it's actually a story of the building itself, the story form that we use to share with our future investors. And that I think that's a really key factor in making sure that we create integrity that we show our investors, what a good deal it could be, and what the potential could be there. So I think, like you said, I'm actually am getting deeper into learning how to underwrite. And it's fascinating, because there's so many ways, like, like you said, about the sponsor, being able to change the perception of how good a deal it is. So I think everyone needs to be able to underwrite, even if you're a limited partner, or silent partner, like it's really important, it's a worthwhile time investment in your education and learning how to doSophie Lorn-Clifford:
Yeah, completely agree. And it's also this, very prudent of you to be able to protect your investment by asking questions, and having some basic underwriting skills to understand what the investment is supposed to do. I know that like, you know, we're investing to be passive. But if you can just be a little bit active, it's going to really help you out in the long run to get an effective property. So Yeah, that was well summarized. that leads me to the next point, which is point number five, as a limited partner, you can and should reach out to property managers in the area that you're looking to buy and ask if the rents in the underwriting that the sponsor is assuming, is reasonable. This is just one example of you just making a spot check basically, on the sponsors business plan. There's a lot there, right, any terminology that you recognize, if you can check that basically check that assumption, somehow, by going straight to the source or someone that isn't involved in saying, hey, does this look right, right? Like, you know, these rents look to be like 1500 bucks, that seems really high? Does that really make sense. And if a property manager tells you, there's no way you're gonna get that, then that is a problem, right? Because that's something that most likely, there's no reason for them to lie. And there's most likely a reason that they're trying to push up some of the numbers inside the performance. And again, that reflects back on the sponsor, right, when you're making these really loose assumptions. And you don't even know it, right. And so that's why we encourage people to get some basic underwriting skills, let's just starts with net operating income, cap rate, and debt. That's all that you really need on this. So hopefully, that that helps with that one. And then the last thing that I want to mention is that Sophie kind of touched on this before and it'sDerek Clifford:
Thank you. Yeah. So yeah, the underwriting plan a really big point that bears and is worth repeating, is that is what it is, and as long as you can follow it loosely, and the underwriting is a benchmark for how the property is supposed to perform, right? It's supposed to set the standard for what the trends are going to be. And a couple of years into the investment, you can start to see whether or not those trends are being met or they're starting to deviate from the business plan. And so it's really important that over time you review the understand what assumptions are being made, and also know the business plan to make sure that the returns that you're getting are matching with the performance said they were because otherwise how do you know whether or not this was a sponsor, and note the sponsors perspective and creating the business plan, then I think you'll be in good shape. So that good investment? You know, you're going to continue to get was some of the top takeaways. If you want to hear more from cashflow. And unless you're actually looking at what the the guests from Aaron about this, you gotta go back and listen to the podcast episode, because he has a lot more wisdom original plan was can't really tell whether or not it's there, where that came from. So we hope that you enjoyed that. worthwhile for you for the money. So that's something that And if you enjoyed this content, we hope that you will like, subscribe, thumbs up, engage with us, and then maybe leave a I would I would say, and again, it feeds back into the operators rating or review wherever you're listening or watching this integrity, whether or not what they say, or they intend to do podcast, because we want to be able to reach more people. And is conservative so that they can easily beat that, right? Of we hope that you enjoy this. And we also want to mention, too, that we have a Facebook group that's open every week where we course, nothing is guaranteed, right? You have these black swan bring people in. It's called the Elevate equity tribe. And we events that happen all the time, like COVID, or a war that just invite anyone to come in and talk with us about a mastermind about real estate topics, budgeting, personal development, randomly broke out, you know, over the last month or so. So relationships, anything like that. And we bring in some those are things you can't predict, but for the things that experts to talk with us as well. And so we're just excited to see you can, that's what you should be looking for the business plan you there and be active and engaged with the rest of the community and it's totally free. So we hope that you guys will to help underpin all of that. That being said, I don't know if join us over there. So I think that's it for today. Thank you you have any other comments to that. But underwriting is what so much for listening in. And this is Derek,Sophie Lorn-Clifford:
And this is Sophie.Derek Clifford:
We are signing off. Thank you guys it is.