Episode Transcript:  

 So there's a lot of terms we throw around in real estate, and one of them in particular is underwriting. But the reality is a lot of people actually don't know how to underwrite. So today we're gonna learn what you can do about that and how you can improve your own due diligence as a passive investor and more.

Let's get REady2Scale out.

Hey guys. My name is Jeannette Friedrich. I'm the Director of Investor Relations here at Blue Lake Capital. Joining me today is Jason Williams. Jason is the chief underwriter for Lauren Capital, as well as the Chief Underwriting Officer for ironclad underwriting. In addition to that, he's also the co-founder of the Academy presents, as well as the president of XHX Consulting.

Now, interestingly enough, prior to that, he was actually. A senior r and d thermal engineer at Tranter, and he has his PhD in chemical engineering as well as his bachelor's in chemical engineering from good old Texas Tech University. He's joining us today from Greater Wichita. So Jason, welcome to the show.

Thank you. 

Yeah. All right. Now this is, mind blowing chemical engineering to underwriting expert. How did that happen? 

Chemical engineering. I started when I was a kid, I always knew I wanted to be rich, and I figured chemical engineering is one of the better. And I guess career paths to choose, I was wrong in that regard, but I chose it anyway and I started liking engineering.

It's like solving problems every day and they're different. I was, I earned my PhD in chemical engineering and I went and became an r and d, a research and development engineer. And so what I did as an r and D engineer was I had to create systems so that we could test our heat exchanges set as a thermal engineer.

So I was testing heat exchangers. Reducing the data so that our sales force could sell the heat exchangers. And so I had to create systems that could go from the lab tech to the sales force with minimal input for me. And so that's what I did, and I carried that over into real estate, into underwriting so that whenever someone gets a deal, they could put it in.

Do most of the stuff automatically and through modeling, and then they can get a result that way. So that's how I was able to cross over and that's the long and short of it.

Interesting. Interesting. What do you what do you think now when you look back at, say, maybe your first model versus the type of modeling you're doing today?

What what insights have you gathered along the way that have refined the way you underwrite? 

So I'm never gonna have a finished model. It's constantly evolving. It evolves with economic times, it evolves with different lending parameters. It evolves with different investment strategies.

It involves with, all right let's implement rubs, or let's not implement rubs. There's all sorts of different things you can start implementing. And so I look back at my first model and it's like very rudimentary. I bought properties with it, but everything I've learned since I've in incorporated into my model.

And then I also consult people with underwriting. And anytime they have a issue, a lot of times I say look, can we model this? And as an engineer, I worked with a guy and he says, nothing's impossible. So anytime someone asks for something. I think about how I can do that and not, it can't be done.

So then I'm putting all their ideas into my model too, whether I use it or not. And so it just becomes more and more robust and it does become a little bit more complicated, but it can still do pretty much anything. And if it can't do what you need it to do, I can make it do what I need it to do.



Very interesting. Now, the reality is most folks really don't know how to underwrite. Your everyday, average Joe investor, and that's why, they look for sponsors that they can partner with and trust because they trust that the sponsors know how to do this stuff and they have the people to do that, and they know how to read that correctly.

But for those that are really wanting to kick up to the next level in their own due diligence and start to try to learn how to actually underwrite, how pragmatic is that? What kind of timeline does it take to learn to underwrite? And what would be essentially the steps that somebody could take themself through if they really did wanna sharpen that skillset?

So I jumped in to multi-family real estate using a mentor. So I would recommend anybody getting into the space have a mentor or a coach or somebody who can, you can bounce ideas off of. You can share their experiences that way. It can, one of my coaches says they'll turn decades into days, maybe more like weeks or months, but you can still get it.

So I recommend going through a mentor and I do happen to have a coaching program that there's many other ones out there that I would recommend or. Recommend you do your due diligence on and look at it, but if you don't. Want to invest in a coach or mentor just yet? I have a lot of content on my YouTube channel, on my website, a lot of free content.

We have a community where you can go and join for free and there's a lot of content there, so you can pick up bits and pieces of it, but if you worked with a coach, then you can get into the weeds, the nuts and bolts, and how things work versus just like a bigger general picture of it.

I hope that answered your question with that 

yeah, a little bit, but let's pull the thread a little bit further if just in a very simplistic way, let's say this is, a lot of times I think, people that do active investing are certainly motivated to learn how to underwrite, and get a mentor for passive investors, maybe not quite so much.

That's an additional investment on top of an investment, right? So if somebody wanted to say, start their own journey to learn it, what would you say is step one? Is there risk, to, just trying to pull up a YouTube video that's like underwriting 1 0 1 and trying their hand at that.

Do you recommend that? What's your advice for somebody that really in some way, shape, or form wants to take the step forward? 

So YouTube I've looked. On YouTube and you find a lot of handwaving. You might find grant Cardone teaching his daughter how to underwrite an apartment complex.

He does it in really simplistic forms and methods, but it's not, it doesn't really pertain to an investor. It's like they want, there's, they're gonna put in maybe hundreds of thousands of dollars. They want to know if it's safe. They don't want to. Trust it to something you teach a 8-year-old or whatever.

So you, I'm working on putting more content on YouTube. But what I would do first is if you're thinking about investing in someone, once someone's deal, get their underwriting, if they don't share your, their underwriting with you, I think that's a big red flag and. You can, you should walk the other way right off the bat.

'cause if they don't wanna share it with you, how do you even know that their projections are right or anything? And then if they do share their underwriting with you and you have a big old spreadsheet and you get like overwhelmed just by the complexity of it, I recommend you call me up and I can help you.

We can walk through it. I can, and yeah, it might be another bit of an investment. I've saved people probably literally millions of dollars helping them through my consulting on underwriting. I've helped passive investors, fund managers even active operators. So I help everybody but the passive investors, I come to me a lot.

It's like they bring me a deal Hey. Does this work or are these reasonable? And then I'll point out some red flags that I see. I tell 'em why they're red flags, and then the next time they understand, Hey, these are the red flags Jason picked out, so this is what I'm seeing again. And so they don't have to keep coming back to me for every deal.

They gain their knowledge that way.

So basically in, in summation then, is your advice that as a passive investor it's smarter, faster, and easier to just go ahead and consult with the right people that can take a look at that rather than really taking the time to learn how to do it.

So the way I think of it is passive investors are passive for a reason, and the more active you make 'em, the less passive they become. 



And then eventually everybody will be I'm doing more work than these operators. I, and I'm only a passive, I want more part of the deal. But I'm also a big believer in the who not how.

So you find somebody who's good at what you want done and you work with them and it's yeah, I work I work in spreadsheets and modeling and stuff. I'm not so much into like capital raising myself 'cause I'm an engineer and I'm an introvert. But I know people who are, and I team up with those people, so and they team up with me so that I can run the numbers for 'em.

And they trust me and I trust them. And so it's who, not how in a big way. 

Yeah, for sure. All right. Now, you alluded to earlier about, helping somebody recognize the red flags, so let's talk about that. So before you even start to model a deal, and when you're first just looking at it, back of the envelope type of thing, what are these red flags that you think are most important for people to pay attention to and look for?

Some big red flags that I see are and it still pertains now, is using temporary trends for the long game. Back in 20 20, 20 21, places like Phoenix, Arizona, they were getting double digit rent growth. I think San Antonio was getting up to 30 plus percent and people would come to me and they would underwrite I 30% year over year for five years and. If you're in the space and you've been in the space since then, you know what happened? A lot of those places actually had negative rent growth, a lot of vacancies. 'cause people were moving away. And so it's that's a big red flag right there. It's like you don't want to just 'cause you're in a good time now.

You can't carry that over in five years and make that be your business plan 'cause that's not sustainable. Yeah, absolutely. And another one, this one may not be so much for passive investors as operators, but considering only annual cash flow. So a lot of the models that I see are like year one, year two, year three, year four, year five, and they just give you a number.

I like to consider the monthly cash flow, and especially for heavy value add plays where. And I give this example, I see this all the time. It's say your cash flow for year one is 18,000. Okay? And it's oh, okay, 18,000. So that gives me about what, 1500 a month roughly. But what you don't actually see is for the first six months, your negative 24,000, and then you make up the other, what?

42,000. On the back half of the year. So the first six months, you're coming outta pocket, you're coming outta your reserves, and if you didn't raise those reserves you're dead before you even get started.

Yeah. Excellent. Excellent piece of advice. Any other additional red flags that you can help us, take notes on here?

So this doesn't pertain to passive investors, but the operators you're investing with, how many markets are they in? Are they like just scatter, shoting, all over the country? Are they in s. South Carolina, North Carolina, Texas. Texas is big. Are they in Dallas and Houston? Austin, San Antonio or whatever, or are they in Ohio?

You wanna make sure that they like concentrate on a single market and learn everything before, learn everything about that market before moving on to other markets. Like some big players, they might start in Phoenix and then after they get a good foothold there, they might branch out to DFW or something, but.

You don't want to just follow the big players wherever they go because they've already got their ground set and you want to get your ground set because there's nothing like being your own comps. It's this comp is comparable to this apartment complex that I own down the street, so I know I can get these.

You're just guessing and you're just scatter shoting all over the country. It's like that's just recipe for disaster.

Yeah. Excellent. Very good advice. What about when it comes to projections? That's one of the most difficult and challenging aspects of underwriting, is trying to really gauge, okay.

How much is inflation gonna go up or down? How much is insurance gonna go up or is it actually gonna go down, and trying to gauge labor, right? Labor, how much is labor gonna cost? How much our supply is gonna cost. When you're looking at those types of projections or rather if you're advising.

Someone that's a passive investor that's trying to look at, someone's underwriting and make, sense of it and rather or not, it's on point. What are some of the kind of best practices or rules of thumb that you, yourself exercise that you would advise other people can to when they're looking at these types of projections?

When they're really very unknown and people are just, doing their best with whatever rationale they have to guess that it's gonna be x. 

You mean you're not polishing your crystal ball? No. And actually I was just talking to my business partner about this earlier today is we're seeing a lot of deals where people are assuming like, lower cap rates than they are today.

And it's like what we, what I like to do is I do sensitivity studies. It's what will happen if the cap rate is lower? What will happen if the cap rate is higher and yeah, I'm ideally it would be maybe a point or two higher or less than two points, a point higher than when you buy it. But maybe what if it is two, two and a half percent higher?

It's that can kill a deal right there. I do a lot of stress testing. What can I push the limits of? What would it happen if I hold it for six months versus 48 months or something? What happens if vacancy drops to 70% or whatever? You need to be able to look at all this stuff and make an analysis of it, but it might not be your business plan, but you at least have to be mindful of what's going on.

Then as an investor, if you see someone doing these sort of projections or sensitivity studies, you realize that they're at least thinking of possibilities that could happen in the future, whether it happens or not. And so they'll be more proactive as operators than reactive. So that's what I stress too, and that's another one of my big red flags is not stress testing, so 

Oh yeah, absolutely.

But back down to the. Getting down to kind the nitty gritty details here, what do you think is actually, in today's environment, a reasonable way to gauge, say, the cost of labor? Does it increase 2%, year over year, 3%, year over year? Or with insurance, which is also extremely difficult to gauge, right?

How are you determining exactly what type of growth you're attributing to those types of factors? 

I try not to do anything myself. I have third parties that I trust for insurance. I have insurance brokers that I can reach out to and say, Hey what are things looking like? And I invest in Texas.

Five years ago we were looking at four or 500 a door, and now we're up to 1100. Florida on the coast, you're looking at 2,600. In, say, Idaho, you're still at 1 50, 200. So one, it depends on your market. But it's like you need to have these relationships with people who can tell you where, what things are doing.

And again, it's a who not how. I'm not gonna go out and reach out to all these insurance companies and say, Hey, how do I, or what are the numbers for this market, rev, for this build and all that? I send it to my guy and he gives me a indication. That I can use for my underwriting. This is before I even get like a solid quote.

Cost of living employment. That, that's just hard, but it's every pro forma I have, like I said, a third party. Have eyes on it for taxes, insurance even the budget for proforma rents, what we think we can get the rent for, and what do we think the vacancy will be, and what do our expenses look like?

They know what they're paying their employees, and so they can assume that's what other people will be getting.

Yeah, interesting. Now, this was not one of my planned questions, but I, the curiosity can't, I can't help myself so I can get the giant insurance, rates, being jacked up in Florida.

That makes sense to me in Texas. That doesn't really make a lot of sense to me. What is the underlying, theory behind why that such significant increase in insurance charges? 

Hail, wind and hail are a big, we're in tornado alley. And I don't know if you remember back in 2021 in February, like Texas was, the whole state of Texas was frozen.

Yeah. Yeah. I actually am originally from Texas and I was living in San Antonio at that time. And. I I had no electricity for a week and I remember joking, I was talking to my boss, our CEO, Ellie Perlman, and I told her that I felt like I was in the Hunger Games because it was actually warmer for me to stay on my porch with my little fire pit.

And have my little fire going. And so I was roaming the streets literally looking for sticks and twigs 'cause I was running outta things to burn, to keep my little fire going. And yeah, it was a bummer for sure. It was very rough and a lot of people actually died, which was crazy. But I still don't quite see how hail and.

Yeah. The freak freeze that we had, and, occasional flash flooding still correlates to anything near the destruction level of, huge catastrophic hurricanes, like in Florida. 

So my, my understanding is, there was a lot of damage. It wasn't necessarily anything but like pipes breaking 

Houses flooding and and I don't, I think the insurance. Companies still haven't been made whole from how all the payouts they made then. And so they had to increase rents or increase rates on everything. And that's what kicked off, like the huge rate increases the premiums is was that.

They're starting to come back down, but they're still sitting at over a thousand dollars a unit right now. And wind and hail. It's like I can buy a wind and hail deductible buy down for $250,000 on one of my properties. Regular insurance is like 70,000. So I was like, I could spend two 50 and I hope I have a claim because if I don't have a claim, then I just wasted it, it's like you wanna, you're not gonna buy it down unless you're planning on using it, yeah. But it's it's just it's horrible. And after that, it's like there was only like two or three companies in Texas. They all left. And so I think that they got to pick their own rates at that point.



Yeah, very interesting. And for those of you, listening along with us today, and a lot of people don't realize this, but my husband is from Houston and he learned the hard way that, you can get flood insurance, but that ne won't necessarily cover hurricane damage because they consider that to fall under the wind and rain category.

'cause technically it was, a bunch of rain and wind, that allows water to get into the home and, a bunch of. Crazy hoops people have to jump through and multiple layers of insurance people have to have in place to cover the different type of catastrophes that can occur.

Yeah. 

Yeah. And the insurance is, I think it's just a joke. 'cause a lot some companies like, your pipe bursts and your house flooded, but you don't have flood insurance. So they won't cover that. Or they might cover it, but you don't know. And so it's even though you're not in a flood plain and you don't need flood insurance normally, if you don't, if a pipe bursts, how can you consider that a flood?

Whenever the freeze caused the pipe to burst. But insurance is. Yeah, that's a different topic. 

Yeah, it is. It's a whole other count of worms. And getting back to where we were it's great you put together an underwriting, you feel really confident that you know this is gonna be a good deal, a good investment, and then reality, hits and you gotta hand handover that underwriting to asset management and say.

Here do this, right? Yeah. What do you do to try to ensure that after you have conducted an underwriting and you're actually handing that off? That the partner or the asset management team that you're handing it over to can actually be successful in implementing it. 'cause it's all one grand plan, but you gotta make sure it can align with reality.

Do you have any kind of special practices or tips that you've learned to really help solidify, your theory become reality? 

So actually that is like my third pillar in my course that I teach. Is like, all right, you have this business plan, now let's make it work. So what I teach my students is, and this goes back to the like the monthly cash flow.

Every month that you own a property, you should be getting the financials. So what I do is I put those financials in my model and I can compare what the budget is, what the pro forma is, and what the actual is, so I can watch. Everything going and we can see, all right, our actual revenue is actually better than everything else, but our expenses are way higher.

And so our NOI is 10% lower than it should be this month, and so it lets you get on track a whole lot sooner and. It makes it so come month 13 of ownership, you realize, hey, your NOI is 30 or 300,000 shorter than it should be. What do we do? You can project and make changes a lot earlier on. So that's why I do the monthly versus the annual as well.



Yeah. Yeah, absolutely. Now I'm curious to know since you've been doing this for a very long time. What would you say was one of maybe an example of a deal you underwrote that looked rock solid that totally did not come out that way? And what lessons did you learn from that?

I was in a deal, I was a passive investor 'cause I was learning the passive investor stuff. While I was creating my stuff so that I could see what the passive investors should be, experience, what operators should be doing for the IMP passive investors. So I was a passive investor in the deal.

Everything looked good, underwriting looked good, the proforma looked good, the rent projections looked good, everything looked good. What happened though, was the GP team did not raise enough, and so they were funding CapEx from the cash flow. I got zero return from it and there was a lot of other things going on and they ended up selling it and I think I made 2,500 bucks.

And at the time I thought it sucked. They held my money for almost two years, and all I gave out of is 2,500 bucks. But. After hearing about all the foreclosures and everything happening now, it's like at least I didn't lose everything. Yeah. So I can't complain too much, but at the time I was complaining a lot.

So really my biggest thing is even if the underwriting looks good, it's you're betting on the jockey. You can have the fastest race horse, but if they don't know how to run it, you, it doesn't matter. They can run it into the ground and you not get anything.

Yep. Very true.

Alright Jason, this has been very fun and interesting. Before I let you go, I'd like to take you into what we call our lightning round questions, which are just five questions that I ask all of the guests on the show. So are you ready? Sure. All right. So when you're not underwriting, what do you actually do for fun?

What do I do for fun? I have four kids and so I do a lot of stuff with them. Like over the summer I didn't let 'em have devices, so we played a lot of board games. 



So that, that was fun. Let's see, what else do I do for fun? I. I hang out with my wife and we go to date night, like once a week or so or try to.

So 

Nice. Very nice. All right, and what is something interesting about you that most people don't know? 

I don't know because I just lay it all out there and everybody knows everything. I'm an Eagle Scout. I went to Philmont with my daughter in 2022, which is a high adventure scout ranch in New Mexico where we hiked for 60 some odd miles with wow.

50 pound packs on our back and. My daughter was one of the few who actually made it and I made it 'cause I went with my dad when I was a kid. And actually we went up to the summit of Mount Phillips and I got this, a picture of my daughter, the same place I got a picture of my dad. So it was really cool.

That is really cool. Nice. All right. Very good. Now what about a book or a podcast? If somebody, just wants to get sharper when it comes to, say, underwriting or, understanding economics better or even investing, is there a book or a podcast that you're a big fan of? 

You mean apart from the Ironclad Underwriting podcast?

Of 

course. And no shame in putting that plug. That's a good one that people should check out. 

I do have a podcast where we just recorded the 16th episode, so I, so it's fairly new, but most of the podcasts and books that I listen to are, like I mentioned too, not how. 



Dan Sullivan and Ben Hardy I listen to their podcasts and they have a handful of them.

But the books let's see. 10 x is easier than two x. I like that. So a lot of those type books lately I've been listening to Alex her a lot. All right. He does a hundred million dollar, offers, a hundred million dollar leads, and now he has a hundred million dollar money models out.

So 

Interesting. Okay. I'll have to check that out. Very good. All right. One of the things that's important to us also to always sum up the show with is, this is great. We all wanna have money. We wanna see some strong returns. That's cool. But the point the point of it is being able to build and to live extraordinary lives.

To have that as a tool, to support what we really wanna be doing with our lives. So what's your advice to someone that is focused on that? 

So like the passive investor side or just in general? 

Just in general. For someone that's focused on trying to really build and live an extraordinary life.

So I, I feel like I have a good life and I think it happened after I left my W2 job as the RD engineer and yeah, the work life balance might not actually be a 50 50. But what it does afford you is you can be with your family at critical times. You can go on vacations in the middle of the week and not have to call in for anything.

So I would say if you put in the work now, it pays dividends later and it gives you more freedom in the long run. 

Yeah. Excellent advice. Very much all right, very good. And then last but not least, Jason, if folks wanna get in touch with you because they need you to look at this underwriting or, need to, pick your brain for something else, how can they find you?

I have, like I said earlier, I have a lot of free resources ironclad underwriting.com. We have our community, which again, has more free resources that you can access through that website. And you can contact me, we can set up a time to call. I have a Zoom call at ironclad underwriting.com or I'm on, I'm, oh, I'm on LinkedIn a lot.

So it's linkedin.com/ Jason Williams PhD or something like that. Or just look me up. There's not too many boats floating around LinkedIn. I also I have free resources on my YouTube channel where I have my podcast episodes. I, and I'm on Spotify and Apple and all that for podcast episodes too.

So you can find me pretty much anywhere. So 

Very good. Thank you so much for letting us pick your brain today and giving us some helpful advice. Really do appreciate it. And for those of you that invested your time with us today, thank you. We appreciate it. Make sure to leave us some comments.

Let us know what else you would like us to dig into, and in the meantime, be bold, be extraordinary, and keep moving forward. Ready to scale is brought to you by Blue Lake Capital, where we hunt down the best multifamily investment opportunities that we can find and invite investors to join in with us. We target Class B value add multifamily properties across the Sunbelt.

Our CEO Ellie Perlman invest a substantial amount of capital into every deal. This means our interests are aligned with yours. If you're an accredited investor looking to expand your portfolio and diversify sponsors, be sure to visit us@bluelakecapital.com. Blue Lake Capital, be bold, be extraordinary, and keep moving forward.