Patrick Antrim, Founder of Multifamily Leadership, and Tanner Bickelhaupt, CEO and Founder of the Tanbic Company discuss valuing real estate and cap rate versus 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) – Right now, Bickelhaupt says he’s been getting passed on pricing. You’re paying for the value-add before you buy, and then it’s a bid for who will take the risk.

There are certain things to look out for. Properties that have been around for a long time and are comfortable might have low-hanging fruit like washer dryer replacements. Maintenance teams might be overwhelmed. 

“Where I get lost is, I’m typically trying to underwrite to a 7% cash on cash – I don’t even like using the term, because everyone says ‘conservative’ and ‘modest’ – but I’m trying to write to a 7% return. I’m extremely confident that we can hit given some core parameters.” 

Bickelhaupt says he never banks on the market. He goes for large reads and where the capital is moving. He expects that will drive the market. 

“The big reads in this institution, they can underwrite market risk. They can underwrite market risk all day long. They can’t necessary underwrite development risk. I can underwrite development risk. So if I can solve the development piece, take that risk off, deliver them a product, they’ll pay you for the market risk,” said Bickelhaupt. 

(17:20) – The development risk is big because you’re building something out of nothing, and you don’t really know what sort of hiccups you might run into. Plus, supply costs have gone up. You can’t underwrite for problems like a delivery being held up for three months while your loan spins around.

Know Your Customer

(20:40) – Bickelhaupt says being aware of what your customer’s income is and what the rent they’re paying is, you can figure out how to up the rent based on true value. Build something swanky in an area you know people want it and can afford it, and you’ll be alright.

(21:45) – Each broker will tell you how much rent growth there is in every deal. That’s based on income.

“If you see a business plan, you really get in the weeds, if you’re going to invest in a deal, that’s a good question to ask. ‘What’s the average income of your renter profile there today?’” 

You have to consider what people are making before you raise rent. If you have this great idea to improve the apartment and that will raise the rent, but people are already paying 35-50% of their income on rent, they’re going to move. In Class B and Class C properties, people will move the second you raise your rent. 

(24:50) – Buying something and hoping it will go up in value has happened to work in the past few years, but it isn’t a structure you can underwrite. 

(25:25) – Not being in the office affects how and where people are spending money on development. 

“What we’re seeing is, we’re seeing two-bedrooms getting leased like crazy, and one turns into an office. We’ve talked about the ideas of having your apartment, then a place you can go downstairs and have an actual office with an address,” said Bickelhaupt. “I think the tertiary markets were the biggest benefactor of that, because people were able to get out of the city, go somewhere more sprawling, get a lot more for their dollar. I think they’re going to stay for a while.”