Quick & Easy Underwriting with My Calculator: Part 2 Guide
Oct 09, 2024
Welcome back! In Part 1, we talked about the basics of underwriting and how to use our calculator. Now, let's dive deeper into how this tool can help you figure out if an assisted living business is profitable.
Why Underwriting Matters in Assisted Living
When you're thinking about buying an assisted living facility, you need to know if it's going to make money. That's where underwriting comes in. It's like doing homework on the business to see if it's a good investment.
Our calculator helps you do this homework quickly and easily. It breaks down all the numbers so you can see if the business is healthy and if it can make money in the future.
Check out the video too:
Important Terms to Know
Before we jump into the calculator, let's learn some key terms:
- Profit and Loss (P&L): This is a report that shows how much money the business made and spent.
- Non-Disclosure Agreement (NDA): This is a promise not to share secret information about the business.
- Add Backs: These are costs that you might not have to pay when you run the business.
- General Partner (GP) and Limited Partner (LP): These are different types of investors in the business.
- Rent Roll: This is a list of all the residents and how much they pay.
Using the Calculator: A Closer Look
Now, let's explore the main parts of our underwriting calculator:
Past Financials Tab
This is where you put in the money info from the past few years. Here's what you do:
- Enter all the money the business made.
- Enter all the costs of running the business.
- The calculator will then show you important numbers like how much profit the business made.
Expense Tab
This tab helps you figure out future costs. Here's how to use it:
- Copy over the costs from the Past Financials tab.
- Add any new costs you think you'll have.
- Take out any costs you don't need
- Make sure to include some extra money for unexpected repairs.
Summary and Ratios
This part of the calculator gives you a quick look at how healthy the business is. It shows you things like:
- How much profit the business makes compared to how much money it brings in.
- How much it costs to run the business compared to how much money it makes.
- How much it costs to pay employees compared to other expenses.
These numbers can help you decide if the assisted living business is a good investment.
Real-Life Example
Let's say you're looking at an assisted living facility that made $500,000 last year. The expenses were $400,000. The calculator would show you that the profit was $100,000.
But what if you think you can increase the income to $550,000 and keep the expenses the same? The calculator would show you that your profit could be $150,000. This helps you see how changes you make could affect the business.
Wrapping It Up
Underwriting might sound complicated, but our calculator makes it much easier. It helps you understand all the numbers behind an assisted living business. This way, you can make smart decisions about whether to invest or not.
Remember, good underwriting is key to finding out if assisted living is profitable. It helps you spot good deals and avoid bad ones.
Ready to take the next step in your assisted living investment journey? We've got two great resources for you:
Download our free Assisted Living Business Plan Checklist. It'll help you create a solid business plan as you start your investing journey.
Need help figuring out where to start? Join the next Roadmap Challenge and build your launch plan with me.
With these tools and our underwriting calculator, you'll be well-equipped to make smart investment decisions in the assisted living industry.
Happy investing!
Show full transcript 👇
Transcript
00:00:01
[Music] hey everybody welcome back to assisted living investing it's brandon gustafson happy to have you back here on the channel uh last time we went through the quick and easy version of the calculator that i had on our tutorial i wanted to kind of jump into more of the the in-depth version of the calculator today make sure you like comment uh subscribe to the channel ring that bell so you get notified every time i put some content up here uh join the conversation on facebook and follow on instagram and
00:00:39
twitter so you make sure you're notified every time there's a new video that drops and if you just only have time for just the quick short versions of this follow me on tik tok i'm putting out videos out there on a weekly or actually on a daily basis trying to make sure you have all the content that you need so that you can be productive as you're trying to find and purchase an assisted living facility so today before we jump into the video and the tutorial i wanted to go through
00:01:04
another another few definitions for you make sure you understand a few of the other items that we're going to be talking about today as we go through the content in the calculator so number one is the p l so what is a p l i've talked about that a few times in my videos p l stands for profit and loss it's a financial statement that the seller will provide to you after you sign the nda with them the p l is going to show you all of the income expenses that the seller has for the past few
00:01:31
years and they're often the documents that the seller will send to their accountant when they're getting ready to prepare their taxes so this is something that might be done in quickbooks or or something like that so these are the financial statements of the of the facility and it's going to be very helpful as you're trying to put in your information in the calculator trying to do underwriting on a deal nda i know we've talked about this before but nda's done stands for a
00:01:56
non-disclosure agreement so it's basically a legal form that allows you to share information sensitive information um back and forth with each other so you know it could be your social security numbers it's their taxes um things like that so you're you're able to share that information back and forth that's what the nda is what it allows you to do ad backs i talked about ad backs a little bit in the last video but an ad back is a line item in the p l um that doesn't apply to you so you're going to
00:02:26
um kind of take it out of your analysis so let's say that the the seller has purchased a vehicle and they're they're expensing that vehicle on on in their p l but you don't plan on having a vehicle so you would take that line atom that says vehicle you would take it out of your analysis and you would add it back in as um something that is not an expense um so you just are basically nullifying that line item you still want to have it as you're looking at things to see kind of what they
00:02:56
looked at and what they use as their expenses but it's good to be aware of what those are um so that you can take them out and add it back because it's going to have a positive impact on on you and what you're trying to do with your underwriting there's also going to be a few terms in here i have the calculator built so you could try to use it when you're putting together a syndication so that's kind of bringing a group of people together to to do a deal um i haven't tested it out too much on
00:03:21
there but i do have it built that way so if it's something that you're interested in and learning more about i would love to have a conversation with you comment down below if you have insight into how things work with that as well i think that would be awesome i'd love to kind of start building partnerships that way but there's going to be a couple terms in there one is gp and that stands for general partner so general partner in the case of this calculator also counts for if you're doing a joint
00:03:46
venture with somebody so what you would do there is just kind of zero out the lp version of this the limited partner and then you just count your general partners as as the joint people so if you have two or three people in a joint venture then you just kind of put that gp count at two or three um put that um at a hundred percent um we'll get into here in the calculator but that's kind of how you would do that uh but they are the people that are guarantors on the loan they're going to
00:04:11
be liable um in the event that the the loan defaults or or something like that like they are they are the people that are on the paperwork um you as a joint venture or a single um a single entity a single um sole proprietor um are also kind of in that same boat as a general partner there's more complexities to put that as a simplified version that's what it is the lp is limited partners so those are people in a syndication that are uh giving you money for the deal often times they are not listed as a guarantor
00:04:42
unless they have a large net worth or there are certain situations where they would be listed as a guarantor and a loan but in most cases they're not going to be they're just going to be a person that that kind of gives you money so that you can then purchase a facility so that's what an lp is in in this calculator they're just kind of considered a passive investor somebody that doesn't really have much say or anything in how the facility is run but they've given you money and they
00:05:09
just want to be a passive investor they don't want to be involved with the day-to-day work that's going on in a facility the other definition is rent roll so rent roll is a census for a facility for all the residents that are there and it often will like include a room number sometimes they'll have a resident name sometimes they'll block that out they just want to keep that sensitive information to themselves which is totally fine they just might say room a resident one or room one resident a or whatever
00:05:40
they might just do that to kind of hide it but it still gives you a really good idea of what it looks like it can give you what the pay rate is it can give you if it's vacant or occupied they can tell you if it's private pay versus medicaid and kind of get you that information a rent roll is extremely important i would highly encourage you to pursue getting that information from from a seller it's gonna make or break um your deal like you need to have a really solid understanding of what that looks like
00:06:03
but that's what a rent roll is so that's a question that you definitely want to ask when you're asking a seller for their information when you're getting the pnls and everything make sure you get a rent roll so we're going to jump into the calculator i'm going to go through this one a little bit more quickly i think than i did last time it's at a little bit of a higher level and it has a lot of information i can't go super in depth with this like i did in the last video but i do want to to
00:06:29
make sure that you have a good understanding of i'm going to move some of these things around while i'm talking but we are going to start here at the past financials tab so in here this is where you're going to grab the pass financials from the seller so you're going to put in over here we'll scroll over so you've got the different expenses that are going to go in here so they're going to give you line items and i can't remember these numbers are from an actual facility i can't remember which one it
00:06:55
was or how big it was but just kind of gives you an idea and then i put in here you know this was a construction related ad back so i have highlighted these and then over here i've got this is the income so any income that's coming in could come from rent you could even separate it out by medicaid and private pay if you wanted to sometimes you offer extra services and so you're going to put that in here but that's where the income section lives and then down here this is where you're
00:07:22
going to put in different ad backs so over here we've highlighted which ones are add backs and then i will go in and i will make formulas that go in and and pull it in so i will it's what's called a vlookup i'm not going to get too deep into it you could find a quick youtube video on what it looks like but as long as this name is the exact same as this one you can do what's called a vlookup and then you can say i want to go and grab all the charitable contributions from from over here and i needed to match up
00:07:57
with um with the corresponding year and it will just kind of pull that information in here it's just a faster way to do it rather than going and saying turtle contributions i gotta go find it i'm gonna throw it back over here and put 300 in comment down below if you want me to make a video on kind of that part of analytics and how vlookups work and how you can kind of create efficiencies as you're working through uh different things um in in excel or in google sheets just to make your analysis go a
00:08:24
little bit more quickly but right here we've got all of these add backs that are coming over from this expense side so this 390 000 worth of add-backs and then down here this is the ebitdarm so that is i can't remember exactly what it stands for but it's basically saying um this is the expenses before interest uh taxes um and then it's also like adding back in all of these ad backs in there as well so it's kind of like kind of like the normalized noi that we talked about in our last video
00:08:59
so you're gonna take all your expenses uh you're gonna take your income here and these are the add backs and so this is that number that is looking at um let's see v 43 that's going to go over and grab this number right here which is that original net ordinary income number and it's adding in the these total ad backs right there okay so it's giving you that number right there and then these are any other adjustments that you need to put in there um so this is the management fee
00:09:32
that we were talking about last time if you're putting in replacement reserves for the units so this is you know if you have uh late rent or something like that that's where you kind of create reserves for that and you just want to kind of have that in there and then property tax sometimes people list property tax over here sometimes they won't so you just want to kind of watch where you're putting in the property tax make sure you're accounting for it because um taxes are expensive so you
00:09:55
want to make sure that's in there so these are the total other adjustments so that is all of these numbers that we put in there okay and then down here is the ebitda so this is now these two numbers so it's taking this one which is all of those expenses and then we're minusing again these other adjustments so these are going to be extra expenses so these were all of the expenses that existed these are adding back expenses that you're not going to have these are adding in expenses that you do
00:10:28
expect to have okay okay so and then from there a lot of these numbers over here are actually going to feed this section over here and these parts these are ones that you want to make sure that the numbers are all you want to go through the different formulas make sure everything is lining up um the way that it this is intended to be and you'll want to double check these obviously is just a summary of everything that you put in there all of the line items giving you a summary of what's over here
00:10:53
you got your gross your gross revenue your gross profit total expenses without the ad add-backs total expenses with add-backs less than any construction cost that you might have in their total expenses with the add-backs you're going to look at just the employee wages and taxes because it's really good i've got a ratio down here that's like employee wage um as a part of the total expense so you can kind of get a feel for how much you're you're spending there on on just payroll
00:11:22
um and without that's going to be your biggest expense you want to make sure you're aware of that your net ordinary income before the ad backs um your ebitdarm and their ebitda and uh kind of do those and then you've got a few ratios in here so net profit margin um that you've got your operating expense ratio your employee wage total expense ratio and then the employee wages uh gross profit ratio so those are just a few ways that you can look at it gets in here to the past financials really helps you dig into
00:11:54
that and better understand exactly what you're looking at here on a line-by-line basis again though i'm going to encourage you to make sure that all the formulas after you enter your information make sure you are validating the information as confident as i am in the calculator there are likely going to be some issues with it and you want to make sure that you are always validating your data and double checking things and making sure that everything works the way that it needs to work okay
00:12:21
jump over here now to the expenses so what i do on this one is actually take what i put in the past financials so these expenses and the ones that are not ad backs i will throw into this expenses tab just so i have it there in one spot and then i'll add in a few things that they probably don't have that i want to include um or i'll make start making adjustments off of it so i just kind of put a straight number in there some of these are going to be things that they put in they give you a
00:12:48
yearly amount and i want to know what the monthly amount is so i have this adjustment factor here and it's basically if i have the monthly amount the yearly amount is going to be the monthly amount multiplied by that adjustment factor and then if i am given the yearly amount i'm going to take i'm going to take the monthly i'm going to take that annual amount and divide it by that adjustment factor so so i can get a monthly and an annual amount in my mind it helps out a lot to do that
00:13:19
these are like this repairs of maintenance is one that i always put in um that they typically aren't gonna have and so i just put like a three percent um kind of buffer there and that's going to be reserves that are are there for repairs and maintenance for example um they might give you a food line item and so you can look at that or you could look at just kind of what the average food costs are per resident per day and so right here i've got in here eight dollars and so this one is is basically
00:13:46
looking at it's pulling in things from the projected financials calculator which is over here and that number is actually how many residents there are and then i'm multiplying that by cell c18 so that eight dollars and then i'm multiplying that by 365 days so per year so this is um you know say i've got 60 residents in there eight dollars a day 365 um days in a year i'm going to be spending about 146 grand on on just food costs okay this right here is the percent of the total expense so this is just a formula
00:14:21
that's letting me say this this expense amount right here this 211 000 divided by the sum of all of these expenses just so i can get a get a feel for how much i'm spending on each of these different line items okay so it just kind of lets me see oh i'm going to be spending about 35 percent of all my expenses are going to be on wages another 25 on food um i'm gonna be spending 12 and a half percent on management everything else in here though is is really low right and i would kind of expect to see that your
00:14:53
your taxes might be high your insurance might be high and then utilities but everything else is going to be relatively low when you're looking at things um that's just a good way to look at it then if you need to make larger kind of capital expenditure type improvements i've created a spot where you can kind of track those in here and then these are formulas that just grab total amounts um from each of these two separate tables and then they feed into the yearly poor pro forma for you to
00:15:21
look at and it kind of is going to help you get out and and restart kind of looking at some of those um numbers and and how you can do that all right guys so i i was planning on having this be just a two-part series um but as i get into the numbers and and really start diving into the calculator i realized that uh it's going to end up being a few more videos than that so we're going to chop this one off right here that was part two of the of the calculator tutorial video we'll get into
00:15:50
the pro forma and and other things in our next video and just make sure you are commenting down below if you're seeing things that need to be improved on the calculator let me know so i can improve the template for people but also make sure that you are adjusting those things on your own end so you're not losing uh any of the work and you're not losing anything as you're working through and you're not missing anything as you're trying to underwrite your own property uh and your own opportunity that you're
00:16:17
looking at make sure that you are liking the videos i give it a big thumbs up make sure you ring that bell so you get notified next time i drop a video follow me on tick tock uh to make sure that uh you're you're getting those quick videos and just having something like always there so that you can learn something on the go while you're just kind of playing around on your phone uh join the conversation on facebook join me on twitter and instagram uh for for more information and just to make sure
00:16:44
you're notified when something drops i look forward to seeing you on the next video we'll continue the tutorial we'll keep going through the calculator and uh yeah i'm happy you're here happy to see you here on assisted living investing and i can't wait to see you next time uh make sure you have a good day and i'll talk to you later have a good one we'll see ya [Music] you
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