Quick & Easy Underwriting with My Calculator: Part 1 Guide
Oct 08, 2024
Ever wondered, "Is assisted living profitable?" The answer lies in good underwriting! Today, we're going to talk about how to underwrite an assisted living business using my underwriting calculator. Don't worry if you're new to this - we'll break it down step by step.
Check out the video, too:
What's Underwriting and Why Should You Care?
Underwriting is like detective work for investments. It helps determine if a deal is worth your time and money. For assisted living facilities, it's super important because it can show you if an opportunity will make money or not.
When you're doing real estate underwriting for an assisted living facility, you look at things like how much money it makes, how much it costs to run, and how much you might pay for it. Our underwriting calculator makes this whole process a lot easier.
Key Things to Know About Underwriting
Before we dive into the calculator, let's learn some important terms:
- Cap Rate: This is a quick way to see how good an investment might be. It's like a report card for the property.
- Net Operating Income (NOI): This is how much money the facility makes after paying for things like staff and supplies, but before paying taxes or loans.
- Price Per Bed: This tells you how much each bed in the facility costs. It's a good way to compare different properties.
- Pro Forma Analysis: This is like looking into a crystal ball to see how the property might do in the future.
Using the Underwriting Calculator: Home Info Tab
Let's start with the Home Info Tab. This is where you put in all the basic stuff about the property:
- The facility's name and where it is located
- When it was built
- How many bedrooms and bathrooms it has
- How big it is
- What kind of neighborhood it's in
- Who you want to live there (like seniors, people who need memory care, etc.)
You can also make notes about your offer and questions for the seller. There's even a place to put contact info for important people like the seller's agent or your attorney.
Quick Analysis Tab: The Heart of Underwriting
Now for the fun part - the Quick Analysis Tab! This is where you can quickly see if an assisted living facility might be a good investment. Here's what you do:
- Put in how much money the facility made and spent in the last three years.
- Enter this year's numbers so far.
- Type in how much the seller wants for the property.
- Decide how much profit you want to make (that's your desired cap rate).
The calculator will then show you if the deal looks good based on your goals. It'll even tell you what a fair offer might be.
Pro Forma Analysis: Looking to the Future
The Pro Forma part of the calculator helps you guess how the property might do in the future. You can play around with different scenarios, like:
- What if you raised the rent?
- What if you could lower some costs?
- What if some beds were empty for a while?
This helps you see how changes might affect your profit.
Wrapping It Up
Underwriting might sound complicated, but with this calculator, it's actually pretty easy! It helps you make smart decisions about buying an assisted living facility. You can quickly see if a property might be profitable and if it's worth making an offer.
Remember, good underwriting is key to success in the assisted living business. It helps you avoid bad deals and find the gems that could make you money.
Ready to take the next step in your assisted living investment journey? We've got two great resources for you:
1. Download our free Assisted Living Business Plan Checklist. It'll help you create a solid business plan as you start your investing journey.
2. Need help figuring out where to start? Join the next Roadmap Challenge and build your launch plan with me.
Stay tuned for Part 2 of this guide, where we'll dive into some advanced features of the calculator.
Happy investing!
Show full transcript 👇
Transcript
00:00:01
[Music] hey guys welcome to assisted living investing it's brand augustus and i'm happy to have you back on the channel i just wanted to quickly recap what we've talked about the last three videos we've been talking about tours the importance of a virtual or an in-person tour getting out and talking to people and helping them understand what a tour is a virtual tour versus an in-person tour why it's important to have a tour and and what that can mean uh for you and your underwriting and your due diligence
00:00:39
process so make sure you comment down below let me know if that was helpful if there's anything that that you found uh in your process as you're going through and trying to acquire a facility that that you found to be a little more helpful i'd love to hear your feedback so that i can implement that into my videos going forward but today we're going to talk about something that that people have been asking me about a lot on on facebook groups um here on the channel um my calculator so
00:01:06
for those of you that don't know i have created a calculator to underwrite assisted living acquisitions and i i've i share it very broadly i love to share it with people and and make sure it's a resource for you to use so that you can have something as you go through it i think it's something that everybody looks at as a first step on their path to underwriting a deal and seeing if it's going to be something that's profitable but i send it off to them and then oftentimes i don't hear back from
00:01:36
people but i worry that you get the calculator and you're like oh my gosh this is so complex i'm not sure exactly how to use this so i wanted to give a tutorial uh on how to use my calculator how it works and help you understand how you can better utilize it i do plan on this being probably a two-part series possibly even a three-part series just depending on how long it takes to go through things because i want it to be very comprehensive so that you know how to use the calculator and understand some
00:02:05
of the terms that that i have on their rates and ratios and different things like that so i want to make sure this is very comprehensive but make sure you comment down below if you have any questions i can dive into it we can set up a time for a quick call to go over it together and i can help describe things and help you work through the process um as you're trying to acquire your facility but before i get into going through the calculator and the full tutorial i wanted to go through a few uh
00:02:30
definitions just so that you have them up front as you're going through and you can refer back to these definitions later on in the video i hope that's going to be helpful for you the first definition that i've got for you is underwriting so what is underwriting underwriting is the process that you go through as an investor to determine if you're comfortable with the amount of risk involved in the deal you're interested in and a part of underwriting is looking at different rates and ratios
00:02:53
so we're going to talk a little bit about cap rates um here but there are a few others that are in my calculator as well so we'll get into those as we get into the tutorial probably in part two the next definition i wanted to go over for you is a cap rate so cap rate is something that you're going to hear a lot of people especially in a commercial world um you're going to hear a lot about cap rates so i want to kind of give you an overview of what a cap rate is a cap rate is used as a quick way to evaluate a
00:03:19
project and what the return on investment with that roi might look like so it's just a quick easy way to look at it you figure the cap rate by taking the net operating income which is noi and you divide that by the purchase price of the facility um so say you're purchasing something for a million dollars they have an noi of the past year of a hundred thousand dollars so you take a hundred thousand divide that by a million dollars you have a 10 cap rate so that's just the quick and easy math on on how you do a
00:03:50
cap right what a cap rate is the next one is going to be noi so what is net operating income right i just talked about that as a key part of the component that that gives you the cap rate the noi is the amount of money that is available after all of the expenses except for interest and taxes you may also choose to look at a more normalized noi and that's going to be looking at things where you're putting in different things like an ad back and i'll get into that actually in the next video what an ad
00:04:19
back is but there are certain things that you can take out of of a pro forma uh when you're looking at it but there are also things that you might want to put back in and so a normalized noi is looking at what currently exists and then taking out things that currently exist out from your analysis and putting things in that may not exist so that for example could be something like a management fee like if you wanted to pay somebody to to be the manager of the of the facility it's typically like a five
00:04:50
percent management fee um you could add that in um for the normalized noi or maybe they're doing a management fee and you don't want to do it so you could take that out to do your normalized noi when you're doing that and you can build a cap rate based off of that normalized noi rather than the the real noi that's probably going to give you a more realistic cap rate for for your current situation uh the next one is price per bed so this one is i think pretty self-explanatory but i want to make sure
00:05:16
because i'm going to get into that a little bit here uh in in the video in the tutorial on the calculator so price per bed is the price for bed rate that determines how much money you are paying as a buyer for each bed in the facility so how you figure that price is you just take the purchase price so again let's say it's a million dollars you divide that by the total amount of beds in the facility you could also do this by a price per unit um so sometimes you're going to be able to have multiple beds
00:05:42
in in a in a room so you could do a price per unit same same idea let's say you're you're purchasing a facility for a million dollars you've got a hundred beds in it um so you take a million divide that by a hundred and that equals ten thousand dollars a bit which is an incredible price um i think what you would be realistically like a good benchmark for you to probably set is about a hundred thousand dollars a bed you obviously want to look at your own criteria and see i mean if you're getting larger
00:06:09
facilities you're probably gonna get a better price per bed there i've been looking at some recently that are like sixty thousand dollars a bit so just kind of look at your criteria look at cap rates look at price per bed just kind of do that but those are some really good rates that you want to do and we're going to get in that in the tutorial and how you can use that in my calculator as well the last one the last definition for you today is pro forma so pro forma is a method of calculating financial results
00:06:35
using certain projections or presumptions a pro forma allows you to look at past financial performance and project that performance into the future so it's taking uh how something has performed in the past and then making a few tweaks to it like you know i'm going to increase rents by 10 or i'm going to be able to decrease a payroll expense by 15 or i'm going to hire a management fee and that's going to be an increase of five percent so i need to put it in there so you're looking at all of those different
00:07:05
factors and you're putting it in there and it's allowing you to project out what things might look in the future so i've got a version of of that a quick and easy version of that um that we're gonna get into today in the tutorial and then i've got a more complex version that we're gonna get into uh next next video um where i get into a lot of kind of the nitty gritty of of what it looks like to build a big kind of long term 25 30 year pro forma that i've got in my calculator so hopefully those things
00:07:35
will be useful for you so now we're going to jump here into the into the video of the tutorial of the of the sheet so obviously this is in google sheets which is just google's version of a spreadsheet i found that this actually works out quite well i've built this um enough and worked enough in google sheets and i'm very familiar with working in excel it's what i do for my full-time job so i i think you're gonna be able to you'll find that there's a lot of the information here that you need um to be
00:08:03
successful so the first tab that we're looking at here is the home info tab right there so home info is we're going to put the information about the home so you can put uh the name the location comes right here assisted living entity and real estate entity for me that's how i track um which of my entities are going to own and hold these which one's going to be the operating um entity which one's going to own the property information about the house so the year it was built bedroom bathroom count the
00:08:32
square feet and those things down there those things up there are going to feed some of those ratios there they're just kind of helpful so you can get a a count of price per bed price per bathroom price per square foot i'm just looking at a few things like that you can put in here the neighborhood classification so if it's an a b or c property type is it residential commercial uh your ideal tenants are you working with elderly care you're working with mental health are you memory care
00:09:01
facility kind of what what do you want to do with this facility what's your strategy your rental strategy like are you are you going to be bringing in people you're going to be using something like a place for mom or another resource like that are you using your facebook page or your own website or whatever and then notes on the offer that you want to make these are just general notes a section for that and then this is questions that you have for the broker and then up here is just going to be a quick and easy way
00:09:30
for you to to grab these are the people that i am using as i'm purchasing this facility so your broker the listing broker accountant attorney lender your payroll vendor who did the inspection so that you have that information who's the who the title company is on on the purchase of the facility if you're if you have a property manager who who that person is um if you have to hire out a contractor who that is and if you have a handyman as well so um name phone email any notes that you have um
00:10:00
it's it's it's really easy to have this in one spot on a spreadsheet so that's the purpose of this and then right here if you were able to find out medicaid rate in the state that you're working in um usually this is going to be a daily rate say it's 70 a day for that resident you're able to put that in there if you've got a private pay rate you can put that in there as well and just kind of make some notes around around those things so this is just meant to be where you're going to capture a lot of
00:10:28
that information that's going to allow you to have it in one spot and keep yourself organized so i found that to be very helpful as i'm going through and purchasing facilities now we're going to get into the quick and easy tab so this is the the the big thing that we wanted to get into today this is how you can quickly analyze a deal and and see if it's something that's going to work for you okay so what you want to do here is you're going to get the historical financials this could be
00:10:56
the p l the profit and loss statement from the from the seller they'll give that to you in the process and so you'll be able to see what the total income is and then you'll be able to look at expenses like the payroll expense and then other administrative expenses and that's going to give you your total operating expense so this is very very high level we've got here this is your this is going to be your payroll expense and then this is going to be your total expense and then this field right here
00:11:24
is actually just your total operating expense minus the payroll so that's going to give you all of the other expenses rolled up into into one line item so when you look at a p l you're going to be able to see this is going to make a lot of sense so you're just going to break out that payroll line expense and then you're going to take your the rest of of all of the other operating expenses um so there's going to be a line at the bottom that says all expenses or or something like that you take that number minus out
00:11:50
the payroll number and that's going to be the you know all of the expenses that you've got um that kind of fits into this this bucket right here hopefully that makes sense comment down below if you need help understanding that i tried to make this simple um so that you're able to to put this information in it what you really need to know is you enter this number and you enter that number and then this number is going to populate itself okay um this is a number that you're going to
00:12:16
enter in this is all the income that's coming into the facility you're going to do that for historical years so typically you're going to get three years of historical financials on on a facility that's very standard it's something that a lender is going to need from you so make sure you're getting that information unless it's something that you know they just haven't owned for that long in which case you just get what you can out of it but right here you're just
00:12:42
going to put those numbers in for those years and then if you have in the current year that you're working in this year's 2021 so you would just do year to numbers um for uh for that year so that you know right now we're in august of 2021 um they give you financials through the end of july and so you put that in there and then over here on this factor section i've got a thing where you could say months in the current year so in that case where they gave you to the end of july you would just put in a 7 right
00:13:13
there and that's going to factor in what this 2021 projection is and it's just going to make it so that it projects those numbers out so you can see what they might look like by the end of 2021. obviously when you're doing that you want to kind of make sure that it's in line with previous years as well just to make sure that it looks correct and from there i put in a pro forma line so this one's just going to let you projected out what it's going to look like in the future just like one year
00:13:38
into the future um nothing fancy here i was going to let you kind of see what that's going to look like okay so now we're going to hop down here um to this section so this is going to be your asking price here you've got the desired cap rate right there and then here these are what the current cap rate is so this is the asking price this is the current cap rate um that you would see for that year at that asking price so you would take this noi this net operating income and then you're
00:14:09
going to divide that by the asking price and so you can see from there what the cap rate would be historically and then where it's kind of at today right so you can see how it's kind of trending a little bit there and then this would be the price at the desired cap rate so this is saying um this noi and then i want if i wanted it at an eight percent cap rate um what would i be offering at that point so in this case you'd actually be offering more than the asking price so you're getting
00:14:40
a pretty good deal there so it gives you a kind of overview on that one this one right here kind of shows you this cap rate um 7.5 is a little bit lower than eight so this number is going to be a little bit lower than that number um so she's going to kind of let you look at those things a little bit historically and and see if you're getting a good deal getting the deal that you want to get on on something and then over here this is what the cap rate is based off of that pro forma so this
00:15:05
is really the section where you want to pay attention to it's good to see what it has trended at but this is what you really want to pay attention to if the pro forma is is in line with that asking price so the cap rate that i've got here these are just kind of dummy numbers i threw in there these are you know with with that pro forma number um it's a six point three percent cap rate uh which is lower than that eight percent and that's going to put you at a lower um asking price so this is this number
00:15:40
right here is kind of what you would look at um from your perspective as as possibly that offer that you want to make so you would say oh you know what i'm going to offer you 1.1 million rather than 1.25 because that's about where i need that to be um for me to to look at hopefully that makes sense make sure you comment down below if you have any questions on on how that works and then right here this is the price per bed at the asking price so this is saying um total amount of beds and we'll get up
00:16:07
here into this factor section here in a second um so you know there's 14 private beds two medicaid beds so that's 16 total beds and then we're going to divide that by this asking price and that's going to give us um the the price per bed at that asking price and then right here this is the price per bed at the desired cap rate so this is those same 16 beds but at this price right here so you can kind of see what the gap is right there and it kind of gives you a good idea on on you know
00:16:39
if that if those numbers are are pretty close to the same you're probably in a good spot if there's a big gap you know this is a twelve thousand dollar per bed gap that's that's a pretty sizable gap so maybe you want to look at that and say maybe i want to get this number up to 72 000 per bed and so you can kind of start playing around with it and and see what that gives you as far as as your offer number so just really quick easy way to look at this this is going to give you if you have
00:17:06
comps that you're looking at in your analysis again this is going to be the sales price what that comp sold for what the noi on that was it's going to give you a cap rate so then you can look at it and just kind of compare the deal that you're looking at against some different comps and what their cap rates were to see if it's marketable because you want to make sure that your offer is also within reason that it's competitive with the market you don't want to pay too much but you don't want to pay
00:17:33
too little and and steal something from somebody if you can help it because we're on this to kind of help each other and make sure everybody's kind of productive for them and then down here just a couple of definitions what is a cap rate and then what is a price per bed just in case you need to remember exactly what it is i went over it earlier in the video in the definitions section but this just put them in here so that you can have them you know readily available for you i'm going to jump over here to the factor
00:18:00
section and a lot of these numbers are going to feed things um over here in the table so this right here is kind of meant to be static and and not make a lot of changes what you would be changing is like those numbers these numbers and these numbers based off of what you're getting in the p l's um the rest of it is just kind of going to stay there and from here you can put in your desired cap rate so you know say say you had a you wanted a nine percent cap rate and you could see when i did that it
00:18:30
adjusted um this desired cap rate number uh a desired um cap rate number that offer that you would do there so change it back to eight and you'll see um when i do that it's gonna adjust this and puts that number back there okay these are projected expense increases so this is right here in the pro forma section um saying you know i i think that expenses are going to adjust and they're going to be up to 25 percent higher than they were maybe it's 20 and you can see when i change this those
00:19:01
sections right there in the pro forma are also going to adjust okay so we're going to keep that at 25 percent for now but you can adjust it as needed this is your private bed and your medicaid bed count so you know maybe you're looking at a facility that's a 20 i don't know let's say it's a 10 bed facility it's got two private rooms and it's got eight medicaid rooms and so you can see when i adjust that it doesn't look right let's say maybe it's um there are f i don't know let's say
00:19:29
there's actually four private beds and there are um let's say there are 10 medicaid beds uh let's adjust this and say that it's six private beds and and ten medicaid beds so at least we're getting a positive noi that's what i was shooting for right there um not great numbers right there like it's it's it's not good um but it kind of gives you an idea we'll go back now to the example that i had in here so we had two prior we had 14 private and we had two medicaid beds um gets us up there but
00:20:00
you can adjust those based off of the the deal and and numbers are going to adjust where you need them to be or where they should be based off of the p l that you receive from the seller right here these are private bed rates medicaid bed rates and these are monthly rates so 3 500 a month 2800 a month it's gonna let you see what those look like and then this is a vacancy um amount and and really quick this is is this is um these bed rates and then these bed counts are what are informing this part
00:20:32
of the pro forma so say you know your private bet is actually 3 600 a month and you had 1400 beds so you could see that pro forma increased by you know a few hundred bucks if few a few thousand dollars i'll take that back down to 3500 but you can play with it that way so if you know what those look like you can kind of project out what your total income is going to be and then this vacancy rate is saying um 20 percent of the time i'm going to have of those 16 beds um 20 of the time um they're going to be vacant so um you
00:21:07
could change this then to the 15 um you could change it to 10 percent you can see it's adjusting that total income number up there as you're doing that so i'm just going to keep it at 20 it's good to be very conservative when you're doing your underwriting so um probably put in a a number right there um at least for your offer um that is a higher vacancy rate i think 20 is reasonable but for your own personal um view of how things are are looking and how you want it to be um
00:21:34
maybe a 10 percent is what it's actually going to be at um for your underwriting purposes you want to do a 20 that's what you're going to base your offer off of that's how you're going to do your underwriting to make sure it's a good deal for you but you could run better case scenarios to see what it might look like if you had a ten percent vacancy rate rather than a 20 percent and play around with those numbers so that helps you out a lot there if you have any renovations
00:21:56
that you're going to be putting into the facility so you've got to you know build um a bathroom or you've got to build a new office or you've got to do an extension you're renovating a garage or whatever you're going to put in those projected renovation costs there i've just put in a hundred thousand dollars on this one i've had facilities where it's very minimal just cosmetic stuff you know a few thousand dollars i've had one where we had to do a bathroom and
00:22:20
then build an office and and things like that and that one took you know twenty thousand dollars or something like that so um just kind of look at what those projected renovation costs might look like and then from there the asking price and this actually is going to inform the um field over here so if i click on that it's going to change that one to 1.5 and over here if i change that cap rate you'll notice that it also changes the cap rate over here in that section so um those are both those these two fields
00:22:54
are actually fed by the factors up here and then this one i went over a little bit earlier this is to do the the 2021 projection or the current year projection based off of the year-to-date numbers so you just would put however money however many months in the current year you have um those financials for and that's gonna then build out a projection so you can just kind of see what those look like so that's it for the the calculator tutorial today um as you can see it's quite complex we'll get into in our next
00:23:24
video uh where i get into more of some of the nitty gritty uh of how i do things on a longer projection and listing out line by line expenses and really diving into the seller's financials and what that looks like and how you can start looking at those and building out real projections um for yourself so i i hope you like this video i hope that you found it valuable make sure you like the video uh give it a good thumbs up make sure you click on that that bell so you can be notified when i put out
00:23:54
other videos um subscribe to the channel uh make sure that you're joining the conversation on facebook uh i'm doing short videos on tick tock so you can watch those and stay up to date on our instagram and twitter feeds to make sure that that you know uh when a new video drops and you can jump over and see what's going on in on the channel comment down below if you have any questions uh if you need me to go through and get a little more specific into the calculator with you and help
00:24:20
you out with that uh and i'll look forward to seeing you next time thanks for joining us today on assisted living investing and i'll catch you next time [Music] you
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