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Rob Beardsley oversees acquisitions and capital markets for Lone Star Capital and has acquired over $300M of multifamily real estate. He has evaluated thousands of opportunities using proprietary underwriting models and published the number one book on multifamily underwriting, The Definitive Guide to Underwriting Multifamily Acquisitions.
Rob shares how he was raised in a family full of real estate professionals, but his love for numbers led him down an altogether different path–underwriting! His interest in numbers grew so intense that led him to his own success.
He tells us about how he learned underwriting – which led him to create an inspiring book and the benefits of this powerful strategy.
Rob breaks down the process of how to determine if an opportunity is worth pursuing, and provides some handy tips for getting a good deal.
The process of underwriting can be a difficult one, but it’s imperative to ask the right questions. Rob outlines some key considerations for ensuring that any new proposals or projects will stand out from others in their field and get merit-extra points towards being successful.
The underwriting strategies are just around the corner with this amazing episode. Don’t miss on the principal details – I know you won’t regret it!
In This Episode
- Rob Beardsley’s roots in real estate and how it started
- The difference between active and passive investments
- The process of underwriting
- Key questions to underwriting
- Biggest insight from Rob’s multifamily underwriting book
Hey everyone, and welcome to another episode of Wealth Strategy Secrets. Today we’re joined by Rob Beardsley. Rob oversees acquisitions and capital markets for Lone Star Capital and has acquired over $300 million in multi-family assets. He has evaluated thousands of opportunities using proprietary underwriting models and published the number one book on multi-family underwriting, The Definitive Guide to Underwriting Multi-Family Acquisitions. Rob, welcome to the show, my friend.
Yeah, thanks a lot for having me.
Yeah, really great to have you on. I think investors are really going to get a good appreciation for some of the underwriting tactics and techniques, and your experience in looking at so many deals. You are one of the best in the business when it comes to underwriting. Also, from a limited partner perspective, a lot of folks don’t really understand all the mechanics that go into underwriting. I think it’ll be great to jump into that.
To kick things off, why don’t we just tell the audience a little bit more about yourself, your journey into real estate, and building wealth. How did it all start for you?
Sure. I grew up in Silicon Valley in Northern California. My parents were in residential real estate. Their primary business was buying and selling homes for their clients, but on the side, they did some flips and construction. They never really were investors per se; it was always about making an income or churning deals quickly and not really accumulating assets or building long-term wealth.
I didn’t open my eyes to this building wealth paradigm until more so into college when I started reading books on real estate and Rich Dad Poor Dad. That opened my eyes to the journey that made sense to me. Originally, when I saw my parents run their business, I was kind of put off by real estate and wasn’t particularly attracted to it because they were just running around stressed out, and it didn’t look like they were having a lot of fun.
It’s funny that eventually I did circle back to real estate and ended up meeting my business partner and starting Lone Star Capital, which, as you introduced, is a multi-family owner-operator focused in Texas. That’s been a fantastic journey of building a business but also doing investing alongside the business. I would say the number one perk of being a sponsor and being in the business I’m in is that I get to invest alongside my investors and get all the benefits of this wonderful strategy.
Yeah, no, that’s awesome. We have a lot of investors who invest in single-family rentals or vacation rentals. Having done both types of investments, as well as more passive investments, what would you say the difference really is from your perspective?
The difference is one is active, and one is passive. As much as people want to believe that their rental is turnkey, there’s always something going on, and there are always some responsibilities you may have. It doesn’t necessarily have to be a nightmare, but it’s just not truly passive. You’re essentially running a side business, which is great and can be profitable, but you may be taking on a bigger headache or more risk than you fully understand. That risk won’t necessarily come to the surface until something bad happens, like unexpected CapEx. For example, if it’s a single-family rental and your tenant leaves, you could have one, two, or three months of vacancy, which has a dramatic impact on your annual P&L. Whereas in multi-family, if you have a 200-unit property, one tenant leaving is not a problem at all.
Yeah, absolutely. Another thing that people don’t put into the equation when assessing whether it makes sense to do single-family or not is opportunity cost. Your time is truly your biggest asset, and if you get stuck dealing with tenants, termites, and toilets, it really sucks you in. Like you said, it can be a great place to start if you’re trying to build equity or create a business as a side hustle. But as you get bigger and try to scale, it results in diminishing returns.
Tell us a little bit more about the underwriting side. How did you get so intertwined into underwriting? Did you study that in school, or where did this affinity for underwriting come from?
I studied computer science in school and always was a numbers guy. I had a numbers background, so when I started in the multi-family business, I was naturally attracted to the numbers and wanted to wrap my arms around underwriting to understand the business. I felt that was the critical component to understand in order to be confident and have the ability to invest. You can’t invest in something you don’t know, and to me, that was the best way to know the investment. I gravitated towards the numbers.
One of the best things I did was build my own model because that enhances your learning. You’re not just learning how to plug numbers in and get numbers to come out; you’re actually seeing how the sausage is made. You see every number and every formula, how they flow together, and you can see the impact of different assumptions such as pro forma rents, exit cap rate, and rent growth assumptions. You see how everything is built together.
For folks that aren’t familiar with the underwriting process for a multi-family deal, can you walk us through what the process looks like and how you’re building out your model?
Sure, so at this point, as I mentioned, I’ve built a model from scratch, which was very educational and helpful. It’s not just an educational exercise; it’s the model that we use every day to underwrite hundreds of deals. Of course, it’s been improved over time as we’ve adjusted our ideas, methodology, and strategies.
When we look at a new deal, it’s an information-gathering initial phase. We make sure we have all the right information from the sellers, such as the rent roll, the P&L, and any other ancillary due diligence we may need. We start plugging all that into the model, which gives us the state of affairs of the property in its current condition. What we want to do is identify the future opportunity of the property, so we need to look at the market data and comparable properties on a rent and sales basis. This helps us create the most accurate picture of the future for the property. That’s how you make real money—not by buying something as it is but by having a vision for the property and being able to execute on that vision. That’s a very simplified underwriting process.
Yeah, no, I think that’s really helpful. Talk to us about assumptions, right? How do you really gauge certain assumptions, like market rents, for instance? What is a good projection rate to build into a model? There’s got to be some reverse engineering from where you want to get with a target profile for investors and make sure the deal is even good enough to get through.
Yeah, and my favorite kind of phrase or way to think about it is defensible underwriting. You want to be able to defend every assumption, so if someone points at a certain assumption like rent growth, for example, you want to be able to defend that with some data. That wouldn’t be hard to find—you would just go to CoStar, Yardi, or whatever data service provider you use and look at the rent growth projections for that sub-market, property neighborhood, or area you’re looking at. That would be one way to defend that assumption.
However, to your point of making sure it’s a good deal, you don’t want to get carried away with something like that because you could be relying too much on the market. At the end of the day, in my opinion at least, you don’t want to rely too much on the market to deliver your returns because the market is not in your control. I would rather invest more into business plans or opportunities where we have more control over the outcome. Even if we’re investing in a hot market where rent growth has been double digits, we’re not going to put that in our model. That’s okay because that’s upside that’s not factored into our underwriting, which makes us feel good about potential better upside. You don’t want to necessarily bake every single piece of upside into the deal because that means all you have really is downside.
Yeah, well said. I think that’s really the difference. A lot of investors who are new to multi-family are used to thinking about appreciation in terms of single-family residences. In this case, what you talked about is forced appreciation. It’s very different because you are taking that vision and trying to execute against that business model.
Tell us about additional opportunities. One of the things I really love about real estate is that even though it’s a very stable asset class, there’s so much creativity to it. You can identify additional revenue opportunities, like implementing a trash service, negotiating a better deal for tenants with group cable service, putting in a pet park, and charging pet fees. Tell us how you evaluate those types of creative opportunities to drive up the rents as well.
Yeah, you pointed out some good ones. Those are good examples, and there are so many more, as you know. Some of them are more established, and some are more speculative. We don’t want to go out there and do a bunch of things that are speculative. We know the things that work as far as interior renovations. You can look at comps as a way to prove out your plan. You could say, “Well, the deal down the street did these renovations, and they’re getting these higher rents.” It’s very straightforward, and we can comp to that.
Things that are a bit more ambiguous or difficult to comp would be adding the dog park, like you said. That may not directly enhance your revenue because it’s not directly adding revenue, but maybe it encourages more people to have pets, and then you have more pet fees coming in. Or you’re just making your property more competitive from an amenity standpoint compared to other properties in the area, which helps with leasing renewals and your overall P&L. When it comes to things that are more creative and speculative, we want to test them out first and see how well they are received by the tenants before deciding to roll them out programmatically.
Right. Yeah, I think there are lots of different opportunities there, but that was really key how you pointed out not looking at things that could be speculative. This is why we like this asset class so much—it’s very stable, and you can prove things out.
What you’re validating, which is an interesting point, is that people always love to say, “If we upgrade the kitchen, we’re definitely going to get our money back.” People can relate to multi-family because they’ve gone through some transactions in their lifetime. You can evaluate and say, “If we put in new flooring, fresh paint, and upgrade the appliances to this level in the kitchen, we should be able to comp that and see what other properties in the area have been able to achieve with those types of renovations.”
Yeah, exactly. It really isn’t rocket science, and keeping it simple is definitely one of the benefits of the business. We don’t have to reinvent the business plan for every single deal. For the most part, every deal is different, but you can identify an opportunity, and it will be very similar to the last one. You can rinse and repeat.
Yeah, and I know you’re in a lot of markets. Tell us about the markets that you focus on. I know Texas is a big one, obviously, with Lone Star. Tell us the primary markets that you’re focused on, Rob.
Houston and Dallas.
Houston and Dallas, okay. Tell me, do you do anything in terms of underwriting for a particular market? We talk a lot about job and population growth and trying to target those areas that have growth. Is there any representation of that in the underwriting model, or how would you really assess that?
Yeah, there is, and you’ll see it two ways, pretty much just as far as rent growth goes. Rent growth varies by market and sub-market within that market. You’re going to change your rent growth based on sub-market or market anyway. The more interesting difference I would point out is as far as return expectations. Some markets are just more competitive or perceived to be less risky. If there’s less perceived risk, the potential return is lower as well.
If you’re going to invest in a very tiny market that has no growth and one employer, it’s a super risky market to invest in. You should have a very high projected return in your underwriting to justify buying in that area, or else it just wouldn’t make any sense. Conversely, if you’re buying in a top-tier market like Dallas, where everybody loves and wants to be, with corporate relocations, population growth, job growth, and everyone thinks it’s super stable and diverse, you have to underwrite to a lower return expectation.
Just to put some numbers to it, for example, if you have two deals that are identical but one’s in a good location in Dallas and one’s in a good location in Houston, you might demand or expect a 13% IRR on your underwriting for Dallas. But for that same exact deal in Houston, maybe it’s a 15% or 14% return. It’s hard to quantify these things, of course, but there definitely is a difference there because you are essentially trading away projected return for being in that desirable market.
Yeah, good point. I also like to think of it in terms of further insulation you have in a deal by being in those strong markets. Some people always ask, “Why don’t you invest in Boston or New Jersey?” They just don’t have the same metrics and demographics we’re looking for in terms of multi-family. There’s plenty of development happening, but the risk profile is much higher in some of those markets.
From an investor’s point of view, if they’re looking at a deal, what are some key questions you would recommend asking around the underwriting of a particular opportunity?
Sure, first I would, if a passive investor is so inclined, ask the sponsor to see the underwriting. Even if you’re not at that level or don’t have the time to dig into it, starting to look at more models and getting familiar with them helps. You can judge the sophistication and rigor of a sponsor by their model. It doesn’t mean the most complicated-looking model wins, but if it’s organized and makes sense, that could be an indication that they’re organized and their stuff makes sense.
There are some sponsors out there who are reticent to share their model for whatever reason, and I don’t think that’s a valid stance. If a passive investor encounters that, I would be leery. Beyond just asking for it and taking a look, I would look at the highlights—pro forma rents relative to in-place rents and the expected rent jump. Then look at the business plan relative to that rent increase and see if it feels justified and makes sense.
You should also take a peek at some rent comps, which should be prepared and put together in a digestible format by the sponsor through their model and investment presentation, so it’s not a ton of digging around for data. Another thing to look at is the rent increase and growth over time. Rent growth typically is around three percent, which is reasonable to put in the model. Some markets are in double-digit territory, some are lower. We’re not trying to be 100% accurate but want to be justified and conservative. If your market has been growing at five to ten percent in the past few years, putting three percent in your model is safe.
Lastly, look at the exit cap rate. For those unfamiliar, the way these models work to derive the sale price in the future when you sell three, five, or ten years down the road is by taking that year’s sales income, the NOI, and dividing it by the exit cap rate. The exit cap rate should make sense relative to the market cap rate today. If market cap rates today are around 3.5%, the exit cap rate should maybe be 4.5% or 5%. As you look at more deals and get comfortable with those numbers, you’ll get a better sense.
Of course, there’s more you could dig into, like looking at expenses and comparing the seller’s current payroll with your projections. But at the end of the day, passive investors aren’t in this to become active investors and pore over financials. Building up a baseline level of understanding and strong trust in the sponsors you’re working with is the best way to go as an LP.
The biggest gotcha would be having to do with the business plan implementation or the stabilization period. Sometimes you’ll see models where the business plan happens way too quickly. You go from the in-place rents to $100 or $200 higher rents seemingly overnight, and that’s obviously not possible. You want to err on the side of being conservative when it comes to implementing the business plan and how long it’s going to take.
Yeah. What do you think about today’s marketplace? We’re in an environment where interest rates are rising and cap rates keep getting compressed. Is it becoming more and more difficult for you to find good deals? What are you really seeing in the market, and how are you managing that?
Rob: It’s always hard to find good deals, right? But right now, what we’re experiencing with the upward pressure of interest rates and not so much a major adjustment in cap rates—cap rates are definitely due to go up, and I think they already are. It’ll be interesting to see where the data comes in as we track it. We track all of our deals as far as their going-in cap rate, their yield on cost, the underwritten IRR, the guidance pricing versus our price. We have all that data that we keep track of, and then we do a quarterly webinar where we analyze that data.
I’m really looking forward to the next one because it’s going to show some pretty big shifts in the data. For the last three quarters, cap rates have just been slightly compressing every quarter. Everything’s been moving slowly in one direction, and I think this next round of data will finally show a reverse of that trend, with cap rates going a bit higher. I’m not sure what other insights will be in the data, but it’ll be interesting to see.
Going back to your point, interest rates have moved more than cap rates have moved to offset interest rates, so it’s still squeezed. What we’re doing now is buying deals at much lower leverage. We were doing deals at 80% leverage before the interest rate world freaked out, and now we’re doing deals at 65-70% leverage. This really changes the risk profile of the deal and helps us get the best loan terms possible. The only downside is that as sponsors, we have to go out and raise a lot more equity.
Interesting. Are you seeing that with some of your peers as well as one way to underwrite and structure a deal?
Yeah, I haven’t seen it a lot. I’m sure a lot of people are doing it, but I think a lot of those who are doing it now were the players doing lower leverage before anyway as a general practice. We’re finding our willingness and ability to go down in leverage is allowing us to be more competitive in today’s market. A lot of those players doing max leverage deals and getting away with it because the debt was really cheap and the deals were working out—they’re finding it very difficult to transact in today’s environment. I’m hearing of groups taking pauses at the moment.
Huh, interesting. Another point, Rob, maybe you could share. A lot of people don’t realize this, but how many deals come across your desk that you don’t even pencil until you get to one that goes under contract? Can you give us an idea of that ratio for you guys?
Yeah, it’s about a hundred to one. In 2021, we underwrote about 500 deals and did four transactions. It roughly shows you that it’s about a hundred to one ratio. We’re trying to tighten up the ratio and be more savvy with what we choose to spend our time on. There are a few ways to look at how to do more deals. You can do more deals by increasing your funnel—instead of underwriting 500 deals in a year, you could underwrite 1,000 or 2,000. Another way is to increase your conversion rate through the funnel by finding better deals to underwrite in the first place, discarding the ones you don’t want, and underwriting the ones you do. We’re trying to work smarter, not harder.
Yeah, a great point. I think a lot of investors might see different deals, but they don’t realize how much work has gone into a deal by the time they actually see it. It can be underestimated. What would you say is the biggest insight you could share with listeners about writing your book?
Writing my book from an underwriting perspective? Well, a lot of people reach out to me after reading the book, and they really like the chapters about partnership structures. The main topic is underwriting and evaluating deals, but I included those chapters about layering on the partnership structure because it’s important. If you are going to underwrite a deal, you can’t just underwrite it in a vacuum. You have to have some way to buy it and partner on it. You need your preferred returns and your promotes, and how to actually plug all that in and make sense of it in your model to evaluate the deal. I think that’s a really cool insight. People sometimes gloss over the structure and don’t dig into the details of preferred returns, promotes, fees, and different things like that. It’s an eye-opener for a lot of people who read my book.
Sure. And Rob, what would you say from a personal development perspective, what is the one practice that’s yielded the biggest results for you?
I would say journaling and being explicit with my goals, writing them down almost daily. The more I sit with my goals and think about how to achieve them, the more likely they are to come true. It’s amazing how much time there is in the day. We’re all very busy, but if you look at your day and your goals in relation to your day, often you’d be shocked to realize you didn’t spend any time moving closer to your goals, at least directly. I like looking at my goals and then seeing what I can do today, this week, or this month to inch or leap closer to reaching those goals.
Yeah, well said. It’s really interesting because we live in this digital age. I came out of the tech space myself, and I remember everything was digital—apps on your phone, wherever you go. Maybe five or six years ago, I learned the power of journaling and writing things down. I can’t believe how powerful it is to sit with pen and paper, get your thoughts down, and gain clarity. Once you get clarity, it drives confidence in what you’re doing and creates new capabilities. It’s super powerful, and I totally agree on the goal side. When you stretch out and say, “Here’s a one-year goal, a three-year goal, a ten-year goal,” it simplifies and cuts through the noise.
You can define what you need to be satisfied in ten years and think about it all the time. If you’re not doing activities or creating habits that support those goals, you’re not getting any closer to them. Having them crystallized in your head and writing them down puts you in a much better position to achieve them.
Yeah, and you’re always going to find time to do what you need to keep things going. If you’re running a business, you’ll find time to get your mission-critical stuff done to keep the business running. But there’s no guarantee you’ll find time to do something like writing a book, which is easy to procrastinate. I’ve procrastinated my next book for a year. I started writing it and then pretty much put it down and didn’t touch it for a year. But I still found time to buy deals, manage my team, and raise capital. The way I see it, you don’t need to budget for getting your regular day-to-day stuff done—you’ll find a way. But budgeting time and writing in your daily journal to take time out for deep work, like writing a book, is really critical.
So, Rob, where do you see yourself in five years?
I think the goal for the next five years is to build on the foundation that Lone Star has built. Lone Star was started by myself and my business partner Kent over four years ago, and we’re just getting started, getting established. It’s turning into a real business. The next five years will be really fun as we turn it from a startup into a well-oiled machine, building the team and processes so things can just hum. With that well-oiled machine, I would like us to have multiple billions in assets under management and a real deal portfolio.
Yeah, awesome. I know you have a conference coming up in September, Rob. Do you want to tell the audience about that?
Yeah, sure. The conference will be our second time putting on an event here in New York. I’m bringing together the best of my network with a focus on capital, which includes family offices, private equity firms, crowdfunding platforms, and debt and equity funds. I love bringing those people together. There will also be great sponsors in the room. We do a deal Shark Tank where family offices and private equity firms act as sharks, and sponsors pitch deals. It’s very educational to watch the pitches, learn about good pitches, and see how the sharks or investors react and what follow-up questions they ask. It’s a great way to sharpen your skills and understanding of deals. We’re bringing that back this year. It’s also a great opportunity to network and hopefully walk away with some contacts to do more deals.
Awesome. What’s the URL for folks?
The best way to find it is on our website, lscre.com. We have an events page on our website that will take you to the upcoming event in September.
Okay, excellent. We’ll link that in the show notes as well. Any other links or if people want to reach out to you or follow you, what’s the best place they could do that?
Yeah, on the same website, lscre.com, I have a free download of our underwriting model that we use. I keep it up to date, so it’s our latest and greatest model. If you’re interested in downloading an underwriting model to start looking at deals, you’re welcome to download ours. We also have articles, video resources, and whatnot on our website. You can subscribe to our monthly newsletter, where I write an article every month. That’s been consistent for over three years now. Finally, on LinkedIn, I post every single day and am active there. If you want to connect with me, you can connect or shoot me a message on LinkedIn.
Yeah, that’s awesome, Rob. Personally, I’ve really enjoyed your content. I love how you get into the weeds. I even went through some of the training stuff, which was really well put together in terms of underwriting. Thanks for putting that together, and hopefully folks will reach out because you’ve got some really solid content.
Yeah, thank you a lot.
Awesome, Rob. Thanks so much for coming on the show today.
Yeah, thanks again for having me. It was a great conversation.