Aileen (00:01):

Welcome everyone to today’s episode of the, How Did They Do It Real Estate podcasts. We are your hosts, Seyla and Aileen and today’s guest, we have Justin Goodin. Justin is the founder and CEO of Next Level Equity, born and raised in Indianapolis, Indiana. He has a background in finance and supply chain management and specializes in multifamily underwriting. Justin has past experiences in single family homes, but has since shifted his focus to investing exclusively in large multi-family assets in the Midwest. Justin is on a path to achieving financial freedom and wants to help passive investors do the same. Thank you for coming on the show today, Justin, how are you doing?

Justin (00:36):

I am great Aileen and Seyla. Thank you for having me on your podcast. And I’m excited to speak with you both.

Aileen (00:40):

Thank you so much. So we’d like to start off a little bit by sharing more about your background and how did you get started in real estate?

Justin (00:49):

Sure. Well, I majored in finance and supply chain management at university here in Indiana. So along with doing that, you know, I kind of fell into this path of looking for additional ways to earn passive income and kind of just, you know, supplement when I was doing in college and the job was working at the time. So I started, you know, looking for different ways, including, you know, day trading, swing trading and, you know, quickly found out that, you know, day trading and swing trading. It wasn’t for me. And just because how, you know, unpredictable and volatile the market could be. So it made sense to kind of look for more stable investments and real estate made a lot of sense. And I mean, long story short, you know, I bought a single family house in the city that I was you know, living in and it worked out great and just earning passive income every month from this, you know, little single family house kind of planted a seed within me. And, you know, it’s, you know, kind of made this idea that, you know, I could scale and go larger. And so I started looking into multi-family syndications. So along with that after college, I currently work now as a multifamily underwriter for a large bank here in Indiana. And aside from that, I’m kind of just, you know, working with mentors, working with other rock stars within the multifamily industry and going after larger assets.

Aileen (02:07):

Awesome. Thank you. So you started off with single family homes. How did you find that first single family home that you invested in and, um, what was the process, how did that process look like?

Justin (02:17):

Yeah, pretty simple. Really. That’s, that’s a great question, but I mean, I didn’t really know the kind of, you know, underwriting and deal analysis that I knew back then. I mean, given this is only, you know, pretty simple just single-family house, but it really just made sense to look at an area that I was familiar with. Uh, the job I was working at the time was really just right down the road from the single family house. It seemed like a pretty affordable area. And most of all, it was a recent fix and flip for another local investor. So, you know, I knew the, you know, the repairs and maintenance expenses most likely be pretty low in the, in the future just because it was recently fixed up and it worked out well. Um, the kind of financing I put on that property, which is a typical conventional 20% down payments and 30 year mortgage long-term debt.

Aileen (03:00):

Awesome. So that’s cash flow now and you, do you still hold that property?

Justin (03:04):

I do cash flow instil on it today.

Seyla (03:07):

Awesome.  Justin, you mentioned that you now focusing on multifamily, at what point that you decided to make that transition?

Justin (03:16):

Yeah, pretty much immediately after purchasing that single family house, I was looking at, you know, buying my second one, whether it’s going to be a duplex or a fourplex. And when I started really getting into it, it’s like, you know, pretty much like a wake-up call. I knew that I wasn’t going to be able to put down 20% on these larger properties, you know, a couple of times a year and I really wanted to scale and I really wanted to make a career in real estate. So I know Christmas is coming up. My mom asked me a couple of things I would like for Christmas. And, you know, I said books on real estate and a lot of people talk about the rich dad, poor dad book that changes their life. Well, I mean, for me, it was Michael blocks investing in an apartment, investing in apartments to achieve financial freedom. And now it’s kind of the book that changed my whole perspective on things and really opened my eyes to using other people’s money and, and going bigger, faster with all the benefits for the departments that they hold.

Seyla (04:09):

Awesome. And what markets are you focusing on right now and your company is looking for?

Justin (04:16):

I am currently focused in different markets in Indiana, mostly Indianapolis, Indiana, but then also different parts of the Kentucky and different parts of Tennessee. I really like those markets because the kind of markets we focus on are just markets that are growing low unemployment feature, a lot of future growth, job growth and markets where, you know, one company like one large company, he doesn’t, you know, take up a lot of the employment for obvious reasons. So, you know, if that large, if that large employer went out of business and that market was pretty much depended on that company, it could have a lot of effects on your apartment and in your cash flow. So those markets make sense for me that are really affordable areas to live in. And most of all, they’re relatively close to where I live, so I can easily eat, you know, jump in the car and travel down to meet a broker or do a tour on one.

Seyla (05:04):

Thank you for sharing that. And as you know, multifamily is a team sport and it has a lot of roles, in order to make it work. What is your favourite part of being in the multifamily team?

Justin (05:18):

I really liked that multi-family is really in real estate in general is just a never ending learning experience. So there’s, you know, a ton of different ways to kind of travel down and get into multi-family or get into real estate. But for me, I just really like, it’s a never landing learning experience. You’re constantly learning new ideas, you’re meeting new people and it’s never the same thing every day. I mean, you’re looking at different properties, different markets, there’s always a lot of variables. And so it really keeps you on your toes and keeps you learning at the same time.

Seyla (05:50):

So I just want to get into a little bit about underwriting process.  So when you getting a deals, how do you actually underwriting it? And what are the things that you look at in order to make that deal was actually, uh, reasonable for you?

Justin (06:07):

Yeah, so probably the first thing, or first two things you really need to start. The underwriting process at a minimum would just be the rent roll and the T 12. So the rent roll is, is essential because, you know, you need to see how much the owner is currently paying in rent or how much the current owner is charging her rent. And then how much you think those rents could go post renovations and after reclining their property, the T 12 or trailing 12 month financial statement is really key because it’ll show exactly how the property has been performing in the last 12 months. And I mean, as you know, especially in this current environment, it’s really important to have most up-to-date financials possible and really hone in and see how that property is performing and then see how it could be performing, you know, after your acquisition.

Aileen (06:50):

So what kinds of things do you look for when you’re trying to evaluate the rent increase or the potential rent increase, um, while you’re doing the underwriting,

Justin (07:03):

One of the most important things would just be looking at comparable properties and looking at how the interior of those properties look. I mean, for example, if you’re going to go in and replace all the units with stainless steel appliances and, you know, really, you know, A-class features in the interior units, but if the market wouldn’t support that, you know, 150 $200 rate increase, then you know, you’re basically just going to be over renovating that property in a way. So you really want to make sure that your rate increases are going to be in line with the market and that the interior upgrades you do with the, with the, with the property are going to be in line with what the market wants and what those tenants want. And some good feedback on that would be really just checking in with a good property management company in the area. You know, they’re kind of the boots on the ground company every day. They know what’s going on with the market. They know what a property could potentially charge for rent. So always checking with a property management company before making an offer is, is really key.

Seyla (08:00):

So one of the thing is, to value, the property, which is probably one of the most difficult part to come up with the right value. And so how do you determine a cap rates for the property and, um, and the market that it’s in?

Justin (08:17):

Yeah. So there’s a couple of different ways to determine the cap rate. I mean, one way would just be asking the local broker like, hey, what is the cap rate in this area? Or, you know, something like, what are you seeing, you know, B class properties in this area trade for, or like what cap rate and for those who don’t know, the cap rate is just really the NOI divided by the price or market value. And it kind of gives you, it’s just your, basically your return on your investment. And it’s a way to look at our property and kind of compare different properties in a way that can make it relatively all the same. Um, so it just takes the NOI divided by the price doesn’t account for any kind of debt service. And that’s the kind of way it, you know, unless you compare different properties in a way,

Seyla (08:59):

Any reports that you use to validate that the cap rates for that market is accurate. Um, according to what a broker is telling you.

Justin (09:08):

Yeah, that’s a great question. Some of the ways you can verify the cap rate aside from just, you know, asking different people in the market verbally. Um, there is one thing that, you know, Glenn Gonzalez from obsidian capital, he says is trust, but verify. So any kind of information you get from, you know, property management companies or with a broker, especially you always want to trust, but just verify that for obvious reasons. So you can always reach out to different appraisal companies. They have really well, you know, market data, and then you can look at something called a Co-star report and Co-star usually has really good data. So that that’s another Avenue you can go down and look at, look at a Co-star report.

Seyla (09:48):

Awesome. Thank you so much for sharing that. Um, so can you walk us through some of the due diligence to validate the financial data that provided by the seller?

Justin (09:58):

Yeah. So one thing you really want to do is to validate the rent roll by doing a lease at it, lease audit. You really want to confirm that the actual leases matched the rent roll, and you can do this simply by checking the seller’s bank statements to confirm that the rent amounts in the rent roll actually reflect what the actual seller is collecting in rent each month. Another thing would be just to ask for a cash basis, financial statement, sometimes the accrual statements can be misleading. So there shouldn’t be any reason, any reason why you couldn’t, um, you know, achieve a cash basis statement, but it’s always beneficial to kind of look at, look at the cash basis, in my opinion. And again, just like, you know, any, any kind of information that you see in the O M or any kind of information from the broker or seller you always want to trust, but verify again.

Aileen (10:46):

So when you’re asking for these statements, is it during, um, your due diligence process prior to submitting it [Inaudible]

Justin (10:52):

Or is it after you submit an [Inaudible]? I would say like a lot of these, you know, all, a lot of this information you’re going to requesting is before you make an offer, um, in my opinion, it would, before you submit an offer, you really want to have all your ducks in a row. You want to make sure that the offer you’re submitting is, you know, what you would expect to pay. If it wasn’t going to be accepted, um, you would not want to retrain on a property. So you really want to make sure you have, you know, you know, feedback from the property management company terms from a lender and any kind of other information that may be going on with the property. Um, just make sure you have all that validated before you make an offer.

Seyla (11:31):

So how did you estimate the amount needed for the Capex and reserves when you are doing the underwriting?

Justin (11:40):

Yeah, I would say that’s something that could definitely be verified by doing an actual in-person tour, but to start with just doing some quick underwriting and you using rule of thumb amounts, I would use, I mean, $3,500 a for rehab. That’s a pretty light rehab, as you know, I mean, it’s a pretty simple, maybe doing some paints, replacing some fixtures and a units, um, pretty light upgrade though, something else that’s more conservative, it’d be like $5,000 a door. And with that, you’re talking more, you know, replacing some flooring, replacing some appliances, new paint, and you could do a pretty decent amount with, with 5,000. So that would, that’d be like where I would start with the initial underwriting, but, you know, again, touring the property with the property management company and even more important will be, you know, touring with a, with a general contractor. They will be able to give you some really accurate statements and some good feedback on, you know, how much they think this unit could be renovated for. And then the kind of rent increases that could come, come off that.

Seyla (12:40):

So what, at what point in the process would be an appropriate time to engage the property manager and contractors to do that property tour with you

Justin (12:51):

[Inaudible] this is after you do some initial underwriting, you know, contact the broker with kind of the price range. You’re thinking that, and they’re like, Hey, I mean, yeah, that makes sense. That’s kind of like what we’re thinking, then you really need it, you know, take action. You need to verify everything with your property management company. Uh, you need to get a term sheet from a lender and then most importantly, you need a tour. Um, so I mean, if they say like in EOM, Hey, the, the units look great. You don’t need any kind of renovations. I mean, $5,000 is really high. I mean, if you do a tour and you know, the units look a lot worse than you expected, or you might need like $8,000 a door then, um, then yeah, that could be a serious problem. So I’ll definitely make sure you have all that in line.

Seyla (13:31):

That make sense. And I just want to go back and talk a little bit about the results for the underwriting. Do you have any recommendation for, um, what type of reserve that you should put into your underwriting? You know, making sure that, um, the deal is actually solid and, um, you know, like, uh, going through, especially right now with the COVID-19

Justin (13:52):

Yeah. One of the reasons, uh, reserves that lenders are requiring right now, just because of the COVID-19 situation is a lot of lenders are requiring 12 months of principal and insurance payments. So that is something that we’re baking into our analysis now. And on top of that, we always raise a 10% contingency. So on top of all of our mountain expected for rehab, we always raise 10% more just in case things come up. And I mean, I mean, as you guys know, like things always come up, so it’s always good to have extra capital and we raise, um, around like 8% of working capital also just for some added buffer too.

Seyla (14:30):

And now I want to go a little bit voters in terms of the exit strategy. Um, do you have any recommendations for us or our listeners of what is a conservative exit strategies, um, when you are doing the underwriting?

Justin (14:46):

So yes, um, some, uh, conservative underwriting strategies, as far as your exit price, exit cap rate, we always underwrite to the cap rate escalating, and it can kind of vary by the market and vary by the class and age of the property. But depending on how many basis points that’s going to be, we always predict, we always underwrite that the cap rate in the market is going to increase. I mean, the multifamily industry is doing great right now. Cap rates are actually compressing, but your investors will feel a lot more comfortable. You’ll feel a lot more confident in the deal if you know that you’re getting to the right price point with the cap rate escalating. So that just in case the market does take a turn for the worse that, you know, you’re going to be covered. Another thing to look at is your price per door.

Justin (15:34):

So one thing that you could look at when at your entry price, so if you’re buying it for, I mean, $40,000 a door and your exit sales price is coming in around, you know, a hundred thousand dollars a door, let me depend on the strategy, what you’re doing to the property and the market. If you’re going anywhere above 30% and increase for your price for door sales price, it might be a little aggressive, but again, that’s just something that maybe, you know, talk with your partners about, talk to your mentor about and just really make sure you have that verified in.

Seyla (16:06):

Awesome. And, uh, so Justin, finally, I just want to ask you, um, what is the minimum stress task, uh, for the underwritings that, uh, you know, before you actually submitted an otherwise that, uh, that you should do?

Justin (16:21):

So a couple different things. I just want to be like really conservative in my underwriting. I, so one thing we’re doing right now is a 0% income growth for year one. And then just depending on how we feel about the market growth and how we feel about the renovations, you know, we’ll really kind of dial in our income growth for the next several years. And we’re definitely conservative a lot more conservative than other buyers in this market. And aside from going to, you know, the cap rate escalator, and I’m being really conservative with our, with our rate increases. And just because there’s a lot of uncertainty in the market right now, and a lot of uncertainty in the industry. So before we make any kind of offer, we’re really just making sure that we’re conservative on all our underwriting pieces, just so we’re really confident in the deal.

Seyla (17:05):

Awesome. Thank you so much, Justin, for sharing, uh, sharing all the tips and tricks in underwriting with us. Um, so what is next for you?

Justin (17:15):

What’s next for me is just continuing to look for large multifamily assets and Indiana, Kentucky, and Tennessee. And I have a couple of different partners I’m working with in Indianapolis. We’re actively making offers in all those markets. And as you know, it’s just really competitive right now, really tough to find something that pencils out. So aside from, you know, finding, finding deals my own, I have dreams of, you know, being a vertically integrated company, I would like to start a property management business one day within this company and really just grow and reached out to other investors in my, my market and, and work with as many different people as I can.

Aileen (17:53):

And so Justin, can you talk a little bit about how you are, um, finding those deals currently or your, um, different strategies that you’re utilizing right now during this time?

Justin (18:04):

Yeah, that’s a great question. I’d say one thing we’re doing right now is to be really unique. And by doing that, we, I mean, to be unique, we’re doing other things that maybe other buyers aren’t doing right now. So I have another partner that actually active in making cold calls directly to apartment owners. And that’s just something we’re doing to kind of beat the competition, kind of skip where, um, you know, skip like all the brokers that are coming to us with these deals that aren’t pencilling out. And another thing we’re doing is direct mail marketing and people have different opinions about direct mail. I mean, some say it works, some say it doesn’t work, but I feel like really confident in it. And I mean, it just takes one, one person to call me, right. So, um, you know, never hurts to try and, um, doing some direct mail campaigns to Indiana, Kentucky, and Tennessee,

Seyla (18:52):

Great strategy, good luck for you and for your team on that. So how has real estate investing impacted your life so far Justin?

Justin (19:05):

I would say that I like real estate. Like I mentioned, just because it’s never a name, you know, learning experience. So since kind of diving deep down this real estate journey, you know, I learn a ton of information about real estate and business and investing in general and I’ve made a ton of great connections with other people in the industry. Um, you know, I’ve taken numerous people out to lunch coffee and just, you know, I’ve met people that I never would have met if I haven’t, you know, went down this road or if I want to read that book by Michael block. So it’s really been an eye-opening experience just too kind of step outside my box, do things I’m uncomfortable with. And aside from the people that I met and learning experience, it’s just been, you know, a great way to get kind of, you know, spend my time and, and always strive to be better.

Seyla (19:54):

So what is one thing that, you know now about real estate that you wish you knew when you first started?

Justin (20:01):

Yeah, I would say I kind of, you know, going off of that, I heard this in the beginning, but not fully understand that real estate is really just a relationship business. So you really need to build relationships with lenders, property management, companies, brokers, and also, I mean, just like, you know, with active and passive investors. So I’m, you know, I’m constantly on the phone doing quick phone calls to meet different people all through the week. You know, I really like building solid relationships with brokers and to do that, you really need to, you know, do things that other people aren’t willing to do. So instead of just sending them an email saying, Hey, send me deals. Um, you know, like another thing you can do is actually, you know, travel down to their office, meet them in person, and take them out to lunch. And then something else I’d like to do is I, after I do a phone call after I meet a broker as I, them on LinkedIn, and you can just kind of stay top of mind by doing that by, you know, liking their posts or commenting and just a good way to stay top of mind to them.

Seyla (20:58):

What is one thing that sets their successful people apart in the real estate investing business?

Justin (21:04):

Yeah. So the one thing that sets successful people apart would just be grit. So doing things, like I said, that others are not willing to do staying persistent. And I mean, as you guys know, like in this business, you could underwrite a hundred deals or more and you know, maybe fine one or two that might be worth making an offer on. So for a lot of people, that’s not going to make sense they’re going to quit after X amount of months or whatever. So, you know, aside from that, like, you know, with raising capital, you could ask 30 people, you might get one person to say, yes, I’m interested. So it’s really about being persistent and really realizing every time you get to know you’re one step closer,

Seyla (21:44):

What tools or techniques have you used to improve the efficiency of your business or personal life?

Justin (21:51):

Yeah, so probably the biggest thing that comes to mind is implementing a miracle morning routine. And if anyone wants to find out more about the miracle morning routine, you can look up how L Ron, but basically the miracle morning routine is just about creating some really effective habits and routines in the morning to kind of start your day in the best possible physical and mental condition. It’s combination of doing some visualization, some journaling, some meditation and exercising, and also something else I’m doing to kind of accelerate my real estate career is working with different mentors. So I think by hiring mentors, you can really turn decades in the days. And as you know, I mean, buying apartments is a team sport. So you really need a great team with a track record and credibility. And you know, when you’re raising millions of dollars for a deal, you haven’t done it before. You really want to make sure that what you’re doing is correct. And having somebody to look over your shoulder. Um, so other than that, you know, I take, I really take advantage of free resources out there. So you can learn a ton of information from watching YouTube videos, listening to podcasts like this. And so I always try to stay up to date with those things also.

Aileen (22:57):

Awesome. Thank you so much, Justin. And so if our listeners wanted to find out more about you, where can they go? Yeah.

Justin (23:04):

I’d be happy to talk to anybody. You can email me at Justin@nextlevelequity.com and you can also connect with me on LinkedIn at Justin Goodin.

Aileen (23:13):

Thank you so much, Justin really enjoyed having you on the show today.

Justin (23:17):

Thanks for having me guys.