3.4 · Underwriting: the Gallinelli math on PH numbers
Why this lesson
Section titled “Why this lesson”This is the spine of Level 3. Every lesson before it supplied an input — the cost of money (3.1, 3.3), your access to it (3.2) — and every lesson after it consumes the output: the condo trap (3.5) is this math run on vanilla listings; foreclosures (3.6) are this math with a discounted purchase price; high-yield formats (3.7) are this math with a different income line; the capstone is this math, defended. Underwriting — the discipline of computing what a property actually earns before believing anything a seller says — is the one skill that separates a property investor from a property buyer.
The framework is Frank Gallinelli’s (the level’s spine book): a small set of ratios, each answering one question, none sufficient alone. The line items are Philippine: association dues, RPT, vacancy at honest local rates, repairs, management priced even when you self-manage. The videos teach the method on US numbers; the tables below swap in yours.
Coach Carson again — the harvest’s honest surprise. He hand-derives every metric this lesson needs, with worked examples and a critique of each metric’s blind spots. Two segments of a long video.
Segment: 03:05–21:59 — how a rental makes money, the back-of-envelope method, NOI, and cap ratewatch full video
Watch for:
- 00:36 (of the full video) — the Warren Buffett framing: a deal should look obviously good with approximate numbers. If it needs a 40-row spreadsheet to look good, it isn’t.
- 10:14 — analyze the building debt-free first. Separating the building’s performance (cap rate) from the financing’s performance (carry) is the single habit that stops leverage from flattering bad buildings.
- 15:29 — worked cap rates: $700/mo NOI ÷ $130k = 6.4%; $1,200/mo NOI ÷ $350k = 4.1%. Same method, your pesos.
- 18:13 — cap-rate benchmarks vary by city and asset class (his Newmark table). PH equivalent: commercial ~6–10%; residential ~4–6%.
Segment: 21:59–34:03 — adding the mortgage, cash flow, and cash-on-cash returnwatch full video
Optional supplement — a BiggerPockets webinar segment analyzing a real fourplex with concrete expense line items. Use it for the expense-category checklist, not the math: all computation happens inside their members-only calculator, cap rate and GRM are never named, and the rest of the video is largely a membership pitch (we’ve cut it).
Segment: 21:16–34:22 — rent comps and expense line items on a real 4-unit propertywatch full video
The metrics, formally
Section titled “The metrics, formally”Six questions, six numbers. Definitions first, one honest worked example after.
1. NOI — net operating income. Annual income the building produces: gross scheduled rent, minus vacancy, minus all operating expenses — association dues, RPT, insurance, repairs, capital reserves, management — but never the loan payment. NOI belongs to the building; debt belongs to your structure. Everything else derives from it.
2. Cap rate = NOI ÷ price. The building’s unleveraged yield — 2.2’s vocabulary, now computed by you instead of read from a REIT filing. Compare against commercial ~6–10%; residential ~4–6% and against the financing cost (3.1’s carry test).
3. Yield-on-cost = NOI ÷ your total cost (price + closing friction + renovation). The same ratio on what you actually paid — the number that below-market entry (3.6) and renovation move, and the market cap rate doesn’t.
4. Cash-on-cash = annual cash flow after debt service ÷ total cash invested. The levered return on your actual pesos out of pocket. Useful, and the most gameable of the set — Carson’s warning above.
5. GRM — gross rent multiplier = price ÷ annual gross rent. The crudest screen: how many years of gross rent to repay the price. Metro Manila condos often run GRM 17–24 (i.e., 4–6% gross); provincial apartments 10–14. Use it to rank listings in seconds before underwriting the shortlist — never to decide.
6. IRR and payback. Payback = years for cumulative cash flow to return your invested cash — brutal and clarifying. IRR (internal rate of return) is the annualized return of the whole dated cash-flow series — cash in, yearly flows, sale proceeds net of friction (3.8) — the one number that lets a property compete honestly against VWRA’s expected return or MP2’s 7.12%. Compute it in a spreadsheet (=IRR() on the dated column); never trust a seller’s IRR whose assumptions you haven’t rebuilt.
The 50% rule — the conservative screen. Before line items exist: assume operating expenses eat ~50% of gross rent (vacancy included, loan excluded). It looks pessimistic against a condo pro-forma; it looks realistic against five years of actual ownership, once dues, the vacancy you forgot, the repaint between tenants, and the plumber’s third visit are in. If a deal only works at 30% expenses, it doesn’t work; if it survives 50%, refine with real line items and let the deal earn its optimism. The related dial: the operating expense ratio (opex ÷ gross income) — condos with heavy dues often genuinely run 35–45% before any misfortune.
The PH line items
Section titled “The PH line items”What actually goes in the expense column here — the course’s replacement for the US checklist:
| Line item | Honest PH basis |
|---|---|
| Vacancy allowance | 5–10% of gross for ordinary long-term units; more in oversupplied districts (Bay Area vs Makati are different planets — check listing volume in the building itself) |
| Association dues | The condo killer: get the actual ₱/sqm/month from the building (it’s in every listing or one message away), × unit size × 12. Often 15–25% of gross rent on its own |
| RPT (real property tax) | Statutory: up to 1% (province) / 2% (Metro Manila cities) of assessed value — which is a fraction of market value set by the LGU’s assessment levels; pull the actual tax declaration. Plus the SEF add-on. Small, but never zero |
| Repairs & maintenance | 5–8% of gross for newer units; more for older buildings and houses |
| Capital reserve | 3–5% of gross set aside for the aircon, the water heater, the repaint — the items that arrive in year 3 whether reserved or not |
| Management | 8–12% of gross if a property manager; price it even when self-managing — your hours are not free, and pricing them keeps the self-manage decision honest (3.9) |
| Insurance | Fire insurance on the structure/unit — small, required by any lender anyway |
One worked example, honestly
Section titled “One worked example, honestly”A real-shaped Metro Manila listing: RFO studio, 24 sqm, Ortigas fringe, ₱3.5M, achievable rent ₱17,000/month (₱204,000 gross/yr — GRM 17.2, and that GRM already whispers the verdict).
| ₱/yr | |
|---|---|
| Gross scheduled rent | 204,000 |
| − Vacancy 8% | −16,320 |
| − Dues (₱90/sqm × 24 sqm × 12) | −25,920 |
| − RPT + insurance | −9,000 |
| − Repairs & maintenance | −12,000 |
| − Capital reserve | −8,000 |
| − Management 8% | −16,320 |
| NOI | ≈116,400 |
Cap rate: 116,400 ÷ 3,500,000 = 3.3%. Opex ratio 43% — the 50% rule barely flattered it. Against bank money at 6.5–8%: negative carry of 3–5 points before the loan is even signed. Cash purchase? 3.3% net, taxable, illiquid, with tenant calls — versus MP2 at 7.12% tax-free and zero effort. This is the median Metro Manila condo, underwritten honestly, and it is exactly why lesson 3.5 exists. Now the contrast that shows the method’s other gear: a provincial four-door apartment at ₱4.5M grossing ₱40,000/month (GRM 9.4): the 50% rule gives NOI ₱240k → cap rate 5.3%; honest line items (no association dues — it’s land and building you own outright) might reach 6–6.5%. Still not a slam dunk against 7% money — but now the below-market-entry and yield-transformation escapes have something to work on. The math doesn’t find winners; it finds the distance each deal must close, and names the escape that could close it.
Build your underwriting template — the spreadsheet the rest of the level (and the capstone) runs on:
- Rows: the full PH line-item table above → NOI → cap rate, yield-on-cost, GRM, then a financing block (channel, rate, term, amortization from 3.3) → cash flow, cash-on-cash, DSCR → a stress block (+3% repricing; −10% rent; +2 months vacancy) → a 10-year IRR block with an exit priced net of ~8–9% friction (placeholder until 3.8 makes it exact).
- Underwrite one real listing end to end. Pull the actual dues from the listing, the actual RPT if visible, honest rent comps from three comparable listings for rent in the same building or barangay. 50%-rule screen first; line items second; write which was more optimistic.
- Rank five listings by GRM in ten minutes, then fully underwrite only the best one. This two-speed habit — crude screen wide, deep math narrow — is how practitioners process a hundred listings without a hundred spreadsheets.
- Write the verdict: cap rate vs the money, cash-on-cash vs MP2/VWRA, IRR vs the same, and the sentence this course requires of every underwrite: “For this to beat my passive alternatives, I must believe ___.” If the blank is “appreciation resumes,” see 3.5. If it’s “I buy 30% below market,” see 3.6.
Check yourself
NOI includes every one of these EXCEPT:
Why does Carson insist you analyze the deal debt-free first?
The 50% rule says:
A ₱3.5M studio renting ₱17k/month has a GRM of about:
Cash-on-cash return is the most gameable metric because:
Which line item most often kills Metro Manila condo NOI specifically?
IRR earns its place in the toolkit because:
You can move on when… your template computes every metric from raw line items with no hardcoded results, one real listing is fully underwritten with actual dues and rent comps, the GRM-screen-then-deep-dive habit has processed five listings, and your verdict names the belief the deal requires.
Go deeper
Section titled “Go deeper”Data sources for PH inputs: Global Property Guide’s PH rental yields for district-level gross yields, Lamudi/Carousell rental listings for live rent comps, and the building’s own admin office for the dues figure nobody advertises.
Next: 3.5 · The condo trap and the five escapes — the math you just learned, pointed at the asset every PH investor gets pitched first, with institutional data on why it loses and the five documented ways out.