Escape the Rat Race: A $200M Real Estate Investment Guide For Investors, Fund Managers, and Founders

Drew is the Founder and CEO of a $200M Real Estate Firm called Breneman Capital.  Drew’s focus is primarily on Multifamily.  His successes here have led him to appear on HGTV when he was recognized around the world as an up-and-coming real estate investor.
What this means is that Drew understands real estate, how to make money, and how to teach you to do the same in your pursuit of Making Billions.

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[THE GUEST]:  A natural-born entrepreneur, Drew started his first business at 14. He then launched a highly-successful internet business while in high school. His ambition for finding the best investment vehicle for his earnings from his internet business is what led him to real estate, purchasing his first two rental properties at 19 years old. His drive attracted the attention of HGTV, where Drew was featured as an up-and-coming real estate investor. He wanted to share what he had learned and aspired to provide direct real estate ownership opportuniti

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• 19:18 (Cont.) Escape the Rat Race: A $200M Real Estate Investment Guide For Investors, Fund Managers, and Founders

Transcript

Ryan Miller  
Hi, my name is Ryan Miller and for the past 15 years have helped hundreds of people to raise millions of dollars for their funds and for their startups. If you're serious about raising money, launching your business or taking your life to the next level, and the show will give you the answers so that you too can enjoy your pursuit of making billions, millions. Let's get into it. 

In this week's episode of making billions I have my friend Drew Breneman teaching you a masterclass on all the tech underwriting and due diligence tactics he uses in his $200 million fund. Let's get into it. 

Hey, welcome to another episode of making billions I'm your host Ryan Miller and today I have my dear friend Drew Breneman. Drew is the founder and CEO of a $200 million real estate firm called Breneman Capital. His focus is primarily on multifamily his successes here have led him to appear on HGTV when he was recognized around the world as an up and coming real estate investor. So what this means is that drew understands real estate and he understands how to make money and how to teach you do the same. So Drew, welcome to the show, man.

Drew Breneman  
Thanks for having me, Ryan, appreciate it. Happy to be on honored to be on I think you do a really good job with this podcast and the whole making billions community. So like, yeah, looking forward to adding value for the listeners.

Ryan Miller  
Thank you. Yeah, it is a wonderful community, very grateful. And we are certainly fortunate to have someone with your breadth of knowledge to come on to the show. And we're gonna get into all those tasty tips, you just hang in there. Because Drew is about to reveal things that are going to make your jaw drop, we're going to walk you through all of the stuff that he does to achieve these groundbreaking returns. But before we get into that, maybe you can bring me up to speed where did this all begin for you?

Drew Breneman  
Yeah, pretty, pretty early. So yeah, I started a internet business when I was in high school buying and selling items in a video game called Diablo two and just kept all the money from doing that and started reading about what to invest in and tried my hand at the stock market and mutual funds, but didn't really have patience for it being you know, 16-17 year old kid. But then real estate really made a lot of sense. And I've spent the last 20 years on that, where I was reading a book called Real Estate Investing by Gary Eldridge. And the light bulb really went off for me, he just broke down how to do your first deal, how to manage it, but also how do you actually make money in these things. So he's talking about cash flow and paying your loan down and appreciation and the tax breaks you get how it's not correlated with other investments. And the appreciation mode like description he had was really a like the light bulb moment for me where he had a real it's over simplified now that I've been doing this longer, but it was probably good. It was over simplified. Since I didn't didn't know anything at the time you put 10% down on a property, it goes up 3% in a given year, that's a 30% return on your equity. Obviously, it's not that simple on every deal where you can always put down 10% And definitely can't do that on the any bigger deals. And they don't always go through percentage or sometimes they go up more sometimes they don't go up at all, sometimes they you know, go down like it's but that at least was like wow, the returns can be high on this. And we're combining business with an investment together. So and the returns were high, the risk was real, it was lower than the stock market. And you know, the negative with real estate is it's not liquid. So you can't just click a button, get your money out. And it's a lot of work for somebody. So whoever's running the deals,

Ryan Miller  
man, what a cool journey. I think you mentioned you started when you're a freshman in university, is that right?

Drew Breneman  
Yeah. So once I read the I got the real estate bug reading these books and said, Alright, I'm gonna major in real estate. But I was already doing deals. By the time I was taking my real estate classes, sometimes the teachers would be like, Hey, dude, what are you seeing out there in the market for, you know, cap rates or for this or for that, and so they put me on the spot. And so it's kind of because I was the only one doing deals like the teacher wasn't none of the other students were obviously but yeah, so bought my first place when I was 19. A duplex in Madison and I when I was a freshman, and the plan was moving to one of the units my sophomore year to rent out the upstairs one and upstairs unit and then rent out the bedrooms and the unit I was gonna live in. So I did that. And the deal went, Well, maybe a tip for folks. I mean, it worked out great for me on how I looked at the first deal was I tried to keep it extremely simple, where I just really focused on two things, how they value the properties and getting that dialed in. So in Madison, everyone was using a gross rent multiplier. And so what that is, is you just take the annual rents times the number and that's the building value. And the heart the key is figuring out the seen enough deal, sell and know what's the prevailing gross rent multiplier in the market. Once you get into bigger deals, people are using cap rate and other things. But it's at least at the time, so I figured that out. But I was not sure like, Am I missing something? Am I do I not know how this will, I'll say, Oh, this is a good course or multiplier. But the reason it was attractive to me was because I missed something. So to kind of keep myself safe from doing something like that. The other thing I focused on and it was just these two things was that it would be cashflow positive, you know, a lot of people for their first real estate deal, it's extremely complicated, they're gonna want to build a self storage facility in the middle of nowhere. And they're going to be a developer and have to lease it up and do all these different things. And there's a million moving pieces in one thing that I guess I was fortunate and I just kind of eliminated a lot of the variables, if you will, and just focus on those two. And then because anybody can figure out rents, you know, by looking at what else what other things are renting for and then figuring out the expenses by talking to you know, your insurance agent and looking at the taxes. So yeah, that was kind of so then the deals all went well, even though my mindset was sort of I need to get this first one going is my own money. If I make a mistake, that's fine. I ended up buying four deals in college total about $2 million of property and then that was graduated in December 2007. So you the writing was kind of on the wall with the economy, the first CMBS auction, you know when it failed in September and you could see things really slowing down so I got I have a job at a developer in Minnesota. And then my first investor there who were it was one of the interns there. We went and met with his he's like, why don't we go meet with my dad, I met with them. We started doing deals together. And over the last 10 or 15 years, we bought about $100 million of property together. And then I have another family that I started a similar relationship with did about a similar amount of acquisitions with where we probably own about 100 million with each family. And then I've syndicated some deals to just individual investors, which is what I've spent a bit more time on these days, because I would have people come to me and say, like people I knew at least what they want to invest 100,000 or 50,000 or 200,000. And that actually just turned them down because I wasn't really set up to take on other investors, you know, but now now we're set up to do that. And we're just doing only multifamily across across the Sunbelt.

Ryan Miller  
That's perfect. So you focus on multifamily. So you started I think you mentioned before it was 2005 is when you launched Breneman capital. And now you've built this thing, man, that's good for you. You built it to 200 million in real estate. That is awesome. Roughly, what what deal size? Do you guys like to plan? Well, starting

Drew Breneman  
out? I mean, yeah, we you know, was smaller. But now five to 35 million, let's say, biggest deal. I've done two dates, 33 million. But yeah, so it's sort of really looking, you know, in that deal size, and then only multifamily and only certain types of multifamily. We're only buying in Phoenix, Dallas, and Austin. And just from our analysis, those are the best markets in the country for a variety of reasons. But a lot of them are pretty obvious in terms of just the job growth story, the population growth story. And then also we want deals we can add value to so we're buying deals usually not like the brand new shiny new one, but not the super old one either that should have had like the plumbing and electric changed a million years ago. So typically, the stuff we're buying is built in like the 1980s to, let's say, 2010, and it needs some form of renovation, and then our whole businesses where we go in, and then we'll renovate it. Sometimes they don't need renovations, and it's just a mark to market play with the leases. But that's generally the whole business. I mean, most of the deals we bought have been off market 80% of the deals I bought have been either off market or through a repeat broker or repeat seller. You know, one thing that we've kind of figured out or just coincidentally, I really haven't bought a lot of deals when it's like heavily brokered, and there's like 10 offers or 20 offers on it, like obviously, you're not getting the best price in that scenario. So I only bought one or two deals that way. And those ended up still being good deals just it's kind of timing, where one was like right before Memorial Day, and like 2019 and abena, everyone was already off to vacation or something.

Ryan Miller  
And that's, that is that's perfect. So you got timing, you got that locked down, you've got your Buy Box locked down five, between five and 35. You mentioned before you see your commercial, but now you're doing multifamily specific in those areas that you listed for your just your own analysis, shocking someone who has 200 million under management does analysis does his homework, this is good. And so understanding your markets that you function in understanding your Buy Box, those are all very powerful things that Drew has done to build his business to where it needs to go. So I'm wondering, as we transition, I'd like to spend the rest of this our time together talking about let's just say like three or four things that you find to be absolutely vital in not only running a company of 200 million assets under management, but also on your way up to the 200 million under management, you've probably learned a few lessons by now wondering if you'd be able to share three or four vital things that you found that have aided you in your success.

Drew Breneman  
Yeah, I think you know, these, none of these I knew early on. So this is the stuff I've learned, yeah, over the years being in the trenches doing the deals. But yeah, I think number one, and they're like the reason I gave let's say it's a pretty specific answer and like what I'm doing today, and if you would have asked me in 2009, what am I doing, I would have told you, I'm just I'll buy anything that's like a good deal in Minnesota, Minneapolis, St. Paul with where the me and my two first partners were living. And really anything I mean, could be office, hotel, apartments, retail, and I wasn't I wasn't specializing in anything. And those deals all ended up crashing it because we were buying in 2010. So like the performance was still excellent. Like our track record on our sold deals as a 25% IRR. We've done 13 full cash out refi is where we buy it, we raised the value and we can refinance out all of our equity by increasing the loan balance. So like we've done great, but like I would have done even better. I bet if we would have just specialized from the get go. I sort of specialize but didn't realize what I was doing until maybe a few years ago, but I had only from 2013 to 2020 I only bought two deals that were not multifamily. So really like number one thing I'd say is you want to specialize, like don't be a generalist. And like why that's important is you know, this is a competitive market and you want to think what how can you create an advantage? How can you create an edge and when I was buying in 2009 I had no advantage over those other people because let's say maybe I'm competing with someone who only does retail properties. And now I'm dipping into retail I'm doing my second deal ever against someone who maybe has done 50 of those and so I became that that guy that's done whatever 30 Something multifamily deals now so specialize like because you'll get better at it you'll develop an expertise it's easier to if you have a team you know they actually know what they're showing up to do at work like we work on multifamily versus like Whatever dude brings in we're doing today and then to you if you do that, then you're known for something and especially in the deal sizes we play in most every deal is sold through a broker but a lot of times off market. So the brokers know who does who do what kind of deals and a lot of times they never even make it to like the full market they might just send it to the three best buyers that are doing those kinds of deals. So if everybody knows what you're what you specialize in, from your employees to your investors To the especially the brokers that's gonna help you a lot because then with the brokers you're gonna, they're gonna know you for that. And then I guess the next tip is like, you know, you want to get friendly with the brokers really be you know mindful of your track record with the brokers build a relationship with the brokers focus a lot in your reputation with them where if there's like a minor problem at the property and you're buying it My advice would be to like be think longer term and like about the bigger picture and just let it slide and don't be nickel and diming everybody to death, you know, I've sold deals to people where like I, you know, at the end of it, I was like, Man, I'd never never want to deal with this guy again, basically, like they wore me out asking for little stuff all along the way. And then they want us they wonder if I want to sell anything else? And I'm like, I don't know, probably not, you know, and I have like 30 buildings. And if he was like a great buyer, maybe I'd be like, Hey, let's let's take a look at this one. I'll say well, maybe selling next year. So yeah, specialize and then you know, get get close with the people who control the market.

Ryan Miller  
Yeah, I love that. Yeah, you're, you know, to that example of a very difficult to we'll say client, but just counterparty will you're always building reputation your which is just what are you known for? And if it's known for being annoying, and a deal like so your reputation and relationships? Well, I think and on the show those who follow it, I say this all the time is reputation relationships, gonna have the biggest factor on how successful you end up being how well you run a business. All of those things, if you're a CEO or you aspire to be a big part of being a CEO is building alliances and building you're using your reputation to get people a lot more friendlier with your company. So if you're Don't be that guy that you dealt with, you're building a reputation relationship in one way, and to Drew's point could be a competitive edge in itself, your reputation and your relationships could be one of those edges that you're able to exploit to win in your market.

Drew Breneman  
You're very right. You're very right, Ryan, I mean, I could just keep going on that for a second. I've had my best, you know, one of my best employees, he before starting with me, he was working at a $50 billion private equity shop. And he liked what he heard in the interview. But he's a very cautious guy in terms of like, how he does some things. And so he asked around mutual people, and everyone told him some really great things where he always brings that up when we're like meeting people when like, how do you guys are working together, he always brings us up but it was having that good reputation with some with people helped. And I've got investors that way too. I've literally had brokers refer investors to me like passive investors that just throw that in, put money into our deals, where it's like, Hey, this guy was looking to buy this property, he doesn't know what he's doing. I know that you're a nice person and like are trustworthy. So I wanted to introduce you to him. Maybe you guys could just work together. And like so like, it's so to me, I just be how I normally am. And like I just that sort of stuff keeps happening to me. So it was never like a strategy. But then I see people doing things that are counter to that. And I'm like, Yeah, this is like not going to help or there's been times I've entered a new market. And then I've asked for like, hey, why don't you call this person that works at the same brokerage companies in Chicago and ask them about me. And like on one of those calls, one of the brokers said Drew's the realest buyer ever, like that was his referral, like, you have no problems with this guy. 

Ryan Miller  
Man, I love that. So there you go, your reputation relationships just smooths it out. I love it. And that doesn't come quick. We refer to those as long game strategies and building your reputation relationship. But that time has come in whether it takes you five years 10, whatever it was five or 10 years are coming, you might as well be a much better version of yourself than you are today. And that my friends are what will be a bit of a magnet, and it can pull in money and deals and partnerships if you've managed it properly. So and yes, Drew, I could go off on this as well. So to summarize that first point, integrity matters, but also your edge matters. And so if you have an edge, use it, if you don't think about what kind of edge you want to have in your sector, and then get to work building it, maybe go on podcasts, tech, maybe you go get a PhD, I don't know what you need. But at the end of the day, what you're saying is it's better to be a specialist than a generalist, because specialists have edges, good edges, and you can use those edges to win in your market. So as we move on, but let's be the second thing. Like for example, I'm curious now that you've grown this fund, just 200 million that's that's no small number, building an investment fund a capital market, financial institution that you've have. That's that is building a business. So the business of real estate investing. And for those of you who are just in other investment markets, maybe some of these things might work too. But I'm curious Drew, when you've built your business, what kind of tools tech stack, any of those things have you found that you would like to recommend is helpful tools in this industry?

Drew Breneman  
Yeah, that's a really good question, Ryan, because I mean, what's funny is for the first 15 years, my tech stack was like, my cell phone and Microsoft Excel and my free Thunderbird email client, you know, and now the thing is, once you hire people, and then also you start doing these bigger deals, yeah, you do need technology. And so that's, you need a you need a good team and good technology. So you got to for technology. I mean, yeah, number one, everybody underwrites these deals in Microsoft Excel, that's still just the best thing for any sort of financial analysis. We have one of the you have a really great model that that guy investment model that the guy from the private equity shop created, and they still use their for their billion dollar deals were using on our stuff. But yeah, Microsoft Excel, but everyone already probably knows that. But then then really what we're doing next, to populate our model, the first thing we do, and this is something I had never heard of, until two years ago was it's called Red IQ. So our ED IQ, and what this does is it it uses its uses AI and then also with what you teach it for how you code your revenue and expenses. So let's say a common issue. This is just a time saving tool. You might It gets sent the rent roll, and trailing 12 Financial that is in PDF form and none of the columns really line up, right. So then when you maybe use your Adobe Acrobat to try to convert it to a PDF, it's just a jumbled mess, this can scan the PDF and then puts it, it's on their website, the application, and then essentially has everything laid out how it thinks you would want to lay it out. And it knows that by you changing the categories and recategorize and things in your account, and then it learns what you're doing. So a lot of times, you'll throw throw in a deal, and then it'll just categorize everything, how we do it, where we keep track of the other income a certain way. And we let's say some people might put payroll into repairs and maintenance at a property or they might have a payroll category. Other people might have the trash contract in the Union utilities, some people have it in the contract section. So we just want to get everything standardized, though then in so we can just rip through these past financials where we'll get we're able to dump into our model a t 12, current rent roll the 2022 financials 2021. Like we can just load it up and get it all sifted through in a matter of like a half hour we're before that used to take like a day just flows freely through the model and starts populating everything, then we change it based on the business plan. But yeah, so read IQ to clean your seller financials, let's say definitely you need that once you start getting into these bigger deals, because if you're just buying like six units or four units, you don't need it, because you can just rearrange that quick enough. And it's not, you know, none of this stuff's that cheap that we're gonna gonna bring up. But it's like, what if you're doing a 200 unit? Yeah, this year, you repopulating hundreds of items like this would make this well worth the money. I think if we cancelled our subscription, probably people would be up in arms that were here. They'd be you know, my people jumped ship got in trouble. You'd

Ryan Miller  
You'll be in trouble, you'll be on somebody's naughty list. Yeah. And what about So you talk about populating models is a big part of all finance, not just real estate. Part of those is looking at maybe the financials of a company or an asset that you're trying to buy, but also the market data, where do you go to get your market data in the industries that you work in

Drew Breneman  
really three places like Moody's, they have a subscription where it's real estate data, and then also yardie has a product called yardie matrix where that has market information in terms of like what they saw for rent growth in a given market. And then also they have predictions on made by economists and their their financial models of rent growth. They also have building level data, where they for larger buildings they have the rent the rental rates by unit they have the unit mix, they also have some expense estimates and then and then costar which costar is basically in the real estate industry is trying to be like a one stop shop where they have listings of deals for sale, they have news, they have all the data I just mentioned, he already has for the most part coasts are also has and then they also have just breakdowns of supply, new supply and each market vacancy rate, what's the cap rate in a given market? So like those three things, it's all quite expensive. So if you're just going to pick one I'd say go with costar because that has that sort of has everything where then if you want another source to double check like then then yardie. But we've made some separate models of predictions on price appreciation where one of these folks that works for me they are their hobby is basketball analytics and making a made a predictive bracket for the NCAA Tournament optimization models. So he applied the same sports analytics to predicting price appreciation in different apartment markets. And a lot of almost all that data that we pulled in was from Yardi and costar and then we bought some census data by zip code. And so that because we got to get it slice and dice a little more granular to do this, this model that he made, but so that's dependent, what you're doing those would be the sources, I go over data for sure.

Ryan Miller  
I love that. And what about when you're doing the big deals that you do either in real estate or any other asset class? Sometimes we have a fund administrator or investor relations or onboarding portals, like do you use any CRM or any kind of deal platform fund administrator? Anything like that?

Drew Breneman  
Yeah, we have a yeah, my answer is just Yes. Yeah, yeah, we're using a product called Juniper square for our investor portal. And so what Juniper square essentially does is it for every investor it it shows it's like a Charles Schwab or brokerage account type login, where you log in, you'll see all the deals you're an owner, and what your percentage is, how much money you invested, how much you've been paid to date, depending if some deals like you also put in like, what's the net asset value, if you sold it today, and can show like potential returns if it was sold. So it's a nice tool, and also you can get your tax documents in there and investor communications sitting in there. So it's a nice tool. And you know, I'd say that you really wouldn't need that unless you have more than maybe 20 investors, you know, it's not, you know, it's fairly expensive. So if you, you know, some of this stuff, it's really comes in handy when it's like, we want to pay out $100,000 distribution. And then this will create a one to one email with that investor saying, you've just received a distribution, here's your amount, and then update all those things and keep track of it in there where, you know, otherwise, you'd have to make a spreadsheet and track all that yourself and then send you know, if you got 50 investors 51 to one emails and it take forever where this just you can do it in five minutes.

Ryan Miller  
Perfect. And let's say the I don't know how you pronounce it, the N Crieff or n c r. Oh, yeah, I was telling about that before. Yeah. So use that or like, how does that play into your overall data stack when doing due diligence?

Drew Breneman  
Yeah, so I'm not subscribed to that. But I was able to get the data that they had one of the guys who works for me has a master's degree and then they was able to get it from the school. And so what that NACREF is it's a national association. counselors of real estate fiduciaries or something like that, is that what the acronym is, but what most people know it for Is It has a index that is supposed to is the best thing to depict private real estate returns. So obviously for public equities, you know, the best thing is the s&p 500, where you have the 500 largest companies or whatever it is, it is as that's the average of the market. But for private real estate there, you wouldn't really look at like REIT stocks because REIT stocks are highly influenced by moves in the stock market will say that, like those are REITs are more correlated with the s&p 500 than with private real estate, you know, where so naked, do they have an index, we were able to get that data that had the returns and went back and calculated the returns by product type from 1990 to 2020. And by product type, I mean, multifamily industrial office retail, because I always thought multifamily was the least risky, but I didn't know kind of where did it shake out return wise and actually, for all hold periods from 1990 to 2020, where you could have owned a property for three years, five years, seven years, 10 years across an acre of data multifamily had the highest returns for every one of those hold scenarios for for every time period. And then there was just like, and then it also had the least return volatility. So the lowest risk for every period, except for like one of the 50 different periods where retail or industrial was had a less risk for one time window, but still lower returns. So So yeah, that's important too. And then yeah, we use, I think you're asking about CRM and stuff like Juniper square, that's good for keeping track of your investors. But it'll say you want to keep track of like your more business to business contacts, like your brokers or your insurance agent, or your lenders for that we've been using Pipedrive. But really the Pipedrive we dislike the interface, and you know, the cost to what you're getting, there's not really any one feature in that where it's like, you have to use Pipedrive. But that's what we've used. I do like, you can send a bulk email that looks one to one. So let's say you want to email 10 brokers at once, okay, you got anything I should take a look at, like, you can do that as a merged email that looks just like it's from your email. So that's nice, but that's kind of a rare occurrence. You know, email 10. Brokers are gonna get 10 phone calls. So careful, careful with that, with that with that feature.

Ryan Miller  
So I love it. I literally average 200 emails a day. So I feel your pain man. So what about so that's good. So you have a tech stack that helps you to run these deals and really manage and lift a lot of weight with the right technology? What about financing and underwriting? I mean, what what have you seen what do you like to see what's going on in that factor from from the master drew Brennaman?

Drew Breneman  
Yeah, I mean, I guess for financing first, you know, I think probably a couple a couple things like one thing where if you've never, you've never bought a property before. And you might get a sheet that says like, here's a loan program, it's 80%, loan to value or a 125, debt service coverage ratio. So you start out and you don't know what the debt service coverage ratio is. And until you go, okay, I can borrow 80%. So you're looking at a four unit or whatever is the first deal, you finally get one you like, and then let's say you never talked to the lender about it, but you send it to him, and then they size the loan. And they go, we can only lend 60% on this one. And you're like, why is that? And it's well, it's look, it's constrained by the debt service coverage ratio. And so what I'm getting at is, I think, what's what's nice. What's counterintuitive, if you will in to be invested in real estate is you really actually need to start with the loan first and knowing what that is. So let's say I'm looking at this type of multifamily property, you you to actually see what your returns would be how much money this would make, you're going to need to get from the lender, what would my interest rate be? How long what's in the Okay, if that's a fixed rate, how long is it fixed for? Is there any interest only term? And then also, how is this loan sized, and this debt service coverage ratio thing comes into play? In that what what that saying is, let's say they said I want to 125 debt service coverage ratio, what they're saying is they want the net operating income of the property to be 125% of your loan payment. So you have an extra cushion of 25%. And so if you're buying something, you know, today, most all deals will be limited by the debt service coverage ratio, because a lot of them interest rates went up. And a lot of the properties that have no debt on it would make you know, day one similar to the interest rate. So I can go through how to size a loan if you want to get real nerdy,

Ryan Miller  
let's get crunchy. We've got a pretty advanced community here. So it's all investment bankers, fund managers, entrepreneurs, this most people are pretty advanced here. So yeah, if you can crack that open on how you calculate and underwrite those deals, let's do it. Let's chop it up.

Drew Breneman  
Yeah. So okay, because the other thing too, then to get into for this as So I explained the debt service coverage ratio somewhat, but also the lenders, they are going to use potentially different rents and expenses and vacancy rate than you will so lender underwriting. So that's the next thing you would need to actually with my list of questions, you're going to need to ask how the underwrite, always have to go through and you should also ask about the prepayment penalty. Let's save that for the end, though, because I could do a whole prepayment penalties are very important. As you get better in this business, you almost think of the end of the deal more at with the loan than at the most what your interest rate is, but for loan sizing and how this works. So a lender, they're going to look at your in place rent. So what's the rent today that's on the sign leases that's been actually paid. So if let's say we're July, and then they're going to want to still use what was paid in July for the rent, and then for the other income, like parking and late fees, they're going to use a trailing 12, meaning what was collected over the last 12 months. So you might say, well, well, something that I will be able to charge more and do XY and Z lenders don't care about that. They're just looking at what's there today. And so same thing in Chicago where I did a bunch of deals that markets always been really tight from a rental market standpoint, none of my deals ever had more than a 3% vacancy and collection loss in a given year. So when I buy I was assuming 3% vacancy and collection loss, but the lenders they will Wilson 5% or more. So in Chicago, they would assume five. But in a place where maybe the actual vacancy is 8%, well, then they're going to assume eight. So you have your in place rents your trailing 12, other income, your 5% vacancy rate. And then for the expenses, what they're going to do is they're going to take the trailing 12 expenses, just like the other income plus, they're going to do like a two to 3% annual increase to account for bumps, oftentimes, they don't give you an increase on the other income. So it's just you know, we're trying to underwrite this, like a banker where it's conservative, and then in today's times where in the insurance market is real up and down, are really just really up that you need to get get a real insurance, quote, they want to underwrite your real insurance number, they don't, they're not going to trust the sellers numbers, they're going to say, well, maybe that guy's got a policy with 200 buildings on he's got some sweet deal where the premiums low, so then they're going to use your real insurance number. And then for the property taxes, this is another common thing where the lender is going to underwrite worst case scenario. So let's say you bought a building and the assessed value went up, but it's under appeal, they're just going to do the worst case. So they're going to take your new higher assessed value times the most recent rate. So they're going to look up your actual bill and the assessed value and take what sort of the the higher to be conservative. So you have your income, your expenses, so we need to subtract your income from your expenses, and you have your net operating income, or probably better called your underwritten net operating income. So let's say if that's 125,000, now you can only in the lender requires a 125 a 1.25 debt service coverage ratio, that means the most you can pay towards your mortgage payment on a principal and interest basis is $100,000 a year. So then what you would need to do is you need to calculate, okay, based on my interest rate and $100,000 payment, how much can I borrow based on that? That's what you need to be doing? Which sounds complicated, and I guess, you know, haven't had to explain it like soup to nuts like that, I guess it is, but it's you'll need to do that. Because otherwise, you're not going to know what the loan loan amount is, you know, if you're just starting out, sometimes it's hard to get, you know, a bank, a lender, they'll probably size a few deals for you. But if you just send them like deal after deal after deal the size, you're not buying anything, they'll probably they won't continue that forever. So like on our stuff, we just do all this on our own, it's already in our spreadsheet, we have a lender Analysis tab that size of the loan. And then you know, the limiting constraints is the debt service coverage ratio or loan to value whichever one kind of comes into play first. Some lenders also use debt yield, which is your they want to see your noi divided by loan amount being a certain certain yield. But that's that's only certain types of lenders use that and no one starting out will see that so you don't need to overdo it with getting into that.

Ryan Miller  
Yeah, perfect. And so he metrics on a multifamily deal, right. So we talked about deal. We talked about underwriting and financing, and even building a company how the technology that you want to put it play, we've covered a ton, right, so Drew has been very generous. And I have one more question, what key metrics when you see a deal? If people drop a stack of 15 deals on your desk? What are maybe three or so of those things that you'd like to see me even want? I don't know, what are some of those things that just scream? We got to do this deal? What is what are those categories that you look for?

Drew Breneman  
First, I will answer that. But I do want to go back to prepayment penalty for a second. Because I said I'd say that it's it's really one of the most important things I had my the guy I've used for most of my debt on my podcast, and he was done over at the time $12 billion in loans when I was probably 15. And the most important thing he said that whole podcast was his name, Steve convert. So shout out to Steve was you need to match your loan up with your business plan. And one thing that has happened to me to my benefit is I have bought a bunch of deals for people who did not match up their loan with their business plan. So don't make that mistake. And so what I'm talking about is, let's say you are a developer, you just built a building to use examples of what I bought, you stabilize the property, it's leased out and I need to put a loan on it. You're a developer, you, you buy the property, you build on it, then you usually sell it, that's your business. But all these deals I bought, what the developer did was they put a 10 year fixed loan with a yield maintenance prepay on it. The reason they did that is you get more proceeds when you do your debt service coverage, you know loan sizing, if your rates lower, you get more proceeds. And one way to get a lower rate is to take a unfavorable prepayment penalty. So these folks did that. And then they you know, a year or two goes by and they go, hey, I want to sell and this I bought like four or five deals this way. And some of my biggest deals have been my largest one was and my third largest deal was as well loan assumptions off market someone with a yield maintenance, prepay annual maintenance, it's a whole fancy calculation on if you pay it off now maintaining the lenders yield and bottom line on these deals, the prepayment penalty would have been 10 to 20% of the loan amount depending on the deal. And these were, you know, the $20 million loan and like a $9 million loan. So this would have been, you know, two, three $4 million on one of these. And so as I got better with the deals and I let's say I bought a property and then I know I'm going to raise the rents or I'm going to renovate it, and then I'm going to either sell it or refinance and put a permanent loan on, I look at that thinking I want the most flexible prepay. That's my number one thing that I'm looking for in this loan. So the most common loans I've done have been ones where the prepayment structure is, let's say 3%, the first year then second year drops 1% And then zero after that. So I do my business plan, it takes a year to pay 1% or zero to get out of the loan. And it's pretty much impossible to find a loan with no pre pay and commercial. So that'll be something that'll be new to somebody who gets going and invest in real estate or maybe already doing it and you keep doing all these yield maintenance loans or unfavorable pre pay structures because you're getting a low rate What I really like, on the deals that I'm doing, I'm thinking pre pave really first. And so that's a big tip that I didn't want to gloss over. But in terms of what I look for in a deal, you know, I, the first thing I would look for is the location. So really, I bought only in two types of locations, and is like where it's already established. So the nice neighborhoods, places that are already, you don't need to wait for the area to gentrify or anything. And then I'm buying the deal that I can just buy, renovate and already command a nice rent for and create a lot of value on it, it's already in a good area. So I don't need to wait for the area to improve, I just need to improve that property to kind of match it up with the area or the other place I've done even better on buying is sort of where it's where it's on the upswing where it used to be rough, but now it's we'll say like, grungy, we'll call it you know, like, the Chicago neighborhoods, it's Logan Square. And it's these places where the hipsters are riding their bikes up to and all the ramen shops and bubble tea places are going so if you've never heard of Logan Square, just look for where people are riding their, you know, their bikes to in with the bubble tea. Like that's usually the giveaway, you know, even if let's say the deal, it seems like the return might be high, if it's in a rough area, you know, in an economic downturn, your tenants are just they just have weaker financial situations, you might have to deal with crime on the property. So it could be hard to get good tenants or good, you know, employees to work there. So yeah, I think location, I'd say first where I need to be buying the right areas. And then I'm only looking at these markets that are really booming already in terms of the population and jobs. And then what we're trying to do on every deal when I said we're doing these value add deals is we're trying to solve for a 15% deal level IRR. But basically what that translates to nowadays is you take those kinds of returns on like a five year basis, were you on a five year hold where you'll double the money and make, you know, 15 IRR, you need to create essentially 15 to 25% additional value on the property. So the the metric in terms of metrics that you're looking for everyone in real estate uses this term cap rate. And so if that people aren't familiar with that, that's your noi divided by your net operating income. So what the property makes if there was no debt on it, divided by your purchase price and the in, so that's just a metric, the higher the cap rate, the more cashflow, there'll be on the deal, that's also your yield on the property if there was no debt on it. So if let's say the property makes 50,000 a year, and I bought it for a million all cash, it's a five cap and also I make I make 5% as my, you know, cash yield every year. And so one way to compare how much value we're creating, is this term unlevered yield on cost. And so like, if you would say like, what am I looking for, it's in a good location, and the unlevered yield on cost is a certain amount above, like today's cap rate, that's for the most part, you know, I'm looking for that. And then, you know, seeing what the IRR and equity multiple would be in the reason I like unlevered yield on cost is it doesn't, it just takes a lot of the noise out and so how that's calculated I can walk through that is that's going to be your it's your net operating income when you've X after you've executed your business plan. But in today's dollars, so what do I mean by that, let's say you're going to you're going to buy this property, the rents are $800. But when you renovate it, you can raise them to 1200 in today's times, so what um, so what I do is, then I'll make a new pro forma, so income and expenses that would show $1,200, then also, what would my expense be based on those $1,200 rents, because now we will need to assume your our taxes are going to go up and also things that are based on revenue are gonna also increase expense wise, some things like utilities aren't going to change if you're charging more necessarily, or maybe could go down if you're putting in all new like low flow toilets. But we're not getting that deep into the utilities, we don't assume we caught any expenses usually ever so. So you'd have your your rents and your expenses into assuming no, like market growth. That's what the unfunded term is, if someone says this is an unfunded blank, that means it's they didn't also grow it. So like I said, the rents are 1200 I didn't say was 1200 today, but I put 1300 in my spreadsheet, because it's going to grow like $100 between now and then as well. So yeah, that's that's your, your, your numerator. So the top number in this equation here, where that'll be your noi based on where we can stabilize the building, and then your denominator instead of it being just your purchase price. We also need to factor in our other costs, like the renovation now. So that's going to be if we could just snap our fingers and stabilize this building. That's unprinted yield on cost. That's the new rents and expenses. And what would we be all in for if we could just snap the fingers, everything's re rented its renovated purchase place plus renovation. And then if people want to know how to use that, like, let's say the market normally sells at a 5% cap rate. And then if I look at that and go, Okay, I can stabilize this deal at a 6% cap rate. If you do the math 6% divided by 5%, that's should be 120% or 120. So then you subtract off the one I've just created 20% of value. So then that's what I said we're aiming to do. So that's how I look at it, because everyone in real estate uses cap rates. So then instead of going, Hey, I'm into this for 10 million, and it's worth 12 The better way to describe that to somebody that's already in real estate would be Hey, we're all in at a 6% unlevered yield on cost on this as a 5% cap market. So we're Oh, we got a big spread in there. Like that's how that all comes together.

Ryan Miller  
Man! brilliant. So as we wrap things up, is there anything else you'd like our fans around the world to know how to contact you anything at all? Yeah,

Drew Breneman  
but I mean, first of all, I mean thanks for having me on. You know, like I said love the making billions community and everything you're doing I think I saw you like a big conference on Instagram or something where before we we got going so yeah, keep keep crushing that Ryan. So thanks, brother. Well, I

Ryan Miller  
appreciate that. Yeah, so

Drew Breneman  
my podcast THE BRENNAMAN blueprint. It's a real estate investing podcast. We get into some of this sort of like the tips and tricks like you're talking about we've been talking about the back half of this and you know, just bring on people like me that are doing deals lenders, attorneys brokers also do some episodes for passive investors like red flags and things to look out for. So just yeah, all real estate. That's the Brennaman blueprint and that's on all the podcast platforms also on YouTube and then social media. I got my at Drew Breneman, just on every platform, I think so just whatever you like, you can follow me there and then then for our company brennaman.com. So B as in boy, r e n e ma n.com. On there, you can find out about our portfolio sign up for our newsletter, you can sign up to be on our investor list where we raise money deal by deal for investments. So then we send them out to people on our list and then they just fill up from people on our lists also have a blog on there and then a passive investing guidebook you can download which is basically breaks down everything you'd want to know about real estate investing 200 Plus page PDF, so he's took quite a few of us took a few months putting that puppy together. So that's all on there. And it's free to download and kind of get acquainted with us and what we do in real estate in general. So

Ryan Miller  
yeah, brilliant. So you've been busy man podcast that go sign up for his podcast, download his white paper, which is basically book let's be honest, 100 pages, man, there's gonna be a lot. So if you loved what Drew has shared with our community, I know I certainly have but if you've loved all of these things, that's just a sample so you can go and enter his world in his orbit and, and really consume a lot of this stuff. So if growing into someone like Drew, if you want to be running multimillion dollar deals in multifamily, or just in real estate, go follow this guy, he's got Instagram, he's got it all man, there's no reason why you can't enjoy some of the wisdom that he shared as he just gave us a sample. So just to summarize, become a specialist by exploiting an edge use tech to dominate your deals. The third thing that he talked about was building your financing package with the metrics that your capital partners find most interesting, in fact, deal breaker thresholds. So build yours to make sure you meet or exceed the thresholds that your capital providers want to see. And finally, just learned those key metrics on deal diligence and what they mean you do these things, and you too, will be well on your way in your pursuit of making billions.

Wow, what a show. I hope you enjoyed this episode as much as I did. Now, if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guests even better. And make sure to come back for our next episode where we dive even deeper into the people the process and the perspectives of both investors and founders. Until then, my friends stay hungry. Focus on your goals and keep grinding towards your dream of making billions