While the product for us
syndicators is the property or
the pool that we're doing,
pricing and engineering, that

product is financial analysis.
The best indicators I know are
all excellent financial analysis
people. They make their choices

objectively and based on the
data and their facts, they tune
their projections to maximize
both the return for their

investors and the return for
themselves. And they have
meaningful conversations about
money, they're not afraid to go

into the details about the way
back engine works. In our top
level mastermind of the altitude
syndication founders club, we

spend a lot of time talking
about financial analysis,
because it literally is the
engine for what we do. It drives

what we sell, and how we talk
with our investors. The more we
know about the numbers, the more
we we earn the trust of our

investors, and the better we
perform in our investments. So
in this module, we're going to
take a first look at the

altitude four step financial
analysis system, and how to get
started at being an expert
yourself in underwriting.

Alright, so financial analysis,
let's go ahead and switch to our
whiteboard. So the full altitude
four step financial analysis

system is obviously broken into
four steps. The first step is to
understand what are basic facts
and assumptions?

Right, so this is composed of
facts, assumptions, and market
data. So those facts that just
are facts, I mean, they're just

the reality of the world. The
building is 15,000 square feet.
That's a fact. Right? It's not
going to change the address is

whatever the address is. Those
are the basic facts that drive
everything. There are also some
numbers that are specific facts

as well. If you need to know
what tax rates are, the tax
rates are facts, the amount of
property taxes that you're going

to pay, may or may not be a
fact, depending on what
jurisdiction you're in, in
California, ours is based off of

the sales price, we're exception
most is based off of an
appraised value that vary that
deviates maybe every two years.

So they are not as much of facts
as as you would think. But there
are still facts underlying it,
because you have the mill rate

on those that assessed value,
which is a fact that mill rate
isn't going to change anytime
soon, unless there's, you know,

obviously legislation for it. So
facts, then there are your
assumptions. So those are things
like well, I'm going to estimate

that rent growth is 3%. Or I'm
going to estimate that the
increase in my expenses is at
2%. We're gonna get into a

little bit more detail about
this in just a minute. But I
wanted to give you an idea,
those are the assumptions that

we go in and make, we make are
making. Now I also lump market
data into here, because from the
market data, we can build better

assumptions. So I said before
that 3% was our rent growth per
year. Now, what does it look
like? Historically, we can see

that from market data, what has
that red growth been? Maybe it's
been 3%, maybe it's been 5%.
Maybe it's been 1%. Whatever it

is, that can derive how your
assumptions are, the better that
you know what your facts are,
and what your assumptions are,

and that your assumptions are
assumptions, the assumption
knowledge, you can have
meaningful conversations with

your investors, because you're
talking about something
objectively. So you can describe
that. Well, when we did this

analysis, we were assuming that
rent growth would be 3% per
year, because we did the market
research. And most of the

properties around us were
actually at 4% per year, but a
few were at 2%. So we decided to
split the difference, be a

little bit more conservative and
assume that rent growth was
going to be just 3% per year.
And that's why we have the IRR

of 17 rather than judging it
based on on what may turn out to
be a false rent growth rate of
4%. See, once you know that

that's an assumption, you can
have that kind of conversation,
very straightforward. And you
can talk to investors like that.

Now, I did that just off the top
of my head, because I've done it
for long enough. And I know that
it's an assumption, right. So

that's why we need to outline
that the next step is our noi.
And potential value. So from
here, all of that information

from basic facts and assumptions
leads into this conversation of
NOI and potential value. And why
we'll go through that in detail

in just a minute on how analyze
calculated in case you don't
know, and even if you do know,
I'd recommend still watching it

because we're gonna go into a
little bit different way to look
at this than you've probably
seen before. And a why and

potential value, a potential
value may be the sales price or
the actual value of the of the
property itself. This is

important because it figures
into how we calculate our exits,
and how what assumptions we take
into those as well. The next

step after NOI and potential
value is cashflow.

You know, how we look at what
cash is coming in those things
that are not part of noi, but
still get spent? Biggest one of

them obviously, is your
financing. You know, how does
taking debt affect your analysis
and your property? Are you

choosing the right kind of debt
or not? The last step is
performance. This is where your
projections are that you will be

talking with your investors
about. So what are those? You
know, what sort of purchase and
sale? What are the measures of

it are how what is our cash on
cash look like? What is our IRR
look like? What are those look
like in order to be able to have

that now that's where you're
gonna start your conversation
most likely with your investors.
So but as you'll see, you cannot

do have a conversation about
performance. If you don't
understand the cash flow. If you
don't understand the cash flow,

it just doesn't make any sense
you cannot have a good
conversation about it. Also, you
can't have a good conversation

about cash flow. Without
understanding the NOI of the
property, it doesn't make any
sense it you just wouldn't be

able to have that because noi
comes first, then you cannot
have understand your noi at all,
unless you understand what your

basic facts and assumptions are.
You can't put an noi together
without understanding them. So
let's go into a little bit of

detail just to make sure that
you understand how these are
calculated. So in our basic
facts and assumptions,

obviously, we want to know
things like our our growth rates
and things like that, I'm going
to take you through a very

simplified way of looking at how
to do the financial analysis.
And if you want more detail, we
have other programs that can go

into that in much, much more
detail. Contact us and we can
have that conversation if you
want to have more understanding

which you should, so that you
can have better conversations.
So in terms of calculating noi.
So NOI is is basically a

objective measure of exactly
where the property is at any
given point, right? We consider
it objective, because there are

two kinds of costs. And we're
going to talk about costs in
just a minute. But it we
consider it to be an objective

thing. So it all starts with
your gross income. And so this
is your rents. It starts with
your rents, right, most of these

are income producing properties.
So this property is producing
rent, they pay it every month.
Those rents can be whatever it

is, but we start with the rents.
Now, if we're gonna go also with
the assumption here that those
rents are that you have a fully

occupied building that we're
looking at. You do it slightly
differently when it is a when
it's not fully occupied. But for

our purposes, we'll just talk
about the Reds as As if it's
fully occupied, so you have
rents. And then you also have

other income, right? You may or
may not. But for an apartment
building, you'll have other
income in the forms of your

laundry most of the time, or in
a, in a office building, you may
have other income in terms of
other sort of things that just

take place in the building,
maybe there is a cell tower, or
maybe there's something like
that, that produces other income

for the property. Now, I remove
this from the other piece of it
that we add. And I'm just going
to call it my cams. And by cams,

we cam stands for common area
maintenance, I call it I call it
all sorts of things, really. I
mean, I call it cams, I call it

pass throughs a lot. Also, I'm
talking about all of the
operating expenses that we pass
on to the tenants to pay. So

there's obviously different
lease types, there are ones
where the tenant pays every kind
of thing that we can pass

through property taxes,
expenses, electricity, all those
expenses get passed on to the
tenant, that's a triple net

lease.

But there's also in your office
buildings and in your industrial
buildings, it tends to be a
little bit different, what gets

passed on to the tenant, it
tends to be things like we set
a, it over any increase of our
operating expenses, each year

can be passed on to the tenant,
so not the entry level, but
every increase. And we call that
a modified gross lease, or

sometimes you'll hear referred
to as an industrial gross lease.
The third, or in the case of an
apartment building, there's no

pass throughs typically that go
on to the tenant either. But So
out of those, if you add all
those up, we have the gross

potential income, I guess I
should say. So this is so we
have two kinds of rent, I would
said that we would use it as

100%. But here's how you do it,
if you didn't have a fully
occupied building, you'd have
the actual rents that are being

paid. And that's, that's there.
And then you'd have this other
category here and that is your
your marked up rents. So you

mark up your vacancies to market
and they can be added on this
portion as well in order to get
your gross potential rent. Now

once you gross potential income
one thing that then you can you
do is we subtract out of our
gross potential income, our

vacancy and credit risk

so we subtract those out, and
that gives us it may give us our
our, let's put it here. Let's do
this. So we subtract that out.

And then we can add back another
category of Other income. This
is different other income not
subject to vacancy. Now why did

I do this, and I'm making it a
little bit more complicated than
it needs to be. But I just kind
of want to give you as much

information as possible. So you
understand how this works. And
fortunately this is on video. So
you can watch it over and over

so that you really get it and
then again please feel free to
reach out to us and we can go
into any of these in a lot more

detail. So, we can talk about
the different programs that we
have to make this happen for
you. So why other income not

subject to vacancy because this
other income here this other
income is being adjusted by this
vacancy and credit risk it's

being reduced. So that kind of
other income is the best
possible example is a is an
apartment building. So if you

have an apartment building that
is 100% leased and let's say
it's generating $500 a month in
laundry. So 100% leased $500 in

laundry. Now what do you think
would happen if suddenly you
went down to 50% least you
probably are going to have your

laundry other income cut in half
as well. So that's why it is
being done. justed by this
vacancy and credit risk here. So

there's other income that we
don't say is subject to vacancy.
Now, that's probably something
like a cell tower, or a

billboard or something like
that. Now, yes, they could be,
they could go, they could up and
leave or something like that.

But it probably has a
significantly different vacancy
factor than your regular units
that you're renting out. So

after we do this, so let me make
this clear. This is an equal
sign. After we figure out what
our gross potential income is,

subtract our vacancy and our
credit risk, add back together
income that's not subject to
vacancy, now we have our net

income. Right? So now we have
net income. So now what do we
need to do? Now we've gotten
that income, we need to get to

net operating income, the next
step is we have to subtract our
operating expenses. So I'm going
to write that over here burry

operating expenses. So now we've
got all of those things that we
have to pay. Now, as I said
earlier, that there are two

kinds of expenses in the world,
we have what we call above the
line costs. And we have below
the line costs, above the line

cost, which is what we're
talking about here. These are
the operating expenses, the
above the line costs, our

objective, everybody has to pay
them kinds of things. So what
kind of operating expenses are
we talking about? We're talking

about property taxes. Right, you
got to pay your taxes, that's
objective, no one's getting
around it, you've got to pay

your insurance. Writing these in
the order that I typically do
them into, you have to pay for
insurance. If you have a loan on

it, you definitely need it, it's
probably, you're probably doing
an incredible disservice to your
investors if you don't have

insurance on your on the
property. So you everybody's
pays for insurance, we still
consider management. And above

the line costs now, yes, you do
not need to manage the property
yourself. But But or you could
manage it yourself. And so it

wouldn't necessarily be a cost,
but there still is a component
to it. That is objective, it the
building still needs to be

managed. And even if you're
doing it yourself and not
charging, you're charging the
investment for it, which would

be a mistake, that's money that
you could be making. But even if
you're not doing that, it's
still taking your time. And so

it's kind of an inherent cost to
the project. Then we've got
repairs and maintenance.

Right, you always have to repair
the building, even if it's, even
if it's thing, even if you have
a full triple net lease, there's

still repairs and maintenance,
because most of the time even in
a triple net lease, there are
expenses that the tenant doesn't

pay for. A number of them are
roofing structure, things like
that. And even if they are
things that they pay for, you

still got to calculate them all
so that you can pass them on to
the tenant, right? Other than
repairs and maintenance, you've

got utilities. And so this is
you know, your water, power,
gas, those types of things.
Those are objective, they all

need to be on a building. And
then you've got things like
Portage, and contract services.
So there's different kinds of

things. You may have pest
control, trash, Portage,
janitorial, things like that.
I'm gonna just call them Portage

and contract services for our
purposes here. And those are the
big categories of the operating
expenses. Are there more Yeah,

but these are the biggies right?
So we add all those up and now
we have the our operating
expenses and now the reason that

I lined it up actually, let's
just do it this way. The reason
I put it like this, so this is
our net income. Right we bring

down we bring those over here.
So this is minus our operating
expenses

and now we've got the magical
noi. So that's how we calculate
noi. And then if you wanted to
take the potential value, it's

really a simple a simple
measure, the actual value, or
the value of anything is
calculated by the NOI divided by

the cap rate. cap rate is an A
is one of those assumptions that
comes from market data, by
looking at similar properties

that are similarly situated, and
what what they would calculate
what their their cap rate would
be. So if a building selling at

a 6% cap, then such and such,
you know, 7%, would be
different. So if you go up in
numbers have your cap rate, the

less expensive the value is
because we got cap rate in
denominator. So that's how we
calculate NOI and potential

value, I don't want this to
scare you off, here's the best
way to learn this. And be
really, really good at this. And

I learned this technique from my
mentor. So there are a lot of
calculators out there in the
world that are terrific Excel

has them and we're going to be
we have one as well that we use,
actually, we have two, but
through this one is available.

And then we have a much more
sophisticated one we have for
the members of altitudes
indication founders club. Now

in. So you could do everything
in Excel. And it would be very,
very simple. I think it's a
mistake to do that right way too

fast. I think you should do it
on paper. That's the way I did
it. I spent months doing every
single calculation on paper. So

I would write it down like this.
That's how I can spit it all out
very, very quickly, without
notes, because I just done it so

many times on paper, that now
it's not only part of my DNA,
but I see how each little cog
moves. I call them levers. And

that's a more advanced step on
how we work with levers within
this, this system. So that's how
you calculate NOI and potential

value. Let's talk a little bit
about cash flow.

Cash flow is very, it's very
simple it is you take your NOI
and now you minus all those
below the line cost. So what is

the the big below the line cost?
Well, the biggest one that
really affects everything is
your debt service. So debt

service is expensive, right?
That's going to be a big, big,
big, big portion of your bill,
if you take on financing from

debt. So that's a big expense
for you, you've also got your
but you also don't have to do
it. That's why we call it a

below the line cost. Because
it's optional. Now for your
investment, you decide that you
want to debt terrific. Now minus

other kinds of expenses. Now,
what am I talking about? Here,
I'm talking about capital
expenses, or things that are

kind of inherent to the, to the
investment. In this case, also
because we're talking about
syndication, asset management

fees. Asset Management is a
below the line cost somebody
who's just a mom, Pa and they
own it for themselves, they are

not paying an asset manager. So
the and it's not objective that
they should be. So Asset
Management is one of those below

the line costs. Then we also
have things like reserves, you
know, so that we have money put
away and we're continually

putting money away in order to
take care of any capital cost or
any unforeseen things. So
notice, I don't do a calculation

for taxes here. In terms of
income taxes, that's typically
because if you go if you go
through the like the CCM program

or things like that, a lot of
time is spent on taxes. Most of
the time, the way we're
structuring our deal, those

taxes are passed off straight to
our investors. And it isn't
anything that we deal with With
as a syndicator, on this level,

now, obviously, we're still
producing those tax documents
that they need in order to do
their taxes. But we're not

calculating any measures or
anything with taxes, typically.
And so now we've got our cash
flow, before taxes. And I

sometimes give, in some of our
worksheets, we do do the
calculation of after taxes.
Generally, though not, it's

mostly there for the
convenience, because if you're
also are acting as a commercial
real estate agent, you may want

that information in order to
have a conversation with your
your client. So that is the
discussion of cash flow. So this

goes here, this is here. Now,
performance, this is where we
now the rubber meets the road.
Right? Because what we're

talking about is how do we have
a meaningful conversation with a
potential investor. So when
we're talking about performance,

First, I need to understand all
of this, especially this cash
flow before taxes, I need to
understand that I also need to

understand what this value piece
is and how much I'm going to be
buying the property for. And
then in as part of my cash flow

analysis to I need to understand
my debt service, because I need
to know exactly how much money
in equity, I'm looking for

people looking from people. So
it start performance starts with
the purchase price, right? I
need to understand what the

price of the investment starts
in, this is not the purchase
price of the investment, this is
the purchase price of the

property, there are going to be
other costs that go on this as
well. So we've got the purchase
price of the property, then

we've got the costs of the
syndication. These are things
that we talked about in terms of
fees, like what is your Do you

have an acquisition fee? Or do
you have a you know, a finance
fee? Or things like that, in
order to get the get it done and

forward? You also have the
additional thing of how are you
going to make money? So that
kind of goes out here?

How are you making? Money? So
that's always the thought that's
going on in our head is, is my
investor getting a good

investment? And am I making
money. So we've got costly
investment, we've got to
identify what our ideal hold

period is. And this is an
assumption. And then we've got
to figure out what our what our
exit strategy looks like, and

estimate it oops.

Right, so at the end of the day,
what I've got is, and this may
or may not look familiar to you.
But I've got this, this bar

here. And at the very beginning,
I've got my the price that the
investor invested in Now
typically, I do $1,000 shares.

So this is from the investor's
eyes. That that's that's why
it's a minus because he gave us
$1,000. Now in year one, what's

happened, we've gotten those
rents, we've got this cash flow
here that is coming in and
paying in 12345. So we've got

let's say we're making so for
that $1,000. Let's say we're
making $60 a year. But we
actually have increases that's

why it's a cash flow. That's why
you need to know your growth. So
in year two If we add, let's say
it's 62. Let's say I'm in the,

just for ease, I'll just put
easy numbers. And then in year
five, it's 68. Right? Okay, so
now we've decided that it's $68

is the cash flow in year five.
But there's another piece of
cash flow, because we decided
this was a five year hold, plus

the revision. So once we sell
the property, that money also
goes back to the investor. And
so let's say we sell that for

$1,500. Now we've got an actual
investment of that we can use.
So let's look real quick. And
we'll just put in what that what

that looks like. Got my
calculator off to the side. And
I'm making these numbers up. So
if it doesn't work out, that's

why. Oops.

So we've got this investment
here. Let's do a IRR
calculation. IRR stands for
internal rate of return. What it

is, is it basically says during
this whole time period here that
we are holding on to the
property, what is the annualized

percentage of growth of that
property? Now IRR needs to be a
positive number. Otherwise, it's
unreliable. Oops, oh, perfect.

So in this case, we've got an
IRR of 14%. So off top my head
that's a little bit lower than I
typically do, actually, it's

13.92% is what the growth rate
would be for this property. Now,
what I am doing, all the time,
is I'm actually going back and

forth and back and forth through
this. So part of the financial
analysis system is, once you've
identified all of these, you

know, what the NOI is, you
spread out that noi to figure
out what the NOI is estimated to
be, for years 234, and five,

which is what we're still doing
here, in order to and somewhere
in between here between the NOI
and the cash flow, and then

subtracting out those other
expenses, those below the line
costs in cash flow in order to
come up with. With what are your

12345 is we calculate our
reversion by taking our noi on
the last year or in the in year
six, really, and then dividing

that by our estimated exit cap
rate. So we'll put so you can
see it, so that is your six noi
divided by the cap rate. So let

me make extra clear the exit cap
rate.

And then you end up with a then
you end up with what that exit
value is. So then we use all of
this to calculate the IRR. And

now what I am doing as a
syndicator is I'm trying to find
how in my business plan, can I
drive the IRR up for my for my

investors. And I drive it up
this should connect with you now
I drive that up to the point of
the risk level, that risk

profile from my founders
investment theory. So I'm always
I'm just pushing, pushing
pushing. I don't want it to get

above the point of the normal
risk profile amount for my
founder investment theory.
Because what I can do is when I

reach that, so I'm driving that
up, right? If my founder
investment theory level is here,
at say 16 percent, I really want

it to be a 16% return. But I
actually can drive it
comfortably up to here through
adding value or things like that

this spread is my money. That's
the money that I make as a
syndicator. That's the money
that's going in my pocket. So

I'm pushing up my IRR, I'm
pushing up my fees that I'm
charging, I'm taking more of the
piece of the pie, until it

balances out at a point where
the IRR is acceptable and
believable. And we're not doing
this to drive it up in a way

where it wouldn't work or it's
not going to happen. We want to
drive it up in our business plan
to a reasonable Yes, I think

that is totally achievable
level, because we really, really
want to hit this point. When it
comes time to sell, it's great

when you get to tell your
investors, we hit our target, or
I exceeded, we exceeded the
target by 2%, something like

that, that makes them happy,
that makes them trust you more,
so you don't want to make it
unrealistic. You don't want to

come in and say we're gonna get
a 20% IRR and then deliver a 10%
IRR, you probably are gonna be
not so happy to invest with you

again. But so I try and hit that
number. And then I figure out
how can I take the rest of it
for myself. That way, they're

making good money, and then I'm
making money. So that's the way
this works. That's how financial
analysis is the whole basis,

we're always trying to drive up
our value, trying to figure out
how to squeeze as much juice out
of the investment as would be

reasonably possible in order to,
to create not only a good
investment that investors are
likely to go into, but then to

create that additional amount of
money for ourselves. So after
you've done this financial
analysis, you've brought in your

properties you've looked at them
you finally you've done the
financial analysis, you've got
the model that works. you've

determined this property is
green for launch, meaning it's
ready to go. It is now time to
leave the launch pad and let

your syndication lift off. In
the next series of modules.
We're going to go through just
how to do that. We're going to

talk about how to launch your
syndication.