How to Value Real Estate Cap Rate vs. Return on Cost

The Wealthy Apartment Investor Podcast

How to Value Real Estate, Cap Rate vs. Return on Cost

Tanner Bickelhaupt, CEO and Founder of the Tanbic Company

(0:50) – Price for unit matters right now more than it ever has, Tanner Bickelhaupt of the Tanbic Company says. People tend to lower their rent in competitive markets, but then it becomes a competition over who can go the lowest.

“Specifically where we’re focused right now is, we believe that when everything is trading and it’s constantly just raising the price per pound, what people are buying for, what that’s also doing is, it’s locking in their rent,” said Bickelhaupt. “Because it’s locking in these debt-service-coverage ratios.”

Finding land is a big deal right now, though underwriting hasn’t let up. Tanbic will look for tertiary markets that people would be interested in living in, but where housing rates might be sky-high, implying that people are more likely to be renting.

“If we’re in a spot that allows people to participate in the amenities, whatever that city has, then we like that.”

Tanbic Company works with a lot of developers, each with its specific niche. Internally, they’re looking for product they may never sell. Moving forward, they want to work on creating a competitive edge even further down the line.

Looking for Land Deals

(4:52) – It wasn’t easy to decide to develop in secondary markets. There was no data for the area. Luckily, they ended up underestimating the market.

(6:30) – “We have made a lot of offers because I didn’t think a lot of people were tracking this cap rate delta – Class B to Class A. So all of the sudden, I’m like, Class As to buy. Because eventually, the equity is going to figure all this out and they’re going to all go to the Class A. They’re going to compress the Class A cap rate. That was our guess. So these developers that were in construction – they’re selling deals on performer rents right now,” said Bickelhaupt. “I would argue that their performer rents are low.”

Bickelhaupt says there are merchant-type builders who build with a high velocity who are slowed down by trades; the Class B to Class A isn’t as exciting because there isn’t as much to see in the first two years or so, but they pay off if you capitalize them correctly.

(8:57) – Bickelhaupt likes investors to be involved the whole way through. Some will communicate quarterly about financials and that’s it. In some cases, investors will get in without reading the business plan, but really, you want them to be involved with the story. Additionally, you have to be nimble.

(11:48) – It’s important to stay active in development and management meetings. Bickelhaupt says building relationships and partnerships with people who have proven track records and accumulated knowledge has helped him immensely. Those relationships have to be able to withstand tough times.

“For me to go to a market and do a development deal would be difficult, even though we were in discussions with some GCs in different markets. The level of trust isn’t quite there yet. Because what’s happening is, there’s so much development, some GCs would tell you like, ‘Gosh, we’re so busy, we have such a pipeline, we don’t even know what to do.’ They get plans and feedback saying no, they mark them up 30%, they take it back and the developer is like, ‘Cool, let’s do it.’”

(13:15