multi family cap rates are lower than I've ever seen them in my lifetime. Well, I mean, yeah, so in my lifetime, lowest cap rates are the lowest and debt is approaching the highest that it's been during my investing career. So if I'm buying a multi family deal, I have to be uh putting in a higher exit cap than I bought it for. And if I'm not doing that, then I'm basically setting myself up for failure. What's up and welcome back to how to invest in commercial real estate. And we are back again talking about another exciting episode. But before we get into that, we're just doing a little update here. Things are slowing down. You know, debt is getting more expensive deals are, are interesting to under right now and you're constantly going through these shift In the market where debt is super cheap and you want to try to buy everything you can or debt is expensive and it, and it makes that picture harder, right? Your, your interest rates are changing. Your leverage rates are probably changing. There's, there's a lot going on and it's not like sellers, you know, you're selling property right now. We just sold the property right now. Um, we're not immediately just the Fed raised interest rates drop your price $1 million.
It doesn't happen. Tenure was pushing 4% today. Uh, So that, that's crazy during covid it was less than one. Uh, and so it's just, it's going up so fast, People aren't able to adjust a year ago. We were buying, we were just, we told each other, let's buy, everything we can, everything was great. And then all of a sudden we're having to be more patient. So there's a big expectations gap between seller and buyer. So you know, it's not just on the existing side, even in the new construction side, new constructions and absolute bare costs are going up like crazy skilled laborers at a, at a shortage. If you're on a floating interest rate, that sucks. I mean it's just not, not the best time to be building something necessarily either. So there's definitely a law that you can noticeably feel on our side going out and looking for deals. But with this low opportunities will begin to present themselves because interest rates are going up. Sometimes people on float floating rates, People may have purchased property with a really low rate and now they've got a five year fixed or a 10 year fixed and they're coming due for the refinance and you know, maybe that their rate is doubling and it's gonna put people in a bind and it will create some opportunities.
Yeah. So I love that opportunities because the biggest question, I think anybody gets that's bought these types of commercial real estate properties. You know, whether it's apartment complexes or industrial really anything if somebody who's interested and they're trying to learn, they come up to you eventually and say, hey, how are you finding these deals right? So that's what we're going to talk about today is what criteria We're using to find the deals were buying and to look at the number of deals we need to look at to buy. The deals we want to look at. So I think that could be the first point is you've got to underwrite a crap ton of deals. You've got to have a criteria like we came up with today where you can go through and sit down in 10 minutes and underwrite a deal and see if that works and then then go on and spend more time. But 99% of the deals aren't gonna fit in your criteria and you can move on to the next one. Yeah. People you say, well how are you finding the deals? People do ask me that. But that isn't the question they should be asking because the deals are thousands of deals. It's it's how how are you underwriting the deals or how are you determining what is a good deal? That's the question that people should be asking.
Uh And the thing is is you have to get good at the underwriting part. So then you'll know when a good deal is a good deal. Otherwise you're never gonna find the deal that you want to buy because you don't know how to underwrite it. So today let's talk about uh just the things we use to sift through the noise and to get to properties that we want to make an offer on. Yeah. So the first one is, you know, one of the more important, but it's the easiest one because it's the most advertised right? When you see a deal listed for sale that has tenants and it's occupied. It's typically sold on a cap rate. That's, that's the first one. You need to pay attention to a cap rate. You need to understand what a cap rate does and what that typical cap rate gets you in in typical returns on the back end with a normal assumption, right? If if you have a 15 or 20% required return and you're looking at a five cap chick filet, you're never going to meet that return ever. You could, you could, it's very hard. Not, not in the first few years, but you would have to bank on a massive increase in value and rents and hot market in order to maybe get there in the future.
But generally speaking, a cap rate is taking the net operating income for that first year and the purchase price for that first year. And it's saying, hey, if you bought this property in cash, you would make this percent return a year. So a cap, if you bought an eight cap deal in cash, You would make 8% that first year. Yeah. So we'll remind each other we're gonna get flak because people always want to tell us that we're using the definition of Anacapa rate wrong. I really don't care if they think that, but if you're buying a million dollar building and it's being advertised as an eight cap, what they're representing is that there's $80,000 of net operating income after one year. After all expenses. If you bought it all cash, you'd get $80,000 which is 8% on your million that you invested in the deal. And so that's the first number we look at. It's the most important number. It tells me the most about the deal that I can get from one number. Okay. But it's a complicated number to me because you just you just mentioned the 5% chick fil a we're trying to buy some 8.5 9% on on multi tenant retail. There's uh multi family cap rates, Cap rates, I assume very based on location.
So how do you know what a good cap rate is? You have to use all those uh in your evaluation. That's right. It's one number in many numbers. And it could be that uh for whatever reason, the five cap could be a better deal than a cap. We're not saying that it's not better. It could be that the a cap is in a terrible location and it's gonna do nothing but go down in value. And the five cap could be in the fastest growth market in the country. And so yeah, you get a low year, one return, but the rents are going to be going up and you're gonna sell that later for a big gain. So you have to This just one metric we're going to go through about 10 or 12 of these. Yeah. And what they're doing is they're taking the net operating income and they're trying to assign a market cap rate to that deal for that asset class. So they go look at similar deals, similar asset classes and similar locations and take their net operating income and the value they traded out. And that gives you a cap rate and they take that market cap rate. They divided by the Ny. And that gets you a value. That's that's it's a metric of value. But what it tells you is that first year is net operating income which is almost you're starting return. Yeah. And if you look at a five cap deal so it's gonna if you bought it all cash gonna return 5%.
But you want to leverage that okay but you're gonna go get debt at 6%. The deal is only paying you five but you're paying six to the bank to get the money to buy it. Uh you're gonna be negative cash flow. So the only reason you would do that is if there was some huge upside or you're gonna go in and double the rents. Your one or two. The only way that maybe some cash buyers might be okay with that. Yeah. If you're an all cash buyer and you want to be as safe as possible and you want to get a chick fil a, you know, In Dallas, maybe five. Sounds pretty safe. So we touched on negative leverage there. But one of my favorite topics and the next point on our list is positive leverage. And the idea of positive leverage is that we're going in and we're buying this eight cap deal or this unlevel ridged 8% return deal and we're leveraging that up because we're borrowing 80% of the cost to buy that 8% deal at, at 4% or 5%. So then we've got that four or 5% arbitrage or that portion of positive leverage. And that's where we make additional money, right? So that's, that's huge because a lot of things you can't buy using leverage. It's, it's hard, it's, it's riskier.
But real estate is one of the easiest things to leverage up because there, it's easy to collateralize, it's easy for a bank or to go into a bank and say, hey, I'm buying this shopping center, I'm buying this apartment complexes. It's, it's full of tenants. It makes This amount of money a year after all expenses and after you take out debt service, it still covers the debt service, by you know 1.3 times this is a great loan for you and that's what they're in the business of doing. So they'll be willing to do that right because if something goes wrong, they can always, they don't want to generally, but they can always take over that property, right? Yeah. And, and so people that are listening to think about this, if you had something that you knew, could could give you an 8% return or a 10% return, Uh, for every dollar you put in it and you knew that you could go and borrow money at 4% and, and buy that asset that will pay you the 8%, then you should want to ultimately, and theoretically borrow as much money as you can because once again you're borrowing it at one number and you have, you have an investment that's paying you more than it's costing you for those funds.
And so that's why the debt picture is so important. That's why leverage is so important to retail or not retail to real estate. Yeah. And, and one of the first questions when we bring each other a deal, hey, here's this awesome deal. Sweet. What's the debt look like? Because again guys, that's 75 85% of the purchase price. That's where the majority of the money is coming from to buy this deal. You need to understand that more than anything. That's a massive, uh, fulcrum point that you can move that adjust your outcomes substantially on, on the front and the back end, whether you're paying a ridge or whether they're giving you a shorter or longer amateur. Ization period, it can affect you a million different ways. Okay, so cap rate number one thing we look at, that's the first thing number two is what kind of debt we can put on it. Because those two numbers help us go to the third point cash on cash, cash on cash return. That is our third metric because we are cash flow buyers. We are not speculative buyers. We're not buying something and hoping that it goes up in value later. We want to make my money for investors.
Day one that we buy it now. Not every deals like that. Maybe a new development deal isn't like that, but Most of the stuff we buy, we want cash flow day one. So the cash on cash is a big number. Okay, so when we look at it and we see a number, if it's, I don't know 5%, 7, 10%, what do we, what do we think is good? What do we underwrite to? So what, what I would think is good is if we can get our limited partners a double digit cash on cash return and a clear path to it. Growing getting to higher r r which we'll get into later. I would do that. So maybe somewhere starting at 10% or higher and then growing throughout the whole period, correct? Now there there are bigger funds that have deep pocket investors and they just want to get their capital allocated and so they may say, Hey, I'm happy with a 6% or 8% cash on cash return. Uh and that's fine and we may be there someday. But a lot of our investors have appreciated the higher returns that we get. Uh and of course we want to make more money on our money because we don't, we're not as rich as we want to be yet. So cash on cash, higher number is better. And so yeah, double digit Returns.
I've looked at some of those really big deals where people are buying things for $500 million. And, and uh They get, they get investors that are spending $10 million $20 million, right? And, and those cash on cash rates seem to be less than what what we target. Right? So cash on cash, you're simply whatever money you had to actually get out of your pocket, whatever your wire was to the closing company, your total funds out of pocket, not including what you got in debt. That's that's a key indicator. You have to have that. I forget what I'm saying here. But the money you get in free cash flow every single year is divided by your initial uh kind of whip out cash down payment. And that that yields a percentage. And that's your cash on cash number. Okay, Alright, let's go cap rate. Then we had the debt. Then we have cash on cash. What's the next 1? Internal rate of return and the internal rate of return is really calculating the return on your money while it's invested in the deal.
So once it's paid out to you we're not calculating it but it is really accounting a future sale. Right? So that's the biggest assumption in I. R. R. Is your have you have to underwrite an exit at a at a reasonable price. Yeah. You don't know your I. R. R. Till you sell it, correct? So that's an assumption in the beginning. And what you do is you have to assume some sort of income growth or or no income growth over the period of time and then again for your exit you're assigning a market cap rate or what you believe that market cap rate to be when you believe you would sell it. So a couple assumptions there and then you put that market cap rate on your N. Oi for let's say you're selling in your five. You take the sixth year net operating income and you would divide it by your market cap rate. And that would give you your estimated value when you go to sell in your five and I are includes the cash on cash that's been distributed throughout the deal. Yes it does take that into account it takes into account all of the equity pay down or the mortgage pay down because you're paying down that mortgage you owe less on it. And then you're also like you said you're assuming an exit cap rate and a purchase price or sale price down the road.
And so you know you're paying down the mortgage then you you sell at this price not only to get the difference between that sale price and your purchase price but you also get the difference between the purchase price and how much you pay down your debt. And it takes all that number along with all the cash on cash that you paid out while you had it. It kind of bundles all that up accounts for the time value of money and gives you an average yearly compounding return. We're not gonna get into it any deeper than that on this show but we have done one in the past and we probably do want to get in the future. So again just specify cap rate was the first one we're buying on an 8% plus cap rate debt is the second one. We typically want to buy a deal that we can leverage up to 80% probably is a bare minimum On at least a 25 year am on at least. That's a very good point. The next one is cash on cash. We need at least double digit cash on cash and a clear path to that growing I. R. R. What would you say are required to I. R. S. I'd probably say I like to look at above 20 above 20%. I was gonna say a little less maybe 17.5 brian still way too optimistic for this market.
But I think when I first started, when we first started yeah all of our deals were to the investor were 20 plus 20 percent. Now I would say if we had a deal that gave the investors north of 15 we would still be okay with that. Yeah I agree. Okay so the next one that we're looking at for price per foot price per foot is huge. Price per foot in relation to um the cost to build that deal again is big. But at the end of the day We own a shopping center and we bought it at $70 a square foot and a guy was building one right across street and it was like $400 a square foot. So what would you rather be in a $70 per square foot basis or $400 per square foot basis? And how does that translate to your rental rates? You're gonna have to charge way more rent for your higher basis than you would for a lower basis in a building. You could get away with a lower rents. Yeah so you you limit your your potential tenant base as long you know a lot of the times that your your $400 or $500 there. Either in such a good location like downtown san Francisco or or something L.
A. Or whatever, you can just demand that. But if it's any other market it would have to be a brand new development in order to to command that kind of rent. Well that's fine. But if the initial tenants go out of business, how are you back feeling that? And how are you going to get enough rent to cover a really high purchase price in our apartments? I would say we would use price per unit kind of like we would a price per foot multi tenant retail. Uh It's just a way to compare similar asset. So if I'm gonna buy an old shopping center, I may want to get it at 70 $80 a foot. You know maybe middle of the road shopping center maybe 100 and 20 $150 for a newer shopping center. $200 to 50 ft. And an apartment that's kind of the same thing. Uh C class apartments or workforce housing. We want to be at 30 40 50,000 door. You know middle of the road apartments maybe 19 eighties nineties construction would be at 75 80 90,000 adore, new construction could be anywhere from You know now 125 - 225 a door. So when I see price per Foots that are too high for my comfort.
I see typically artificially inflated rent. Right? You've got a Starbucks or some sort of national credit tenant, all of their tenant improvements or the cost to build out that space was, was built into that lease? So when you go to re tended it, you're not gonna get that price per foot. You're not because that wasn't the actual rental rate. That was so much bullshit baked into that number that gave them an artificially high rental rate. And therefore, you know, the building is selling for a higher price per foot. Not always. So what we're looking for, I would say for me it's it's on retail unless there's a story behind it, less than $200 a foot. Um, and I don't, you know, once you get under $50-75 a foot, you're kind of getting into some really rough retail. There really isn't a number on, on multi family price per unit price per unit. But I'm just saying, uh, it's a little bit different animal and depending on the location and the vintage. Um, you just want to be in line with the market on a price per unit basis. It's not like a wine connoisseur there, the vintage.
Yeah. Anyway, the next one is super important and there's a lot that bundles into that. But you need to pay attention and be aware of the demographics around the specific location you're at? You want to know where those people work? Are there? Are there jobs to support them? You want to know? Are people driving by my shopping center? Are there good traffic counts? How much money do these people make? How many people is there? What do you find that number? How do you find me the median salary of, you know, within three square miles or something? The broker will have that information. That's the easiest answer. But there are online services where you can pay so much per uh, per pool, per, per look up, you know, a location or you can get, you can probably pay a monthly service and then you can look up as many properties as you want. And it does a one mile, three mile five mile radius for population for the number of, it's all included in the demographics report. So what we're looking for, uh multi family doesn't matter quite as much on on this location more jobs. Right? Way more jobs. But Retail the location is is extra important.
But I tend to look at over 100,000 population Market that that that it's in if it's a multi family. If it's retail, I want, I want 100,000 within a three or five mile radius, not just the deal size. And I want the market to be probably 250,000 people or bigger for for retail. You think that's because people are willing to drive a little bit farther to where where they live than where the they live to where they want to shop? I mean, is that why maybe it's a little more important for retail. That is multi I think people that uh, where they live is um, you drive to work where you can afford. Yeah, but I but as far as retail goes, you just want to go. Yeah. Well, the issue is it's not where people necessarily going, it's where a person wants to invest and open a business. That's a that's a harder decision than just getting an apartment that's two miles down the road because he doesn't mind going that extra mile. But if a business doesn't think people are gonna be driving by, they're not going to spend the money to open that business in that retail center.
And so that's gonna cause that center to struggle. And that's why retails more location dependent than multi families. You know, I would say, you know, cars driving by a good retail center will have, you know, 30,000 plus, 60,000 plus. Could could be more, but a good retail center. I mean, we've bought numerous retail centers with 50,000 cars a day on the hard corner passing right in front of it, I would say a minimum for me is 10th 1000 traffic count in Front of the Senate would be a minimum. But the higher, the better uh, population density. Uh, once again, I think within a 3-5 mile radius, I'm looking, I'd love to have 100,000 people if I can, we don't always get it. Um on the income, it needs to match your tenants right? You don't want to look for this, the median income is super high, but if all your tenants suck and cater to super poor people, then that doesn't do you any good. You need to, you need to match those or vice versa, right? You need to say who is going to shop at a goodwill? Who's gonna eat at this taco place? Who is going to get their nails done here?
Is it a nice nail salon? Is it a crappy nail salon? And you need to make sure you're in the demographic for that area. People say, oh, I never buy there. That's a rough part of town. If you've got tenants that fit in a rough part of town and they're paying rent, I'd bet on that better than a lot of, a lot of the deals. As long as it fits, it makes sense like, okay, this tenant looks like it should be on this corner, The people who come in and shop live. I mean, you can, you can match make that, that's why we don't have a Chanel store in downtown jinx. That's why we don't have a Chanel store in downtown and that's why you have Saks Fifth Avenue and, and Utica Square, right? You see, you see these things and it starts to make sense when you're looking for them because again, most people are shopping and dining and eating and going out to a bar and getting their nails done in a very close radius of where they live. Alright, what's next? Next one? So this isn't as important to your returns but it could really dampen them later. If you don't take into effect in the beginning and that is deferred maintenance, you need to take in the vintage of the year, the vintage of the property that you're buying the year.
The But this is what I I think I came up with once again when you're thinking about, okay, I'm looking at all these deals, how do I quickly evaluated is those are the things that can trip you up. So if I'm looking at 28 cap deals, if one looks rough on the outside needs a new roof. All the H V A C s are original and this one has a new roof and the H V C. S have been replaced with. You know, one is a better deal than the other. So this is just one of these critical metrics that we use to quickly evaluate which deal we should make an offer on. Okay? But on a on a quick evaluation like we're talking about deferred maintenance is mostly just you driving by and looking at it yourself right? Looking at the parking lot because you can't look at the roof. Not always some of that stuff is listed in the O. M. You can call the broker. These are things that you can you can ask in one phone call with the broker. Okay what is the age of the roof? What condition is it in? What kind of parking lot is that? Is that asphalt is a concrete? What condition is it in? And then certain amount of it you can just tell by the pictures is hey what am I gonna, is there any compact or you know deferred maintenance dollars that I'm gonna have to allocate to this?
And is there anything serious that makes that a cap look more like a 7.5? You know that's that's what we're getting out there and as you go through it you will gain more experience. It's like the bathroom remodel guy coming in and spending five seconds in your bathroom. It's like oh yeah it's gonna cost $25,000. It's like but you didn't do anything, you didn't you didn't crunch. You know it's like listen lady I've done this a million times what you said, it's gonna cost $20,000 or a little bit more or a little bit less. But right around there now we're looking at properties, we're taking the square footage, you can multiply a price per foot of T. P. O. In your head. You can get estimate what asphalt would be. You can um estimate what leasing commissions and tenant improvements might be because you're gonna be the one paying those and doing those. You should have a roundabout number now we can look at a deal and if it's 50 60,000 ft you can almost just plug in $300,000 as a placeholder number and then modify that as you go. Like this will get me some vacancies lease that will get me a new parking lot and in a good chunk of the roof and go from there back it down, raise it as you have inspections.
Alright. Alright. Next 1 10ant risk. This could be an interesting one because um the bank is looking into this a lot. You should be looking into this lot. You have a lease right and you may have 50 years at least term. But how sure is that lease? How do you know that tenants going to pay you? Is there any risk of them going out of business? Is there any risk of them relocating? There's always tenant risk but it's just how much of it and it goes in like we were talking about last week with the implied value. This is one of those calculations you're taking in. You know what is the probability of the tenant losing? So you have one tenant, what's the probability of them leaving? Um And then what's the probability of them staying and you need to be prepared for both of those circumstances tenants gonna leave or not. May be based on how long they've been there. Well you can go if it's a restaurant for example and you go in there on a, on a friday evening for dinner and it's dead. I would not assign them a high probability of staying open. If you go in there, it's packed, you can assign them a better probability. If it's a publicly traded company, you can assign a better probability of them honoring their lease term If it's a more regional company.
I mean again if they've got 57 locations like our store deal, I was mind blown that we were able to get the exit cap we got on that deal because it was a one unit operator. It was, it was one unit. You didn't get a guarantee from this 50 restaurant conglomerate. But think about an Olive Garden. Think about what Olive Garden would have to do to get out of that lease with you, they would have to declare corporate bankruptcy, they can't just guarantee. Yes. Yes. So that that's huge. That's why they sell at a lower cap rate and people are willing to make less money on them is because of the surety of Olive Garden staying and honoring that lease at least while they have least term Olive Garden. No. Well, so what does it mean to me, I'll take a slightly different bend on the tenant risk is you don't know which tenants are gonna leave necessarily, but if you take a quick look at the rent roll and 80% of the tenants have expiring leases Uh in the next year, that's a higher risk because they can easily leave at the end of their lease. Then if you take a look at the rent roll and there's at least five years left on every single 10ant that's a lower tenant risk than than the previous example.
Uh And so some of them might be. Sometimes I get these these deals where they're marketing it. And I look at the rent role and that the lease expired already. And I'm thinking, okay, why are they still there? Why haven't they renewed? Uh They're on a month to month. And so that's what we mean by tenant risk is take a quick glance at the rent roll. How much least role do you have in the first year to what kind of leases are they on triple nets month to month. Do they have a long, you know, you know, five years left, eight years left that some of the tenant risk include in addition to looking at your tenant base and seeing, okay uh some businesses do better than others like a postal office. They have addresses and people paying on monthly subscriptions. That's a better, more secure business model than other, another type of business like you know, a jewelry store or something by a local person. That's their only business and they just sell trinkets. Okay. They can go away pretty easy if they don't have the sales. So that's how, that's what we mean by tenant risk. And there is a good example that apartment complex in north Carolina was in Jacksonville.
Right? So you had more tenant risk in that apartment complex because there was so many marines stationed for camp there that when they would ship them off and they bring you military orders, they can just move out. I mean as they should be able to, but you have a higher tenant risk there because people can leave with military orders and it's a military town. Yeah. Where they, they may be just shrink the size of the base all of a sudden. Right? So, okay, Next one is deal size. This is one of the easier one of the two. And again, going back into talking and having discussions with brokers when you're calling on a deal, the deal's already sold or gotten a contract or what he says didn't appeal to you or even you submit an offer and getting getting contract but it falls out. You need to be telling the broker, hey, I buy deals in between X and X. You should give him 57, 10 parameters him or her. Whoever the broker is to say this is the type of deals I buy, they're obviously in the business of selling deals. So what you missed out on the first one. It's a numbers game. You just need to look at more deals.
Get that person to send you more deals, Give him your criteria. He they're gonna put that and their little uh Crm or database or whatever. Hey, this is a buyer at 5 to $10 million deals at this Cap rate in this part of town, in these markets or whatever. That's just another. You have no business looking at $20 million dollar deals. If you know, you don't have four or five million dollars. So the main, the main thing you're looking at is too small of a deal. Maybe it's not worth your time. Too big of a deal. You can't raise the equity. Is that is it? Pretty much, yeah. Even if you could raise the equity, is it taking on too much risk? Because like we talked about last week, Every deal has a potential of not working out, even though it may work out 80% of the time. So can you stomach that deal? If it fails you have the cash reserves, You know, you raise the four million. But what if you it starts losing money and you need another couple of million to keep it afloat through a hard time. If that's if you can't do that, if that deal is too big for you, then you shouldn't be spending, so you don't want it to be a disproportionate amount of, of the total amount of deals that you have?
Yes. Yes. And and the lender is probably gonna shut you down before that anyway. Your investors will probably shut you down before that. What do you mean you want to buy a $50 million $50 million $40 million 13, nope. Okay, so we're going from seven to now. This one's 50. And you know what you're doing, the bank's probably gonna tell you hell no. The investors are probably gonna say a similar thing. Hey use somebody else's money for this 1st $50 million deal. Uh You have to gradually get there. But again, it's just a parameter of you know what you're putting in the search list of Costar Craxi or wherever you're you're getting your deals? There's no point in looking at $30 million deals if you can't buy them and you can buy a $5 million deal, just put the max at like six million, leave yourself some negotiation room or whatever. Alright, next one. Did you go through these pretty quick income growth assumptions? Income growth assumptions? This is a big one for us because you can have the cap rate which is kind of a year one? Uh cash flow? Uh It kind of helps you get a year one cash on cash but we have to kind of try to forecast what is this deal going to do in the future?
Is it is it on the way up? Is it in a great area? Am I gonna increase rents over time or am I not going to be able to? And so that's one of our quick evaluations that we go through and sometimes they're built in rental increases to lease. So just reading the lease and seeing this tenant has 10% annual increases. You bought it that way right. The face value cap was low, it wouldn't have met that parameter. But when you look at the income growth assumptions, it's like, hey man, we get, we get to a spot in 18 months where I would buy this deal, can I suck it up for 18 months to get a good return in 18 months and then get a better return in 36 or 72 months or whatever it is. And and along with that you're, you're evaluating where the rents are in line with market and so that that will tell you if you have room to run on your income growth, if you're buying really high rents compared to everybody around you, then you're probably not gonna be able to get as high of rent growth as you want. But like an example of, we have a deal in Tulsa where it was an older center, rents were $10-12, a foot and a mile down the road.
There $25 a foot because it's a little bit newer area. Well that's great for me because I know I'm below market and if someone wants to rent in that area they're gonna have to, you know rent from us or from them. But I'm I'm half of their rent and so now I can start pushing those rents so there's some big time upside there. So I should be willing to pay a little bit more for that property, take a little bit lower cap because I know I can grow that rent and again these are cohesive right? You're you have a lower basis, you have a lower price per foot so you're able to charge cheaper rent and you know comparable rent is way more expensive again because their basis is so much more expensive. So you can see how some of these are already starting to fit together just like this one and the next one. Right? So annual rent growth or the assumption of what rent growth you're gonna get the next one is the exit cap rate. So to get an I. R. R. You have to figure some sort of rent growth. You're not just gonna assume it's stagnant for five years and you have to get an exit cap. So these are important and they go with each other annex to cooperate. You can't assume if you buy an eight cap deal that it's going to be an eight cap deal in five years or 10 years or 15 years.
You have to, you have to put some thought into that. It could change right? What how could it change? Well we've we purchased a property that I purchased at like 9.5 or 10 cap. But it was because of some risk that it had with a couple of tenants. But I knew if I could alleviate that risk that it's probably an eight cap deal. And so that helped me, I built into the model, I built enough cash to handle a worst case scenario and changing that problem tended out and then I put a lower exit cap, which which isn't always normal in order to get an I. R. R. Can you get a lower cap rate? Could it change because you're making a lot of improvements to the property? It could change because you're making a lot of improvements. It could change because the area of town is gradually getting better. It could change because debt is uh cheaper than cheaper than dirt. It could change because debt is insanely expensive. Right? All of these factors are are going into it. Like right now if you're buying multi family, multi family cap rates are lower than I've ever seen them in my lifetime. And well, I mean, yeah, so in my lifetime, lowest cap rates are the lowest and debt is approaching the highest that it's been during my investing career.
So if I'm buying a multi family deal, I have to be uh putting in a higher exit cap, uh then I bought it for. And if I'm not doing that, then I'm basically setting myself up for failure or I'm just lying to the investors in order to get them and I are that they're comfortable with to invest with me. Um, so people are buying multi family deals at four cat, 4.5 cap right now and debts pushing, you know, pushing six and, and so they should be, if they're looking at a five year window, they should be, you know, putting a higher cap rate on that. Maybe it's five, maybe it's six. I don't know how much they want to go, but it's just part of what we have to go through when we underwrite deals, uh, to quickly evaluate them. So the next one, I'm gonna tie in with this one on a story about a sale. We just have, but the next one is potential upside, right? We always want to look for a deal that's got a little bit of maybe an out parcel, maybe some vacancy, we can lease up, but hey, it's good now, but here's this little cherry on top. If we could do that, it would be amazing. So talking about exit cap rate, we bought a shopping center in Wichita Kansas and it was a mid $7 million deal size and it was 111,000 square feet of multi tenant retail around round about, we did nothing to the out parcels and we bought them at an 8.5 cap and we sold them on a 5.85 cap.
We did absolutely nothing. We figured we would do that because again the people who are buying single tenant retail deals typically buy on much lower cap rates than people who are buying multi tenant retail buildings. So we are comfortable with the multi tenant side. So that was both something you could sell at a significantly lower exit cap than you were buying on. And it was a nice little potential upside for the deal. So it fit both of those parameters. Stephanie prominent is similar, right? You got to Vegas and it's like this is an amazing shopping center even if we don't have this extra ground lease or pad side to sell. But man if you do that, that's an extra million dollars. That could be amazing. So again, just going back into our discussion last week about implied value, you have to assign probabilities on some of this and and say okay the downside. I could lose my biggest tenant and that I may stall distributions or or lose a few $100,000 in trying to return to that space. But the upside is the property is going to continue to appreciate just like it has and I could sell this million dollar you know acre that nobody assigned any value to before I bought it.
Alright, that's it, that's the 11. So anyway just to follow up cap rate debt cash on cash. I our our price per foot. I'm running out of fingers, demographics, the property condition, The tenant risk the deal size, the income growth assumptions, the exit cap and the potential upside this is a list that we came together this afternoon and created in in 10 minutes because we're using it all the time. We're looking at deals all the time. We have parameters of what we know we would buy. So when you see it you can act on it. These deals fly fast times. People ask me is Joel how do you evaluate deals? How do you know what to buy? That's the really the one of the things I get asked the most and it's hard for me to tell them in a sentence, you know. But this list at least gives them an idea of how I'm going about how we're going about evaluating deals and kind of using all of our experience on each one of those points to come up with which ones we want to make offers on. Anyway that's the name of the game. You gotta be underwriting deals. You have to have a criteria and hopefully this helped you identify what your criteria could be.
Anyway, thanks for joining us and join us next week to invest in commercial real estate