Underwriting Multifamily Properties with Jason Baik

Jason took the plunge and quit his W2, even though he had zero experience or knowledge in real estate. Now, he is GP an operator in over 350 units. Today, he shares with his underwriting tips everyone needs to know - even if you're not your team's lead underwriter.

Some highlights from today's episode:

• How to choose a market to invest in
• How AI will (or will not) affect commercial real estate
• Underwriting basics you need to know

Jason Baik is a Former Director and Vice President of Data Science with a B.A. in Economics from Northwestern. He is currently general partner and operator on over 350 units.

Check out Jason's underwriting course with over 20 hours of in-depth walkthroughs to truly teach you the business of multifamily from a data-driven perspective. Click here for more info: https://www.theunderwritinglab.com/

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Transcript

Ciaara: 0:00

Hi, everyone. Welcome to Commercial Real Estate Bosses, where we interview badass investors who are crushing it in the commercial real estate space. I'm your host, Ciaara Hoffmann. And on today's call, we have Jason Baik of Compounding Capital Group. So thank you so much for being on the show today.

Jason: 0:17

Thanks for having me, Ciaara.

Ciaara: 0:18

Perfect. So as usual, I always like to start off by knowing more about your story. So tell us your background. What did you do before and how'd you get into commercial

Jason: 0:27

real estate? Yeah, I used to be in corporate America, started off right out of college as a management consultant after sleeping underneath my desk one too many times decided to pivot into data and analytics. So I spent about eight, nine years just climbing the rungs of that corporate ladder investing in stocks the entire time. But I've always known that I've had this desire to be a real estate investor. So I decided to save up some money. And about two and a half years ago, I actually made the pivot into real estate full time when I had absolutely no real estate experience. I had zero units. I didn't even own my own home. And since then, I've been able to acquire about 300 and, depending on when this airs, 375 because we're under contract for some properties today. And yeah, it's been a wild ride so far. Hopefully the next year has a lot more in store.

Ciaara: 1:21

Perfect. Yeah. So that's an exciting story. You just jumped in head first, you didn't have any units. So what kind of gave you that motivation, that push to just go full into real estate without having obviously any units Yeah.

Jason: 1:36

I guess as reckless as that may seem, I decided to approach it a different way where I saved up X amount of money and I decided that I would treat myself more as a startup. I would build a runway for myself and I would give myself five years to succeed. And if I didn't succeed, I could always fall back on my data knowledge and try to get a day job somewhere else. In terms of my why, I think I've always had this innate desire to prove to myself that I can do what I set my mind to. And my ultimate goal is to have the same time and financial freedom that everyone else has. And so I figured real estate was the fastest way to get me there. And taking a leap of faith and doing this full time was going to get me there faster than Just juggling a day job and also doing real estate for 10 years. So it's a little bit of impatience mixed with a little bit of confidence in myself but I'm not really motivated by consumer things. I don't really like to buy things. I don't care about cars or boats or anything like that. My ultimate goal is literally to be able to wake up every single day. If I want to hang out with my wife, great. If I want to watch Netflix, great. If I want to work 18 hours, I'm excited. Also great. So just more about the freedom of choice, really.

Ciaara: 2:55

Yeah, that makes sense. So did you go straight into commercial or did you start off doing single family first when you made

Jason: 3:01

that leap? I started off in single family homes because I didn't know where else to start and I couldn't afford a larger multifamily, but even with single family homes, so I started off real estate investing during the height of the pandemic or actually right when it first started. And so it was incredibly competitive marketplace. I couldn't really get any deals to pencil. So the first deal I ever did was actually a portfolio of six single family homes. You can argue that's like multifamily or that's commercial because it was a big purchase, but it was still in essence, single family homes, but that was the only way I could be competitive. I saw someone that put a portfolio of 20 single family homes on the MLS. I couldn't offer on all 20, but I could offer on the six ones that I liked the most. And yeah, I guess the story is that it just ended up being accepted to my own surprise. And that's how I got started,

Ciaara: 3:53

Nice. And so going from that into multifamily, how did that transition happen? Did you already know about multifamily? Did you join a mentorship? What was that process like?

Jason: 4:04

Oh I knew even when I first started in single families that I had bigger dreams. Plenty of people have made their riches in single family homes, but I didn't want to buy a few houses every single year for over 20 years, I wanted more units and wanted more scalability. Right after I acquired, I think seven single family homes is the total amount that I I stopped with. And then I pivoted to multifamily soon after. And I didn't necessarily join a mentorship program to begin with. Like a lot of people that might be listening that are just starting off. I was always skeptical. All of these mentorship programs are asking for 10, 20, 40 grand. And to me, that just seemed wild at the time, just because coming from the traditional path that I came from, you typically don't pay that much for random education online, right? That's usually for like accredited universities or college courses. So I went about it the slow way, or I absorbed as much knowledge as I possibly could through all of the free content or low cost resources out there. I went to a bunch of meetups. I went to a bunch of events. I read a ton of books, watch YouTube videos. Udemy also had some courses on real estate that you could take. So I beat my head against the wall until the stuff started to eventually stick. But it wasn't really until I convinced a professional real estate investor an asset manager who was really good at underwriting to tutor me and I paid him for the hourly time that I feel like my journey changed and my trajectory kind of shifted because Getting that real time feedback with someone experienced helped tremendously.

Ciaara: 5:50

Absolutely. I think it's going to help a lot when you hire someone. If you can find a mentor in this space, who's going to walk you through, especially it sounds like your expertise is in the underwriting. You have a background in data science, so that felt like a good fit for you. So How has your background been able to get you to where you are now?

Jason: 6:10

I would argue that part of the cause for my continuing success is based on my love of data and my expertise in it. Because real estate especially in commercial requires a large team. You really have to provide some sort of concrete value to others in order to be a part of that team. And for me I decided to translate stuff that I've already known about myself, that I'm pretty data driven. I'm pretty good with numbers and use that as leverage to get my foot in the door with the right team and the right partners. I love to underwrite. It's not the most glamorous of roles, but it's something that I enjoy. And knowing that real estate also takes a long time and it's a long term game. I always tell people to double down on something that you actually like. I tried to raise capital a little bit. I wear many hats today. I'm an asset manager. I find deals. I oversee assets myself directly. But you have to also make sure that you are providing concrete value to teams and niching down is typically the easiest way to provide that concrete value. Yeah.

Ciaara: 7:19

So underwriting seems it was easy for you because you love doing it. You're interested in it. You love numbers and data. I think what trips people up the most is underwriting because most people aren't data scientists. They don't have that type of background. I know you do have an underwriting course, you're teaching people to do this. How can you teach people or help people to do it who don't have that natural numbers background? Is it something that anyone can do, or do you feel like it's something that you just really have to enjoy numbers in order to be an

Jason: 7:47

underwriter? I think my personal opinion is that everyone should know how to underwrite because at the end of the day, if you're not the one that at least understands the baseline model yourself, you're putting the complete faith in someone else That this deal is worth pursuing and the secret that not a lot of people might understand is that I, as an underwriter can make every single deal work, literally every single deal in the world, I can produce whatever returns you may want to seem because it's just a spreadsheet model. It's just based on whatever inputs you put into it. So I'm not saying that, all underwriters are out there to con you or anything, but it's more that's everyone is subjective. Everyone has their own opinions. Everyone has their own risk tolerances. So if you are allowing someone else to make that decision for you, there's a lot of chances for miscommunication or just ignorance. So I always recommend that people understand at least the baseline to be able to underwrite a deal yourself. And part of how I teach others is also something that I've learned in corporate America, where coming from a world where I was talking to CFOs or CEOs or CMOs, Not everyone likes numbers. Most people want a distilled version of your findings. They don't care about your r squared value. They don't care about your chi squared test. It doesn't make sense to them. I learned even in my corporate job that I had to go the extra mile to take all of this complex statistical language and these findings and convert them into plain English. And part of how I teach people leverages that same skill set. Underwriting is not particularly... Difficult, but it's not easy. And I've built a process that allows people who might not even be good at Excel to at least do the bare minimum to understand if a deal is right for them.

Ciaara: 9:41

That makes sense. Going back to data. There's so much information, so many things people can analyze. It can get overwhelming. So how do you use the data to analyze deals, improve deal analysis? Like, how are you merging those two worlds?

Jason: 9:56

So that's a great point because analysis paralysis is a very common term that a lot of people suffer from and when you're starting it's quite difficult to not get overwhelmed by all the various data points or the data sources or all the tips and tricks that everyone gives. So part of what I've understood are the three biggest factors is having a process from someone that understands what it is to take down multifamily deals. Getting benchmarks from that individual so that you at least have a place to start and then creating a feedback loop of some sort allows you to make sure that you are getting real time feedback on the mistakes that you might be making in real time as you're trying to underwrite. It's not easy to sift through all the noise, it gets, it's like a, I hate to get too mathy, but like an exponential graph where it's really hard, but all of a sudden, once you start learning the nuances, it gets exponentially easier just because you know what you're looking out for now. And so the easiest way, again I went down the bullheaded way of trying to learn everything myself and I would spend 10, 12 hours a day for one underwrite. And it was incredibly ineffective, incredibly inefficient, but it's something that I had to do for myself just cause I am the way that I am. But getting a network helps tremendously joining a mastermind. I'm part of multiple masterminds today. Even finding partners or other people that are on the same journey and being able to bounce ideas off of them helps tremendously, but there is a lot to be said about not focusing on the wrong areas of real estate investment, because there's a lot of knowledge out there that people might not realize that it's not made for them. It's made for more institutional buyers. Yeah, it's a difficult ecosystem of picking and choosing the right information, but that all comes with education.

Ciaara: 11:48

So you mentioned you were spending, 10, 12 hours underwriting one deal. How much time, like if we're efficient at this and, we have all these deals coming in, how much time should we be spending on underwriting a deal before we come to a conclusion of this looks good or, this is probably not going to work.

Jason: 12:06

So the method that I teach is a top down approach where you always start off with the area because the basics of real estate is that you can improve a property as much as you want. You can put five, 10, 20 million into a property and fix it up to be brand new. You can't inject that same amount of money into a location. So if you have an amazing asset in a crappy location, that's something you probably don't want to take down. While the reverse, a crappy asset in an amazing location is something that you should obviously be excited about. Again, it's all about the process where I spent 10 hours underwriting a deal and then I Googled the address and I realized that I was in a class D area. And of course, that's why the returns look so amazing. So if you flip that on its head and just Google the address first, you can save yourself a lot of headache based on the criteria that you set for yourself. When I'm taking a look at a deal clean, I always started with macroeconomic KPIs job growth, population growth things like that. Although I have opinions there as well. And then I take a look at Google maps. I drive around the streets to look for signs that the neighborhood is going in the right direction. I then look at the numbers of the deal to ensure that they pass some basic rules of thumb. And only after those initial steps that do I open up a spreadsheet and go through the effort of analyzing the deal fully. Before you make an LOI or at least get under contract, I'd suggest that you do that full underwrite, which could take still four to five hours, depending on how good you are with a spreadsheet. But if you're looking at just Google Maps or just the address itself, that could be as short as 15, 30 minutes. There's been multiple times where I get a deal from a broker. I realized it's not in their area that I want it to be in, and so I pass on it in a matter of minutes. And so that could technically be considered an underwriting, right? Because I took a look at a deal. And it's something that doesn't fit my buy box. And so I pass on it. So it all really depends on the process you use to go through underwriting.

Ciaara: 14:12

Got it. Now when someone's choosing a market to invest in cause we get deals from brokers on the daily when you get that email from a broker saying, Hey, this is a property that, it's either off market or it's listed. Is that when you say, okay, let me research this particular address. Let me look at that market or are you even before that you already know exactly which market you're going into. So you just say no immediately because that one is not fitting with what you're looking at.

Jason: 14:40

So my suggestion is always to have a core market that you focus on. I am an operator, so I am the one that finds the deal, that puts together the team, that stabilizes it, that talks to the property management company every single week. And I know from experience that building a team is not easy. And I have a team already built in Cincinnati, which is where we're focused on in terms of our real estate investments. So I look at Cincinnati deals. If I found a deal in the middle of nowhere, Idaho, I don't know any contractors. I don't know any property managers. I don't know any lenders in Idaho. So the effort that it will take me to get there will be multiple years at the very least. And so if you're starting out, I know it's that FOMO, the fear of missing out forces you to want to take a look at every deal in every single location, but at the end of the day, you have to niche down. You have to start focusing because. There's no way you're going to be able to operate a deal in two different parts of the country effectively. Now, you can partner with other people, but again, to start off with, I think it's better to be, narrower just so that you don't drive yourself crazy. And just so you start to find real traction instead of spinning wheels, just looking at a bunch of deals across the country that you're not going to end up closing ever anyway. And a lot of people as as a follow up question to what I just said, ask me, Oh, then what's the best market to choose? And I think part of the misconception out there is that you should be using the same exact macro metrics that all these institutional investors are using population growth, job growth, household income growth, job trajectory, or, where employers are moving. And also that's a fallacy that leads a lot of people to invest in areas where they are really small fish in a really big pond. So I always recommend people who are starting out to also just focus on an area where you have some sort of competitive advantage yourself because you need to master an area and mastering an area where maybe it's your hometown. Maybe you have a brother that's a contractor. Maybe you just know someone that's local that knows area really well that will take you a lot farther than trying to compete in Dallas or Phoenix or Raleigh without any competitive advantage there.

Ciaara: 17:03

Now that makes sense. So for somebody who is new, they want to maybe learn underwriting. What are some starting points for them, like some tips and tricks for somebody who just wants to get that basis down that you were talking about for underwriting? And maybe they're not even going to. specialize in that area. Maybe they're a capital raiser, but they want to just know enough to be able to know whether this person is presenting a good deal to them or not.

Jason: 17:26

There's a lot of great free resources out there, there are Facebook groups, there are free events, free weekly Zoom calls, there's books by Rob Beardsley has written some good underwriting books, and It's doable in terms of absorbing all the knowledge yourself. I did it on my own, so it's not rocket science, but what I had to do was trade my time for it. I had 40 hours a week free that I didn't have a day job for. So I decided to use that to really. Learn everything that I could from as many different sources that I could find. So that is definitely one option and it's perfectly doable. The second option is usually paying for something. I love the idea of paying for one on one time. I stopped really offering that myself because I don't have the bandwidth. But finding someone that has some sort of knowledge or experience underwriting. And getting them to quote, unquote, like tutor you, I think will also bring you a long way. You can always join masterminds, but they can be quite expensive. And unless you're very serious about this specific asset class, I don't recommend you drop in 20, 40 grand on a multifamily mastermind, unless you can afford it.

Ciaara: 18:37

Of course. And so going back to data analysis, I think a lot of people are just noticing right now that AI seems to be overtaking everyone's social feed right now. Obviously, AI has the ability to process a lot more data than a human can a lot more quickly, more efficiently. So how do you see AI affecting our ability to underwrite deals? And do you see it as being an overall positive for us as investors or potentially negative?

Jason: 19:08

That's an interesting question. And I might have a different perspective just because I've been in data my entire life. Ever since I started, AI has always been like on the fringes of every conversation that I've ever had, where being in data, one of our biggest fear is having everything that we do be outsourced to robots. In my opinion most of what in data or in real estate. Requires a subjective touch that just is not possible to be completed by a robot, and I'm not particularly worried, or I'm not very optimistic that AI will suddenly infiltrate on multifamily and all of a sudden make things a lot better. Real estate overall is pretty old fashioned. And as much as I've tried to create some processes based on my coding and my ability to automate things there's a lot of stuff that's still done in person with handshakes and just face to face. So underwriting is also only as powerful as the story that you can tell after you've completed it. What I was alluding to before where if you can do an amazing job with underwriting, you've got all these technical details, but you're terrible at marketing that your passive investors or to any potential partners, the deal is never going to get done. So part of the role of the underwriter in my personal opinion is also taking that one step further and really distilling this opportunity into a small package that allows a investor to get excited for it. And that requires a lot of an ability to storytell a knowledge of the industry or the market that you're playing in, it requires some marketing across some salesmanship. I don't think AI is going to be able to handle what is arguably the more important aspect of underwriting, which is the storytelling part. I'm sure you can get AI to plug some numbers in. You can train VAs or parakeets at this point to plug numbers to an Excel spreadsheet. That part is not that difficult. But that's not underwriting in my opinion. That's just manual labor. That's just plugging numbers into an Excel, which. Is very low value. The high value aspect of it comes from understanding the business, which I'd argue only a real estate investor can do at this point, not necessarily an AI bot.

Ciaara: 21:35

All right. I like to switch gears a little bit here and do a walkthrough of a deal that you've done. So it could be one that maybe was more challenging than the others, maybe your first deal. And just walk us through, step by step, how did you find the deal? What worked, what didn't work and what did

Jason: 21:51

you learn from it? Yeah, sure. I can. I love talking about our first syndication deal that we did as Compounding Capital because it was an amazing experience. And like I even like to this day, we're pretty much stabilized, but I still learn a lot of new things from it. So this was a 36 unit that we actually found on Redfin of all places. It was publicly listed by a residential broker. And part of why I love telling people to focus on a specific market is also that we would not have been able to check Redfin for this deal if we didn't know that Cincinnati was our core area. If you're looking across the entire United States, you're not checking Redfin for every single market in the world. And so you're going to miss on these opportunities that might be gems in the rough. So this was marketed by a residential broker. They were asking for under market, and we jumped on it. I think we, we offered on it within 24 hours of being listed publicly, and we were under contract within another few days. So we were the first offer, and we were accepted immediately. So that was a great lesson there in terms of trying to find those deals, and it was an already stable deal. We wanted to add some value in terms of turning the interior and transforming the community. And that aspect of it went pretty well. We have construction in house so we can keep our costs to a minimum while still deriving a lot of ROI from the amount of money that we put in. But what we weren't prepared for, like most of the real estate investors today, Was this leasing struggle period that happened in Q4 of actually last year. So all of a sudden come November, no tenants were moving in. There was no applications or no showings. And it was a trying time for every operator because at the end of the day, I'm responsible for making sure that this asset is performing and that occupancy remains high. So fortunately, we had a wave at the end of December that was strong. We went really hard on marketing. We did apartments. com. We did Facebook ads. We did Google ads. We for some of our properties, we did own standalone websites. And so we went really hard on marketing. We tried to focus on also customer service where we're responding to tenants really quickly to make sure if they're in the market to make a decision soon that we don't miss on that boat. So it was a lot of hands on involvement, even though we have third party property management companies. We still take ownership if there's any obstacles that the asset is suffering from. Yeah, that was an interesting learning, but fortunately part of what we pride ourselves in and also making sure that we have enough cushion, we're not assuming that we can take down a property and do full unit turns for 5, 000 a unit, right? We're not assuming that during year one our vacancy is only going to be three percent. We are much more conservative with allowing a buffer, so even despite the increase in vacancy that we suffered from earlier this year and late last year, we're still able to actually hit our projections. We just gave our first distribution in February, and we were able to do that because we had a lot of buffer built in. Now, most of that buffer has been eaten up by this unexpected situation, but that's what it's there for. And so it's a win and an obstacle. We're going to continue to build buffer and now we know how to handle slow leasing situations a little better. And it's a constantly evolving process and I feel like I'm always learning something new every day.

Ciaara: 25:27

Love it. And I like how you said, it was listed and then within 24 hours you put in your LOI, which you could never have done a turnaround time that quickly if you hadn't already identified your market, if you hadn't already built the relationships in that market with property management companies and other players in that market. So obviously a lot of upfront work was needed before you even got to that point.

Jason: 25:51

Exactly. And that's part of the mastering your market that takes months. Like you have to meet multiple property managers. You have to meet multiple lenders. You have to get face time with these brokers. But all of it eventually pays off. It just might take a while to get to that end.

Ciaara: 26:08

Awesome. Jason, thank you so much for being on the show today. Where is the best place for people to contact you online and learn more about you and your underwriting course.

Jason: 26:17

Yeah, I'm pretty active across social. I give free underwriting tips every single week for 2023, or at least that's the plan in which I plan to stick by Facebook, LinkedIn, Instagram. I'm also starting a YouTube channel that depending on when this comes out, might have it's first video already up. But across all social media, I'm just, Jason Baik, b a i k. If you're interested in learning a bit more about how to improve your underwriting it's the underwriting lab.com. I've got a self paced video course that's 20 hours of content that tries to really teach you the business of multifamily and how all of this kind of functions in reality. And if you just want to follow the brand and kind of stay up to date on projects that we're working on, it's compoundingcapitalgroup. com all one word. Perfect.

Ciaara: 27:02

And we'll make sure to have all those links in the show notes below. Thanks everybody for tuning in today. If you guys enjoyed today's show, please write us a five star review on Apple podcast or Spotify. Every review helps us to reach more and more people looking to get involved in commercial real estate.

27:18

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