How to Underwrite Multifamily Deals and Avoid Costly Real Estate Investing Mistakes

Eric Chen (00:00)
We tracked all 15 major markets in the multifamily space in the entire country. And and from that you will know that you will learn that the data shows there are many, many states throughout the country, they actually have a supply issue, oversupply issue in building affordable housing, apartment units. So in those markets, how you value a property to buy will be different from a market that have a underserved, undersupplied market, right? Where the tenants demand is so much greater than the apartment that’s that that’s built, which is California is a is a prime example.

Issa Hanna (02:11)
Welcome back to another episode of the Real Estate Pros Show. I’m your host, Issa Hanna, and today I have Eric Chen, a broker and investor here to share his knowledge with us. Eric, welcome to the show.

Eric Chen (02:20)
Thank you, thank you for having me.

Issa Hanna (02:22)
I appreciate having you. We talked before, man. You’re super knowledgeable. Excited to pick your brain, like I said. But for people at home, I said you were a broker and an investor and— and a very seasoned one at that. What do your day-to-days kind of look like?

Eric Chen (02:36)
Well, my day-to-day, you know, at the brokerage world, which is an active business, as everybody knows… we— a little background about us, we’re the largest commercial real estate investment sales team specialized in multifamily in the entire state of California. So that means we have any given time 20-plus listings. They are on average five-million-dollar to thirty, forty, fifty-million-dollar deals. So we’re serving private investors, some institutional clients. And so our day-to-day look like… today is a Monday. We had a team meeting that starts at 8:30. Our entire team gathered together, go through the pipeline, go to all the to-do lists, figuring out where each deal is at, and have the main absolute must things that we’re gonna target today and this week, and for this deal.

And things are always changing, so at, you know, managing the deal flow and then managing the team in place, and then so everybody can go without thinking too much. So that’s our beginning of the week, beginning of the day. Throughout the day, our producers, including myself, will be on the phone— cold-calling, prospecting, lead generating. And then in the afternoon, we will be managing what we have on hand— any problem, issues, also underwriting new deals, proposal analysis for future clients. If we’re not in the office, we’re out there meeting people, setting up appointment with potential clients, understanding them, first meeting, understanding everything. If there was a opportunity that they wanted to us to underwrite, propose the property, then we would do that and then do a presentation after that, eventually see if there’s a deal that we work together for listing.

Issa Hanna (04:26)
I love that, man. You guys have a whole process. You just described it— bam, bam, bam, bam. And that’s what it takes to be successful. And then with your resume, that’s why you are so successful. You told me you— you have over 20 years in the multifamily game. You started off in that. So can you shed a little bit more light on— on how you got started in— in the real estate field and then, you know, how you kind of quickly got up to where you— you are today?

Eric Chen (04:52)
Yes, so a— a little background before— before I started in commercial real estate: I actually came from Taiwan by myself when I at the age of fourteen— no parents, no family, no financial support. I was living with a relative I’ve never met with, no English. And so I had to really learn this new country, you know, starting eighth grade. And after high school, I literally just try to go figure out what I should do, but I have no support. I— I from— from coming to US 14 years, so for the next 10 years, I have— I did not see my— my family, my parents back home for 10 years. But during this time, as I was trying to figure out what to do to get ahead, I tried to think, you know, to have some sort of job that can give me a limitless income, which is in sales.

And when I thought about sales, I thought about real estate. And then when I thought about real estate, I said, “Hey, what’s the type of sale that can yield the most commission?” I didn’t know anything at the time— that’s just what I was thinking. So I picked commercial real estate, you know, thanks to Lord God, I pray. And then they— I got stumbled into a national commercial real estate company, mainstream, they sell a lot of deals. And I started there, and then the next four years, I was an assistant, just learning. I was earning less than $2,000 a month. This is, you know, 2003, 2004. And— and and through learning the business, doing things day in, day out for another broker, I learned the foundation. I went back to finish my school, college within two and a half years while doing full-time on both. And then I started as an agent, and it was September 2008 when the financial crash— that’s when I started.

Issa Hanna (07:33)
My goodness.

Eric Chen (07:34)
And then obviously, you know, long story short, toughest time to start. But because I have no support and I had to figure everything out, I have something to prove to myself that I can do this, I have to make it work. So even during the toughest time, I figure out how to learn how to cold-call, presentation, how to navigate this business, all the groundwork from the assistant now, I have to perform. And through all of that, I became one of the fastest growing agents. Every single year I double my commission. Within the next five years, I grew really quickly and I got recruited to now the world’s largest commercial real estate company, which is CBRE, and I’ve been there for— been here now for twelve years.

Issa Hanna (08:15)
Wow, I love that story, man. And— and you hear that a lot, you know. But fourteen years old to come all the way across the sea to this country, not know the language, so then you have to learn the language, you have to start at a new school, you know, you didn’t see your parents for ten years… yeah, no— no support system. No support. You put together— you put together a plan, man. You learned this business from the ground up, and— and— and that’s what I get with you. You’re an analytical guy, man. You love to make… you— you have great plans, you know, and— and you bragged about how good you underwrite, and you kinda wish that or— or a lot of investors, they— they sometimes don’t make an investment because maybe their lack of knowledge on— on how to underwrite an investment. And that’s where you come in, so you can shed some light on that.

Eric Chen (09:06)
Yeah, so thank you for asking that. I think, you know, a lot of people these days, maybe even on social media, online, try to teach these different things, but maybe they really haven’t done it so much. So it’s still a little bit conceptual. In the real world, I think underwriting, obviously for everybody— meaning in the industry for broker like us, when we’re talking to a seller, how do you underwrite accurately so your pricing is accurate? So then, therefore, when you take the listing to sell, when buyer investors is underwriting, they see that it makes sense for them to buy for the long term. So everything has to be documented to a real-world way that is gonna work. So all of this is what we practice every single day. The lender also uses it to fund the loan, the appraiser also calls us on the underwriting so they can make the value work, right? So everything surrounding from underwriting, I would say, is something that nobody just know how to do it, but I do think it’s a lacking skill set that— that that that that could be benefiting more people out there.

Issa Hanna (10:17)
A hundred percent, because when you have the knowledge to underwrite, to speculate, you can almost get that number to a T. And— and personally, and— and I know you, you know, seasoned underwriter like you, we estimate our costs high and we estimate the profits low. And if it still makes dollars, guess what, guys? It makes sense.

Eric Chen (10:39)
Yes, absolutely. And also the underwriting is not just a one-thing, one-time thing. It should be underwriting the current numbers of what this property is, and gives you a measurement of how the investment looks before you buy. But then also there should be an understanding of how to plan for the future to make the building work for you for a three or five and seven-year, 10-year plan. And then you look backwards in, and then— then you make your decision, you know, right there and then, so after underwriting it. So I think it’s— it’s— it’s a forward-looking metric, it’s a current underwriting. There’s so much things about the numbers that— that that that make or break the deal.

Issa Hanna (12:00)
Definitely. And then when they have a broker like you, an investor comes to say, “Hey, Eric, Eric, can you run the numbers for me? Can you give me a five-year hold plan on— on something like this?” You have the knowledge to break it down for them. Here you go, right on paper. So for you, you know, you lone-wolf investors out there, sometimes it’s really good to have an agent to admit like, “Hey, there— there might be a guy that— that could do this a little bit better,” because you might be missing out on opportunities that— that you don’t even see. So—

Eric Chen (12:27)
Yeah, a lot of the time the investor miss out on a deal or pass on it, they actually miss some of the factor in the underwriting that they’re lacking. So yeah, so it— it is— it is— it is a class on its own.

Issa Hanna (12:40)
A hundred percent. And I love that that’s one of the things that— that you brought up right away. You brought up underwriting in our conversation good two, three times, just very briefly, and I’m like, “He knows what he’s doing.” This is the— this is the investment broker and investor that you want to talk to because underwriting is great. And then I wanna kinda shift gears a little bit. You are an investor and also a broker. Investors, real estate investors especially, we always have a real estate nightmare or an investment nightmare. Do you— can you care, or I’m sorry, can you share one with our viewers? I always find it fun to hear our seasoned investor nightmares.

Eric Chen (13:21)
Well, a nightmare I would say is things sometimes is uncontrollable, right? You make your investment, now you own the building. You know, I think management is a key to success to execute a plan. The— the thing is, even, you know, sometimes the best management team will have to deal with, you know, emergency and accidents that happen. There was a property that our investor owns, and then all of a sudden it was— it caught on fire. The police went and— and still did not have the actual cause after they tried to investigate. We think it’s a tenant illegally hooked up the washer and dryer in the hallway of their units, you know, into another electrical outlet that eventually caught fire. And then it— it burned down a few units, insurance has to step in, tenants has to evacuate it, and then, you know, the next a year, year and a half is dealing with city, county, insurance, buyer, seller. And the deal was in escrow, by the way, at that time. So we had to deal with even more, right? So— so but we got the deal closed, no problem. The buyer understood the value, took over, you know, from where we left off, seller make the money. Everything eventually worked out, but— but this is a sort of nightmare I think an investor and an owner, you know, sometimes will have an encounter, not to scare anybody. And— and and so things that you don’t see happening, right? But doesn’t mean you just, you know, don’t invest, but just know that there’s so many things can happen in— in— in commercial real estate ownership.

Issa Hanna (15:11)
100%. We are a business of variables, and— and every day you get hit with a different variable. And then, you know, when the house burns down, you’ve got to do everything to the new code. So the fact that you guys were able to keep that thing together, and— and the buyer didn’t freak out, and— and the seller was able to go through and you guys navigated it, that ties into the experienced broker thing I’m telling you guys. Is when you have somebody like Eric, you know, that deal will stay together and ever— you know, no harm, no foul once the insurance steps in, because it’s definitely a lot of red tape, a lot of regulations you have to go to. And if you’re not, if you don’t know how to go through this, it’s gonna be very, very stressful. And that’s where a guy like Eric comes in that can really, really, really help you. Eric, man, we’re rolling on the advice today. I— I love this. I— I love when I get somebody in— in the studio that— that can talk and— and— and give us like really different perspectives on of knowledge. You know, you’ve— you’ve got such a wealth of commercial knowledge and— and you know, the house fire thing… a lot of, you know, a lot of investors I know never dealt with a house fire, so I love the fact that you were able to kind of give us that whole scenario. And then with that, I took some notes. You were talking about California, right? And you said the opportunity in California is that it’s so underbuilt. Can you give us a little bit more about that?

Eric Chen (17:19)
Yes, so we— we tracked all 15 major markets in the multifamily space in the entire country. And and from that you will know that you will learn that the data shows there are many, many states throughout the country, they actually have a supply issue, oversupply issue in building affordable housing, apartment units. So in those markets, how you value a property to buy will be different from a market that have a underserved, undersupplied market, right? Where the tenants demand is so much greater than the apartment that’s that that’s built, which is California is a is a prime example. And and for many, many reasons, because government regulation and cities sometimes make it difficult, the cost is high, the— the land value is high, construction cost is high everywhere, interest rate right now is pretty high, so it makes it harder to build.

And when it makes it harder to build, developers tend to build more for-sale product— houses, condos, townhomes— that they can get rid of right away after finished construction. But the apartment building for rents, they’re starting to build a lot less. Well, guess what? This trend has been happening for the past 25 years, since the 1990s. So for now, over 25 years, probably 30 years now, when a— when an area that is probably, you know, even top GDP, if you want to calculate that compared to other countries, you have millions, tens of millions of population there. Half of the people at least are renters. And the rental market’s growing. The 18, the 19 years, or the 20 years of entering the college, the workforce, they’re renting, but we’re not building enough. They can’t buy the houses right away, can qualify mortgage. So— so— so that makes the existing building rents keep going up. And that’s why the government said, “Well, rent control…” Well, that doesn’t work.

So it really is a sort of a crisis that’s always, you know, has been brewing, but turn that also to an opportunity when an investor says, “I’m gonna go buy as small as a fourplex or a 6-10 unit building and hold it for long term and actually make it better,” right? Make it better means how do I actually make the building better that justify higher rents, so their income goes up substantially. And through creative financing, they can refinance. They don’t have to sell and trigger tax events and actually rebuy and buy another one, buy another and build their portfolio, just like the single-family home, but they can do it for the apartment building community as well. So that is the strategy and the opportunity, despite the problem that we’re facing in California.

Issa Hanna (20:07)
Definitely. And it’s a lot better than the rent control thing. You know, when you build, there’s a demand. You investors, we need to meet this demand— that’s how you control the prices. You can’t just, hey, and you know, everybody’s entitled to their opinion, you can’t just say, “We’re gonna freeze the rent at this, but we’re not gonna build any more housing.” There’s still a shortage, so I love that you brought that up. I love that.

Eric Chen (20:31)
Yeah, in— in this, sorry, sorry, in just another example, I think recently just happened in the state of New York, they’re talking about complete rent freeze for, you know, certain type of apartment building. Well, guess what? That type of policy just completely kills the business, making the landlord C— all completely impossible to operate their business. So some of the landlord actually abandoned the building, they don’t want to put in any money into it, they left it vacant. Well, that doesn’t help. So I— I just think, I just hope that, you know, I— I think the— the— the politician, the investor, the developer, everybody, the— the— the everyday, even renters, you know, that— that gets more educated to helping protecting our apartment inventory stocks, and not by— not by putting these regulations that makes no sense.

Issa Hanna (21:23)
Definitely. We need to meet the demand and— and that’s how you’re gonna— that’s how you’re gonna get the prices more affordable, and that’s how they’re not gonna shoot through the roof every three years. So definitely. And— and why wouldn’t they listen to the investor about how to solve the problem and not the politician? So I nominate Eric to take care of our problems. Future now, Eric, five years down the line: what— what are some plans you have?

Eric Chen (21:49)
Well, my plan is to continue to execute on the brokerage business at the highest level, continue to serve our clients to create and build wealth and maintain and preserve, right? So a lot of time, you know, people put money into the properties, we help them buy, sell, even tell them to hold the property— “Don’t sell, don’t buy,” or refinance, right? So these advices is individually customized to every single person and everyone’s plan is different. We do it one client at a time. So I’m continuously to serve our clients in our area. But at the same time, I’m looking to also share my knowledges that— that I have accumulated in the last 20 years to the outside world, because people may see the transaction getting done, big number, they think broker make a lot of money is easy. Well, it’s not, right? It’s— it’s further from the truth. But at the same time, the knowledges can be shared to help the future generation or the people out there to make better investment decision. That’s what I want to do.

Issa Hanna (22:57)
That’s a beautiful answer, and— and you’re gonna leave a legacy behind doing that. And speaking of future generations, we have a lot of viewers that are just starting out. Maybe they just got their real estate license or they just bought their first property, and— and they want to grow their networks. As a broker, as real estate people, we are— especially successful ones— we are experts at building relationships, fostering them, and then growing our network. Can you give them some advice on— on how to approach that?

Eric Chen (23:27)
Yeah, so that— that’s the entire thing that I’m actually going to be sharing on my social media right now, is to starting to share that: how do salespeople become an elite professional? So that— that comes with the system that you— you mentioned, come with the right mindset. And you want to combine real experiences into actionable plan, and then also with the right mindset so they don’t overlook their own potential. Then we can actually help people to be a lot… reach the goals that they can reach, right? They can make seven-figure— seven-figure income, eight-figure team, or they can just work remote or do the things that really support what they want in their life. It takes works, but that’s something that I think we have to framework to teach.

Also on the investment side, right? How do you value a property? How do I get started? Do I really need all the money saved up to get started? Or do— is it more the education, the knowledge that I have so I can go out and still try to buy more units, have more passive income? What do I need to actually get started or to be successful? All of these, you know, is something that I would like to share with people more, hopefully in the future.

Issa Hanna (24:46)
Definitely, and that’s some great advice. And— and if people wanted to get a hold of you and you do teach them with this new program that you have, how could they reach you?

Eric Chen (25:39)
The best way is probably from Instagram on my page, @eric_c_chen, Eric C. Chen. And from there, I think people can, you know, DM me or they can send me a message. They can also email me as well, and we’re— we’re happy to teach people. Yeah, we’re happy to share.

Issa Hanna (25:16)
So you guys at home, if Eric started perking your ears up and you want to learn from him, slide into his DMs, because it’d probably be the best decision you ever made. So Eric, with that, I’m out of time. I wanna extend an invitation for you to come back on the show just because I’m not done picking your brain about all the knowledge you have. So if you’ll accept, yeah, definitely.

Eric Chen (25:39)
Happy to do it. Happy to do it. Yeah, thank you, thank you for having me. Any topics in regards to what we’re talking about today on a deeper level, or what the viewer maybe wanna see when they share with you what they wanted to know, I’ll be back and I’ll share with you guys anytime you want.

Issa Hanna (25:58)
I love that, I love that. We need more people like you in our— in our space. We need more people that are willing to share their knowledge, especially the great knowledge that you have in your brain. I enjoyed this conversation so much, Eric. I want to thank you again for coming on the show. And then to our viewers at home, if you guys enjoyed our conversation with Eric and want to see more just like this, make sure to hit like and subscribe. I talk to people every day that can bring us different knowledge on every aspect of the real estate industry. Until next time, the Real Estate Pros are out.