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The Real Estate Addicts (REA) podcast is a must-listen for anyone interested in real estate development, investment, construction and entrepreneurship. Each episode dives into a wide range of industry topics and features conversations with savvy, successful entrepreneurs who candidly share their career paths, challenges, breakthroughs, and the stories behind the remarkable companies they’ve built. Expect big personalities, thoughtful insights, and conversations that both educate and inspire.
Co-hosted by Ray Hurteau, Dan Rubin (Instagram: @rhinvestgroup), and Marc Savatsky (Instagram: @choose_boston)
Follow the Real Estate Addicts Podcast on YouTube: @RealEstateAddicts
00:11
baseball. It's unbelievable. It's a boring sport anyway. Welcome to the Real Estate Addicts podcast. We're here with your hosts, Mark Savatsky, Choose Boston. Ray Hurteau, RH Investment Group. Dan Rubin, RH Investment Group. Awesome. And before we get into it, I wanted to thank you guys again for supporting the podcast, for listening. It would mean the world to us if you could subscribe to our YouTube channel and share that with friends. We're going to ton of listens through Spotify and Apple podcasts.
00:38
but Dan wants to be a YouTube influencer once again. He's grown to a hundred thousand, says. us some. I'd like to get to 100 first. And then hundred exit, thousand exit. But what are we talking about today? Metrics. Metrics, yeah. So metrics is in like shortcuts, ways to quickly evaluate the health of a deal. When I was first transitioning from uh construction to real estate development.
01:06
This guy smirks at me when I say transitioning. Only you think I'm smirking. I didn't even think of that. I'm thinking of metrics in like, oh God, don't even talk it. I'm thinking 2 % rule. Now I'm thinking 2%. How about Kristi Noem's husband? Did you guys see that news? No. Oh yeah. She's like the Homeland Security woman. Well, she was. And she's right wing and her husband wears her shoes at night. yeah. Did that just come out? I don't want to kink shame anyone.
01:35
But yeah, that's like the eye at the whole of sun being a little different. you walking around in just think it's funny with like these like hard, right people who just ate themself. Right? that, like. I'm unnecessarily angry. Yes. Are you walking around in Jesse shoes at night? What? I'm not, but maybe, I don't know. We'll see how I feel tonight. Can you tell us about those socks? Socks. Did you want to go into Did you want to talk about your socks in China? posted something on LinkedIn about the automatic folding laundry machine.
02:04
turned out to be scam. Um, in the comments, someone wrote like saving time on that is awesome. What I've done is, um, replaced all of my socks with one type so that when I'm folding my laundry, I don't need to pair up all these different orphans. And I was like, that's a great idea. So I threw away all 30 of my individual pairs of socks and I bought 30 pairs of socks from overseas and
02:30
one by one, every single day I wear them, they rip at the same spot on the big toe. So you're talking like a weirdo. don't have any of my own socks. Or these are really bad socks. And these socks are just falling apart. So you're just throwing away socks every day. Every single day, yeah, I need to figure out a solution because I'm running low. Well, that would be a very bad ROI. So why don't we talk about some numbers? do want to do? That's a good transition. a good transition. Construction to real estate development, I took a course at BU called Fundamentals.
03:00
of real estate finance. And it was an excellent course. I took a number. This was the one that stands out. And really what it focused on was all of the different alphabet soup of abbreviations. DCSR, know, cap rates. DSCR. DSCR. You already failed. uh Well, NOI, right, that's a big one. EBITDA. EBITDA, yeah.
03:23
Well, that's more for business related. Yeah, that's if you're doing, you know, a lot of public companies, know, Warren Buffett and Charlie Munger are among the most well-known and well-respected Well, let's start with our favorites, right? And they hate when it's complex and unnecessarily, it's almost like you're making it sound more complicated than it is. And I feel that way about a lot of the metrics in real estate. Well, actually, I feel that you can do 80 % of your underwriting uh on a napkin.
03:50
on one tab of an exposed spreadsheet. The marginal benefit to the second and third tab on that spreadsheet is 10%, 5 % more accurate. This is our next guest here. I'm going to answer it. Hey, wouldn't be an episode if we didn't have Mark's phone going off. Once per episode. There he is. I'll be right out. Excellent. Oh, look at this, guys. Live phone answer. We should do a live episode where we take Should we stop this and redo this episode? Well, no. Why don't keep going? All right. Let's roll.
04:18
My favorite metric, well, the first thing I wanna say is that any numbers- You going out in your socks? Okay. This episode, for those watching, this thing's off the hinges, for those listening, I don't even know. I don't even know how you can listen to this, but we'll get it going. We're all having fun here. know, Dan, since it's just you and me now and we talk every single day, you know how I feel about the numbers, but you can make a spreadsheet as complicated as you want. You can make it as simple as you want.
04:48
you can put any numbers into it that you want. And the spreadsheet can look great, but it's gotta be based on reality. And uh that's my biggest problem with underwriting and numbers and metrics is that people will put the feel good numbers on there, which makes them feel like it's a deal, but it's gotta be realistic. Don't say like, oh, well, we're gonna build this and in two years, comps will be a higher and these are gonna be the numbers that we achieve. Well, what if they're not? You gotta have that range. People love to inflate their numbers. One thing I did- lied to ourself.
05:18
And one thing I did was, the two most important things you're going to have to have are you need to have sort of like a variance matrix. And I've done one of these for us on our underwriter and it's, it's different cells. on, on the, on the row side, it's like, you know, sell out price if it's a project, right? Do we go plus, and it's like, can control the percentages for each thing. can go up by a percentage, each cube or two percent or 5%. And then on the other, on the column side, it's it's a construction costs.
05:47
So what if we save money, which do you ever, but let's say you do, or if you go over, like how does that screw up your numbers? So you kind of have to look at it. And some people call that sort of sensitivity analysis. And I look at it two different ways when looking at a project, little harder to do when looking at it from sort of a rental perspective, because you may have to take into account the time value of money when you've got investors and when you might be able to refi.
06:16
that gets a little more complicated. And frankly, it's a nut that I haven't really had to crack yet. Did you answer my question about your favorite metric? My favorite metric? Or at least favorite. I'll take that one. If I'm doing back of the napkin, my favorite metric is the 1 % roll, which means if my- Well, that's on rental play. On a rental, I'm looking at 1 % of, say the property's being sold for a million dollars. Ideally, I want that property bringing in $10,000 gross.
06:44
Very hard to find in Boston. You get a property that's $10,000 gross, they're probably asking one five for it. So you're already less than the 1 % rule. And on bigger pockets, they typically say, talk about the 2 % rule. So you double that. That's how high the values are here in the Boston area. And I'm sure other areas like that. Talk to me about the shortfalls or cap rates, because that's, think, the most common. Cap rate, yeah. Just a number. It's really, it's sort of meaningless, but it's sort of a way to
07:14
Describe the value of properties relative to their net operating income, which is the gross minus the operating expenses. A lot of commercial brokers and agents will use a cap rate when determining the value of Well, give me round numbers, ending in zero. So 5%, 5 % might be a cap rate. to a cap rate and then tell me what a realistic target is for an acquisition. Well, it depends on your market. I know.
07:44
You don't, you don't, you don't let's not use back bay and let's not use Western Massachusetts. Give me like something down the middle. The 6 % cap rate, 5 % cap rate. Back in the low interest rate days, it was 4 % cap how do you get there? Well, you get there by seeing what the market will pay for Well, the property is at the top There you go. And you divide it by, so you take what the market would pay theory for the property and you divide it by your net operating income and that's it. What is your net operating income? I just said it's gross minus operating expenses.
08:13
Gross income. So it's what you're left with? It's what you're left with before your debt service, before any of that below the line bullshit like depreciation. You take all your income, you subtract all of your expenses, and that's your NOI. Actual expenses. It's not the paper expenses like depreciation and all Correct, your actual hard expenses, and that's your NOI, not including your debt service, so not including your loan payments. So I paid $100 for a property, and the NOI on it was $20. What is your cap rate?
08:44
50%, I don't know. is that? That's a very high number. Mark's just making shit up. I was gonna say, if you sell, take a million dollars and your NOI is 50 grand, yeah, you're looking at 20. Maybe I'm doing the math wrong here. That's a 20 cap? No, I think we're gonna go off the rails real quick. I think I do it, you do it the opposite. You take the NOI and you divide it by the value, that's it. And a general rule of thumb,
09:12
is the lower- We got this. No, no, no, I do this all the time. I'm dyslexic. If you wanna equate cap rate to like cash on cash return or cash flow, typically the lower the cap rate, the less cash flow you're gonna have and the higher the cap rate, the more cash flow you're gonna have. It's generally a measure of risk and it's relative to other properties in your market and it's also going to have some interplay with what the actual debt rates are. if I can go out-
09:42
or savings rates. Cap rate is does not have anything to do with your cost of capital, your debt service. It will in some regards, you're not going to have a cap rate that's going to be higher than your debt potential. Well, it depends on what time. Okay, you know what, you're right. If you find a diamond in the rough, you're going to get a great deal and you can do it. So cap rate to me means nothing.
10:08
The thing that Capri means to me is a quick way to put properties side by side by side by side. And just, it's a mental shortcut, but it doesn't mean that much more. What means a lot to me is cash on cash. So cash on cash is an evaluation of what it sounds like, how much I'm pulling out of my own wallet and what the return on those dollars are. And then what happens when you refinance and get the money back? And zero dollars of their own cash.
10:33
I think that's infinity, right? It is infinity. Yeah. that's a very- Or you pull money out of the deal and now it's like, what is it? Negative infinity? I just broke the calculator. So it, I don't know. That's not how I would evaluate a deal. That's, some people will look for a dollar amount per door. They won't look at cap rates. people just say- Well, think that's the big, one of the biggest issues. There's no common, there's no real common denominator in terms of what someone looks for.
11:04
and qualifies it as a good deal, right? Like to you, cash on cash is important to you. Cap rate might be important to someone else. cash? IRRs might be important. Internal rate return is usually important. be important to someone else. A lot of investors. There's a lot of different metrics that are important to certain people. And so when you're going out and you're either looking to raise money or you're looking at evaluating a deal,
11:33
you have to come up with what metric is the most important to you. Right. A great example where IRR might be way more important than cap rate or any other measure of return on sort of a rental side is you buy it, you rent it, you don't care what you're making because you know in five years you're going to sell it or you're going to alter that property or do some other value add activity and make a ton at the very end, the terminal value. And then when you take that return and you annualize it, that's where your IRR comes from. So you don't
12:03
get somebody says, want 17 % IRR. You're not getting 17 % every year. You may get nothing. And then in year five, you get a big chunk of cash when the, that event happens. it's hard to say like what's good and what's not. And again, to Dan's point, it's very local to the markets. You know, somebody in like South Carolina renting out single families is going to have a very different view of what success looks like and a good return. On a for sale development, what metric do you typically look for? I'm going to take my.
12:32
total development costs. And we're going to compare total development costs being a combination of your hard costs and all of your soft costs. And I'm going to compare that to my total sellout and divide the two. if a project makes, you know, a hundred dollars and it cost me $90 to build, that's a 10 % return. And that's marginal. You know, I want to make $20 on every hundred. But if you scale that to a hundred X, right?
13:02
You almost the bigger you get, the smaller that percentage needs to be. And the smaller you get, the bigger their percentage needs to be. No, cause I don't actually don't really concern myself. And I think that's a common mistake with absolute numbers. You can get very drawn into a deal by looking at absolute numbers like, this thing makes a million bucks. It's like, yeah, if it makes a million bucks, but that's 9%, 7%, it's going to disappear. Like you need to stick to the percentage. might make a million dollars, but it's going to cost you 20.
13:32
projects succeed and they fail on the margin. Which means get what you're saying. It has to have more meat on the bone as we like to say. Yeah, if your heart costs $20 million, a million dollars could go in a puff of smoke. It's one change order. I mean, a lot of people see successful developers because the unsuccessful ones don't go out there and say like, hey, I didn't do a good job. Well, they can live like vampires for a long time. They can and some do, we get it. But what I'm saying is that
14:00
Eventually they fail and we only villainize the successful people and no one sympathizes with the ones that put their necks out there, gave it an honest try and didn't do well. We'll exclude the group of nefarious participants. don't know. one's ever felt bad for a real estate developer. No, that's what I'm saying. No one ever feels bad ever. Like I said, I think that's part of the reason that we do this podcast. I think it's to humanize it a little bit and to show the back behind the glossy pictures and the big sellout numbers.
14:30
And what it really, what are your thoughts on wealth tax? All right. We'll talk about that on the future episode. This has been any other metrics or no, we're done. We're done. ah Thank you guys as always for tuning in here. Appreciate you listening. Yeah, that's okay. you for listening, reading, reviewing, subscribing. See you in the next one. Okay.