Achieve Wealth Real Estate Investing Podcast

James:  Hi, audience and listeners, this is James Kandasamy from Achieve Wealth Podcast. Today, I have Glen Gonzalez who have been a big operator out of you know, Austin, Texas, and Glenn has deals which he has done in Dallas area, Corpus Christi Clean and south of Houston City, called Lake Jackson. And he is currently owning about 3,000 units at some point, in the past few years, he owned like more than. 4,500 units and he also have a strong property management company, previously, which used to manage up to 6,500 units. So he brings really good value to this podcast. Hey Glenn, how are you doing?

Glenn: Hey, James, doing great. Thanks for having me on, this is exciting. 

James: Yeah. Yeah. Did I miss out any of the story behind you that you want to clarify?

Glenn: Maybe. I think where I came from, you know, because people are always interested. You know, we talk about all the success that we have, but I actually started as a maintenance man.

James: Wow. 

Glenn: I was kind of at the bottom of the barrel, picking up trash and I was like a porter, really. And then I was eventually painting apartments and fixing stoves and stuff. So my involvement in the apartment industry started about 30 years ago. So I actually came through as a maintenance man, leasing agent, property manager, then a regional manager, director of operations and so all the way through. Pretty much all the different ranks of Property Management until about six years ago, when I started buying my own, as the owner. And that really changes the perspective on apartments, you know, you got an operator perspective and an owner perspective, so maybe I could share some of that today while we're all on the call. 

James: Sure. That would be really, really interesting. I mean some of the big guys that I know in this apartment, such as Ken McElroy. I mean, he started as a property manager, right? And I interviewed Eddy Lauren who has done like more like 1 billion in transactions as an operator. One of the big first advice that he told our listeners when I interviewed him like a few podcasts back was like, start from the ground, start to learn from the ground itself. Be property manager or be a maintenance man or porter and then learned in the business because you can learn so many things.

So it looks like you have that 'coming from the ground' experience. Now, you have no more than 3,000 units and you used to have 4,500 units, which is awesome. I mean looking at from the ground itself up to the asset management; like when you were maintenance man or a porter, what did you think about the owners?

Glenn: Oh my gosh, I used to get so nervous when the owners would show up to one of my apartment complexes because my boss would call me and say, hey, the owners are coming so I want to make sure this place looks perfect and everything is in order. And then they would tell me things like, you know, if they ask you a bunch of questions, you know, they would say let me do the talking. So I was basically supposed to keep my mouth shut and that just kind of made me nervous, you know, because of all the hype and stuff.

 So I don't know, you kind of think the owners are almost not like real people to some degree, but they are, they're just like you and me. They're just common folks.  

James: Yeah, it's interesting. I mean sometimes, especially the maintenance crew, right? I mean usually when owners come into a property, when we go and visit our property - I mean, most of the owners, we talk to the office staff, right? Because we think we control the whole thing but the backbone of renewal in the property is the maintenance. Because people are happy when work orders are being taken care of and people really like that. So we really make it a point to really take care of the maintenance people and that's another advice for all the listeners out there.

If you own property, don't just look at the property managers or the leasing agents or the assistant managers; go and say hi to your maintenance people because they are really, really important. Don't you think so?

Glenn: Absolutely. I would add a little bit to that. You know, when I go visit a property, I always speak with the maintenance guys, always because they will tell you everything that's going on on that property, even the stuff the manager might not know. I mean, they know how often they're recharging air conditioners or how often they're fixing things. I mean, they know the work orders like the back of their hand, but beyond that, they even know the tenants. I mean they know which ones have pets and which ones don't have pets because they're in there, doing work orders. They know everything. And I would say that they're often the ones that are neglected because like you mentioned earlier, when we go and do a site visit, a lot of times we'll sit down with the property manager and we'll talk about the lessee and the marketing and the delinquency and some of those common things but rarely do we talk to the maintenance guy about, hey, is there anybody out here

that's like a bad apple, that's like creating a lot of havoc? And they will tell you who's dumping the trash out there. They will tell you who are having parties late at night and whose got like 5 dogs in their apartment. You know, I mean, they know everything. So my advice is if you need to know what's really going on behind the scenes, get to know your maintenance guys.

James: Yeah. I think it's also important during the due diligence process right? Because sometimes we are with the Brokers and we have the managers and you can see that they like to hide the people who know the real stuff which is the maintenance guys, right? So try to get to them to ask more questions. Did you have any tips and tricks to get to maintenance guys while doing due diligence so that we can get the truth from them? 

Glenn: Yeah. Yeah. I think part of it is just making them feel appreciated and that their opinion matters, I'll tell you this just like I was sharing my experience. I used to get really nervous when the owners would come around because to me, when I was younger, they were very intimidating. So if one of those guys came up and wanted to talk to me, I'd be like, um, you're talking to me? So find a way to make them comfortable, you know, really, at the end of the day, just make them feel appreciated for all their hard work and acknowledge that they are such a big part of the team. And when they feel appreciated and they feel acknowledged, trust me, they'll share with you a lot of important information. 

They may offer information that nobody else knows. They may say things like, hey, by the way, I would go check the roofs on building 3 because we had several roof leaks on that one building in the last four months. They know everything because they're doing all the sheetrock repairs on the inside, right? And so they even know where it's leaking. It could be around the chimney or something in there. Just be like, good idea, thanks. I will check that. So yeah, due diligence, maintenance guys, you're absolutely right.

James: The other thing that we do, just to share with the listeners is you know, we also ask the maintenance guys to rank the property managers. So it's not only like property managers control the whole thing, I think six months, once a year, we do this 360 feedback on the property managers from the maintenance right? Because you know, sometimes you need to give them the voice, right? And I think we have to just give them an official channel for them to voice what they want to share in terms of how the property managers are doing,  what these people are doing.

Glenn: You know and I've shared this with some of my friends in the industry that you'll never ever

have a successful manager without a successful maintenance guy and vice versa. If one of them are really good at their job and the other one is not, you will not be maximizing the value of that apartment complex. I mean, it's almost like a marriage, you know, the manager and the maintenance supervisor, they're married at the hip. They've got to be on the same page and if they're not, if they're complaining about each other, you know, that's an opportunity to stop and pause about why they're not on the same page. So just FYI, you know, and if one of the maintenance guys like you said gives a rating to the manager of a very low number like, oh, that manager is a 2 at the best, you might want to go talk to the manager. 

Like how do you rate your maintenance guy? He's like a negative 2 at best, you know, and it's like, what's going on and who knows what the problem is? Before you could then read the financials. The financials will tell you the story too because if your way out of budget, you know, say the maintenance guy is not very good at painting so he wants to contract out every paint and your turned cost could be very, very expensive. There's a lot of you know things that you can learn from each other. That's why it's on your part. 

James: Absolutely. Absolutely. So, how did you climb that ladder from porter to maintenance to becoming an owner?

Glenn: It's a funny story, James, it's really funny story. To be honest with you, I'm out there trying to do work orders and I started my industry in Salt Lake City and it's really cold outside. So when you're picking up trash, you're freezing cold, especially when you're going from apartment to apartment, carrying all this stuff. Anyway, so I went and I told my boss, you know, I don't want to be a maintenance guy forever. I want to be a manager because they get to sit in the office and talk on the phone. That was my motivation, I was young. I just don't want to be out in the cold. So they're like well, we don't have any openings for maintenance guys to be managers. I'm like well just so you know, that's my next step. 

So they had a 60 unit apartment complex that needed a part-time manager and a part-time maintenance guy so I said I'll take it. So I was part-time on each one of those so I got to learn the manager skill and you know talk on the phone and then I needed the work orders and make ready and I learned with this valuable lesson. Somebody moved in and they had to fill out one of those move-in checklists to make sure that the units in proper condition when people move in and they turned it into the manager after they signed the lease and it's got all these things that don't work. The stove doesn't work right, the toilet is running and the dishwasher won't cycle or whatever. So that I got to know who fixed this apartment, you need to get them back.

So I'd go back later in the day and I would take my tools and change my clothes and they're like, hey, what are you doing here? I'm like, well, I'm the maintenance guy. And they're like, oh, so you're the one that got this apartment ready? I'm like, yeah, that was me. And I realized then I was not a very good maintenance guy, but that was my transition.

 But I really was able to turn that apartment community around. And the problem with occupancy and revenue and it got to the point where it was doing very, very well because I kind of was able to see it from both sides. I knew how much we can rent them for but I also knew we had to get them ready first and I work my little magic as a newbie to the industry. I was very successful. 

My boss recognized the success and they had another, I think, it was larger, I don't remember exactly, 200 or 300 units. It was struggling with some of the same stuff and they asked if I would go there and give him my opinion. So I went, kind of as a manager, over to this other community and found that the leasing agent and the manager were really good friends but that leasing agent wasn't very effective at all and the manager was too good of friends to fire her friend. 

So I said, well, let's do one of those secret shops and do an evaluation and kind of did all that and I showed the manager. Look, you know, you're not a very good manager because you're not able to make a business decision. You've got to make changes on the leasing and that leasing agent is affecting you as a leader. So she kind of said she realized at that time that if she wasn't able to make an improvement or change it was going to stifle her own career as well. So she made that change and all the sudden, the leasing got better and collections got better and people were giving better reviews and my boss recognized that I had this knack for identifying problems.

Well, then I got to oversee multiple apartment complexes and I became what's known as an area manager so I had two or three that I could oversee. So my career just started kind of progressing a little bit. I graduated college and I was supposed to be a hospital administrator and I did my internship at a hospital and I did not want to do that the rest of my life. So here I was at a crossroads, maintenance manager/hospital administrator, now what? 

So I said, I'm just going to make Property Management my career. And then I just started getting more educated with real estate licensing, then I eventually got my CPM designation and I was involved with the apartment association stuff. So there you go. That's kind of how I moved up the ladder a little bit.

James: So at what point did you buy your first property? I mean, syndicated or you know, start using some other..

Glenn:  Sure that's a great question. So in the time frame from that point, it was probably another, gosh, 10 or 15 years later. I was now working for a big REIT, a Real Estate Investment Trust,

in the Pacific Northwest. Equity Residential, they're very big property owner-manager REIT and I was getting great experience there. Well, I had a mentor that was serving on the board of directors for the apartment association, his name is John Gibson, also from Washington. And I went to John and said John I want to buy an apartment complex one day. And I showed him this little 60 unit deal that I was analyzing. And at this time I was still a regional manager. I still got a W-2 paycheck. When I went to John and I said, "You know, tell me what you think."

 And he said, "You know, you'll probably do okay."

 He said, "But I have this little 44 unit apartment complex, I'll sell you and I'll make it much easier to buy."

 I said, "How so?"

 He's like, "You just need to come up with a $150,000 down payment and I'll carry a note back for the rest."

 And I said, "Great. Let me go look at it." 

So I went and looked at it and this guy wasn't managing it very well and I knew how to manage pretty well so I'm like, 'This is great, we can make money on this."

 So I went to two of my friends and I said, "You guys want to go in on this apartment complex with me?"

 They said, "What do we need?"

I said, "$150,000."

 And they said, "You know, what are the splits?"

 I said, "A third, a third, a third."

 And they said, "Okay."

 I said, "But you each have to put up $75,000."

 And they're like, "Whoa, well, for a third, a third, a third, shouldn't we split that 150,000, a third, a third, a third?"

But I didn't have any money. So I'm like, "I found the deal if we're gonna make money and you guys put up the equity, you guys will get your money back before me but once we start making money, we'll split a third, a third, a third."

 And those two friends said, "All right, sounds good."

 We did it. We bought that apartment complex. He carried a note back and we own it for like a year and a half and we sold it for about a million dollars more than we paid for it in eight months. So that third, a third, a third, those folks were pretty happy. So the mistake I made is when I sold it, I carried back a note on part of our profits and the guy that borrowed or bought it from us has defaulted on that note. So, actually, we made a lot of money on paper, I lost half of it to a bad note. So word to the wise if you're going to be a lender to a buyer, do your homework. 

James: So you seller-financed to someone else, I guess.

Glenn: Yes. We still pocketed a half million dollars. So I mean we did okay, but we carried a note back. That was my very first deal, it was 44 units and it was while I was still working as an employee.

James: That's very interesting because you really came from the ground up and you made that transition to a owner, you know, and you found the deal and you able to convince your friends to finance it. So at what point did you had the realization that, hey, I'm a regional now, I want to buy and why did you want that thought process came in? Why did you want to be an owner? 

Glenn: Well, a couple of reasons. One, I knew that these owners that came seemed like they had a lot of money, in my mind. I assume that they were pretty rich people. They drove fancy cars and stuff and from my perspective they were wealthy. But the other one is I realized that when I got really good at property management and I increased the value of that apartment community, that owner would eventually sell that property and he would take his money and run and I would get a thank you and he would get a lot of money. And they always said, "You know, Glenn we really appreciate your property management efforts. You've done very well for us and thank you very much."

 So I got a lot of thank yous, not a lot of dollars and you know, that was a motivation for me. It's like someday I wish I could trade that value for myself. My wife always encouraged me. She's like, "You know, you're really good at making other people a lot of money. Someday, you got to do that for yourself." And so that was motivation too. You get really good at Property Management, you should maybe be the owner but I didn't have any money.  

James: But you have that knowledge on how to increase the NOI, which is the most important, I would say. Having a lot of money and buying assets if you do not know how to increase the NOI from the ground up, you're maybe just half-blindfolded.  

Glenn: Yeah, and I think you know what made me successful later in life, is that experience and the knowledge that I had from the ground up. It gave me great insight in helping me find good deals that I could fix if they're broken. And then, later in my career about six years ago, I started to buy my own. And I remember having to raise over a million dollars on my first deal and when people realize that you have experience, you know what you're talking about and you came from the ground up, they're more likely to invest with you than they would be with somebody who has no experience,19:48inaudible]  just go syndicate deal with no experience. So, the experience really paid off in the end for me. 

James: Yeah, I'm sure it's paying off right now itself. So I want to go into some of the secrets in Property Management because you are the insider.

Glenn: Yeah, that's right.

James: Because I mean, for me, my wife does a lot of property management and just because of the knowledge that we have in asking questions to our employees and all the employes doesn't really tell us stories. They don't tell us like it takes five days to make ready or two to three weeks to make ready and all that kind of thing. I mean, property management is a people business, there's a lot of detailed things happening inside the property management itself. And if you do not know the details, people are just going to take you for a ride. So, let's go into the details. So how would you know a leasing agent is not a good leasing agent.  

Glenn: So great question, James. There are indicators that are quite obvious, but then there's some that you kind of have to peel the onion back a little bit to figure out. The first indicator is if your occupancy is struggling, where all your competitors are saying, in the 90s and your property is like in the 80s and you have enough product that's already made ready, and it's priced correctly, but gosh, people are just not leasing so that could be an indicator.

 You know, there are remedies to that. You can hire a secret shopper that will come and pretend to be a renter and they will give that leasing agent an evaluation. 

James: And what does the secret shopper do?

Glenn: They pretend like they are an average person coming to rent an apartment. You know, they give a name, they go on a tour and they kind of evaluate whether or not the leasing agent was able to connect with them as a renter if they took them on a tour of the apartment. Mostly if they followed up to say, "You know, are you still interested in renting?" You know, some leasing agents never follow up. Some agents aren't able to connect with people like emotionally connect with people because you know renting an apartment home it's an emotional decision. There's apartments everywhere. So the only thing that makes your apartment may be different than your competitors' apartment, maybe that leasing agent. 

So if the indicators are there, there are remedies but sometimes you just got to peel the onion back and what I mean by that is you just need to listen to how they talk to people. You need to get feedback from the residents. As an owner, you can always send out a little flyer or a little questionnaire. You know, we get what's called the Move-in Report, where it talks about who moved in, in the last 30 days. I look at those moving reports to see if they've hit the targets on the rent and stuff, but you can send a little questionnaire or you could even call them on the phone, as the owner, and say, "Tell me about your experience from the time you moved in till now." And that'll give you a lot of insight. 

The other thing is the closing ratio. There are averages in our industry about if 10 people apply, what percent actually come back and sign a lease and move in? And that percentage could be anywhere from 30 to 40 percent of the people come back. Now, granted some of those get denied because of credit, criminal activity or addictions and we expect that. But if some leasing agent has a closing ratio of 10% or 15%, you'll want to stop and say there's a problem here because that's below the industry average. And where do you find those industry average? Well, you got to talk to people in the industry. They're not widely publicized on closing ratios but that information is readily available. You can get it through the apartment association. You can get it through people who own and operate apartments and you can just ask, network with people. 

James: Yeah, and what do you do if the leasing agent gives reason saying that our apartment is priced too high?

Glenn: Well, there's your 'trust but verify'; she could be right, you know, I mean if they have a low closing ratio and you as the owner said, "Hey, we renovated this unit and I know we can get a thousand dollars for these two bedroom units." And all your competitors and your leasing agent saying, "Yeah, but all my competitors are at 950 to 900 and you want 1000."

If you argue with the leasing agent say, "But I spent so much money and I need to get a thousand out of this deal." You know, she's going to get frustrated and so are you. But if I were you, I'd go verify that. If the leasing agent is saying all your competitors are renting their two bedrooms at 950 and she's right, you as the owner better eat some humble pie and take her word for it. And when you get the facts verified, you better adjust your price because you may lose a good leasing agent because you're a bad owner. 

James: Correct. Yeah, so it's important that because sometimes as owners. We might hear a certain performer on rents and that may not be true because you are doing it pre-closing, you know. Only when the rubber meets the road then you really know whether whatever you projected in your performer is being able to be captured on the ground. All right, and it's very skill to identify [25:41crosstalk and unintelligible] 

Glenn:  That's correct. I had a boss of mine one time, he was the CEO of a company and he said this to me one time. He said, "You know if it comes down to your opinion versus my opinion, my opinion wins because I'm the owner." 

 He says, "But if it comes down to my opinion versus your facts and your facts are right, it doesn't really matter what my opinion is, the facts always tell the truth."

That's why we do Market surveys. That's why we figure out where competitors occupancy is. And if you're a good owner, you'll realize that sometimes the information is right in front of your face talking to you and you're just not willing to listen. 

James: Correct. There's a lot of data that we can use to really see whether I priced it correctly or not. Such as, how many people are applying, how many vacancies you had for that certain configuration and all that, right?

Glenn: Yeah. Yeah.

James: And how do you select a good property manager? 

Glenn: That's a tough one. That's a really tough one. Gosh, you know I have, in my career, when I was an asset manager for Pacific property company and I think we had like 8,000 units and we had hired two or three different property management companies that did fee management for us as an owner and I was an asset manager. But some of those were some big name brand management companies that had all the bells and whistles but you know what it came down to James? It came down to two individuals, how well did that regional manager get along with that property manager and how often is that regional giving support?
             If they are pretty well connected and they're good communicators, chances are all the other things will fall into place. The bills get paid on time and you know, if the manager needs some overrides or permission to the regional and they're on the same page and readily available, that property will flow better. Sometimes I've seen that a regional manager may have 9 10 11 or even 12 Assets in their portfolio. How often can an effective Regional go visit 12 Assets in a week or a month or two months? Not very often. They're going to be spread so thin.

            The trick is that I know a lot of fee management companies are moving away from this but their profitability increases because they get a management fee increases when they have one fixed cost of a regional manager spread out over many assets. So from the property managers company's perspective, they may give that Regional a big portfolio to cover their salary. You, as the owner, want that portfolio to be small because you want their undivided attention, you know, so that's a good question you can ask a management company. Is how many assets are in that regional manager's portfolio and how often that manager works with your property manager on site. Those are two key elements. 

And of course, the other big one is the back office. How often are they producing your financial packages and are they reconciling every month and do they catch the bounced checks fast enough? The back office, people don't really jump into as an owner, they just look at what's presented to them on the front end. So there's lots of good bells and whistles. 

James: Very interesting. So what is the good ratio for regional versus property that they manage?

Glenn: Yeah. That's a great question. I think an effective regional manager shouldn't have more than seven or eight assets in their portfolio. That number can go up to 9 or 10 if all those properties are maybe smaller or they've got one manager that oversees two or three that helps or they're all stabilized. They are all stabilized in their the assets and they're all doing very well with the regional, then they could then handle more.

            But if the regional manager has a new lease up or repositioning or undergoing a renovation or you're trying to change the demographic a little bit, those are very, very time-consuming. And if that's the case, you don't want them to have more than five in their portfolio.  So there's a big range. Variables are stabilized in the size and then the complexity of the assets that are in the portfolio.

James: Yeah, yeah, that's a very interesting feedback on the regional because as you know, and I know is that property management is a business of issues, daily issues which a lot of asset managers don't want to touch. They say that is a thankless job, we do not want to touch it and all that. But how important do you think Property Management, in terms of the efficiency or the NOI optimization of a multi-family?
Glenn: Again, it comes down to that regional manager and the property manager. You know, I guess the fixed costs are you know, some property managers charge you more, a larger percentage of the management fee. That's a cost that's going to affect your NOI. The property management company has to have some buying power. Hopefully, they buy so many carpets and so much paint that they get significant discounts on the product that they purchase and they pass that right along to you as the owner, that would be a great benefit. 

You know, if you're paying, call it $10 a yard for carpet installed and the property management company can get it done for eight or nine, that's pretty significant overall your Capex. So all those are little variables that you need to kind of ask what kind of benefit you get as the owner. And some of them are the opposite. They're very expensive, some of them pay for very expensive software for the property management and they pass it right along to you the owner and you're, "Gosh, this is expensive every month." And then you start asking about this fee and that fee and there's like an accounting fee on top of the property management fee.

They charge you a fee for processing your own payroll and like, "Why am I paying you to process my payroll? Isn't that part of the services?"

 And they're like, "Oh, no that's an extra."

 So, you know, gosh darn, you just got to dive into it, to be honest with you. That's a good question. It's really complicated. Call me and we'll talk offline.

James: Yeah. That's good.

Glenn: I used to be a property management company,[32:56crosstalk] and I know there are areas that the management company wants to make money on.

James: Correct. Correct. 

Glenn: It doesn't always benefit the owner. It benefits the management company.

James: Yes, but I mean we have to understand property management is also a lot of work and they are the backbone of your operation. So choosing the right property management and how the profit centers and all that is how everybody...

Glenn: Yeah. James if you step back and you realize sometimes it's worth paying those little fees to these property management companies if they're really good at what they do. Because if you step back, they're really good at what they do, they're going to make you Millions on your asset. if they're not very good at what they do, they're going to lose you Millions on your asset. And here's the key; sometimes they just make excuses on why they're poor performers. And I struggled with a very large management company at 30,000 units. I owned a 650 unit apartment complex up in Dallas and my occupancy was going down and down and down and the bad debt was going up and up and up and I'm like, "What the world is going on here?"

 And they said, "Well, the market, the sub-market is getting worse." 

And I scratch my head and I said, "Well, how could that be? Because our competitors are 94 and you're like 81."

 They're like, "Well, that's because they have just filled it up with junk people."

 And I'm like, "I talked to the owner of that one and they said their delinquencies are only like two and a half percent. You guys are like seven. I mean that doesn't an add up either."

 So what's really going on and they were a mess. They were going through changes up above and they had two Regionals that quit because of leadership and the property manager had quit because she didn't like the management company and my 650 unit was struggling financially now after it had just had its best year.

Her name was Letty, she was the property manager for us for a year year and a half. When Letty left, everything unraveled and I ended up having to terminate that management contract and I gave it to a different management company and they were very successful. And they turned it all around and I ended up selling that complex about a year and a half after the new property management took over. And guess what? They out-performed all of a sudden and it was the same submarket, it was the same community. So all the excuses the previous management company gave me was just a bunch of BS. 

James: Yeah. Yeah. It takes a lot of leadership to really fire property management because as an asset manager who just know asset management your hands are tied. You can listen to one excuse this month and next month, I'm going to give you the same excuses. But at what point do you make that call saying that, okay, these guys are not good? So it's very hard for you to make that call if you do not know the details and how to read the financials; as you say, you know the owner on the comps, right?

Glenn: Yeah.

James: But not everybody knows the owners. So, how do they find out? It could be very well true that if [36:07inaudible] so do you have some tips on how to identify bad property management? One point should be fine. 

Glenn: I know a couple of them by name. 

James: We don't need names. 

Glenn: I can't say it on the podcast; call me. How do you identify? Here's one indicator. There's a lot of turnover for some key people. You know if the bookkeepers are quitting and the regional managers are quitting and the property managers are quitting; if you can't have access to interview all those people and talk to them about why they're quitting, you're losing out on an opportunity, but that will tell you, that's an indicator. By nature, I think we turn over about 30 percent of the site people a year, you know. One of the indicators that I chart so if you're up to 40 50 percent of your site people move, including your maintenance guys and releasing agent, but if you're up above 30%, there's a problem. Either with the leadership or how it functions or they just can't get enough training. There's something going on because people don't just walk away from their jobs. And the way to indicate a good one, management company, is if they've got long-term employees that stay with them long term over and over and over again. So there are some indicators there. 

And your intuition; let me just address that. If for some reason a property management company is telling you excuses over and over and over again and in your mind, it doesn't add up but your guts telling you something's not right here, I would say trust your intuition because there's probably something not right there.

James: Got it. Got it. Let's go back to, as you said, the most important person in the whole pipeline for an owner, asset manager. So you have leasing agent, you have property manager, you have Regional and you have the property management leadership. So you said, if I remember correctly, Regional is the most important on how they communicate and...

Glenn: The regional and the property manager those two together. 

James: So how do you identify the qualities of a good regional? 

Glenn: Yeah, you know the good regionals, you can always tell if they're pretty effective because you can ask them a question about, you know, call it turnover expenses or you know, we notice this big expense for HVAC, you know that Regional says, "You know what? I noticed that too because the manager had booked it up in the operating expenses and I reclassify it to Capex."

 And if the regional knows what's going on, how the property is spending their money and where they're booking it and she just knows it or he knows it right off the bat, they're on it, and they are on it and you should be very grateful that they're watching your asset and your financials pretty effectively.

 Now if you ask a regional manager, 'Hey, what's going on? Why did it go up?"

 And she's like, "I've no idea. Let me get back with you."

 And you're like, "okay, get back to me, let’s talk. " And she never he never gets back with you and you send them another email says, "You know, what did you find out? I mean, our NOI took a dip 10 grand this month and it's been pretty consistent, what's going on?"

 If you have to follow more than one or two times, dude, you've got a problem. They're not looking at your bottom line. They're not talking to their manager and they're certainly not watching your asset. 

James: Got it. Got it. Okay. It's very interesting. Let's go to a bit more personal side. Is there any moment in your whole career when you started in real estate up to now, is there a proud moment that you always remember, you're going to remember that proud moment for your whole life?

Glenn: That's a good question. You should have given me some lead time on that.

James: I'm really proud that I did that. It could be anything. 

Glenn: You know, I think part of it is a feeling of satisfaction that I get. You know when we syndicated deals, when we bring investors together, when we take that money that they've trusted us with and we apply it to the apartment complex and we do what we said we were going to do. We renovate the office and we raise the rents. And then, down the road, you step back and you look at the community and I go, "Wow! This actually looks better than it did when we buy it." And then it feels better and our delinquencies are going down. It's almost like your baby. It's like your kid, your little offspring. Like I'm so proud of this community.

 And then you sell that and you give all the investors back their money and they call you on the phone, "Glenn, dude, I'm so happy. You actually did what you said you were gonna do and did better than we expected." To be honest with you, I get so much satisfaction out of that and I like making other people money, you know. And when that happens, they don't mind sharing the profits with me. And now, I'm making money so it's not always about the money, but it's about doing what you said you were going to do and doing it well and kind of being the best in the industry. Not all deals have gone has planned, not all deals have been successful and those are tough pills to swallow but I think, for the most part, my greatest in my career is seeing the magic that we work and executing the plan, I love that. And then there is one other if you don't mind me sharing?

James: Sure, absolutely.

Glenn: There's a gentleman that was a maintenance guy that would come and talk about if you spend this, you know, I think we need more rent. If you fix this over here and you know, I mean really, I wouldn't do anything on the one bedrooms because we have so many of them we can't even random, you know, but we can make a lot more than that. I took that maintenance guy and I said, "Have you ever thought about being a property manager?"

He's like, "No way, there's no way; that's the last job I want."

 I'm like, "But you think like a property manager."

 And this is just a deal here at Austin that I was managing as a fee manager and I convinced him; I said, "Dude, you could do this."

            And he did. He got out of his comfort zone and we moved him from outside to inside and he was the same way. He was so effective, I love the way he processed. And his name is Louis and Louis was a very good manager. He had a wife and a child and he was later moonlighting for a company for Best Buy, you know, he was working in the evenings and on weekends and stuff to make ends meet for his family. And we were at lunch one time, talking and I saw what he had done for the community. The occupancy went up, it had stabilized and he was right. We were making more money on the two bedrooms and I told Louis, I said, "Louis, why don't you quit? How much are you making at Best Buy a month?"

 He said, "I get an extra eight or nine hundred dollars a month by working kind of part-time, on the weekends."

And I said, "If you were able to just devote more time to the community, do you think you can make it more money?"

He said, "I just can't afford to not."

 So I told him, I said, "Let me raise your pay by a thousand dollars a month if you quit that job."

  And I said, "Then, you could be a better husband. You could be a better father to your kid and you won't be so stressed. You don't have to work every single weekend because you're going to get burned out, you're going to get sick and then you're eventually going to quit."

 And he's a grown man, he just started crying. Right there at lunch, it was kind of uncomfortable. He's like, "Why would you do that for me?"

 I said, "Because I see in you great things, Louis."

 And I said, "You should be a better dad and a better father to your child. If you're gone all the time, you're going to look back and you're going to say it wasn't worth it."

 So the community had benefited so much from this guy, it could afford to give him a $12,000 a year raise and it would have zero effect on the properties bottom line because he had increased in a while. And he stood up with tears in his eyes and he's like, "I'm gonna go give notice."

 I said, "And I'm gonna raise your pay this afternoon." And he gave me a big hug, and we've been friends ever since. He's very successful. But that was a proud moment where I identified that it's not always just about the money. It's also about being a good dad, a good husband and have less stress in your life. And sometimes we could take real estate and make dreams happen for people. Now, that was a good moment in my life. You know, it wasn't that long ago. 

James: It's very fulfilling when you impact people's life. I mean you can make money in many ways.

Glenn: That's right.

James: You make a few million dollars and then you forget about it and you give it to investors and you forget about it. But when you impact someone it follows you throughout your life and you remember that's a big impact, you can't really put a monetary value.

Glenn: Yeah.

James:  And I've had REIT investors who when I paid them back through refi, they were like happy, "Oh, okay. I really needed this money and you gave it to me." It was just like a mind-blowing thing to me because I didn't really think that they really need that money. I mean, some people just invest hundreds of thousands of dollars and we give, you know, a hundred thousand back to them. They are like, "Wow! It's like I needed this money and you gave it to me. I'm so happy." So yeah, it's very fulfilling.

Glenn: Fulfilling, yeah. That's neat. Yeah. 

James: So do you have any secret sauce for your success?

Glenn: Do the right thing, in the right place at the right time, little bit of luck. I do a lot of praying, help from above and just do the right thing. You know, I mean, I've gone through business relationship changes with business partners because we're not always aligned with doing the right thing and I say if you really want to be successful, just always do the right thing and what comes around goes around.

James: Yeah. Yeah. I mean, I think one thing that I want to share with the audience is that I know about you and another buyer which is part of our same masterminds when you had details of that property which had a chiller system when it was down like one or two weeks before closing. And you had a choice whether you want to disclose it to the buyer or not and you made the choice of disclosing it, which is I think it's absolutely, the right thing to do. [47:15unintelligible] 

Glenn: Not only did I disclose it, James, I also bought the buyer a new Chiller. 

James: Absolutely.

Glenn: He was already passed his due diligence, he was closing on it. He couldn't come back and re-trade me, his earnest money was more than a chiller so I could have just said it is what it is. I could have put a bandaid on it. But this is a small world we live in. And I've had business partners that have said, "Well, actually you don't have to tell them that kind of stuff." And inside my heart, I think I do. So I bought the guy a new chiller and he heard about that and he picked up the phone and he called me directly. 

A lot of times the buyers and the sellers don't always talk to each other because they have brokers that represent them and then they have attorneys that work stuff out. But he called me on the phone. He's like, "I just want to say, thank you."

 And I said, "You're welcome."

 And I said, "You know, it's a small world and I know how I would feel if the roles were reversed."

 And I was buying an apartment complex and I got stuck with a pretty big bill and somebody had knowledge of it because that actually happened to me. I bought Oaks Creek up in Dallas, a 280 unit deal and after due diligence and even after you know, we should have caught it but we didn't, there was a couple of buildings that had questionable foundation issues and my Engineers didn't catch me with my contractors.

 Later I found out that the owner knew about it, the seller and I said, "Why didn't you tell me I could have just budgeted for it and fix it? Now, I've got to figure out how to scramble to pay for it because it's not on my rehab budget."

He said, "Gosh, I just didn't feel like it was you know, I didn't want to tell you because I don't want you to re-trade me."

 I'm like, "Yeah, I wouldn't have re-traded you. I just wish you'd have told me because I could have raised a little extra money to fix it." Anyway, just what comes around goes around. Secret Sauce, do the right thing. You also have to analyze your numbers. With 30 years of experience, when I come across deals today, I will jump in and I will verify rents, I'll verify rehab, I'll look at how we're going to finance it and some sponsors like me or you, we don't do this but some people do and they just convince themselves that it's still a good deal even though the numbers don't say so or like, "Oh, my guts telling me that we're gonna make a ton of money."

"Uuuh, I don't know, man. The comps suggest that you're not."

 And like, "Well, the taxes aren't really going to go up that high."

I'm like, "Yeah, it's going to go up pretty [49:54inaudible]  and so the insurance."

 So people convince themselves that you know, not to listen to reality. Well, Secret Sauce, listen to reality, be honest with yourself. Listen, the numbers don't lie. You might lie to yourself but the numbers aren't gonna lie to you if you do your homework. 

James: It's so hard nowadays, I think for newbies, especially, who want to get started. I mean, they've been looking for deals for many, many months, sometimes years and they feel so frustrated because the market is good and everybody's a champion. A bull market, everybody's making money. Like I need to get jumping in to buy something. And even though they find the numbers are not really strong, I mean, you have to make a lot of aggressive assumptions. And then, they just go ahead and do it. It's very hard for them. I can understand that but it is what it is. I mean, real estate is not forgiving in a downturn. 

We have been in an upturn for the past nine years and a lot of mistakes has been [50:52inaudible]

Glenn: Well, here's a little Golden Nugget for our current environment. So interest rates are down. I believe they were kind of reaching the top. Everybody talks about that. Well, one way to mitigate your risk is when you buy a deal in today's market and here's what I'm doing is I actually raise extra money for my investors for a rainy day fund. It's not applied to anything whatsoever. It's just going to sit in the checking account as an emergency.

Well, you know, you kind of have to pay some preferred return sometimes or a return to investors for all that extra money, but I'm doing that in my own personal acquisitions just so that I don't ever have to go back into a cash call to an investor and I know things will come up that I can't foresee and the market is gonna take a couple bumps. Well, I'm preparing for that now so, FYI.

James: Got it. Very good tips over there. What is the advice for newbies who want to be like you?

Glenn: Yeah. Be better than me. I think it's important for people that want to get in the industry to actually latch on and become friends with and partner with somebody that's done it before. It doesn't mean you have to form a company together and you don't have to be long-term, but at least do one deal with somebody who's done it over and over again.

You're going to learn so much just by having a mentor friend on one transaction. And once you've been through a full cycle or something with somebody holding your hand and don't be afraid about giving up some of your money to that person or the profits, you know, you will get much more out of the education and the experience and then you can go do it on your own without those people after you've done it once or twice.  Some people like to just jump in and say I can do this. That's my advice, I would do that.

James: Got it. Got it. This is a very exciting and inspiring advice. Let me go to one last question before I let you go, Glen. Why do you do what you are doing on a daily basis? 

Glenn: Oh, man. It doesn't feel like work James. I kind of work and I look the deals and I just love it. I mean, it doesn't feel like work and I could have been a hospital administrator that feel like work. I didn't want to do that for the rest of my life. For some reason, I'm just attracted to this and I get to pick and choose who I do business with. I get to can pick and choose which brokers I like to do business with. I get to put together a team of people that I like to do business with. Not just people in the office but partners that I do business with; investors, lenders, I get to pick all that and you can do business with whoever you want to do business with and you can be kind of in control of your own destiny and it's fun. That's why I do what I do, James. 

James: Awesome. Awesome.

Glenn:  My question is James, why do you do what you do?  

James: I that a real question?

Glenn: Yeah, It's a real question.

James:  Actually, no one has ever asked me that question when I ask that question but that's a really good question. I do what I do because I'm trying to make a big impact in the world.  So real estate is just a tool for me. I mean, basically, my reason would be how I impact. I mean, I love impacting other people's life. I mean, you say it, you made an impact to those employees lives and we make, as real estate entrepreneurs, we make impacts into many people's lives, into the communities lives, into our employees' lives. We also give a lot of donations out. And how do I impact orphans, kids who are orphans in the third world country and we pay a lot of money for their education and all that. So impacting their lives and it gives you fulfillment. I mean that's why I do what I do. 

Glenn: I love it. I love it. You ask me hard questions. I get asked you one at the very end. You want to make a difference in the world, I think it's awesome. 

James: Yeah, yeah. As I said you can make money and you can forget about how much you made after a few years but impacting people's lives, when you really see that you've touched someone's life in a big way that comes with you until you die so that's important.

Glenn: James, you're a good man. 

James: Thank you.

Glenn: You're putting together some cool deals, you're writing a book and you invite people like me to come on your show and share our story and I just think you're a pretty cool guy, man. Thank you.

James: Thank you. Yeah, why not tell our audience and listeners, how to get hold of you, how to get in touch with you. 

Glenn: Oh, yeah. Yeah. So my phone number...

James: You're really gonna give your phone number?

Glenn: Yeah. 5 1 2 9 3 7 5 9 6 4 and I have an email address [email protected] 

And you can also go to the website, we're there too. 

James: Thank you very much, Glenn, for being on the show and sharing all your awesome tips. We have so much value in terms of property management, in terms of your personal thought process and that's what I want to get out of the podcast because sometimes, as I said, it's not only making money it's also what's behind the person. That's why I do this podcast. 

Glenn: To make a difference in the world. Thanks, James.

James: Exactly. Thank you very much. Talk to you soon. 

Glenn: Ok. 

James: Bye.

James: Hey audience, this is James Kandasamy from Achieve Wealth Podcast. Achieve Wealth Podcast, talks to and interviews, a lot of commercial real estate operators and focusing on a lot of our discussion about value-add real estate investing. Today, I have Neal Bower. Neal Bower is from Grow Capitas Commercial Real Estate Investment Company. He negotiates [00:32unintelligible] and acquires commercial real estate properties across the US. He has almost 400 investors right now. A total portfolio size of 1800 units, in which, like around 1400 is multifamily and another 400 student housing. And I would like to welcome, Neal. Hey, Neal, welcome to the show.
Neal: Thanks for having me on the show. James. Very excited to be here.
James: Good. So, Neil, he has been on a lot of podcasts and you know, a lot of discussion goes around the data collection and experiments that you do in your asset management and in terms of your operation and just finding the right cities, right? [01:14unintelligible] and also operation leasing. So there's a lot of data that's being collected. Right. So we can go to that in a short while. My question to you, Neal, in the first place, why did you start collecting all this data?
Neal: Well, I started collecting the data because I screwed up big time. So I started my real estate career in reverse. I mean, most people will start with a single family rental, right? I was a technologist and I got a chance to actually build campuses from scratch. My boss, you know, helped me. He was the CEO of the company, I was the chief operations officer. This was a technology education company and we were growing so much that we decided we were not going to rent offices from somebody, we would build our own campuses. And so that project of building that campus was insanely complicated because, I mean, I hadn't even built a single-family home. Here I am, building a 27,000 square foot campus that's mixed use. It's got classrooms, administrative areas, and restrooms and I had to learn everything from, you know, egress and fire codes. And you know, doors that lock when there's a fire and you know, ceiling heights, air conditioning, cooling, heating, and 500 other things related to that.
So it was a trial by fire. I learned very quickly and did that in 2006 and so 2003 then again in 2006 and got very confident about real estate. I think in my mind, I got overconfident and so I went and bought 10 single family homes in California, I timed them correctly due to no credit of my own. It was just, you know, 2008, 2009 and got crazy confidence. I thought I knew it all. I mean that the fact was I knew nothing and I didn't understand that. And so I went to Chicago and bought 10 triplexes and I screwed up really big time. I made massive mistakes.
None of those 10 properties really ever made any money and I realized just how little I knew and I start because of that disaster, which basically was a million and a half that got tied up for five years with no returns in the middle of one of the greatest, you know, gain markets of all time, I realized that I needed to learn more. So I started collecting data about why those units never made any money. And what it came down to is that I was spending too much time looking at the rents and looking at the units themselves and not spending enough time looking at the area quality. The quality of the tenant base, the demographics of the area, the income levels, job road levels, the population growth. All of these demographics are mega factors that affect every single thing that we do. And they affect them in a way that's very difficult for us to ascertain.
It's almost like you're being carried along on a boat that's going somewhere at 50 miles an hour, but you cannot see outside the boat, right? That is a situation that is the reality of what is happening. And so I started doing a lot of research and data collection. And the more I collected data, the more I realize how powerful it was if I could go beyond data collection to doing data analysis and applying the analysis from one city to another, applying these analyses from one neighborhood to another, from one state to another. And the more I did it, the better I got at it. And so I decided to do more and more and more of it. And that's how my journey started.
James: Yeah. I think demographic analysis has been missed by a lot of gurus out there who are teaching real estate investing, especially even on the multifamily side, right? People are just looking at numbers right now and I think commercial real estate consists of two things and what is the user and the space, right? So and we are missing out the demographic side of it, which shows that the demand and I think that's what you're talking about in terms of demographic and also what is the submarket demand, right? What is changing over there? How is the crime rate, who is staying there, what is the renter profile, right? What's the percentage of renters versus owners? It's just not many people know how to analyze that and that's a very important factor.
Neal: They don't even look at it. I mean, keep in mind a neighborhood that has 30% homeowners and 70% renters is very different. Both good and bad from one that has 70% homeowners, 30% renters, right? So these things matter so much that if you ignore them, then if you think that you're in control, that is an illusion. That is an absolute illusion because those things are really driving either your profit or your lack thereof. That's really what's driving things, right? And so one example is, I mean, I teach a course, it's called Real Focus. It's about the power of demographics and how to apply them to create profit. And I teach it Live to about 4,000 people a year. And I teach it online, to another 4,000 people so there are about 8,000 people that take that course. And one of the examples that I like to give people is this, one of the most common statements, in fact, it might be the most common statement of all in real estate is that real estate is local, right?
So you hear that all the time, real estate is local. Well, actually real estate is not local. James, real estate is hyper-local. So one of the cities that I use in my examples when I'm doing demographics labs for students is I talk about Columbus, Ohio. Columbus is a good city to invest in, right? So doing really well, population growth, job growth, income growth, all kinds of good things are happening there. So in Columbus, there is a small neighborhood that has an average median household income of $183,000 right? That is not an A that is like an A++. So you couldn't really go much higher than that unless you're in the San Francisco Bay area, you couldn't get much higher than 183,000, no. Well, the point is that 500 yards away from this neighborhood is another neighborhood where the median household income is not 183,000 it's not even 18,000, it's 6,000.
500 yards between the richest neighborhood in Columbus, I think it's the second richest actually, and the poorest neighborhood in Columbus, that's how hyperlocal real estate is. And if you don't understand how much that impacts you, obviously in this $6,000 income area, that's a condemned area, no one there pays any rent. Everyone lives there for free in abandoned buildings to this underneath $83,000 area where there's absolutely no cash flow, right? Because the income levels there are very high, there's really nothing available for sale. Everything's taken, everyone there is rich, you know, single family homes that you know, probably are like 1 million bucks. The differences there are staggering. And that 500 yards shows you how much you're missing if you don't understand how demographics drive everything.
James: So I mean, I definitely agree with you because I've seen deals in the hottest market in the country and people just talk about the city, right? But they don't talk about the submarket itself or the particular location, right? So how would you go about defining the boundaries of where you want to define the demand for a specific deal?
Neal: You know, that's a very interesting question and what you're really talking about is, you know, where does the neighborhood stop? Where does the neighborhood end? So you could say something like half a mile from me is a Whole Foods and next to it is a Starbucks, therefore I'm in the best area. But the reality of the situation is half a mile is also a very long distance. It's a very short distance and it's a very long distance. Remember 183,000 to 6,000, right? That was half a mile. So what really could be the case? Is that right where that Whole Foods is, a hundred yards beyond that, there's a street, maybe it's a railway line, maybe it's a freeway, maybe it's just a regular street and everything beyond that is a different neighborhood, right? Different quality of neighborhood. So you can't really compare this neighborhood to the Whole Foods and Starbucks side.
And maybe, just maybe that neighborhood is only half a mile wide and right where your property is, that street actually is another neighborhood, even lower class. So it's very common for people to say half a mile from me is Whole Foods. But actually, they are not in the Whole Foods neighborhood. They're not even in the neighborhood next to Whole Foods, which is lower grade, they're in a third lower neighborhood themselves, like two grades lower now. And that's what everyone has to figure out if you're looking to do syndications or if you're looking to invest in projects. How do you figure these things out there? There are many ways to figure them out, to figure out where neighborhoods start and where neighborhoods end. I use paid tools, so we'll talk about those and I'll also give you some free tools. Neighborhood Scout is the best neighborhood tool I've seen.
I've seen many of them, but neighborhoodscout.com allows me to do two things. It allows me to basically plug in an address so it could be a 200 unit property, I plug in the address, I basically take, pull out a report and it shows me the neighborhood and it also shows me the micro-neighborhood. Now there's a difference between those two, right? The neighborhood itself is very powerful because it'll tell, you know, income levels, crime levels, you know, degree-granting levels, is it walkable? It'll tell you an insanely large amount of extremely useful and immediately actionable information. But the micro-neighborhood part is even more powerful. So you'll see a map and on the map, you'll see the neighborhood, right? You can clearly see what roads are part of this neighborhood, where does the neighborhood start, where does it end? Does it go all the way to that Starbucks, does it not go all the way?
But then, inside of that map, you'll see a yellow dotted line, which will show you a micro-neighborhood, and the property that you just plugged in, the address is always inside that yellow. And what neighborhood scout is trying to tell you is, okay, the greater neighborhood, maybe it's a mile by a mile, right? That's the typical size for a neighborhood. You know, one mile by one mile is this, and then your property is part of a micro-neighborhood inside of that. And how does it figure that out? What it does is, it looks at your property, let's say it's a single family home and it looks at the home opposite it and says, are these comparable? Okay, yes, they are. Then it goes another block, are these comparable? Yes. Are these comparable? Yes. Are these comparable? No. This is a completely different kind of unit. So it says, okay, those units are really not inside your micro-neighborhood. Something changes there. Something's different. Maybe they're really ghetto or maybe they're really brand new. And so the neighborhood quality changes right at this line.
So that dotted yellow line is very important to me because the moment I see that dotted yellow line, I put it on one of my monitors and on the second monitor, I bring up Google and I go switch into street view and I drive around the edges of that yellow dotted line because I'm driving around the outside edges of the neighborhood that I'm investing in. So that gives me a feeling about that neighborhood. And then I'd drive the insights of the neighborhood, it's a micro-neighborhood, so you can on Google, I can basically drive it in about 15-20 minutes.
It gives me a really good idea of what's going on in that neighborhood. Obviously, boots on the ground are better, I get that. But at this point, I've just received this property and I want to make a decision on whether I even want to, you know, spend any time on the property and this gives me that information. And Neighborhood Scout is very inexpensive. I think you can even get like Neighborhood Scout for 39 bucks a month and you get 10 reports out of that. So essentially for $4, less than a cup of coffee at Starbucks, you're going to learn an astonishing amount about this neighborhood.
James: But I mean, end of the day, we want to get rent comps and so let's say the property they're looking at is within that yellow dotted line but there's not a rent comp and now you have to go out of that yellow dotted line, you would you look at your rent comp, how would you compare the rent comp that point of time? Because it's two different demographics.
Neal: It definitely is, right? So there's an art and a science to the rent comps. Some of your rent comps will be inside the dotted line so there'll be good and some of them will be outside the dotted line. I think it's still useful because it's telling you where's your micro-neighborhood and where's your neighborhood? But normally you'll find that the vast majority of the time, the comps from the broker are not inside the yellow line and they're not inside the neighborhood.
James: They are in one-mile circle radius.
Neal: Exactly. And so people are like, well this is only a mile away; are you kidding me? I mean, in San Jose we have areas where the average home value is $1 million and half a mile away, the average home value is $400,000 right? And those are bad areas like really high crime areas. So everything can change in a mile. And I think what this neighborhood scout does is it allows you to basically firstly figure out if you should even be using that rent comp, right? So it might only be three-quarters of a mile away but Neighborhoods Scout shows you that your neighborhood, your property, the one that you're looking at, is actually just at the end of that neighborhood. So that neighborhood is ending right next to your property and then this is three-quarters of a mile away in a completely different sort of neighborhoods so you shouldn't go in that direction looking at rent comps.
But another rent comp that the broker provides, it may not be in the neighborhood, but it's on the edge of that neighborhood, it's still only three-quarters of a mile away. But that one makes more sense because your neighborhood ends right next to that comp. So that comp from the broker actually makes more sense. I'm not saying that every comp from a broker is fictional, that's not true. A lot of brokers work hard on the comps. All I'm telling you is that out of five comps that a broker will give you, truly two or three are your neighborhood's comps. And this tool will show you which ones to pick. And then there's going to be a couple that are going to be, geographically speaking, still be in that one-mile radius, but they have nothing to do with your neighborhood and that this tool will allow you to basically ignore them.
And then on top of that, obviously there's rent comp tools, there's you know, tools like Rentometer and a number of others. That four a five or 10 you know, dollar report. There's another one, for the moment, you know, also starts with the word rent. There are these tools where you paid $14. I remember paying $14 for this report, rent something and it gives me a report that is specifically about a single family and multifamily rents, right? Nothing to do with anything else, not demographics, simply about rents. And it gives me all kinds of rent criteria, you know, it gives me occupancy levels. Now I'm paying another 14 bucks and I've got rental information for my area, right? It's not giving me comps, it's basically explaining the per square foot rent. It's explaining how many units in my neighborhoods are one bed, two bed, three bed, those sorts of things so that I understand what the unit mix in that area is and if it's a good unit mix. So now I've spent $18 but I've gotten a huge amount of information.
And what I find is people are unwilling to spend these $18 right? And syndicators are unwilling to spend these $18 and here's my message to you, right? As a syndicator, you only make money if your clients make money because they usually have a pref, right? So they're going to make money first and then you have to make money. You realize that on a 300 unit property if it does well, you can make $1 million or even 2 million and if it does really, really poorly, you make $0 million so you're paid less than the janitor that cleans that property. And it might be that the only difference and I know this is best case scenario, but it might be that the only difference between that 2 million bucks and not even making the janitor's salary, it might be those $18.
Because you forgot that part. You look at everything else in the property and you fell in love with it and it had a beautiful pool and it had a beautiful clubhouse and it had a beautiful this and a beautiful that but you forgot to look at the demographics. Because one of the things I can tell you is some of the worst properties have the best looking clubhouses, right? So don't look at a damn clubhouse because they made it that good looking because they want to sell the fricking property to you and get out.
James: Yeah, yeah, yeah. I mean demographic analysis and in some markets like what we're discussing right now, it's very, very micro. And how do you really decide the deal has an upside in terms of rent, that's why we look for in a value-add deal. Unless you're not buying value-add deal, you just want cash flow.
Neal: Well, I think more and more of those deals, I mean more and more of the value adds are becoming cashflow. I mean, let's be honest here, James, nobody that I know of, no syndicator that I know of is able to drive up rents as much today as they were two years ago and certainly not as much as they were four years ago. So I think that true value add is becoming less and less available. Even the deals that are a full value add where we say, okay, we're upgrading 80% of the units, I get that, that technically speaking, if you're upgrading 80% of the units, that's a full value add. But I would challenge whether 80% of those units would receive $150-200 rent bumps. Some will, some won't. I mean the market is changing, the environment is changing. There's only a certain number of people in that neighborhood that can afford to pay that higher rent. And as you rehab more and more and more of the properties in that neighborhood, it becomes more and more and more difficult to achieve those rent bumps. So I think more and more people are doing light value add. At least that's where I'm seeing the industry moving to.
James: Oh No. Even myself, I moved from deep value add two years ago to lighter. I mean, I still do value add, but it's no more the deep value add I used to do and just because I'm doing more agency loan nowadays, no more bridge loans19:47inaudible]
Neal: I think that's really wise because we have to be cognizant of where we are in the cycle. And so I think you're doing the right approach because a lot of these deeper value add projects, there's another name for them and that is they're higher risk.
James: And you also pay a premium for it, right?
Neal: Yeah. Yep. Absolutely.
James: Nowadays, the sellers and brokers, you know, you're basically overbidding the price up and you're basically taking the value away by paying more.
Neal: Unfortunately that's the case. I mean, our company right now has three rules. Number one, everyone is overpaying. Number two, everything we buy, we've overpaid. And number three, if you don't find new ways of adding value to the property after we buy it, we weren't at our performance. These are our three fundamental rules today in everything that we do. And none of these rules existed two years ago.
James: Got it. So coming back to the submarket analysis because I think you have talked about a lot of CT level analysis in lots of other podcasts so I don't want to repeat that again here. Coming to sub-market analysis, so let's say you're trying to prospect a market, right? So let's say I know you like Boise, Idaho, right? That's the top market that is. So let's say now you have Boise, Idaho, how do you go about prospecting within this city, right? How do you look at whether the deal, because the cap rate in the southern part of the city may be different in a certain part of the city, right? So how do you go about prospecting or do you just get the deal and start going?
Neal: The true answer is that you know, several years ago I didn't have the kind of broker and partner operator relationships that I have today. My initial approach was to use a tool like city-data. I use a number of different tools, but neighborhood scout is my favorite, neighborhood level tool, city data, plus local market monitor, plus housing alerts, these three are my favorite city level tools. And then, of course, there's Costar. Costar is not just a demographics tool, obviously. Costar has a huge number of other benefits. The biggest benefit of Costar is supply. It understands incoming supply in the market, which as far as I know, no other demographic tools understand. Simply because Costar has these 50 Prius cars that drive around 50 US Metros on a daily basis trying to figure out all new construction that's going on and totaling it up and trying to figure out if demand is in excess of supply. And in many great neighborhoods, really good neighborhoods, demand is often not in excess of supply.That's because the neighborhood is so great that people are building 3000 units in a two-mile radius of you, which means that everything might be hunky dory now, but two years from now you'll be in trouble. So I don't have a cheap answer to give you when it comes to neighborhoods supply levels, really, Costar is the best option to look at supply and make sure that you don't end up in a market where you'll have 3000 brand new units, you know, delivering and they'll have, you know, two months off as concessions and basically tank your rents for a year. So that's my feedback on supply.
Now away from supply, looking at demographic trends, you can do that analysis on a tool called city-data.com. So when I look at city-data, there's a map on city-data so you plug in the city. So it could be Houston, could be Columbus, could be whatever city you're in; it works better on midsize and large-sized cities. Doesn't work well on like a really teeny tiny city like Saint George. You're not going to get as much value out of that too. So let's say you're in Houston, right? So go look at, you know, scroll down, you'll see this very nice blue colored map of Houston and you notice something very unique. This is something I haven't seen in any free tools. That map of Houston is already broken up into bits. And you'll notice that some of the bits are really tiny, like half a mile by half a mile and some of the bits are big, two miles by two miles, three miles by three miles. And what city data is telling you is that that tiny little bit, everything inside that resembled everything else inside there, but that big one that's next to it, the two mile by two mile, once again, the same principle applied, everything inside of that two mile radius resembled everything else. That's why some of these neighborhoods are tiny, some are mid-size, some are large size.
So what you're really looking at in that map are the neighborhoods in that particular city. Right? And if you click on any one of those little tiles, a box will pop up and that box will give you information specifically about that neighborhood. And there are five metrics in that box that I like to use. Now keep in mind if you pay for neighborhood scout for that particular address, you'll see more information than this, but obviously you're paying for that. If you want something for free here it is. That box, the first thing we want to see in that box is the income level in that micro-neighborhood, remember it might be like 400 yards by 400 yards. You want the income level, the median household income level in that neighborhood, you want it to be above $40,000, 38 is still okay in some of the Midwest states, but what I find is when you're down to 35 it doesn't matter where in the US you are, you're going to have delinquency trouble.
So the median household income of 38,000 is the minimum acceptable level for multifamily projects. Obviously, this number has to be higher if you happen to be in San Francisco, it has to be higher if you're in New York. So I'm going to basically say the rule doesn't, that 38K number is really for markets that cashflow, right? So Texas markets, Florida markets, you know, maybe not Miami, but the rest of the Florida markets, that cashflow, maybe not central Austin. So understand what I mean by cashflowing markets. Here's what you'll see at 38K; when that number, the median household income in that box, when it starts going below 38 K, your delinquency levels start rising. And the true killer of profit is not occupancy. The true killer of profit is churn. And churn is tied to delinquency. Delinquent tenants, some of them do care about their credit, and so they just simply move out. They just leave a key and move out and they basically say, yep, you know, I'm going to skip and let's see if this guy's going to chase me. Because they know 90% of the time, it's not worth your while to chase them and try and get that money. You just move on. You rent out your unit, you move on with your life. And these skips and the delinquency connected with them, the repainting, the time that it takes, the marketing costs, the effort, the people time, kills your profit. And what I found is by the time you dropped from $38,000 in median household income to 30, the property and the project, for the most part, has become viable. I do not know of any syndicators that can make a profit in a neighborhood that is under $30,000.
I've made that mistake myself. I haven't been able to make money. So to me, that first number that is an absolute is, go into a neighborhood that has the income to support what you are trying to do. Keep in mind, you're trying to raise rents, right? So even 38 is kind of borderline, right? I tend to basically use 40,000 as my minimum number. I have properties that are at 42 44 46; if you're in the fifties you're doing really well. If you're in the 60s then your property is getting closer to a 'B' and by the time it hits $70,000, you are in a 'B' area. So a 'C' area, one of the definitions, my favorite definition of 'C' area is 40 to 70,000 income, right? And a 'D' area is $30,000 and below. So 'C' minus is 40 to 30.
And obviously, these are metrics I made up myself. You could successfully come to me and argue, no. In my area a C minus is not 40 to 30, it's 35 to 25 I'll just say, okay, that's fine. These are rules of thumbs that appear to work in the vast majority of the United States that people are investing. It may not work in your area, no argument, but I think that within the bounds of them being rules of thumbs, they do work really well because they allow me to understand the quality of an area.
James: Got it.
Neal: There are states that have lower delinquency. Utah for example, for cultural reasons, you can go a little bit lower than that simply because 10% of their income is going to the church, right? Everybody in Utah, very religious people, they contribute 10% of the church, which means that when they do get in trouble the church helps them out, right? So many times in Utah you can have lower delinquency even in markets that are under 35K. So that's a cultural issue, a cultural benefit that they have, but it doesn't necessarily apply to most parts of the US. So that's the first thing that comes up in that box. Remember, we're in city-data, we're looking at the blue map. We're looking at the tiles and we're clicking on them in a black box comes up. Well, the first thing there was income.
The second thing that comes up on that box is the poverty level, right? It's very much tied back to the income. And poverty level, you want to be below 15% as much as possible. If you can be below 10%, you're going to do really well, but 15% I think is acceptable. And if you don't mind taking more risk, if you're in a noose indicator and you really need to get going, then maybe 20, but I can tell you if that number is 30, you can't make money. It doesn't matter how high the rents are. It doesn't matter how many units have been bumped up by the previous guy and they have $200 in rent bumps and 300 and all that wonderful stuff, it doesn't matter. At 30% poverty levels, you cannot get 12 consecutive months of rent from your tenants.
James: So do recommend, I mean, I know that's the job of the active sponsor when they find deals, right? So even the passive investors should go and look at deals...
Neal: Why not? Everything I told you, if you, you know, take this podcast and it's going to be on James' website, you can go to Florida or whenever the heck you feel like. Right? So it shouldn't take you as a passive investor more than 10 minutes, the rule still applies. And keep in mind that a lot of class 'C's are going to be borderline on this so don't expect that good syndicators are really buying properties at 5% poverty levels. 5% is not a good deal; at 5%, that's a class A area. And your syndicators not going to make you any money, so there's no problem with it being borderline. You just don't want it to be too far from these numbers that I'm giving.
James: Correct. Correct. So let's say you get a deal today on the neighborhood that meets all your criteria, right? Poverty level, household income and all that, so how would you go about underwriting that deal? What's the first thing that you will look at?
Neal: Well, I look at the numbers, the same demographics numbers to determine what my delinquency numbers are going to be. Because I find that I can raise a property's occupancy so there are certain levers that I have that are typical syndicator doesn't have. Syndicators don't have marketing teams, right? Syndicators basically have a property manager. That property manager might be good at marketing or bad at marketing. They're typically bad but they're never excellent, right? So we basically decided early on that that extra value add that we have to add in that no one else is adding in, is marketing. And by marketing, I don't mean investor marketing, I mean tenant marketing.
So for every property that we have, we're actually adding more leads on top of what the property manager is generating. For some properties, it's 30% more than they're generating; in other properties, it's three times more than they're generating. So they're generating a thousand leads a year, we're generating 3000 leads a year and giving those leads to them. So I can basically move occupancy numbers up, you know, and I'm very confident about those. So I go back to delinquency. So I look at the delinquency of that particular area. Obviously, Costar gives you delinquency numbers, so that's very good, useful information to have for that particular neighborhood.
The other thing that I like to do is, and this is not always available, is you can get bank statements from friendly sellers. Not every seller gives it to you, but some do. And one of the nice things about the bank statements is that some property managers, previous property managers have basically put all the money in like in one check. But most of them actually put the money in like every few days. So they collect the checks and then they go to the bank every day or every other day and they put the checks in. So to understand what the quality of the tenant basis and what they're capable of absorbing in terms of rent hikes, simply look at the checks to see how much of the money is coming in in the first five days, how much of it is coming in the next five days, how much of it is coming in the five days after that? Then the five days after that, then the five days after that. They might be saying that my delinquency rate is 2% but what if their delinquency rate was 25% on the 15th of the month?
Well, that area, that kind of area where you still have 25 30% of the rent hasn't come in on the 15th, you have to be careful about not being over bullish on how much you can really raise the rents. There's a limit in that market, right? It may not be $200, it might be $120 that you can raise. And accordingly, you want to also cut down on your rehab budget. Because your rehab budget can be 6,000, it can be 8,000 give me 12,000 but in an area where you know, overall income levels are low, let's say 38,000, and you can see that 20 30% of their tenants don't even pay until the 15th, I'm not sure there's any benefit to doing a $12,000 per unit rehab. I'm not even sure you want to do an $8,000 per unit rehab. I think six or four might be better.
Rehabbing does have benefits. The velocity at which your lease increases tenants, like the newer units, but beyond a certain level, it's not that they don't like the units, of course, they love it, they're just not able to pay for it. And when you don't want to end up in a situation where the tenants, all of your new tenants that have come in, those are the guys that are becoming delinquent because really their capability was to get $850 a month units, but they're all in the thousand dollar upgraded units. And so now, all of your upgraded units are the ones that have very high delinquency so when I'm underwriting, those are the sort of things I'm looking at.
James: Got it. Got it. Yeah, it's very interesting to see delinquency and you say Costar has the delinquency data?
Neal: Costar has neighborhood level delinquency data. Yeah, some market levels. So you can basically go in. That very long report, that's like 86 pages, it has averaged delinquency for a particular market. I'm not sure how they get it. No, I have no idea. But what's nice is they also have expense data, right? So they have expense data. Obviously, you talk to property managers about expense data as well but Costar gives you, you know, kind of the average expense for the submarket, the average payroll for that particular submarket. I find that people trying to beat the average payroll by 20%, it's wishful thinking.
James: Yeah. How do you differentiate delinquency between the property management's skill versus real delinquency for the area? Because it could be just the property managers are not doing a good job, right?
Neal: I think so. So one of the services that we provide on in properties that have higher delinquency, sometimes we have operating partners that don't want to do it but most of the time we do it is we make my staff, our staff, not the property management staff, will make delinquency calls on the sixth or seven. So we don't do it all the time, we don't want to do it. But let's say the property has consistent delinquency problems, consistent; one of the ways to figure out the answer to your question is, is this a tenant problem? Is this a PM problem? Hire somebody, give them a script, have them call every tenant that is not showing as having paid by the sixth of the month, make three phone calls, actually make two phone calls and two text messages on the sixth and the seventh. Repeat the process on the 10th and the 11th. If you do that for three straight months and your delinquency is still high, it's not a property manager problem.
James: Well, you find that out after the fact, after you bought the property. Is there any way to find before you buy?
Neal: Well, other than the demographics information I gave you? No, not really because the truth is that it could still be a tenant-based problem. But it could be that the previous owner was self-managing the property and let a bunch of deadbeats that should not have been in there. That in my mind is a management issue but not a property manager issue and that's also an opportunity. You bought this property because you think rents can be at 1100 with low delinquency. Right now, they're at 900 with high delinquency. Maybe the guy just let in a bunch of deadbeats so you can ask for credit reports of the last 25 people that have been put in, what was the actual credit report? Some owners will give it to you, some won't. If they're not giving it to you, you have to question yourself why that is the case? Was he just basically trying to just fill up the property? And, in that case, it's not such a bad thing. You just have to know that when you go in, you're going to have a lot of evictions to deal with. But in that case, it's not a tenant base problem. It's not a property management problem. It's a previous owner problem and you are going to benefit once you churn through all those bad tenants, you're going to have four years of good tenants in your property so you can still hit your performer. You just need more maintenance budget, you need more operating budget and you need your investors to be a little bit more patients because your first 12 months are going to be very rocky.
James: Yeah, absolutely. I'm sure you've seen a lot of financials when you're underwriting a deal, right? So is there any dirty secrets by sellers that you have found from the financials or when you walk the unit and see, aah, they are tweaking these numbers here to make the property more appealing to the buyer?
Neal: I mean, everybody has their own stories about these financials, right? So the one that I find that is fairly common is that you're going into a property, you want to be able to tell during your due diligence, don't do this during their contract negotiation. But during your due diligence, you basically call them and say, hey, we'd like to talk to a bunch of your tenants. And you randomly, always pick a bunch of tenants to talk with and make sure that there's nothing shady about their rent. So you have a tenant that's at $900 and everybody else is at 800, let's pick that tenant and let's talk with him. Let's make sure that there isn't some side deal where that tenant actually is paying 900 bucks and is being reimbursed $200 in cash.
James: Has that happened?
Neal: that has happened; not in a 250 unit type property, but in a 70/80 unit property. Basically, what had happened was all the new tenants that had started in the last four months, were all receiving cash back, right? I think there were 12 tenants and between them, $2,400 a month of artificial rents were created, which is $2,400 a month is $30,000 a year, $30,000 a year at six cap is basically $480,000. So that $480,000 for the seller was created by him negotiating direct deals with those 10 people and giving them $200 kickbacks. So his cost was 2,400 a month for three months and his profit was 500.
James: Wow. I never heard that. That's really sneaky.
Neal: Very sneaky. But you think about how much of an incentive that guy has to do it, right? Technically it's not illegal, by the way.
James: It's not illegal?
Neal: It's not illegal. He has to disclose it to you that there's a side arrangement, but you can't actually send somebody to jail for this. I mean, you can't sue them and win, in my opinion.
James: You can't say it's a fraud?
Neal: I think you can. I think that that's going to be fought over in court. In my mind, it's something that you should basically, in due diligence, if you look at higher numbers, make sure you talk with those tenants. It doesn't take that much time; during due diligence, you're at the property for multiple days. Right? Why not have conversations with four or five people and make sure everything's above board. Say, hey, we were looking to buy this property and just checking your rental contract and it shows $900 a month, is that correct? And if there's anything shady, that guy is not going to fall on his sword for the previous seller.
James: Yeah. I mean, I've done all the due diligence for my properties. I never talked to the tenants. Do they allow to talk to the tenants when you are doing?
Neal: Usually they do. I mean, obviously, they won't allow you to talk to a hundred tenants, but if you randomly pick three or four, they do. It's just not something that people ask for commonly, but there's no reason for them to have an objection. So that's one that I've seen commonly.
The other one that I've seen commonly is that everything that you're looking at is actually coming out of the property management software, not from the bank statements. So you look at the property management software and it says $111,000 in monthly rents. But when you look in the bank, it's just 88. So what they're doing is basically they're not allocating for bad debt properly. And they're saying, oh, I'm sorry, this the way that our property management, Blah Blah Blah Blah Blah software works. What they're trying to basically say is, Oh, I'm sorry you caught us, but we're going to try and explain it away as some idiosyncrasy of the way our property management software works. But you know, yeah, we didn't actually make 111 that month, we only made 88,000. So I think reconciling bank statements to what the property management software says, is very useful.
They may not be trying to screw you over or anything so the difference may not be 88 to 111; it might be 88 to 91 but it still shows delinquency in that property.
James: So have you had any of these cases and you backed out of the contract?
Neal: Yeah, I have.
James: Okay. It's also tricky nowadays, in the hot market nowadays because people are paying day 1, hot money.
Neal: It's very difficult. That's what scares me a lot. I mean, you pay hard money and then you find something where they've tricked you. The only way to get that money back is to sue them.
James: Correct. Because people are paying like in a hot market...
Neal: Even $200,000. I mean, it's ridiculous. I mean, that tells me that something is wrong. In my mind, there is no conceivable reason why anyone should pay $200,000 hard on day one. This is all frenzy that has been created by brokers and it's a sign of an unbalanced market. There is no reason why that should ever happen.
James: Yeah. Yeah. I mean they do have something called early access agreement where you can go and see the rent roll and all that, but you can do a thorough due diligence. Some sellers allow it, but nowadays, even that nowadays they don't allow.
Neal: Well, in my mind, James, I mean, if that is their intent, why don't they just say, okay, well we'll go hard on day five. When people want you to go hard on day one, there's no way to tell if they are doing it because they are unethical or simply because they weren't, you know, somebody who has enough skin in the game and enough confidence in his ability to close. The majority of the time, the reason is perfectly legitimate that they want you to close and so they want you to go hard on day one but I don't think that that's the reason 100% of the time or anywhere close to 100% of the time.
James: Awesome. Yeah. It's a bit scary when you do day one hot money. So coming back to value-add, I presume all the deals that you're doing is value-add deals, is that right? Not a deep value-add or not completely.
Neal: I have some deep value-adds but a lot of them are, you know, standard $6,500 type value-adds.
James: So what is the most valuable value-adds that you see?
Neal: Oh, it's easy. The single most valuable value-add are USB ports. One in the kitchen and one in the bedroom. So of all value adds, nothing comes close to that.
James: Really, especially just because everybody needs a USB.
Neal: Because everybody that comes in comments on it, right? So everybody that comes in comments on it and this is one of those universal things where men and women comment on it equally. And the better value add is, you know, these days, the wall plates, right? You get the wall plates with a two USB ports, correct? So if you wanted to really wow people, the new USB Dash C standard, pay $4 extra for one that has two standard USB ports, but the one in the middle is that new USB Dash C. So I think those are incredible, incredible value adds; they give you a hundred X return.
James: Awesome. Awesome answer. That's absolutely helpful. So now let's go to a bit more personal side of questions, right? So why do you do what you do?
Neal: The truth is I fell into it, right? So this hasn't been a conscious thing. I did technology. I started doing real estate because I was paying 50% in tax. So basically tax avoidance was the primary reason why I fell into real estate. But I think the bigger thing was that on the technology side, when I had W2 income, you know, many years I made more money than I made in real estate but I always felt nervous. It's like when you have $150,000 salary, you're always nervous about your position. Like, I always have to perform, I can never have a bad year, right? Because they might start thinking, well, we could hire two guys for 175 k each and get rid of this guy, Neil. So there was always that nervousness about not being in control of my destiny. And I don't feel that now. It doesn't matter if I have a bad year and I only make a hundred grand, but I still have control of my destiny and always make it up next year. So to me, I think it was less about ownership and more of our control over my destiny.
James: Okay. But you will keep on buying deals? I mean, is that what your plan is? I mean, where do you want to stop? So what drives you to bite the next deal
Neal: In my mind, what drives me is that I still feel like I'm creating value in each additional project. I'm finding some way to make those projects work. I'm contributing and I'm making investors happy and also, you know, increasing my own net worth. Will I keep doing it? No. I think that truth be told, I mean, I admire people like JC Castille who just love it so much. He says, Neil, I'm going to be doing this for 30 years. And I said, if I know one thing for sure, I mean you're very sure about what you just said JC, I met him recently. I know for sure I won't be doing this in 30 years and I know for sure I may not even be doing it in 10 years. I mean, to me, I think that life is an evolution and I don't mind telling my investors, look, I'm going to do this for five to 10 years and then I'd like to do something else because my career is very diverse.
I've done solar education. I've done basically businesses around nursing. I've done high technology; like three different kinds of high technology, staffing, consulting, education services. I've even been a primary investor in a gas station. I'm an entrepreneur and what that means is at some point, I want to create the systems and processes so other people who are smarter than me can continue running the business forward.
And so my most coveted title is not founder and it's not CEO, it is chairman. And so the longterm goal is that at some point, I want to switch to doing that. But I would not hesitate to shut down the business if I didn't feel I was adding value. This business only survives when it adds value if it doesn't add value, making it or forcing it to survive makes it a parasite.
James: So when you say add value means, add value to your personal life?
Neal: Add value to my investors. So by default, I don't say add value to my personal life because if I add value to my investors, the adding value to my personal is automatic. It happens by default, right? So to me, the only kind of add value that we should be looking at is adding value to our investors. And if it doesn't add value, we'll do something else. It doesn't mean I'll go out of real estate. You know, one of the things is I'm a very unusual syndicator in that half of my projects are new construction. And the project that I'm coming out with this week is called The Grid. It's a $30 million student housing project, new construction. And so why? Because as the market shifts and Class C properties become so expensive that everyone's buying six cap on actual or five and a half cap on actual, then in the back of my mind, I'm going, well, you know, I can make a brand new class A for seven cap. I know it's risky during construction, but let's say I get through the construction phase, isn't it less risky? Because at this point, you know, maybe it's not seven cap, maybe six and a half cap, but don't I have a six and a half cap, Class A building? What's the worst that could happen? Do we have a recession after dropped rents? So what? It's still a seven cap building and it's a brand new. That part of it is not going to change if I can't raise my rents. So I look at that and I go, you know, there's this whole business of buying Class C's at five and a half cap is scaring me.
James: Yeah. I was talking to a broker the other day. He was trying to get me to buy a 1960s product at six cap. He says Austin is good now. Then I say what about the B class 1980s? Oh, it's like five and a half cap rate here. I'd rather buy the five and a half cap than buy the six cap; doesn't make sense, right?
Neal: I agree with you. And honestly, you should not be, you know, between a B and a C, if there's a half gap difference always, by the B.
James: Yeah. Yeah, exactly. So is there anything that you do in your daily life that you think has contributed to your effectiveness in becoming very successful?
Neal: I think structure. I'm a robot that has some human, characteristics and I like being a robot. I am extremely structured, absolutely structured, all the time and I feel that it's difficult for people to tie themselves to structure. That's a very hard thing to do because we feel like we are losing something about ourselves. We feel like we're losing a part of our humanity. What I have found is that it's actually the reverse. I'm very structured. I start my work, I work with an extremely high intensity and then I stop and when I stop, I completely stop. I have nothing to do with work because I make sure that every second of those 11 hours or 10 hours that I work really count. And to me, I think that that makes me have a significantly greater output than some other folks.
James: Got It. Got It. Any advice for newbies who wants to start at multifamily?
Neal: Yes. Right now be careful. Please understand that while there is no crash on the cards, I don't believe in all this nonsense about, you know, prices going down 20%. People say that they clearly don't understand macroeconomics, but you are buying at the peak. This may be a peak that is sustained for a significant amount of time, due to the fact that basically, it's very difficult for prices to come down because of macro reasons, but you certainly not going to see the kind of all ships rising effect that we have seen in the last five years. You're starting now, please do not apply the past to your present. This is a tough time. It's going to be very hard. If I was starting today in 2019, the 2013 version of me would advise the 2019 version, not to start. That's how frank I have to be. If you're starting that's fine, but I think you should be cautious and be aware of what kind of environment you're in.
James: Got it. Got it. Well, Neil, thanks for coming to the show. Can you let the audience and listeners know how do get hold of you and how to find you?
Neal: Sure. I think the best way is through education. I'm an educator, I connect with people through education. I have a portal called multifamilyyou.com. We have about 50 webinars that we do every year on multifamilyyou.com. We archive all of them. They're deep dive webinars. They're very different from podcasts because there's a lot of displayed content and tens of thousands of people attend those webinars each year. So that's probably the best way to connect with me. I don't mind people having my direct email address. My email is Neal, that's the Irish spelling, n e a l [email protected]. So you connect with me.
I also connect with people on Facebook. I think about 10,000 people connected with me on Facebook. And then multifamilyyou.com. If you want to learn more about demographics, I have a free course. It's at udemy.com/RealFocus. That course, I think right now has about a thousand people enrolled. So it usually has 1,000-1200 people enrolled at any given point in time. So that's also a completely free course. We don't believe in pitchers, if you're a presenter and would like to present our platform, approach us, but it has to be pitched free.
James: Awesome, Neal. Thanks for coming and adding huge value to our audience and listeners, I'm sure everybody would have learned a ton of things today. Thank you.
Neal: Thanks so much. Thanks for having me on the show. Bye, James.

James:
Yeah listeners, this is James Kandasamy from Achiever Wealth Podcast.  Achieve Wealth podcast focuses on commercial real estate investing; across all asset classes. Today I have Kathy Fettke from real wealth network. Hey Kathy, you want to introduce yourself? 

Kathy:
Hi there, sure. I'm the founder and CEO of Real Wealth Network. We've been around since 2003 actually. And we've been helping people, mainly in high priced markets, find cash flow properties nationwide. And then over the past 10 years or so, we've helped people get into syndication; a lot of our members just wanted totally passive. So we partnered with developers and we build single family homes, one to four units, and then also some apartments and now the opportunity zones, so we're excited about that. 

James:
Oh, cool. Yeah, Kathy runs one of the top podcasts in the nation and what's the podcast name, Kathy? 

Kathy:
Real Wealth Show and then I have a news show that's just seven minutes for busy people, but loaded with information; The Real Estate News podcasts. 

James:
Yeah, I've listened to both real estate news, which I like, because it's pretty short and it just give me the high level things; sometimes we're really just so busy. And I've listened to [01:25 inaudible] So let's go a bit more details into, how do your company or your group helps the investors? Let's start with investors, so are lot of them passive investors or do they still manage the property at all in single family? 

Kathy:
Well, you know, most of our members are busy Silicon Valley workers or their Hollywood people in the industry, that is pretty unforgiving. Both industries, Hollywood and Silicon Valley, you're working a lot; sometimes people are working 70, 80 hour weeks. Even if you're making a lot of money, what you don't have is a lot of time. So they can't be, managing their own properties or flipping; people who try to flip when they're that busy, it’s just tough to do a good job at it when you've got all these other things. And then to add a family or just trying to be healthy and exercise; there’s only so much you can do. So, we really decided about 15 years ago, both my husband and I decided we wanted to invest where there was cash flow and we couldn't find it in California. 

So I had the Real Wealth Show then and Robert Kiyosaki was on it back then and he said, I'll tell you what, I am selling everything I own in California because it's a bubble. This was in 2006 when nobody else could see that; everybody thought it was just going to be this incredible boom forever. And he said, no, no, these loans are going to melt down and he was selling everything and exchanging it for a high cash flow, low cost properties in Texas because that's where the jobs in the population and we're going; so we did that

I talked about it on my show, on the Real Wealth Show, and our listeners wanted to do it; so we said, well, you can use all the team that we set up. You can use the property manager, they're great, and you can use the agent that we use, the contractors; and then we realized, this is really a need; we can make this a business. And that's really what real wealth network became; it's just finding these different resources nationwide to help people find deals that you just couldn't find on your own; and have them managed for you. 

James:

So is it a fund, or is it like a property, buy property or how does it work?

Kathy:

We have both. I mean, for the first five to seven years it was basically brokering. We have a real estate brokerage, helping people sell their California properties and exchange them for really high cash flow.  I had a woman come to me back in 2007, somewhere around then, and she was desperate to retire; she had bought these three properties in Stockton thinking that would be her ticket and they were just a pain; always needing repairs. They were old properties and not very good parts of Stockton. And all the cash flow was just going to repairs, so she wasn't able to retire; her dream of real estate was turning into a nightmare.

And she listened to my show and I said, well look, let's sell these; they were $420,000 each. They rented each for $1,200, not a good deal. So we helped her sell those three properties at the peak and then buy in Texas at basically the beginning of their boom; we got her nine brand new homes in Rockwall, Texas. It was an hour outside of Dallas but we knew a new freeway was coming that would make it just a 20 minute, 30 minute drive to downtown. And she ended up quintupling her cash flow. 

She was able to walk in and hand that resignation letter to her boss; she was able to retire. And about 18 months later, the market crashed; the home she sold for $420,000 each, these little dumpy homes, they were worth about $75,000 after. So she saved herself from complete disaster and in fact, her properties in Texas have tripled in value since she bought them. So ever since then, that's really what we do. We help people see; look, you need an asset that's performing, whether there's going to be a market collapse or not; a $420,000 piece of junk in Stockton that rents for $1,200 a month, is not a deal. We've been helping people understand the fundamentals of investing.

James:
It's so crazy because I think a lot of people thinks that, oh the house price is going up and they're getting richer. Actually, you're not getting richer? It's a dead equity; your equity is trapped in your house.  And I see a lot of people with a lot of money, who buys properties in high class neighborhood where they want to live. Which is completely opposite from how the whole cash flow should be; because the rent doesn't really jump up by that much, compared to your price on the house.  And it's just so crazy, they don't realize it and they keep on buying two or three houses in their neighborhood and they say; I have all these houses. Some people have gotten used to that appreciation play rather than a cash flow play. 

Question for you is, I know every market has cycles. So I know from California to Texas in 2008 was an awesome, brilliant move. So what about today? Where would you invest? And where do you think both California and Texas market is? 

Kathy:
Excuse me.  I didn't mean to cough at the question but it's a big question... So it would appear that today is very similar to 2006; prices have gone up dramatically, in some cases they've doubled in value, tripled in value since rate recession. So people have made a lot of money and they've heard other people have made a lot of money by buying a property and doing nothing with it. So, it's tempting to think that that will continue, that is just not possible. You have to understand the metrics and people can only afford a property that's about three times their income. So if your monthly income is $5,000; you can only afford a property around $1,300 a month with the mortgage and the taxes and insurance. 

So, there's only so high prices can go. Prices were very depressed for the past 10 years, they’re not anymore, they're way past their last peak; salaries are not going up as quickly. So to buy a property thinking that you're just going to get a bunch of equity gain,  I think you missed that. However, will there be another housing crash? That's what people want to know, right? My answer is, I don't think so, because in the last 10 years you have had people have to really qualify for a loan. They also got very low interest rates, some as low as 2% over the last 10 years; and values have gone up.  So they're locked into low interest rates, they have equity, salaries are going up. Even if we had a recession and jobs were lost, I don't think people are going to rush to dump their properties, when they're locked into low payments, just so they can pay more in rent; I don't see it happening.

Plus 10 years ago there was no Airbnb, you didn't know that you could just rent out half your house, I did. Rich and I actually did that when we were having a tough time back in 2003. We rented out a bunch of rooms in our house to get by; we had to use Craig's list and that was crazy, you never know who you're getting, very different today. And, add to it that households are forming, yet we're not building enough supply. Where anything that we're building, that builders and developers are building, is higher end because permit fees have gone up, labor costs have gone up. You cannot build the same house today for the same price, certainly not for the price that most people own their property; they couldn't rebuild it. I live in Malibu where there are a bunch of fires and people are not able to rebuild their houses for what they had an insurance; so make sure you have really good insurance.


So no, I don't think there's going to be a housing crash. There's just not enough supply, there's so much demand. We've had 10 million more renters in the last decade than we have before; we have probably another 10 million over the next decade. There's again, not enough supply in the affordable rang, so even though you're probably not going to see a lot of appreciation over the next 10 years, you're going to see a lot of cash flow. 

James:
Okay. Just because of the demographic shift, I guess, that you’re seeing in terms of the renters and all of that? Do you think it will continue in Texas? Because you’re looking at it from California; at that time when you bought in Texas, Texas was early part of the whole cycle. I came during the downturn and I didn't really feel there was an economic downturn here.  But now it has gone up so much, do you think that taxes will continue to grow?  

Kathy:

Well, it is very scary when you look at a chart and you look at the home prices in Dallas, it just goes, whew, and that is scary. But you have to understand that when we were buying in Texas, it was 26% undervalued, so that the houses were so cheap compared to income. So just to bounce back, the most important metric to look at is affordability and what we know is that there's just a massive amount of jobs in the Dallas, Fort Worth region. I don't think prices are ever going to go back to where they were, it’s the new reality there. Will they go up much more? It just depends on salaries and jobs. I certainly don't see any kind of crash or decline there. But we were never buying in Texas for appreciation, we got it and that was wonderful; but that's not why we were buying. 

It all comes down to cash flow and there are parts of Dallas where we still think there's opportunity for cash flow and appreciation. But it's getting harder and harder to find, like it's harder and harder to find anywhere. There are still deals, especially in the opportunities zones. These are areas that are going to be gentrified, there may be higher crime, not as good as schools, but a lot of that is going to be changing; there's going to be more jobs coming in because of all the tax incentives. So, whether or not you’re getting those tax incentives, if you invest in those opportunities zone areas, you could see some appreciation along with cash flow. 

James:
Yeah, opportunities and some new incentive, compared to the 1031 and some other gentrification that's happening. So, you talk about Dallas, what about other markets in Texas, what are the other markets that you're excited? 

Kathy:
Well, one of the people I follow for my economic advice is John Burns. He does consulting for builders and we have developments all across the country and he's advised us on quite a few of them. He does an economic analysis annually, probably quarterly, he's constantly consulting. And one of the slides he showed recently was where the jobs are going. A lot of my California members of real wealth network say, what about Portland? What about Seattle? And based on the graphs that John Burns shows, that is the area that is having the least job growth in the country. So that should give you the answer you need. In addition to that, you've got all this rent control stuff happening in Portland and Seattle; it's like, no. If you're going to own a rental property, you don't want to be in a place where people hate landlords.

So I would skip the northwest, I'd skipped the west coast entirely, in my opinion, for that reason. Because whenever housing gets expensive, it's on the west coast where they decide it's our fault, when it's not; it's the fault of politicians who don't allow you to build anything, so it's frustrating. But where we're seeing the growth go 100% is the southeast. That's in Florida, Georgia, Texas certainly; these are no income tax or low income tax states. When you've got 10,000 people turning 65 every day, trying to figure out how they're going to retire, they're going to go to areas where they don't have to pay a lot of state tax. So that's one reason, plus the jobs are going, I believe the Orlando area, central Florida area is the fastest growing area in the country at this time. So yeah, we’re all over it, we’re building houses there and we're renovating houses and we're providing lots of done-for-you ,rental properties to our members. 

James:
So what about Phoenix and Las Vegas? I know that seems to be the last leg of boom, I guess. Because they are the ones who's recovering the last, but it seems to be a lot of people trying to look at that market as well. 

Kathy:
You know, I always get a little sick to my stomach when I think about Phoenix and Las Vegas because....

James:

Positive experience, right?

Kathy:

I had the opportunity, we were in contract on two properties before the collapse and we got out of them in time and got our money back. But oh boy, we would have been pretty upset. But no, I'm more upset that I didn't take action after the crash in Phoenix, there were so many foreclosures that just freaked me out, but obviously it would've been good to buy.  So it's hard to buy today when prices have doubled, if not tripled, from when we were able to buy; but at the same time, Las Vegas and Phoenix continue to grow, they will probably continue to grow for a long time. The problem is the cash flow is not quite as good as in some of the other areas in the south east, so I haven't been active in those markets. But if we had a really good team there and they were able to find us good deals and renovate them, and get them rented, and good property management; we'd probably still go in. 

The problem with the Las Vegas is you have very low paying jobs, so the rents kind of cap there. But that could change if different kinds of jobs come in, but you've got a lot of people in the hospitality industry, who don't make a lot of money. 

James:
And also I would say a luxury, it's basically depends on luxury, right? If the economy tanked, nobody is going to go to Las Vegas to spend all their money and that's where the swing will come, I guess. 

Kathy:
Lots of people are moving there for affordability. My sister just bought her first house; she's 57 and bought her first house. But it’s in the Phoenix area because she could afford it.  They bought it, they rent it out and they hope to retire in it in 10 years. So you're seeing a lot of that type of thing. 

James:
Okay. Got it, so when you say cash flow, you're talking about single family turnkey cash flow, am I right? 

Kathy:
For a lot of our members, they want to max out that 10 conventional loans that you can get through Fannie and Freddie.  So even though they might invest in multifamily and other people's deals and syndication, they definitely invest in our syndication. Nothing really compares, in my opinion, to maxing out those Fannie and Freddie loans that you can get at 5%, five and a half percent. Are you kidding? Fixed for 30 years and you could get one to four units. We have a lot of our clients buying four-plexes in Florida and so you can get 40 units with those 10 year loans; and you're locked in at that rate for 30 years. You know rents are going up, I know a lot of people aren't fans of single family, but to me it just makes so much sense. 

You can take all that cash flow and pay off the first loan, the second loan, the third loan; You could have all 10 loans paid off from the cash flow in 12 years, so many of our members do that. Then they have 10 properties free and clear, cash flowing. Again, multifamily is great; it's just a different animal. I think having a good mix of both because it's so easy to get in and out; a single family, it can be challenging, I've had massive challenges. We had a 92 unit building in Indiana that had a gas leak, in the middle of the night and the city required everybody to move out. We had to pay, we had an empty building, and we went from fully occupied to empty overnight literally, because of a gas leak.  And then we had to pay these people off to go find a new place, we had to fix; multifamily can have the same problems that a single family can have, only times a hundred.

Don't think that there are no problems, but it's a different animal; there’s different upside, there's different downsides. But, for people starting out,  just getting into some single family rental homes; just single, one to four unit, it's a great way to start to really wrap your hands around it and understand it and lock in those low 30 year fixed rate loans. 

James:
Yeah, you make a good point.  I'm a multifamily guy but I started in single family. So the cash flow in single families is unbeatable. I usually buy really good deals, so I usually make 30, 40% cash on cash, on single family. I buy by direct marketing and we rent it out. And we have that equity and you have that Fannie Mae loan, you just can't beat it. The biggest problem that we have in our single families is the 10 loan limit. That’s the limit, after that where do I go? 

Kathy:
That's as far as you can go, unless you both, you and your spouse can qualify; you can each get 10 but yeah, then you're stuck. Then you got to get to commercial, [20:19 inaudible] or something, you’re going to run out of money. But, for people just starting out or if you've got one property in the Silicon Valley that you bought for $400,000 and now it's worth 2 million; you might want to take that and do something else with it. 

James:
Yeah, correct.  I think the biggest challenge in single families is managing the property. So we were managing it, it takes up a lot of time, especially in the first few years because things are being stabilized. So once you get a renter, which doesn't leave, then everything is cash flow. So, does your company provide turnkey property management for single family? 

Kathy:
Yes. So what we've done is basically what we did in Texas. We'll go to an area where we think there's a lot of growth, a lot of job growth, a lot of population growth and it's landlord friendly and low taxes; Texas isn't low taxes, but we still have. And there we'll find people, like you said, people who know how to wholesale, they know how to get these deals. They do direct marketing and then they'll maybe look at a hundred deals to find one; but then they'll find that one deal that has a lot of potential. They'll fix it and get a tenant in place, have property management in place and sell it ready-to-go rental, to somebody who's busy and doesn't have the time to do all of that. 

But we ask that there's still be some equity in there, it's getting harder and harder to do because prices have gone up and there's so much competition. There are E-buyers everywhere [21:58 inaudible] an E-buyer now; E-buyer meaning that they've raised billions of dollars to buy a house, sight unseen; instantly, instant offer. So, that's making it a little tougher on wholesalers but with that said, we still have boots on the street in 15 different markets that have either really high cash flow and prices are still undervalued; like Detroit and Cleveland, or in areas where there's just massive growth and people want to get in the path of progress and watch the sun rise. 

James:
Got it. I want to go back to the 92 units multifamily, because I think it's a very interesting story. Everybody tells all the good stuff about multifamily, how much they make? And there are a lot of people who doesn't tell all the bad stuff or deals that are losing money or what deals are under water.

Kathy:
Nobody wants to talk about it, I'll talk about it. 

James:
Yeah, I want to talk about that because I think it's a very good learning. So, you talked about 92 units where there was a gas leak, the city said you have to leave and you went from a 100% to 0%.  So what was the key learning from that experience? 

Kathy:

The key learning would be to make sure you've got the right insurance in place. A lot of people get their insurance policy but maybe don't really understand it; so, get an attorney to read it through and make sure you’ve got everything you need for that kind of situation. If you have the right insurance, then you can get through a situation like that. Unfortunately, in our case, the city made us do all kinds of things that were not necessary, before we could get a certificate of occupancy and  bring people back in; so, it took years to be able to occupy it again. And on top of that, when you have a vacant building and you got vandalism, so we'd have vandalism. And again, insurance can cover that, but it was hard, it was really hard.

So have plenty of reserves, really good insurance. Make sure that somebody, a professional, has looked at that insurance, to make sure that it will cover everything. And then you can get through those hard times. And if you're syndicating, if you brought in other investors into your deal, make sure that you have key man insurance or D and O insurance; because you’re responsible for your investors' dollars. I was able to go to the lender because we were sitting there vacant, no income and still having to pay that mortgage. And it was just cleaning me out, it was so difficult. It was so difficult; so we just stopped making the loan payments and I didn't know what to do. I had a million and a half of investor funds in there. So I just went to the bank, I flew out to Indiana, I met with the president of the bank and just said, here's the keys;  it's empty, it's vandalized, the city won't let us do anything with it, you can have it. And we were probably $1 million in arrears. And they say, I kind of knew they were going to do this, but I didn't know for sure, and it was a really scary moment; but they are like, you can have it. They cut the loan by over a million and it was still very difficult.

 And so I think it's important that people understand the risk because there are so many young investors syndicating deals. They don't have the experience, they're taking other people's money and I literally talk to these young people and they are like, what's the big deal? It's easy, it's easy.  But their Performas are  only accounting for rents going up,  what if they don't, you know? 

James:
Correct. 

Kathy:

You just don't know. So you've got to have run that stress test on your Performa, understand that rear-ends can stabilize. That if there's a recession, a class property is the hardest to fill because people have lost their jobs; so they start discounting and then now someone's got the choice to live in a or a B class property for the same price, they're going to go with the A. So then to get tenants, you've got to lower your prices on the B property and that trickles down to the C. Whereas nobody's really accounting for that and I don't want to say nobody, a lot of new investors aren't accounting for the possibility of that scenario.  

James:

Yeah. And I can bet you that none of the gurus out there teaching about key man insurance and D and D, and E and O insurance, which you just mentioned this now. Because I know a lot of gurus and even they do not know because they just do teaching, a lot of them.

Kathy:

There's a lot that going on and it's kind of terrifying. On the one hand, I feel like wow, there could be a whole lot of really good deals in about five years, but I don't want to think that way.  I wish everyone success, if you're really young and you're following a guru, so to speak, who's telling you how easy it is, just make sure you have someone on your team who's a little seasoned, who's got a little gray hair; you don't want to jump into an airplane with two young guys. If you're going to jump into an airplane and you know that it's blue skies, okay, fine. A couple of inexperienced pilots might be okay, but if you know you're flying into a storm, don't you want that old guy? 

Just know that we are in turbulent territory right now, this is not the beginning of an expansion, and this is the middle or the end. So it's, it's, it's different. It's not as easy. So it's, different, it's not as easy; there's clouds, there's potentially a storm coming. Get that person with experience, who knows how to ride through storms, to be a part of your team, whether they're on it in an advisory position or you give them a little bit of shares so that they're invested in it. But just get that wise person with experience to help guide you. 

James:
Yeah. It's, interesting on how much deal is being done at this peak market cycle. Actually, if you look at the latest data by Dr. Glenn Mueller, we are in hyper supply state nationwide for apartments, we already passed the expansion cycle.  

Kathy:
Really? Oh, I haven't heard that. You know, I hear so many different things, I've heard that we're over supplied in Seattle and maybe Dallas and New York.

James:

Yeah, I mean that is national data, national data and then there's another data which shows each cities and where they are. And if you look at a lot of cities, a lot of cities are in hyper supply stage And the last batch of cities, which is at the last part of expansion, there's like 10 different cities, which is the last part of expansion; so even that cities is going to go into hyper supply. So, that's the data that is being published, I think we are [29:03 inaudible] if I remember correctly, Dr. Glenn Mueller is like 50 or 30 years, who has been doing analyses, research, on all commercial real estate asset classes. I follow him closely and since last June, we already in hyper supply, nationally. 

Kathy:

That's terrifying but I guess there could be deals for you and me in about 2 or 3 years

James:
Well, I still have my properties, but I usually buy value, that way we can try to push income. So if you're buying at  low prices, we are pushing income so that we have buffers, so in case it turns down, hopefully, that buffer is not eaten up.  But there are a lot of people who are buying deals which doesn't have any buffer, there's no real value added component to it. They just buy because they're getting a good loan, cash flowing, there are a lot of investors who want to invest; and there are a lot of gurus out there also telling that there're still deals out there and people are just jumping, it's fear of missing out.  Is it a similar sentiment that you see in 2006, 2007? 

Kathy:
The thing that feels similar, is a whole bunch of people giving other people advice,  who don't have any experience and people with no money and no experience, doing deals; that's what scary. And lenders coming in and so much money, they'll just lend on just about anything, so that feels familiar. What's different is that there are fewer people who can afford a property; you really have to qualify, to live in a home. I don't see a single family housing collapse. In multifamily, there's just going to be rental demand for years to come. So it's really only the people who make bad decisions, who buy the wrong property, who don't calculate the repairs adequately or overestimate rent increases; those are the people who get hurt. They over leverage, anyone who over leverages that's concerning. or in ballooning short... 

James::
Short term loans, Like bridge loans and all that, got it; so coming back to that insurance issue on the 92 units. So I'm trying to understand the root cause; I know we didn't get the right insurance, there's something were not covered. What was your insurance selection process in the beginning? Did someone recommend you to this insurance? 

Kathy:
I trusted my partner. I didn't have enough experience; everything I'm teaching is really from my own experience. I certainly didn't know how to look at a multifamily insurance policy and know that it was enough; I should have run it by an expert and I do that now on everything, we have experienced experts that look at it. But at the time I didn't know and  insurance companies are always going to take advantage when they can, so it's difficult to know what to look for; especially when you'd never in a million years expect something like that. If you're buying an older building, which many people are because they're doing the value adds, these are things that can happen. You have old pipes, the city ended up making us replace all the water lines, all the gas; it was, like having to build a whole new building. It was just a nightmare. 

James:

Yeah, and what kind of loan did you take? Was it an agency loan or was it a small bank loan kind of thing? 

Kathy:

Small bank, yeah… 

James:

I recently had one of my buildings under fire. So, I did look at insurance in the beginning when we bought it, but there are so many details behind that policy coverage. 

Kathy:

Yeah, how could you know? No you can't

James:

I didn't know, until the fire happened when I was talking to the adjuster, he said, oh the good thing is I have really good solid insurance.  But the amount of details in terms of coverage, it's just shocks me, that so many things that cannot be covered if we don't get it.

And in multifamily, just for the listeners education, the insurance is one thing that people can play around with, you can't play around with taxes because taxes by  the county and all the expenses is pretty small. Payroll is something it's a bit hard for you to control; you need good staff to run the property. So you have to budget it properly, taxes, you have to budget properly. But the insurance is, yeah you can pick around here and there; get slightly lower premium and that contributes to your LTV; which is how much loan they're going to give or how much loan proceeds. So, sometimes it's very tempting to do deals to get higher proceed by compromising insurance. And insurance is one thing that always comes at the end of the whole loan commitment process.  Let's say you're closing in two weeks, the bank is going to give you a loan commitment and insurance is the last one that comes, as the final price. And if the insurance agent messed up or if the syndicators or the sponsor messed up, in estimating that amount; the deal can fall through at the end. So what happened is people, there's a lot of possibility that people take shortcuts in insurance because they didn't want to deal to fall through, so it’s crazy. 

Kathy:
 It is just so important to have good insurance.  I have a friend who is a big fund manager, a multimillion dollar fund and he's savvy,  very smart investor and he owned a bunch of buildings, commercial buildings, I believe apartments in Houston before the floods. I don't know if you know this, but if your insurance doesn't specifically say it covers named storms, and of course what hurricane doesn't have a name, if that's not specified, then it's not covered. And he did not have, I don't know specifically, but he was not covered in that storm. Which again is, an insurance company is going to do what’s best for them? So make sure you've got an attorney who specializes. I've got a neighbor who that’s his job; He’s a specialist in making sure your insurance is what you think it is, because it would be just so easy to change one little word.


James:
That's interesting, I didn't know that. Good thing I don't have anything in Houston, but it can happen anyway, whole Texas.. So, did you try to hire a public adjuster and tried to fight for you and they gave up on it just because it's not covered? 

Kathy:
We hired an attorney to help us find it and it didn't get anywhere. I think we got money for the vandalism, but even that, you have to make sure when you have a vacant building, whether it's a single family or multifamily, you have to make sure your insurance company is aware of that and there's a different policy for that. So, there's just a lot to understand, when managing these properties. But, now I know what it's like to manage other people's money and be in a situation like that; I couldn't sleep for years.  I think you could probably hear me on the balcony crying. I would have investor calls where I would just burst out in tears halfway through and these lovely people just worked with me through it, because they knew it wasn't my fault; but I will never go through that again, that's the worst feeling, it's terrible. 

Nobody sued me, but they could have maybe, I don't know. They've been very understanding. But today when I do syndications, we eliminate as many risks as is possible. One of them is we do a lot of building subdivisions and it was really the builders and developers who got wiped out in the last downturn. Because a few banks just failed, they couldn't pay their construction loans; even if you had $20 million construction loan to finish your project that was gone. So, you literally couldn't finish your project, so builders just went out of business left and right, and land became dirt cheap, cheap as the dirt that it was on. We were able to buy a lot of that land because I was just getting into syndications back in 2010, we bought some incredible land; 4,200 lots in Tampa for a 10 cents on the dollar and things like that. 

But we didn't want to be on the other side of that this time around. So the way that we have handled all of our developments is we raise all the money, believe it or not, we raise all the money to acquire the land, and title it, get a horizontal construction, the utilities, the roads and everything and build the first phase. We raise all the money for that, we don't take any bank financing because we do not want to get stuck in that situation; which again, took down the biggest of builders. National builders went down because of their loans, because they're financing. So we just own it with cash, we take all the money from the first phase, use that to build the second phase and our investors get a nice 15% preferred return in a situation where there's no leverage. 

Now I love leverage, I love leverage. And it's different on a multifamily and certainly on one to four units; I’m all about leverage. Just make sure that it's the kind of leverage that you could live with. On a single family home, just make sure, again, you've got the right insurance on that property too. I do know somebody who owned a single family home in Houston, didn't have that named insurance, their house flooded and insurance didn't cover it. So even for a single family up to a big multifamily, you really need advice on your insurance.

James:

Interesting,  I just learned something new, that construction loan and how the builders, because we always wonder how did the building not happen. So now it makes sense because the construction loan, the bank doesn't have the money and they just said, no more, already done. 

Kathy:

You're done. You had everything you need, it all lined up. But even people who had their money in the bank, they couldn't access it. For a lot of people our equity lines, they were just gone. In 2009, I had a developer come to me with somebody who actually listens to the real wealth show and he said, you're just not going to believe the kinds of things I can pick up from the banks, from the REO departments. And these asset managers don't know what they've got; they don't know how to value it. But there were these subdivisions one after another that literally could not be completed because the loans were gone. And I didn't know that I could raise money, but I tried it and we raised $3 million dollars in one event. And we were able to buy 27 waterfront town homes in Portland, in the Pearl district, the hottest part of Portland. They were 70% complete, they were totally built; the only thing that wasn't done was the interior. All we had to do is put in the kitchens and the bedrooms and the carpets and finish it off; and, so we were able to buy it for $3 million, all 27 units, when the loan alone had been 13 million. And then we just finished them off because the builder couldn't do it. 

James:
That's the opportunity you get in the downturn I guess, if you've got the cash and you know how to do it kind of thing, very Interesting. So, let's go to a more personal side, Cathy because you have a big network of investors and you have a big presence on the radio and also on the podcast side of it. So why do you what you do? I mean, what's your big why in your whole venture? 

Kathy:
That's a great question. It started out more self focused. My husband was told in 2003 that he had melanoma, that it had spread, and the doctor thought it spread to his liver and metastasize and told my husband he had six months to live. No one should put a timeline on your life and the doctor was wrong, and Rich is fine today. However, 16 years later, he is fine. Although he gets regular checks, make sure his skin is okay because he's a surfer and a rock climber; and he's still out there in the sun. So in the beginning it was like, I got to figure out how to make money. I don't believe the doctor is right but if he is, I've got two kids, I've got a house, I've got to figure this out. So I just changed my radio show to, how to make money. So in the beginning it was a passionate desire to take care of my husband and my children and learn the secrets of the wealthy and that's how the real wealth show started. 

Then when I learned the secrets, and found out that people are willing to share them, people like Robert Kiyosaki, he was willing to come on my show and tell me his secrets; that's how we ended up investing in Texas.  I just couldn't believe what I was hearing; I just couldn't believe that there was this way to build wealth that no one had told me.  I just couldn't believe it and all the ins and outs of how to get loans and how to clean up your credit and the tax benefits and the leverage; there’s no other way to build wealth. I just couldn't believe it.

So it opened my eyes, gave me hope. We followed, we made mistakes, but even with mistakes and even with losing our money and other people's money in the beginning, we got back up on our feet and it works. And now when I help people, I see, I have people who've been following me since then. And I just had someone on my show last week who said, I did everything you said and I'm retired now, it worked, it worked; 10 years later. So I know it works and  so I'm passionate about helping other people who were in the same situation I was in, which was absolute terror. How was I going to take on the payments of our big house and raise these two little children as a single mother, if the doctor was right? We blew through our medical bills. What was I going to do? I wasn't going to go get a job and be away from my kids for 10 hours a day. So to learn the secrets of the wealthy, to learn passive income and to be able to share that with other people and see their light bulbs go on and like, oh my gosh, this is incredible, how is this possible?  I don't know, I don't know why we're not taught it in school? That’s my why. 

James:
Yeah. I realized with my first single family, when I start getting that monthly cash, [44:07 inaudible] actually, this really works. 

Kathy:

It works, it works.

James:
Yeah. Somebody else paying for your mortgage and cash flows and you buy it right, all kinds of things, it definitely works. It's amazing. Correct. 

Kathy:

I got my daughter, when she was 24; she got a job right out of college, worked for two years, was making pretty good money. She lived in Chico, which is northern California, and  you know the  home prices there aren't totally inflated like they are today, but they weren't two years ago when she bought. She's only 24 years old, and she came to me and said, hey mom, I'm going to buy a new car. I said, no, no; before you buy a car, because that's going to affect your debt to income ratios, let's just talk about buying a house. Oh Mom, I'm too young, I'm too young to buy a house. I'm like; do you know who your mother is? We need to talk. So we went to a mortgage broker and sure enough, she could qualify for a house up to $300,000; she was blown away. 

It turns out that her payment was less than what she was paying in rent for a two bedroom; she could get a three bedroom. So we went house shopping, she found a house that needed a little bit of work, so she got a good deal on it right across from Bidwell Park, amazing location. And then when she bought it, she realized there was a lot of work and then she got real mad at me for about six months. She's like, mom, I'm 24 I'm too young for all this, I don't want to be settled down, I'm a millennial. I'm not supposed to be settling down, it’s too much, I hate this house. I said, honey, just trust me.  Well then the fires happened, right? And Paradise got completely wiped out an entire city, suddenly. She had put her house on Airbnb to rent out a couple of rooms on certain holidays and so forth.

All of a sudden her Airbnb app was just blowing up with people saying, I'll pay $4,000 a month for your place. And her rent is $1,600, not her rent, her mortgage, PITI, taxes and insurance, $1,400 and she was getting people willing to rent for 4,000. So she took that offer, she rented it to a very nice family who lost their home and she went cash flowing incredibly. And she's like, I get it now, mom, this is better than a car, I get it. 

James:

And she can buy a car with that money, right? And be comfortable paying for it too.

Kathy:

That's right, she can buy a car.

James:

Can you name a few of your secret sauces that you have grown this big, in terms of popularity and getting known by people? What's your secret sauce?

Kathy:
You know, everybody has their thing. I happen to love broadcasting, that's my background. I went to school in broadcasting, so radio and podcasts that was just something I love to do.  I love to write, I love to educate, so I just followed my passion.  I know a lot of people want to start podcasts right; maybe they're not suited for that. For me, it was just passion and bullishness and desire to learn. And I think because I was on a major San Francisco station, I got invited to speak at a lot of [47:29 inaudible] before I knew anything about the business. It was terrible; I'd stand in front of the room, I don't know what I'm talking about. But that's when I realized, a lot of people don't know what they're talking about. 

So I just made it my mission to understand and to read as many books and to truly become an expert because I started to see that people who were being treated as experts, really weren't, and that was upsetting because they were guiding people in the wrong direction. So I guess you could say that's part of what... another thing is, I'm just really bullish. If I want to go to an event and I don't want to pay $2,000 for it, I'll just call and ask if I could be a speaker and a lot of times they'll say yes; sometimes it was just for personal reasons. 

James:
Okay, that's interesting. When I hear you on your podcast, it's like a newscaster, like Fox or CNN, you know? Its like, is that Kathy? Oh, it sounds really good. You have a really good voice and a presence on the radio and podcasts, that's awesome. Is there any proud moments in your life that you think it's going to be with you until the end? Do you think, I am very proud of this moment, related to business?

Kathy:

Related to business? Wow, there's been a few.  I would say it's our ability to raise money.  I'll tell you one, a developer that we love came to us and said he'd been working on entitlements on this land for 10 years; it had been very difficult to get the entitlements, but he wouldn't bring us in, until he had them. Which was great and we wouldn't do the deal until he had them. Well, he got them, but he was in a hard money loan because it took so long. It was actually a friend of his, lent him the money for six months and he was at the five month mark, and he thought his friend would extend it and his friend said, no. The loan was for 4 million, the property was worth 9 million. So this friend lent the money for six months, knowing that he would probably foreclose and take the 4 or 5 million in equity, from his friend. So he came to us and said, I just can't believe he's doing this, can you raise the money in a month? And I said, I don't know? So we did, we did an event, we raised the money, we paid off that hard money loan the day it was due. And that guy already had come to the property telling everybody he was their new boss. 

James:
Wow. So he was really wanting to take it, I guess 

Kathy:
He was a shark, yeah. And so to be able to come in and save this developer, because we had built a network of people who are willing to write a check so quickly, it really meant a lot. He invited us to a dinner once we closed and he had 50 employees there, all who would have lost their jobs, if we hadn't been able to do that. So, I would say that was a moment that I was very proud of; and our investors are going to be the ones who benefit from all that equity, not this guy who is just a shark. 

James:
Got It. That's very interesting. I can't resist asking you one question because you raise a lot of money from investors. So, who would you invest with? What kind of sponsor or syndicator that you would look for? What are their characteristics? You don't have to have no names, but what are the character types or characteristic that you would look for, if you want to invest. Because you have seen the whole gamut of our real estate cycle and what people do and all that.  

Kathy:
Well,  and I am investing in other people's deals. What I look for is kind of what I told you. Track record, experience, a deal that favors, I don't want to say favors the investor, but is very fair, investor friendly. I don't like seeing deals where they're fees here  and fees there, so you get a piece of the profit, but there's no profit at the end because they've charged so many fees along the way, there's nothing for you. So just investor friendly projects, but mainly it would be people with a tremendous track record and who has been through several cycles, at least someone on the team has several decades of experience. At this point, I think a lot of people are looking for cash flow, though a lot of our deals have been development, it's not cash flow, we just get a big check at the end once the project's done. But the ongoing cash flow, there’s only a few that really know how to keep that cash flow going in any kind of cycle. So those are the people for my retirement that I would want to be investing with. 

James:
Okay, awesome. All right, Kathy thanks for coming on the show. Can you tell the listeners how to get hold of you? 

Kathy:
Sure. You can go to Real Wealth Network. Real as in real estate, wealth as in your money and network as the network we have nationwide; Real Wealth Network.com. You can join for free and it just opens up all these portals in our website. It gives you data on different cities, where the job growth is, the demographics; you get a session with one of our investment counselors and ongoing education. It's all for free@ realwealthnetwork.com And then of course, my podcast, Real Wealth Show. 

James:
Awesome. It's really nice to have you on the show and I'm sure you add tons of value, so happy to have you here. 

Kathy:
Thank you so much. 

James:

Thank you. 

Kathy:

Take care. Bye.

James: Hey listeners, this is James Kandasamy from Achieve Wealth podcasts, a podcast where we focus on commercial real estate operators across all asset classes. And we like to talk a lot about value at real estate investing. Today, I have Will Crozier from Cap X Ventures who started in multifamily investing starting 2012 and went up to like 7,000 units, almost 350 million in assets under management. Right now, I think he has sold a lot of his assets and he has like a thousand units right now in the Dallas area. Hey Will, welcome to the show. 

Will: Hey, James, awesome to be here. Thank you for inviting me. 

James: Good. Is there anything that you want to elaborate on your past history and ventures in real estate?

Will: I guess, I did about 10 years, single-family just grinding away and then moved from California out to Texas to the DFW area, wanting to do more of the same but quickly realized deal sizes were too small in DFW house. To flip a house out there was 60,000 and I was used to doing a $600,000 houses, so I was going the wrong way around. I looked around and said I need bigger deal sizes so I moved into apartments in a hurry, plugged in with some good people and started my multifamily career about seven years ago. We grew as quickly as we could, partnered up with people, raise capital to syndicate deals and just tried our best to do heavy value-add deals wherever possible. The uglier, the better, basically.

James: I love that concept, right? That's where the deep value-add comes in. And I used to do a lot of deep value-adds even though now I'm doing a lot lighter value-add just because of the market cycle. And I know you do very, very heavy, deep value-add and you've started doing larger units. So talk about what are the deep value-add that you have done? One of the largest deep value-add that you have done.

Will: I did a project, it was 656 units, just a single property alone, drove that one down into the 70% occupancy range. That was not an extremely heavy value add, it was mostly interior innovations but it was the largest one as far as heavy, heavy like, you know, a war zone type properties that a couple of 200 and 400 units that were just ugly. Even drop those down, purchased at 50% occupancy and pushed it down into the high twenties. I mean, just clean up. It was basically a brand new project when we were done with it but turn the neighborhood around in a major way too. 

James: Yeah, I think that's where you make the most money, right? I mean, it's always a real estate. Any invest, at least we walked a game and you took a big risk in that kind of deal. I'm sure that reward also must have been tremendous because there's so much of equity built up, right? That's where the deep value-add or even the value add comes into play. That's where the wealth is created. So tell me about why do you like deep value adds versus the lighter call or yield place? 

Will: Sure. Well, when I started in multifamily, I had a little money, a couple hundred thousand dollars but it was nothing to really, really brag about, I couldn't retire on it. I couldn't invest it at 10% interest and have it changed my life at all so I had no choice but to really do big game projects. I needed to really change my game. To change my outlook on life to set myself up and so I could go and invest and make 7% or 9% and I was just like, that's not the station I'm in life. I was raised poor, I didn't come in from a lot of money. I needed to just shift my whole reality. So I only focused on deals where I could make a 100% return or a 200% return. And yeah, there are lots of people's money together and just go, go, go. And so I did that serial 10 31, 10 31, 10 31, and then, other projects around it, I flipped them. I mean, I was in and out of some deals in 13 months, 17 months; just get in there and go hard. Usually, it was about a two-year thing where if you double your money and then double that money again and then double that money again, you start to see the multiplication effect, just go crazy. So I went from almost nothing to a good sum of cash through doing these heavy value add deals. 

 And you mentioned something that everyone looks at this differently, but risk-reward, I always looked at my deals as not risky because they were in terrible condition. They were rundown, there was no one living in them. So there was really nothing I could do to make the situation worse. Whereas the yield deals, you know, they're really skinny, they're really tight. You jump in there and you make a few missteps and you can drop from 93% to 83% in a hurry. And the way the debt set up, like to me that seemed risky, at least at the time. There are a million ways to look at it, but for me, it's like there's nothing I'm going to do to mess this deal up more. And there were 15 other people bidding on it so I can get out of it if I need to and it's a bridge loan. So to me, at the time it just seemed not risky. It's strange. 

James: You are right actually. I mean sometimes people just look at cash flow. They don't really look at the debt service coverage, right? Because on a yield play or Copley, your debt service coverage is so thin, you've got no way to increase your NOI. So let's say you're buying at 1.25, if you're not doing anything, you're just going to service that debt at 1.25 maybe slightly more because the market appreciates to 1.3; whereas on a deep value-add play, you may be buying it less than one DSCR but you are pushing up the NOIs so much to 1.5, 2 X. So in case the market turns, you're not going to come back to one, you've got so much a buffer to play.

Will: Right. We start cash flowing it 70% occupancy and it's going and going. And so everywhere you go from there, it's really, really nice.

James: Yeah. I mean it's a bit hard for me to do yield place, just because I see it as a risk as well because there's just no buffer there. Question for you--so can you hear me? 

Will: Yeah, I can.

Will: Because you sound to be so quiet. So, I mean, you went up to like zero in 2012 in multifamily and went up to 7,000 units. You did so many 10 31 and you started selling a lot of it. Right? So when did you start selling a lot of your deals?

Will: Well, it became a bit obvious to me writing on the wall, but the tide was no longer with us. You know, the winds weren't at the back anymore. There's still deals to be done. There's always deals to be done. But it wasn't this situation or set up where no matter what I do, I'm going to make lots of money. The heavy value- add deals started getting super rare, hard to get into them. The interest rates started ticking up and that's eroding the value of my property when I'm not doing anything wrong, but I'm watching millions of dollars just get wiped off of the table just because of interest rates, you know? And that goes up and down but that was another indicator. The county started playing ridiculously hard with the taxes and that was another thing. It was just like, I'm watching millions of dollars just disappear and I'm not doing anything wrong.

 You know, I'm just this part of the business cycle and its part of the politics of the game. So when I saw some of those things, easing and changing and the rapid competition, especially in DFW, from not only coastal buyers but international buyers, we're selling to people in Dubai, UAE, et cetera. So it's just like this is a really different game than what I entered in '12. And so when I entered in '12, I was always all in, just anything I had pushed it in, tell everybody, put your money in this thing, it's going to go, go, go. When I couldn't be that aggressive anymore, it made me start to just to look around a little bit, what are my options in life? I had accumulated big pilot ships and I don't need to do this anymore. I can easily retire and not do anything for the rest of my life and my kids could share that as well.

 So I have to really stop and look at my life; what is it that I want to do? What is my risk tolerance? Am I gonna bust my ass really competing for trying to get 7% return? Or maybe find a way to eke out a 10% return. Or for me, it's just hit pause or at least dial it way back, look at my life, what makes me happy? What do I want to do with myself? Let the market settle down a little bit, let it choose a new direction and then decide, do I want to jump back in with this, push everything back in again or figure out a different strategy? So right now, I'm just kind of observing, taking it all in. If a good deal comes my way, I jump on it. I closed the deal a month ago in Abilene, another 120 unit value-add deals. So I'll grab them, but I'm not gonna run around chasing my tail, trying and forcing to put it together when I don't need to. 

James: Yeah. Yeah. It's crazy out there right now. Right? I mean, you can do deals in a good market, in a bad market. The acceleration of how much you want to buy on a market cycle like this, maybe slow down. I mean you have to just think about it, whether it's a real deal or not. I think there's just so many people jumping into the game as well, I guess. Prices are being bumped up so much and they are value-add deals, they are deep value-add deals, but a lot of sellers are asking for crazy prices, which means that deep value-add becomes like a yield play. 

Will: Yeah, it really is. They're charging you the premium to do all the work. 

James: A lot of people are jumping saying, hey, it's a deep value-add or deep value-add but it's actually not value-add. 

Will: We were buying it at 13 a door, you know, going crazy and the same deals are trading for 80 and 90 and they're in worse condition than, I don't know, it's just nuts. They're still deals, but frankly, I don't want to dedicate the 80 hours a week that I used to when I don't need to in this market cycle. Like that doesn't make sense for me personally to pursue that right now at least. At least with full dedication. 

James: Got it. So are you still positive on multifamily or any other asset classes? 

Will: Well, as I said, I purchased last month in Abilene. I'm basically kind of a sponsor in the deal. I raised equity for the deal. I underwrote the deal, I connected it, but I'm more happy to be working with sort of the next generation of deal sponsors, syndicator. If they have holes like equity gaps, I can plug that. If they have some experience things or they're not sure of a specific market, like I was already operating 500 units in Abilene so it's like throw this on there, same management company, it's just stamp, stamp, stamp, repeat. So if there are new deal sponsors who want to want to partner up and follow a similar pattern to what I've already established, that's where I can really add value to another team. I don't want to be out there every day. I don't want to live on site like I used to live on site. I'm just past all that, but I can still work with other people and make win, win, wins across the board. 

James: Got It, got it. Got It. Let's go into details of what are some of the deep value-adds that you have done. Not really a specific deal, but when you look at the deal, how do you identify this is the deal for me, I want to really do this deal. What do you look for in that?

Will: Well, the dream is, of course, the neighborhood. I'm less interested in the specific property than I am, 'can I invest millions of dollars in this neighborhood and have it mean something?' Have it attract the kind of people that will pay their rent, that won't bring crime, that will be a nice safe, habitable place for people with jobs want to live. So I'd always look at the neighborhood and just blue collars, great. If there are work trucks out there in the parking lot, I'm super excited about that. Of course, then property specific things, love of course pitch roofs or individual HVAC. I'm one of the weird guys that love all bills paid. I made more money on those deals than others; it's a hassle but there's money to be made there for sure. What else? Price Point says a lot. The right price point, jump in there and sometimes that's a really, really high price point versus other neighborhoods, but it's still just comparatively low. I love rundown interior units. We got really, really good at renovating interiors and doing it on the cheap. I imported all my stuff from China. I built a company around that, sold that company last year. But we could do an interior better and cheaper than almost anyone could. And that's how you raise rents. And that's how you get the NOI bumps and that's how you make a mini fortune on every deal you do. So those were sort of the criteria I was looking for. 

James: Okay. Okay. I want to go a bit more into the underwriting, but before I do that, why do you like all bills paid?

Will: Well, I always feel weird, is the SCC watching me, like lying sometimes, but you kind of get to act like a utility broker in a way, a middleman, so to speak. Where I can buy energy for 6 cents a kilowatt hour and I ended up basically selling it for 12 or whatever and I don't remember the specifics on that. And then they love it because they're not having to put these big deposits and run credit checks and all this stuff. So I get a buffer that makes it really, really simple for them, giving them a cheaper rate than they would be able to get even on their own. So again, it's kind of paving a win, win, win and I'm pulling in more cash each month. I'm kind of controlling their major expenditures, which is going to be their rents, it's going to be their utilities. And so, I kind of get to babysit a little bit. I hesitate to use that word. But if you have the right management team working with them, it's just a bigger rent check coming into you each month so your income is greater and when you go to sell the thing, you realize those gains.

James: Yeah. And I think you can use your skills to relate the real utility bills, right? I mean, you can do local pilots and all that, which the upside, you get it right. 

Will: Yeah, absolutely. 

James: Got It. Got It. So let's talk about underwriting. So when you underwrite a deep value-add deal, what do you really look for? Do you just look for really, really low rent, you know, expenses? Or what else do you look for? I mean, let's talk about that.

Will: I've never been one to super focus on expenses. Yeah. Expenses matter but they're generally going to be in the right ballpark unless you spot the obvious, water conservation thing or whatever. I always like to focus on income. Income is a lot easier to control than expenses. So you know, look at the submarket, do your market survey, see are you low and why are you low? Are there other factors besides just you have a terrible interior and amenities package? Just chew that up, underwrite that, you know but otherwise, just to figure out why you're low, see if you can plug that gap in that. I was never shy about leading the market. I would like to be a hundred under and come out a hundred over, you know, and I wasn't shy about getting it because we had a nice product and we always had a great management team. So that was probably my number one criteria is just making sure I'm getting something that I can really push and accelerate rents on. That was a lot easier before.

James: Okay. Okay. So definitely income is a lot easier to control, where you can just increase the rent compared to the expenses. I know you do a lot of major rehabs, which needs a lot of materials and all that. So what triggered you to go and start importing materials, to reduce your cost in terms of expenses?

Will: I did the first deal without any imports. I learned quickly, that was just like 77 units. But even on something that small, I had a hard time controlling the logistics supply chain. I would deal with AZ Parts Master Nationwide MRO, Lowe's, Home Depot, whoever and they would start delivering me different products as like keep trying to order the same thing. They would change the light fixture or the fan. And then one week it's $45 and the next week it's $62 and this was very, very frustrating. And my projects, I want it to be very uniform, very beautiful, started looking like patchwork quilts. And this one looks like this and this one looks like this and this was on a small deal. So the next time around, I bought 244 units and it was half occupied and I was like, well, I'm going to need about 300,000 square feet of flooring on this deal.

 I had one of my partners was a Chinese national and she'd done imports for her own business. She's like, let's get on a plane, let's go. So I was like, okay, let's give it a try. And so flew over there and got overwhelmed in a hurry and made a few bad missteps early on, but corrected and adjusted and moved from flooring into anything else we needed massive quantities of. I remember my 1st container, 40 foot high Q container of fans came in, I think it was like 1400 fans. I'm like, what am I gonna do with this? And then before long, they were coming in monthly. And it was a wild run there for a while, to go from one of my one-bedroom units, I had a down unit and I just shoved stuff from Home Depot and Lowe's into it, to having a warehouse and then buying and renting the warehouse next to that and then two more next to that and buying, you know, medium duty trucks and forklifts. I'm like, what am I doing? But it all just made sense for my own projects and therefore it made sense for other people's projects. And that's I think a good foundation for any business is to solve issues and then let other people take advantage of the job you've done there.

James: Yeah. Yeah. I would like to make sure that the listeners know, I mean the amount of hard work that I'm sure really have put in to do all that largest things, is huge. Right? So, it's not simple, but the thing is if you do it, you will get the benefit out of it. And I think when you really want to make a lot of money in real estate, that's the extent that you have to go to because that's where you really make the money when you go to integrate your supply chain. And you hop on a plane and go and solve problems.

Will: Your right, James, and thank you for clarifying that. Like it's easy to sit here in a podcast years after the fact and make it seem like it was somehow easy or it didn't take that much. It literally was 80 hours a week. Holidays, weekends. I moved into my projects to really watch them because every penny of my net worth was in these projects. I was controlling tens of millions of dollars of assets and yet I was living on like 2100 bucks a month. That's me, my wife, my kids, couldn't afford anything. I was a paper millionaire and then a paper multimillionaire and yet I couldn't pay for anything and I was deeply in credit card debt, just trying to keep everything afloat. It's humorous to me when people come in and say, I want to do what you do, but they're like a doctor and they're used to like pulling down 400 g's a year and there's like, you probably should just be a passive investor. Forget all about what I'm doing because it's not really going to mesh. You're going to be in poverty for the first four years you're doing this thing. 

James: Yeah. I remember when I did my second deal, we did like almost one and a half a million dollars. We did it within one year. And I think that whole idea is you're trying to convert all that capital that you have in your cash for Rehab, you're trying to convert it to NOI. So once it becomes NOI, that's equity. Now the building is much more valuable. So you're basically adding all this sweat equity, your ideas, your business tactic, all this into a NOI. And how skillful you are converting this whole thing into the NOI is where the skill gaps.

Will: Yeah. And then if you're really good, you're tempted into a 10 31 exchange so you don't realize any of the equity. And then you go ahead and do it again and you're like, I promise I have some money somewhere [21:37crosstalk] 

James: Yeah. I like to refi and take out that money. I least I want to quickly do it, refi it, take out, okay, now I see some cash, cash flow, right?

Will: And the taxes are a little nicer in that scenario. 

James: Yeah. There's no tax on a refi, right. Even on 1031, yeah, you defer the taxes, but this all tax strategy and the amount of NOI that you created to take out your equity. So of all the deep value that you did, what do you think is the most valuable value-add?

Will: What do you mean by that, James? 

James: Like for example, let's say you have $1 million to do a project, right? But that million dollars become like 300,000. So what would you go in and focus first? Interior. Exterior. And if it's interior, what would you focus? If it's exterior, what would you focus? Because now you have a reduced budget, right? What do you think is the most important value add?

Will: I hate exteriors, they have to be done, but you very, very rarely see any kind of rent increase on exteriors. It's more of a cohesive theme of the property that will give you a rent bump on the exterior, but you can throw millions and millions at roofs, parking lot, siding, like retaining, landscaping, that's going to give you tiny returns as far as NOI. So, of course, I loved the interiors. Flooring is like magic. You put in a new floor and people are immediately amazed by it. I love to put in hard surface flooring. I hate carpet. So I mean, just put in the hard surface flooring, it's easy to turn, it's easy to keep clean. It's a fantastic product. So floors are huge. Appliances, I always bet big on appliances. I almost always went to stainless steel, nice packages; once in a while, I would just make it all black or whatever. But appliances and flooring get you a long, long way on interior renovations. So that's the first thing on all of my budgets.

James: Got It. So appliance and flooring. Okay. Interesting. So let's go to the personal side of it. Right? So you sold a lot of your assets and you said you don't think so, I mean the odds are on your side right now in terms of market and you want to take it slowly. If you find the right deal, you would go ahead and do it. But why did you move out of the country? I mean from Dallas to the Philippines. 

Will: Could have come somewhere a little closer. Right. So just a little background on that. And when I was traveling to China a lot, I really fell in love with travel and I really also fell in love with Asia. My wife is from the Philippines, so I have a direct family connection here. Spending time over here, I enjoyed it. The speed of life is totally different than the US, it's just in slow Mo. That can be infuriating sometimes, you are like, what's wrong with this place? But it's all those things that are wrong that make it so great at the same time. So I try to just accept it, be patient with it, but also got plugged in with a couple of foundations. One that I'm starting, one that I am a currently a board member on and support in any way I can. It's children's surgical outreaches that for some reason is so rewarding to me. Like I'll just do it until I die. If no one else wants to participate, I don't care. But to see how far a US dollar can go and changing someone in the third world's entire life, entire future. Like what we'll spend on an average dinner out, we'll change the entire outlook of one child's life through one simple surgery that takes basically an afternoon. That blew my mind and it made me reevaluate my own expenses, my own material desires in life.

 I just sold my house in Texas. A big stupid, huge, ugly, gorgeous house, and then my cars and all that stupid stuff that I love so much, but just change the focus, you know, and tried to move into something a bit more humble and easy, lower expense so I can divert funds to some of this other stuff that's just so much more rewarding at the end of the day. 

James: Yeah. Yeah. I mean, I'm from Southeast Asia, I'm from Malaysia. Right. So I know a lot of these lifestyles there even though I don't think my lifestyle was slow. It was really fast as well, but it's just a different perspective in life. Did any of these travels and living in the Philippines or even traveling, do you think it changed any of your perspective towards money?

Will: Oh, yes, absolutely. I noticed first, right away when I started traveling a lot internationally, besides just having a hotel to stay in or food to buy, I didn't really ever think about money. It was just weird. Like when I was bored in the US and I was kind of building my empire, If I got bored, bored maybe, if I had free moments ever, I would go on Zillow or I would go on cars.com and I would just browse for whatever the next kind of toy was, the next car. Like, look, what's that house in that neighborhood. There's a beautiful neighborhood, I would love to live there, someday. And it was all just sort of focus on the material, a focus on improving the lifestyle, basically. And when I was traveling, I just never really thought that way and when that started clicking in my head, I was like, I'm really happy when I'm traveling and I'm not focused on really the material at all. It's more learning, experiencing things. It all got cheaper. That was one of the weird things was this much happier, more fulfilling lifestyle was way, way, way, way cheaper than the less satisfying, less happy lifestyle. So that was a big Aha moment for me.

James: Yeah, it's interesting. I mean, sometimes you look at people who are really poor or living in a very small house or hut, you know, in a poor country, they are very happy compared to some people who live in a very big house with a lot of money. I mean, there's so much commitment, so many issues. You have to make a lot of life choices or you may not be happy, but people who have fewer things, maybe they make fewer choices and they're much happier, right? I mean, end of the day, why do we make money? So to supposedly supposed to be happy, right. So it's just so much of a difference in perspective when you're traveling to that kind of places and you experience different lifestyles.

Will: I've heard always that thing where it's just cliche almost in the US and I'm sure you've heard it, where people talk about the people that have nothing. And as an American, when someone says they have nothing, basically that means like they drive a 10-year-old car, either their house is less than 2000 square feet. That's what having nothing meant to m,e until I met people who literally don't have anything. They are living under a leaf house, built out of bamboo and you know, they find an old water bottle to go and haul water from the stream to where they're living that month. And it was okay. They actually have nothing and yet, as you said, at the time they're having the smile on their face and the relaxed nature of it all. And poverty is horrible, it's a terrible thing, especially for health. That's what you watch just get destroyed as people who are aging with diseases but outside of the health, everything else to me seems like they're having a better living existence than most anybody I know in the first world.

James: Yeah. It's a completely different perspective when you start to travel, right? And I see people here, sometimes they complain the country is bad. Oh, this is bad. That is not right. This is not right. Well, you have never seen the other part of the world. So it's just surprising for me on when people just don't have that 360 perspectives of how the whole life is. I mean I'm not saying that I have when you have it, but you know when you travel and you go really live in another country, you can see a lot more things which you are not able to see when you are living here in the US. There are so many things that have been taken for granted here. 

Will: The opportunities in the US are insane, the low cost. Americans think US is expensive. That is ridiculous. The price of cars and of electronics and of anything and the wide availability of anything you want, it's all cheap and it's quality and it's a variety. And you come in most countries and cars costs double like a BMW in the Philippines or in Thailand or anywhere over here, it costs double what it costs in the US. And it's like the cheaper model and it's pretty crazy.

James: Yeah. When I was living overseas in Malaysia, I can never afford a luxury car, have to buy a local car. And even that was really good already. So because everything else was expensive just because the governments like to tax the in parts of the car. And also your pay scale really doesn't jive with the cost of living. Here, the pay scale does compensate for your cost of living. So things are much cheaper here in the US.

Will: Yeah. In China, it blew my mind. You have maybe lower level management positions and hotels or restaurants or whatever and you find out that they're earning $400 a month and yet that's what rent costs. Rent is exactly what their income is. And you're like, how does this even work? Like, I don't understand the economics and you go visit one of these homes and you realize there are six people in a really, really tiny one bedroom, you know, 400, 500 square feet and it's not comfortable and it's not nice. 

We're were very, very lucky as Americans. My wife just became a citizen last month and a smile on her face to have that blue passport. To enter another country with an American passport is a whole different experience than with our Philippine passport where anywhere you go you need a visa. And getting that visa is not like applying online. It's tax returns. It's like bank statements. It's like health records, shots of full travel itinerary of where you're going when you're going to be there. Like it was just a mess. We're spoiled as Americans.

James:  Absolutely. Absolutely. So can you name a few things that you think is the secret success, any secret sauces that you think that you want to share with the listeners?

Will: Yeah, I could share a few things that have hugely improved my performance as a businessman, as an entrepreneur, the short cuts per se. Partnering has been huge for me. It's not for everybody, but it's for most people, especially when you're dealing with something like multifamily. I'm by far not the smartest person around, I'm the kind of a simple-minded guy. I don't even have that many skills. I just have the determination to make sure I'm getting deals done to land the deals, to execute. I'm a doer, but I've had to really surround myself with phenomenal partners who understand accounting inside out, who understand books or taxation inside and out, people who are super duper organized. These are big failings that I have in my skillset, my personality. So I've had to bring these folks in and show them that I can do something to add value in their life. And then we partner up. And that's been huge for me. 

Another thing that's been huge as I've raised so much capital, I mean my returns in all of this would have been tiny compared to what I was able to do because it was easy to go out after a while and some reputation to raise $10 million or $15 million to do a deal. Without that, my returns would have been a fraction of what they've been. But I built the trust, I built the relationships. I performed for my investors. I did everything I could to make them a lot of money and because of that, I made a lot of money, a portion of everything they made, I also made. 

Another thing that I think has just been huge was starting this, I wanted to do it all alone. I was one of these guys that just wanted to read on like Bigger Pockets or like hang out online and just read and I could do it alone. I didn't need anyone's help. I wanted to own it. That would've been a huge mistake in multifamily investing. You can kind of wing it in single family, but multifamily, it's a team sport all day long. You need a hell of a team on your side, on your behalf. You trust each other, you lean on them, you rely upon them. And so team building, not only for my immediate advisors but also for raising the capital. It required me getting off my butt, get out from the computer, go awkwardly, shake hands, go and meet people and it was horrible for me. I hated doing that. I lacked self-confidence. I lacked the thought that anyone would be interested in even talking to me just I was, I was kind of low and slow. You had to just be like, I really need this. I need this to work, I need this to be successful. So I'm going to go and do the worst thing I could think of doing and plant myself at a networking event from 5:00 PM until 10:00 PM and not allow myself to leave. I'm just there, I'm trapped. But no matter what, I got to go talk to people and it was horrible, terrible. The dentist is better, tax is better, whatever.

But eventually I started liking people at these things and they started knowing what I was up to and I bought that house or I bought that new apartment complex and how is that going? And loosen my tongue. I got my confidence up, my courage up and before long, I really love going to them because those were my pals, those were my buddies. Now, wherever I went to these different real estate meetups and without that, impossible to do the business, I don't have enough money to take down 10, 20, 30, $40 million deals Like how am I going to do that? I need guarantors, I need KPs who believe in me. How are they going to believe in me? Chatting for a while, talking about my business, bringing them out to my property, sharing a meal or a beer or whatever. And suddenly they're like, yeah, I'll sign on your note with you. Some of these were full recourse loans and they're pledging their stock portfolio on me. Blew my mind. But it was just through being sincere or not hiding stuff, just being a hundred percent transparent with them. And I had people who I never thought wanted to talk to me, betting on me with their signature and pledging their stock portfolio to make me get these full recourse bridge loans done on 50% occupied properties. So that was the long answer, but really, really, really network, partner up if you don't have what you need, raise capital, do bigger deals and go, go, go.

James:  Yeah. Yeah. Awesome advice. I think so much of advising golden nuggets in what you mentioned just now. Is there any proud moments in your life that you think, you know, you're really proud of that and one day you're going to tell to your grandkids, you know, when you're really, really old, one proud moment that you think, oh, I'm so happy I did this. I'm very proud of that. Can you share that with us?

Will: You know, it's, it's probably the moment, the sort of make or break moment. When I was in southern California and I had a good thing going, I understood how to flip houses. I was making some okay money at it, paying the bills, accumulating. I had more than anyone I knew, but it was 300 grand or something. It was nothing but it was more than anything I knew. So I had a comfortable life and I had a pattern and I had a sort of figured it out and it was really just stepping back and saying, I want more opportunity and I'm willing to do whatever it takes to get it. 

So I didn't know anyone in Dallas, not a soul, zero people there. I looked around the whole country, looked at Florida, I looked at Arizona and Nevada like anywhere there was supposed to be opportunity and I really zeroed in on Texas as hey, strong economy, great wages, low cost of living, low taxation, they seem business friendly and I just pieced this together off of Internet research. I drove around the country and the old piece of crap, 91 Buick with 200,000 miles on it and I was like, where is it? And I picked Texas and it was really just a twin costs on Dallas. I think I visited there in April and it was pretty that day or something and I just moved there. 

So I just loaded up my car with all my junk and then dropped it in a storage facility and lived in a motel six as I tried to figure out what's next, what's the next play. People looked at me like I was a bit crazy, but to me, that was the only move. Like how could I start a business in California? There wasn't friendly for businesses down there. Rent was absurdly high, not only to live but to rent anything for an office space or just to build anything. Costs were really high for real estate. So basically to answer your question, what am I really proud of? I took a leap, a calculated risk. I really calculated a lot. I really studied the thing, but then I made that leap. There was nothing comfortable about it. I didn't have any safety net. I had nothing. I had like six grand in the bank.

 I lived, you know, expendable. I had my nugget but that was for business. It was forbidden to touch that. But I had six grand in the bank that I could actually do something with. And, you know, living in a motel six is humbling. Your friends by this point, they are 10 years into their career or five years into their career and they've got the three series beemer and the nice condos sort of by the beach kind of in California. And here's, Will, doing this weird stuff. But I just saw the future. I saw the writing on the wall and I took that gamble and I'm really, really glad I did it. It stacked the odds in my favor, it put odds behind me and I was able to set myself up to use those odds to roll the dice.

 It didn't work immediately in Texas. It took several years to get going, but the odds were on my side. So then I just needed to play the game then. And I did and I played it as much as I could. And then it resulted in a fantastic past seven, eight years here. 

James: It's a big leap of faith, right? And just so many people are scared to take the leap of fate or they just say, oh, I'm going to do it later. People give so many reasons to make that big jump and it's something that, you know, you have to do it if you have to do it, sometimes you have to make that choice. And is there like a daily habit that you have that you think has contributed a lot to your effectiveness in your success?

Will: I guess this will sound a little controversial. I think there's maybe two things. One, I got good at that networking thing I talked about, and so probably more than a lot of people, you will find me out at five drinking a decaf coffee somewhere or grabbing a beer with people that I've never met before. I don't know who these people are, they just messaged me on Facebook. I'm like, okay, that what's happening here in Manila, people I've never met. They're like, you're in Manila. I'm going to be in Hong Kong, I'll meet you. But that's been huge to just keep doors open. Every time you meet a new person, you never know what door that's going to open up and even if they're humble and starting, they have ideas or a work ethic that you want to be part of or some new partnerships or new source of deals, some new source of equity, whatever.

 So I do a lot of people are like, are you working? You know, sitting there just kind of talking at a bar or whatever. Yeah, that's been huge to keep some momentum going for me, a little controversial maybe. And then on the flip side of that, I try to stay sharp by every morning waking up and going for a jog and without fail, I've got my earbuds in and I'm listening to some podcasts. I'm listening to some audio book. I'm listening to something that's just drilling further understanding, intelligence into my mind, shifting my perspective. That's been huge for me to not maintain, but to continue to grow and expand my mind and where I'm going to go in the future. That's been huge for me. And the exercise combined with the knowledge is amazing. 

James: Awesome. Is there anything else that you want to share with the audience, the listeners that you have not shared in any of the podcasts that you think, hey, I should mention this in some podcasts?

Will: Interesting question. I think I haven't mentioned this just because it's pretty new in my mind, but it's really easy to get locked into the idea that going from having $2 million to $4 million is going to do something for you. It won't do anything for you. Like you won't even notice. It's so obnoxious that adding $1 million to your balance sheet will go unnoticed, but it gets to that point in a hurry to where you really have to shift and I was lazy about it. It's like, oh, there's another deal. I'll grab this. I'll do this one, do this one. What's really changed my life for the better has been reevaluating, stepping back and saying, okay, literally adding a few more million will go unnoticed to me but what will be noticed for me is I dramatically shift my schedule, how I'm living my life, who I'm interacting with, and that's kept me out of the daily grind of business a lot.

 I'm still doing it. I still check in, I still email, I still call, but it's become a third of my day instead of 133% of my day. I do a lot more reading. I'll do more traveling, I'll focus more on cooking or I'm a musician, then I focus on that and this is maybe the wrong topic for a real estate show or whatever. Maybe you frame it how you want, but it's been hugely rewarding for me to make that transition to enjoy life daily. Don't procrastinate life till later. I'm 39 and I feel very, very fortunate to be in this spot now to where I'm expanding and I'm learning and I'm studying language and philosophy and it's making me so much better person than throwing another several million dollars on the balance sheet. So that's a new thought for me. I haven't said it on any podcast but that's really what I'm thinking about right now, a lot.

James: Awesome. Awesome. And I have to say thank you to you, Will, because when I started in real estate, when I started doing multifamily, I have a lot of ideas and thoughts and I started writing my own blogs and I think you are one of the one who read one of my blog and you say good things about my blog and I was thinking, huh? Not bad.

Will:  I remember that well. I'm like, who's this guy? This is really great. 

James: I was like, Huh? Somebody like real, I mean, I think, at that time you were well known in the multifamily space and I was thinking, oh, not bad by somebody commented me. So that's why I started writing more blogs and I say, I need to write a book. English is not my first language but I mean, putting everything that I have in my mind into a book or on my blog helps me a lot because I don't know, for some reason I have to write it down and share it with others.

 And especially when you have the knowledge, you know, what's the point of keeping it to yourself. Right? So you have to share it and I'm proud of all your work that you've been doing in with the children's treatment in the Philippines, which is, I think it's very, very fulfilling. I think that's something that nobody can take away from you. I mean, you can lose the money, you can lose the real estate, you can lose your entire life but that's something that, I don't know whether I'm talking for you or not, but for me, it feel like it follows you because that's Karma, right? You do good, things are going to go your way. Do you want to tell the listeners how to get hold of you?

Will: Sure. I'm a big Facebook guy, so my id is  Will Crozier. I'm friends with James, but just hook up with me there. Two websites that are relevant for me is capxventures.com. That's kind of my multifamily arm. I am also hanging out @angelcapitalist.com. That's where I put some of my boring, boring blog posts; things that I cook up once in a while when I'm really bored. There's some of that there. How to connect with me is there. Some of the humanitarian projects. I'm also doing some angel investing in businesses that I really believe in. I loved not only real estate but any business, small business or larger so I've been investing in small businesses lately. There's one's called Propelio, maybe some people have heard about it so subscribe to that. Make me some more money, please. It's a great group of free real estate, especially single family educational content. Totally free. They're not selling you anything regarding that. So check it out. They're having a great academy there. I think those are the best ways to connect with me and kind of keep tabs on what I'm up to. And I love people to pitch. So if you have deals that you want to partner up with me on or a business that you need equity sometimes that, usually I like equity, but, yeah, reach out.

James: Yeah. Yeah. I mean that's a clue, guys. I mean, if you want to pitch your business to Will, I mean, I can bet you he can look at financials and quickly tell you whether the deal works or not because it takes a lot of skill to really do deep value -add, and, you know, not many people can do it as well, but I think Will is a really good resource for that. So. All right. Thank you very much for coming on the show and happy to have you here. Thank you.

Will: A lot of fun, James. Thanks.

James: Let's get started, 1 2 3. Hi listeners, welcome to Achieve Wealth Podcast. It's a podcast where we focus on how to achieve wealth through value add real estate investing. And today I have John Jacobus from, John, where are you from? 

John: I'm from New York. 

James: New York. Awesome. Awesome. Why not John, you talk to our listeners about, you know, about yourself and what you've been doing and we are going to be focusing a lot on a mobile home park investment and John is an expert in the operation of mobile home parks. And I thought of bringing him on board and learn that asset class through the level of details where we can learn and figure out, you know, why that would be a really good investment vehicle for everybody. So, John, why don't you go ahead and take a and tell our audience things that I would have missed out.

John: Sure. Yeah. Thanks, James for having me on the show, it's really good to be here. As I said, I live in New York City but I invest in the southeast and the southwest. I got started in real estate investing in the early 2000s just doing single-family rentals and fix and flips, down in southern California. I'm originally from the San Francisco Bay area out on the west coast. And there was an equity opportunity down in southern California in the early part of this century. And with my dad, brother and I, we just got started. At the time, I was about 18, so I got started early and that really triggered an interest in investing and building wealth. And from there, just sort of followed my nose. So I got interested in stock market investing and just general assessing quality businesses.

And then maybe four years ago, got interested in multifamily investing, being surrounded by skyscrapers and multifamily housing here in Manhattan. I poke my nose into that, got to know people, build the network and started my first multifamily opportunity as a limited partner in a project in Dallas, Texas. And since then, just sort of took incremental steps to become more active and raising capital. As you know, James, it's gotten pretty competitive in the apartment space, especially when you're out of state and don't have the ability to get on planes and meet brokers or property managers for tours. So seeing that it was a sort of impossible for me to compete with locals and the markets that I wanted to invest in, I stumbled across mobile home parks. And the more I learned about it, the more I poked my nose into it, the more I liked it. And I found that I could be competitive despite being located out of town. And for about the past year and a half now, I've been focusing full time on mobile home park investing. Now, I've acquired a portfolio of three parks and I'm looking to continue to scale where we find value.

James: Awesome. So yeah, I mean mobile home parks, I mean, I do know some things about mobile home parks, but not to the level of details that you would know. Right. So can you explain to the listeners how does the whole, and at a high level, then we can go into a bit deeper into the details of mobile home parks. Why did you start with mobile home parks? Why not self- storage or office or retail warehouse and all that?

John: Yeah, so I'm generally attracted to assets that are under the radar and have a kind of negative stigma with them. So I mentioned I am into investing in businesses on the stock market as well. And I tend to adopt a contrarian mindset where, you know, the more popular or something is in the media or among, you know, the masses, the less interested I become. And so, I think point number one that triggered me to look into mobile home parks was when I would attend these conferences of real estate investors or go to meetups or just hear about mobile home parks in the news, generally, there was no one really focusing on it. So amongst the thousands of people that were at a conference, there was maybe two or three people that were focused on mobile home parks.

 And anytime you hear about mobile home parks in the news it seems to be negative. Nobody wants to brag about the fact that they're in the business full time because of the negative public stigma. To me, that's attractive because there are fewer competitors and especially when you dig into the details and see the fundamentals of the business, they're awfully attractive. So I think just generally the unpopular nature of the asset class was something that really appealed to me. And then, you know, the fact that it actually has appealing economics was even more of an attractive factor of the asset class.

James: Okay. That's exactly why people can still find really good deals in mobile home parks where there's a lot of stigma tied to it, to mobile home parks and that could be just an opportunity. So I mean, I attended like a two days boot camp, on mobile home parks, like two, three years ago. And I thought it was a really good asset class to enter at the time because as you said, not many people, know mobile home parks, it's not out to the masses. There are not many gurus teaching mobile home park too even though they're teaching, they are not everywhere, right? They're not in the social media guys like what's happening now. And that's a huge stigma on mobile home parks. This is a bit cross kind of thing, right? 

I mean that's what even the guy who was teaching that three-day boot camp was telling us, which can be a really good thing, right? I mean, I know the day we want to make sure that we have a good asset class where you know, it's very stable and able to predictably give you good cash and good returns at a high level. So let's talk about how do you make money out of buying a mobile home park?

John: Yeah, so a number of ways. We focus on turnaround parks. So one of the areas, well, I said that mobile home park investing is unpopular relative to self- storage or apartments. There is some competition in the market so I still face very healthy competition in some of tier one, tier two markets, where the parks are closer to class B Class So, in an effort to find value, we've found that there's value currently in parks that are rough around the edges. So whether they have high vacancy rates, they have a high percentage of park owned homes, there may be an issue with the infrastructure, whether the sewer or the water. So those things that have a little bit of hair on the deal, those we're finding pretty attractively priced. So currently we focus on those turnarounds and that's where we're able to generate outsize returns, by digging into those problems and fixing them and either elevating the class of the asset or simply filling in vacancies or in some cases, like one of the projects that we have under ownership right now in San Antonio is we're actually expanding the size of the park.

 So it's almost like a development deal, where we bought it for 20 units and we have plans to expand it by double. So those types of heavy lifts in terms of either turnaround operationally or expanding the footprint of the park, that's how we're finding ways to make money currently in the mobile home park business.

James: Got It. Got It. And correct me if I'm wrong, so the mobile home park is basically you own the park, you don't own the housing units on top of it, right?

John: So in an ideal world, and it really, depends on your perspective and what your preferences, but in the traditional way is that you just own the land and not the infrastructure. So you buy the land and you rent out the land to homeowners who pay you for the privilege of placing their home in your park. So in terms of operational cost standpoint, if you pursued that model, your operating costs are pretty low because you really just own the dirt and you're collecting rent for owner residents to use your land. Now, as you look more deals and get involved in the business, there are very few of those types of properties available because over the course of time, where residents come and go, ultimately you're going to find yourself as a park operator with some homes that you end up with, whether they're abandoned or sold to you or just come with the deal.

 So there are models in the southeast, in particular where there are parks, where the park owners not only own the land and the infrastructure but also own all of the homes, in which case they're more or less operating an apartment complex just with a different look. There are individual units rather than stacked or adjacent to each other. And for those that can do it and have the model and the pricing is right and their strength in the market, that can be awfully attractive. But I think if you're looking to reduce the amount of time and energy to operate the park when you're a dirt owner, that's the lowest touch, lightest maintenance, I think most appealing and certainly most profitable model from an operating margin perspective.

James: Yeah. It's like you have a big parking lot where people come and park their houses on top of it, I guess.  

John: That's right. Yeah. Look at it. And it's great because you know, it's very high margin, but also you've got owners that are in your community so there's an alignment of interest. You've got people that have skin in the game because they own the home and they want to take care of the community. So that's a really unique aspect in contrast to apartments where, you know, apartments, you always have renters and just by nature, you know, they're going to treat their place as if they're renting it. And that's very different from the mindset and the behavior of owners who are in your community. It's a stakeholder group shared alignment of interests and it's a mindset shift and something that I really pursue and try to cultivate in our communities.

James: Got It. Got It. Yeah. It's a very interesting model. It's a very simple concept. It does serve the affordable housing crisis that we have. Both apartments and mobile home park do serve it, even though it's two different, slightly different tenant base. One is one who wants to be a homeowner, even though it's a cheaper house, right? It's not like normal single-family houses but it's something that gives you a roof on top of your head and people liked that. And they have that community feeling when they are in that park so they are able to take care of it much better than like what you're saying in the apartment. You have leases turnover and you're 50% turnover per year and they leave the place every two years. So you have to go and do a turn around cause a lot more management intensive. How do you add value in mobile home parks?

John: Yeah, so a couple of ways. So increasing the rents. So one of the appeals of being in the asset class is it's a very fragmented and somewhat a non-professionally managed business. So in contrast to apartments where you have, I think very high transparency into pricing, because you have things like Yardi Matrix and some of the other platforms, where you can get a very quick insight into what the market rates and comparables are, you don't have that level of transparency into pricing in mobile home parks. So there isn't this invisible hand of pushing up rents with inflation or with market forces because the industry is just sort of 30 to 40 years behind, relative to single-family and multifamily, in terms of just, you know, pricing transparency. So simply coming in and raising the rents to market rates or what should be market, is one way in which you can add value.

Another that I described was expanding the footprint of rentable space. So in some cases, like our project in San Antonio, the former owner had given their residents very large lots, so they were almost twice as much as was required or determined as per the setback requirements. And so we found that if we simply move the homes over a bit and decreased the density by half, people would still be given pretty reasonable living space, we would be able to adhere to the setback requirements, and we would effectively double the rentable units within the property. So that's a way in which we're creating significant value by simply taking a look at the zoning requirements and the setbacks and seeing how we can reconfigure the lots well within the land to create new rentable space. 

A third is just operating it more professionally. Again, this industry is not one where there's a very sophisticated network of third-party property management. And you know, it's largely mom and pops owner-operators who, you know, at this point in time probably own the property outright. They don't have any data on it and they don't really have a need to maximize or optimize the performance of the property and in which case they let things go. So they may run operating expenses high, where relative to where they should be, they may have their friends working for them doing maintenance and or day to day operations. And as a result, probably pay them at higher than market rates. So coming in and introducing professional practices and professional management, running it as a real business, that's a way to bring down operating costs and increase the NOI. Those are really the main drivers, you know, rent increase, increase the rentable space and push down operating costs, those are the things that we focus on and usually have the greatest impact in terms of value.

James: So what about loans? I mean, you said a lot of these are mom and pop and fully, they own the whole thing, right? There is no debt on it. Are you able to get like seller financing deals?

John: Yeah, so of the three properties that we own, two of the three are seller financed. So we've got interest-only loans for six years on those two. And it's awfully attractive not to have to go through a bank or an agency to go through the underwriting process.

James: So you structure your non-recourse or recourse or how did you do that?

John: Yeah, non-recourse loans on both of them. So really great, fairly low down payments. So we have a 75 loan to value on one and 80% loan to value on the other. And we even on the first one, we strung out the timing of the down payment so that we could minimize the use of upfront capital. So, yeah, just increased flexibility, ability to execute with speed and fairly attractive loan terms. Again, another appeal of, of the businesses, you have a lot of flexibility with the lending for some of these smaller to mid-sized parks.

James: Yeah. Yeah, that makes it really interesting because recourse versus nonrecourse and loan terms, you know, in this case, you can structure this how you want, right? Because you're talking to mom and pop owner and how big are these parks?

John: Yeah, so for us, so we have one in North Carolina, which is 75 spaces. That was the first one that we took down. And that was, we negotiated seller financing for six years at 75% loan to value. And then the second park, we closed the month after. That's in San Antonio, that's 20 spaces and we're currently in the process of expanding that to 49 spaces. So by the end of the summer, that's the one where we're reconfiguring the land and bringing in 29 new homes to expand the footprint of the park. And then the third one is in South Carolina and that's about 45 spaces. So in a 20 to 75 space range, that's where we're finding opportunity value and that's about in the zone where you can negotiate seller financing. You know, it's good and bad, the financing.

 One, the pool of capital and the liquidity and access to the debt market is not at the level that multifamily is. So one of the nice things about multifamily is, you know, through Fannie and Freddie and other conduit lenders, you just have masses of capital available to you and it's an industrialized process to go through and get financing for these projects. That type of infrastructure doesn't exist really to the same extent with mobile home parks. So you know, on one end, financing can be really difficult, especially for the smaller parks. But what that affords you is the opportunity to negotiate more flexible and creative deals, through seller financing. Because ultimately, and in many cases, sellers, they don't have a choice. So if they are really interested in selling, buyers can't get financing through traditional sources and so they're sort of left with one choice, which is to carry a note. So, you know, in some cases we celebrate the fact that we can do this stuff, but in other cases we kind of bang our heads against the wall and say, if only we could go to Fannie or Freddie and get this financed, that, you know, very long term, low-cost rates.

James: So you are in New York and scattered all over the nation. How are these parks being managed, who's managing them?

John: So we have onsite managers for all three of our parks. And for all intents and purposes, they carry out the actions that we dictate. So all of them either live onsite in the park or live very close by and most of the time, we have daily calls with the managers to tell them what to do. Now their level of sophistication and their ability does not rival what you're accustomed to in multifamily because you know, in multifamily you've got a level of professionalism and sophistication that just isn't there yet in the mobile home parks that we deal in. So for us, it's just, we've got boots on the ground. Their jobs are primarily focused on collections. So making sure that people are paying rent on time, posting pay or quit notices or facilitating evictions, coordinating repairs to the extent that we need to bring in someone to fix the plumbing, for example. And then to the extent that we're filling in new units, they're coordinating showings with prospective residents to come and see homes and see if they want to sign a lease. So that's really where their job is focused on. So it's not a full-time gig really for any of them, it's part-time income for them and it's in peaks and valleys. So depending upon the activity, whether that's new rentals that we have, rental units available or repairs that are happening, they may be either really busy or find themselves with not much to do.

James: Yeah, I agree. I mean, I see they're not very highly sophisticated people. They are basically, you know, house-owner. So you know, mobile home users, on how people are paying, then we don't expect a lot from them in terms of management. I mean, even in multifamily. Yeah. I mean, we have a lot of professional management, but still, you have to manage them, right? So much moving parts, there's so many expenses, so much of repair and maintenance that need to be taken care of, which doesn't exist in mobile home parks. Because mobile home parks, supposedly, you know, you're just looking at the land and collecting rent. Looking at some common area, usually this kind of thing. So I think it would balance out in terms of, you know, the amount of time that you need to spend, especially for operators. 20:56inaudible] me who's managing our own property management and also people who are not having their own property management, their own active asset managers of apartment, failing to be involved very, very closely. You can't just go to the party. I mean they'll take it to somewhere else.

John: Yeah. Right. Yeah. Great. You know, and I think that's an important point that a lot of people miss. You know, going to the boot camp that you mentioned, I also attended, I think one of the things, I think the boot camp, people who leave the boot camp are fairly transparent about what it's like day, day in, day out. But for whatever reason, I talked to a lot of people that are interested in the mobile home park industry and one of the appeals to them is this sense that it's passive. And I would say, you know, it is very hands-on in the projects that we're involved with that we're turning around and trying to increase the value. We are pretty close to being full-time property managers as opposed to seeing the checks, you know, come in and you know, loving the passive income. So that's fine for us. I mean we like getting our hands dirty and taking action and being involved but that's one thing I would caution people about for whatever reason. I think headline news suggests that this is a passive income source and that's absolutely not the case at all when you're dealing with value add, you know, medium size mobile home parks.

James: Yeah. I mean if you want really passive and you invest passively or [22:28unintelligible] I don't think there's any business, which is really, really passive in real estate, right? Especially if you're an active operator and you want to make the most money. If you want to be at the top of the food chain, then you have to do work. If you don't do work, you can buy the deal and all that but the thing is you've got no control on the returns that are being made and being generated unless the market is getting up. There a lot of guys out there who are making, who are boasting themselves that they made a lot of money real estate without doing work. But it's actually the market is doing the work for you. 

John: Right, exactly.

James:  So this is the elephant in the room, right? So how're the returns compared to multifamily class B and C in mobile home parks? Because you have worked a lot on the capital raising side on the multifamily, so you can see a lot of operational stuff on that side compared to mobile home park, you know, how does that compare to..?

John: Yeah, so I'd say just general rule of thumb, it all depends, deal specific. I know that there are, you know, opportunities that you come across in apartments, they get into the 20% IRR. But generally speaking, I think hurdle rate for me, for apartment complexes, is about 15% IRR over say a five year holds. Whereas the hurdle rate for me for mobile home parks is about 20% IRR. So I'd say it's a 5% difference in terms of a return premium there that I'm seeing and that I'm using as a guideline for allocating capital in my projects.

James: Got It. What about cash flow on a yearly basis? What do you expect between these two asset classes?

John: It's about the same. So whereas, you know, you may expect an 8% yield a cash on cash for an apartment complex, larger apartment complex. We're looking at sort of 10 to low teens on cash on cash return.

James:  Are you syndicating this deal or you're doing this on your own?

John: No. So we use our own capital for all three of our projects and with this fourth in the pipeline. So, I work with other partners. There are about four of us that work together and to date, we've only used our own capital and that's intentional. We think we're still learning. We want to build a track record and we really want to get our arms around these heavy turnarounds so that in the future, we can raise outside capital and go to market with credibility and feel confident taking other people's money to do projects. So yeah, to date, it's just our own capital that we've used. So we're all active partners and no syndication.

James: So you could do a Jv type of thing. 

John: Exactly. 

James:  Okay. So you're saying when you're doing syndicate, you know, I mean, if you do syndication then you have to make sure you allocate some money for your passive investors as well from [25:24inaudible] whatever you guys are putting in I guess. So you're saying cash flow wise is almost similar, is that what I heard?

John: So like 3 to 5% premium, cash on cash return. Whereas the IRR was about 5%. That's what we're seeing. We see a significant portion of the overall return allocated towards the equity, the increase in equity because we are doing a turnaround. So you know, the cashflow is nice, but a majority of our returns are coming through the boost because we are fixing problems, elevating the class of the property or expanding it to generate significantly more income.

James: Got It. Got It. Got It. I mean audience just want to let you guys know as I wrote my book, you know, as a passive investor, you can choose any asset class, right? It's not only multifamily. I know multifamily is a lot of, what popular names nowadays is more famous than anybody or anything else. I mean, yeah, it is doing very well. There's a black swan effect of people become renters, you know, just demographic shift too. You know, people becoming renters. But there are also other asset classes like mobile home parks, self-storage, office industry. There's a lot of different asset class in that people are doing very well, right? Like, I mean, if you as a passive investor can make a couple of percents more compared to multifamily and you can find a good operator who will give you the returns on the backend you can always definitely do that. The key thing is to diversify your investment from what I see, even though I only do multifamily but I just think that, you know, wearing a bigger hat, my thought process, I think that's the message for passive investors, right? So the question for you is, you're talking about the 5% premium with the IRR and that's where the value adds are being generated, I guess. Right? And how do you plan to exit? I mean, are you going to sell to someone else? Is there like a big reap that is coming in?

John: Yeah, so for us, I mean, we like buying and we don't ever want to sell. So I say that in air quotes, you know, we'll own it forever. But for us, the exit is really through a cash-out refinance. For us, we find these smaller to medium size parks where we think that we can elevate the class of the property. So take it just under a million dollars and you know, at a low vacancy and augment it such that it can be financed through, either a conduit loan or a Fannie or Freddie debt. And at that point, we will have created sufficient equity that we can more or less pull out all of our capital that we've put in. And then when we're done, we've got long term, low-cost debt on the property and then we'll just collect the cash and go on and do our next thing.

 So that's the vision for all three of these properties is to execute the heavy turn of the value add in the first three to four years and then refi, take out all our capital and then go rinse and repeat and do that elsewhere. Because, I mean there's a very stable asset class. We liked the business. Affordable housing, we think is going to be a thing for the very long term. We like owning productive cash flowing assets and so we don't have any desire to sell now. So someone comes along and gives us an offer we can't refuse, well, we've got to, you know, do the math and see if it makes sense. But we're definitely not looking to go in, execute a turn and then exit to other private equity owners.

James: Very interesting. I mean that's what value add keeps you in commercial and that's the real power of commercial real estate. The other day, I was talking to a passive investor. He said, hey, this guy is giving me, you know, 8% cash on cash flow and that's it. Right? What about the back end? He said, oh, I don't care what the backend. I say, well then you can get much higher cash flow on mobile home parks. So if cash flow is the only thing that you're looking at, you know, you shouldn't look at multifamily alone. Or maybe you should look at 'A' type, 'A' class multifamily in a very strong location near to core urban center as what I call a core type of deal, right? You really don't have to do just multifamily, you can do a lot of other asset classes, right?

 The power in commercial real estate is actually on the cash flow plus the backend. The equity growth that you generate through value add, right? So that's why I named this podcast as value add real estate investing, because that is the gs of commercial real estate, right. Otherwise, I mean, unless you are rich or unless you are a big family office where you want to preserve your wealth; you're not investing, you're preserving your wealth. You're making slightly more than your inflation. Say inflation is 3%, you're making 8% cash flow. There's nothing on the back end, then you can go and do, you know, that kind of deal. The majority of people, people want the value-add component where it grows on the backend.

John: Sure. Yeah. I mean, we'd love to sell to those types of buyers. The ones that are looking at this squeaky clean, I mean, we'll do the work, we'll create the equity and then, you know, for those that just want to collect the rents, we're happy to sell for a premium.

James: Yeah, there's a lot of syndicators who buy the type of deal where you just cash flow because they get fees. Right? But for the passive investors and you don't understand, you're just going to get a cash flow, right. And some times people are very intrigued by the cash flow concept. Suddenly they come out from work, you know, working w two for their whole lives. Oh, there's a cash flow coming in monthly, you're going to jump on it, which is okay. It's okay for some people, but there are much better alternatives out there. Where you can grow your wealth as well on top of preserving your cash against the inflation. So that's good. So, how are you finding these deals because you are New York, how do you find it?

John: Yeah, so we explore all channels. So we do cold calling, we network with other owner-operators. We had done some fairly extensive direct mailing. We no longer really do that much. We talked to brokers, we go to industry conferences, we look at Facebook, Craigslist, eBay, a variety of other digital platforms. Really, we try to cast as wide a net as possible because again, this industry is really fragmented, not as industrialized as, you know, apartments are. You'd be hard pressed to find significant deal flow on a loop net, for example, for mobile home parks. So we just try to put ourselves in the flow of deals in as many instances as possible. Which means that we look at a lot of deals, we say no to most of them and it's very structured and haphazard. But, I mean, the three deals that we've sourced so far have been through relationships. So whether it's through meetups, we've met people and they needed to refer a deal because they had other priorities that they were going after. So despite, you know, we've done the work and built out databases of owners, throughout the country and, you know, done the cold calling, done the direct mail, despite all that time and energy put into revving up that engine, ultimately today, it's come down to relationships with other people.

James: I mean, it is so fragmented, right? It's just so hard to go and get to a broker and buy a right deal. Right. And daily, even in mobile home parks there to work hard for it. But that's okay. I think you're able to find it, which is really awesome.

John: Yeah. Yeah. And again, it's good and bad. It's hard work to do it because it's so fragmented. But at the same time, that's one of the reasons why there's value there because you've got really mispriced opportunities because the market isn't as efficient. So I mean, I'll take the hard work any day if it means you can still get good deals.

James: Got It. What about the depreciation or tax benefit of mobile home parks? How does that compare to the apartments?

John: Yeah, so with those parks where you're owning the land and the infrastructure, so you don't have quite as a large depreciable base as you do in multifamily. One good thing is that you have a condensed depreciation timeline. So while the depreciable base is not as high in terms of absolute dollar value, you can take a decent material dollar value for the depreciable base and depreciate it over sort of a 12 to 17-year timeframe instead of the, I don't remember the exact number..

James:  27.5

John: Yeah, 27 and a half year timeframe. So what you find yourself in a situation is that in the first sort of 10 to 15 years, you have about the same depreciation benefits and taxable losses that you would experience in multifamily. But then after sort of the 10 to 15-year mark, you run out of the depreciation and then, you know, you find yourself in with a larger taxable income.

James: Well, I didn't know that that is shorter than multifamily, is it 12 to 17 years?

John: Yeah. About that because it's not real property that you're depreciating. These are the utilities, so [35:11crosstalk] and the light posts and the roads and I mean this is equipment, essentially, depreciating. With the schedule, you apply a different shorter schedule depreciation. Then you do the actual structures,

James: You're not paying for the whole, I mean, you're paying for the land plus the utility infrastructure. Infrastructure maybe 10% of the overall cost, is that right?

John: Roughly. Yeah, it depends. It depends on what your infrastructure looks like. But it's still material; in most cases, it's material amounts that you can depreciate, but it accelerated, right? So now while you may have a lower absolute dollar value of an asset that you can appreciate, you can do it over a much faster time so it's accelerated, which means your yearly depreciation charge is higher and can also be a significant portion. But again, that expires faster than you find in multifamily.

James: Yeah. Yeah. But even in multifamily, I don't think anybody owns it for 12, 17 years. I mean, on syndicated deals, I guess.

John: Right.

James: Interesting. So, okay. So yeah, usually I think in commercial office industrial, is it 39 years? Multifamily residential, it's usually 27.5. And you're saying some of the utilities or infrastructure in the mobile home parks minus the land is 12 to 17 years. Okay. Yeah. Very interesting. So,

John: Yeah, so not quite as attractive from a tax basis. Look, after tax returns, I think you still find yourself in a very favorable situation because you know, the overall returns generated by the property are at a premium. And so even if you are paying taxes on that, you're after tax returns still tend to trend above what you would find in other commercial...

James:  Are you able to get a negative K1 in the first few years?

John: Yeah, yeah, definitely.

James: I mean, let's say after value add is done, let's say after value-add is done stabilized, do you still get negative K1?

John: I'd say, I mean deals specific, but it would be reasonable to expect that for, you know, the initial years of operation for sure.

James: Okay. Okay. Yeah. For our listeners, I mean K1 is the form that everybody gets when you're invested in a deal where it shows what is your paper loss or a paper gain. But usually most of the times, it's the loss. Because your mind is seeing the mortgage or you're minusing the depreciation of the asset and also you're minusing the interest on the loan that you are doing. But in this case, I think, John's case, there is a lot of it is seller finance so that still be interest. Yeah. You still have interests, right? Because for your IOS and all that.  Interesting. So where do you think you want to grow from here in mobile home parks?

John: Yeah. So continuing to scale. As I mentioned before, we're probably right on the cusp of taking in outside capital. We'd like to complete the turnaround with the three properties that we have under our ownership now so that we can prove out the concept, you know, go to market credibly with we've executed, have you turn arounds. We did it successfully and just have the inner confidence to be able to go and take outside capital. So look, we're trying to find value and when value presents itself, we'll act. We don't have any stated goals in terms of the number of units that we want to acquire. We do want to get larger. We wanted to do, you know, more complex, more interesting projects. Well, it's hard work, it's also really fun and we find a lot of sizes faction and turning around some pretty beat up and run down communities and augmenting the sense of community, beautifying the neighborhood and again, solving a really meaningful problem, which is the lack of affordable housing. So we get a lot of satisfaction and find fun and interest in solving these problems and continuing to grow the portfolio.

James: Yeah. And how frequent do you go and visit these parks?

John: So I make trips about quarterly. So I was just in San Antonio in April and was out there for a week and then flew back through the Carolinas to see the other projects. And in South Carolina, North Carolina, I'm going back to the Carolinas in June. So about, you know, every two to three months, I'm a boot on the ground, either looking at deals in the pipeline, checking up on progress on existing turnarounds or, you know, in some cases, we've got to get state licensing in order to do what we want to do in terms of lot infill. So for example, you know, I was in Austin in January to sit for the dealers licensing exam. So in order to execute the law and fill that we want to do in San Antonio, we need to be licensed dealers in order to buy homes directly from the manufacturer. So we were in Austin doing that. The same thing is happening in June. We're getting a dealer's license in North Carolina to be able to execute these large turnarounds. So between checking up on projects, chasing new deals and getting whatever required licensing we need in states, we're on the road a lot and touring around the southwest and the southeast.

James: Yeah. Yeah, that's very interesting. How are you getting dealer license to turn it on these properties and how are you finding a lot of fun in doing a lot of value? That's where you make the money. To solve problems that other people don't want to solve. 

John: Exactly. 

James: Right. So, and what's the point of buying a cash flowing deal? 

John: Right, right, exactly. You know, in maybe 30, 40 years from now, great. I'll do those and just collect the rent checks and that'll be fine. But in the meantime, you know, I'm still relatively young, hungry. I want to make an impact. And so that's where value add is really where the opportunity is.

James: I don't know, I mean, I think if you didn't want to work hard, I mean, I know if people want to get into real estate, but just so many people either, they don't want to take action or they think the problem is too hard or they just didn't want to put their mind into solving that problem. And that's where the barrier to entry comes in. Not many people want to solve the problem. And people like you who are in New York, you know, is solving the problem like in San Antonio and North Carlina, it's hard work but that's fun. And you make money out of it and it's generational wealth too, right? Because after you refi, you take out your money out, it's your cash flowing for your whole life. So you don't have to answer to anybody since you're not syndicating anyway, so that's awesome. So let's go to a bit more personal side. Why do you do what you do?

John: Yeah. So again, I think it's just fun. I'm the kind of person that I don't think I'm ever going to retire and sit on a beach or golf all day. I like to be active and doing things that are interesting. I liked doing challenging things and so, you know, for me, I just get a deep sense of satisfaction in doing hard things and really doing those hard things with teams of people. So I like surrounding myself with partners and binding together as a team to solve challenges that are just intensely satisfying for me.

James: Got It. Got It. Is there daily habits that you practice that you think has made you more successful?

John: Yeah, so I would say I'm a distance runner. So I'm an athlete, I've been running marathons for what seems like forever. And what that practice is instilled in me is a couple of things that have really translated directly into investment success. One is just the concept of compounding. So logging miles every day, over long periods of time. You know, maybe in a week or a month, I don't notice the progress, but over years of repeated activity and continuing to grind it out despite pain or cold weather or you know, emotional blocks that would, you know, would it difficult for me to want to move forward, I keep powering through it and ultimately it's led to a lot of success in my running endeavors. Implying that same approach of compounding and continuous daily incremental action in the investing space has really helped position me for success in investing there too.

James: Got It. Any advice that you want to give to newbies who want to get started in the mobile home park operation or investment in the business?

John: Sure. I'd say definitely learn about the nuances of the industry. Take the time to not only attend boot camp or something similar, but talk to other owner-operators about the details of owning and operating parks. You know, it's not enough to just read materials or listening to podcasts, I encourage people to do that, I do it myself, but really get to know owner operators because there are a lot of nuances about running or even finding parks that are glossed over or not adequately covered in podcasts, reading material or boot camps. So I'd say education, definitely take the time. I mean, I took about a year to really get my head around, you know, what is this industry like and what is it going to take to succeed? So education and then just get started. I mean, there's a lot of reasons to say no and to walk away from opportunities. Again, with mobile home parks being kind of 30 to 40 years behind the times relative to multifamily. There's just the nature of the asset classes, there always are going to be problems with these assets because they're not usually professionally managed and they all have some level of hair or warts on them. Don't let that scare you, that should inspire you to learn about which problems are fixable in which are not; where you should run away quickly and where you should dig in. And really find an opportunity to solve problems and create value. So I think those are my two best pieces of advice. Just get educated and then learn to get started and get going.

James: Awesome. Hey, John, why don't you tell our audience about yourself and where to get hold of you or if they want to contact you?

John: Yeah, so my website has my contact details. So Loan Juniper Capital is the name of my firm. We own and operate mobile home parks in the southeast and southwest. That's loanjunipercapital.com. There you can find my email address, my phone number and I'm on Bigger Pockets as well, I'm all over Facebook as well and the mobile home park forums and multifamily forums in Texas. So I try to be active and get my face out there and I do a fair amount of attending conferences in the southeast and the southwest too.

James: Awesome. Thanks for joining us today. I'm very sure that you added so much value. You know, I like to talk about different asset classes such as mobile home parks, other than just multifamily. Because as I said, opportunities everywhere. You have to find the right guys to partner with to know or to learn from. So, absolutely, I had a lot of value. Thanks for coming to the show, John.

John: Yeah, thanks for having me, James. This was fun. Appreciate it.

James: All right. Okay. Bye. Bye.

James: Hey listeners, this is James Kandasamy. Welcome to Achieve Wealth Podcast. Achieve Wealth Podcast focuses on value at real estate investing across different commercial asset class and we focus on interviewing a lot of operators so that you know, I can learn and you can learn as well. So today I have Omar Khan who has been on many podcasts but I would like to go into a lot more details into is underwriting and market analysis that he has. So Omar is a CFA, has more than 10 years investing across real estate and commodities. He has experience in the MNA transaction worth 3.7 billion, Syndicated Lodge a multi-million deal across the U.S. and he recently closed a hundred thirty plus something units in Jacksonville, Florida. Hey Omar, welcome to the show. 

Omar: Hey, thank you James. I'm just trying to work hard to get to your level man. One of these days. 

James: That's good. That's a compliment. Thank you Omar. So why not you tell our audience anything that I would have missed out about you and your credibility.

Omar: I think you did a good job. If I open my mouth my credibility might go down. 

James: Yes, that's good. That's good. So let's go a bit more details. So you live in Dallas, right? I think you're, I mean if I've listened to you on other podcasts and we have talked before the show you came from Canada to Dallas and you bought I think you have been looking for deals for some time right now. And you recently bought in Jacksonville. Can you tell about the whole flow in a quick summary? 

Omar: Oh, yes. Well the quick summary is man that you know, when you're competing against people who's operating strategy is a hope and a prayer, you have to look [inaudible01:54] Right? 

James: Absolutely. 

Omar: I mean, and hey just to give you a full disclosure yesterday there was actually a smaller deal in Dallas. It's about a hundred and twenty something units. And I mean we were coming in at 10-point some million dollars. And just to get into best and final people were paying a million dollars more than that, and I'm not talking just a million dollars more than I was trying to be cheap. The point was, at a million dollar more than that there is freaking no way you could hit your numbers, like mid teens that are already 10% cash-on-cash. Like literally, they would have to find a gold mine right underneath their apartment. So my point is it's kind of hard man. But what are you going to do about it? Right? 

James: Yes. Yes.

Omar: Just have to keep looking. You have to keep finding. You have to keep being respectful of Brokers' times. Get back to them. You just keep doing the stuff. I mean you would do it every day pretty much. 

James: Yes. Yes. I just think that there's so much capital flow out there. They are a lot of people who expect less, lower less return. Like you say you are expecting mid teen IRR, there could be someone there out there expecting 10 percent IRR and they could be the one who's paying that $1,000,000. Right? And maybe the underwriting is completely wrong, right? Compared to-- I wouldn't say underwriting is wrong. I mean, I think a lot of people--

Omar: Well you can say that James you don't have to be a nice person. You can say it. 

James: I'm just saying that everybody thinks, I mean they absolutely they could be underwriting wrong, too or they may be going over aggressively on the rent growth assumption or property tax growth assumption compared to what you have. At the same time they could have a much lower expectation on--

Omar: Yes. I mean let's hope that's the case because if they have a higher expectation man, they're going to crash and burn.

James: Absolutely.

Omar: I hope, I really hope they have a low expectation. 

James: Yes. Yes. I did look at a chart recently from Marcus and Millichap the for Texas City where they show us how that's like a San Antonio, Austin, Dallas and Houston and if you look at Dallas, you know, the amount of acceleration in terms of growth is huge, right? And then suddenly it's coming down. I mean all markets are coming down slightly right now, but I'm just hopefully, you know, you can see that growth to continue in all this strong market.

Omar: No, no, don't get me wrong, when I said somebody paid more than 1 million just to get into best and final, that has no merits on, that is not a comment on the state of the Dallas Market. I personally feel Dallas is a fantastic Market. Texas overall, all the big four cities that you mentioned are fantastic but my point is there is nothing, no asset in the world that is so great that you can pay an infinite price for it. And there's nothing so bad in the world that if it wasn't for a cheap enough price, you wouldn't want to buy it.

James: Correct, correct. 

Omar: I mean that that's what I meant. I didn't mean it was a comment on the state of the market. 

James: Got it. Got it. So let's come to your search outside of the Texas market, right? So how did you choose, how did you go to Jacksonville? 

Omar: Well, number one the deal is I didn't want to go to a smaller city. I'm not one of those guys, you know in search of [inaudible05:11] I find everybody every time somebody tells me I'm looking for a higher cap rate, I was like, why do you like to get shot every time you go to the apartment building? You want to go to the ghetto? Do you want somebody to stab you in the stomach? Is that because that's--

James: That's a lot of deals with a higher cap rate.

Omar: Yes. There's a lot because I was like man, I can find you a lot of deals with really high cap rates. 

James: Yes.

Omar: But you might get stabbed. Right? 

James: And they are set class 2 which has higher cap rate. 

Omar: Oh, yes, yes, yes. 

James: So I think people just do not know what a cap rate means or how--

Omar: Yes and people you know, all these gurus tell you today, I mean let's not even get into that right. So specifically for us like I wanted to stand at least a secondary, tertiary market [inaudible 05:48] I mean like, any City over at least eight, nine hundred thousand at least a million, somewhere in that range, right? 

James: Okay.

Omar: And specifically look, after Texas it was really Florida. Because look, you could do the whole Atlanta thing. I personally, I love Atlanta but it's a toss-up between Atlanta and say either of the three metros in Florida or Jackson. Lords in Central Florida, Jacksonville, Tampa, Orlando. You know based on my [inaudible06:11] experience I was doing this stuff portfolio management anyways, I kind of ran smaller factor model for all the cities where I took in different sort of factors about 30 different factors. And then you know, you kind of just have to do all the site tours and property visits to make all those relationships. And what I see across the board was, I mean Tampa has a great Market, but for the same quality product for the same demographic of tenant, for the same say rent level, Tampa was 20 to 25% more expensive on a per pound basis. 

James: Okay.

Omar: Let's say a Jacksonville, right? Orlando is kind of in the middle where the good deals were really expensive or rather the good areas were a bit too dear for us and the bad areas were nicely priced and everybody then tells you, "Oh it's Florida." right?

James: No, no.

Omar: But what they don't tell you is there's good and bad parts of Florida--

James: There's submarket. Yes Yes.

Omar: Right? So you got to go submarket by submarket. And then lastly what we were basically seeing in Jacksonville was, it was very much a market which like for instance in Atlanta and seeing parts of say Orlando and Tampa, you can have to go block by block street by street. But if you're on the wrong side of the street, man you are screwed, pretty much.

James: Absolutely.

Omar: But Jacksonville to a certain degree, obviously not always, was very similar to Dallas in the sense that there is good areas and then there's a gradual shift into a not as a [inaudible07:29] Right? So basically what you kind of had to do was name the submarket properly and if you had a higher chance of success than for instance [inaudible07:38] right down to the street corner, right? And then like I said the deals we were seeing, the numbers just made more sense in Jacksonville for the same level of demographic, for the same type of tenant, for the same income level, for the same vintage, for the same type of construction. So Jacksonville, you know, we started making relationships in all the markets but Jacksonville is where we got the best bang for our buck and that's how we moved in. 

James: Okay. So I just want to give some education to the listener. So as what Omar and I were talking about, not the whole city that you are listening to is hot, right. So, for example, you have to really look at the human capital growth in certain parts of the city, right? So for example in Dallas, not everywhere Dallas is the best area to invest. You may have got a deal in Dallas but are you buying in it in a place where there's a lot of growth happening? Right? Like for example, North Dallas is a lot of growth, right? Compared to South Dallas, right? In Atlanta that's I-20 that runs in between Atlanta and there's a difference between, you cross the I-20 is much, you know a lot of price per pound or price per door. It's like a hundred over door and below Atlanta is slightly lower, right?

So it's growing, but it may grow it may not grow. I mean right now the market is hot, everything grows. So you can buy anywhere and make money and you can claim that, hey I'm making money, but as I say market is--

Omar: [inaudible09:03] repeatable [inaudible09:04] By the way I look at it, is hey is this strategy repeatable? Can I just rinse and repeat this over and over and over?

James: Correct. Correct. I mean it depends on sponsor's cases. While some sponsors will buy because price per dollar is cheap, right? But do they look at the back end of it when the market turns, right? Some sponsors will be very very scared to buy that kind of deal because we always think about, what happens when the market turns, right? So.

Omar: Yes, James and the other thing that I've seen is that, look, obviously, we're not buying the most highest quality product.

James: Correct.

Omar: But what I've seen is a lot of times when people focus on price per unit, say I will go for the cheapest price per unit. Well, there's a reason why it's cheap because you know, there's a reason why Suzuki is cheaper than a Mercedes. Now, I'm not saying you have to go buy a Mercedes because sometimes you only need to buy a Suzuki. Right? I mean that's the way it is, but you got to have to be cognizant that just because something is cheap doesn't mean it's more valuable and just because something is more expensive doesn't mean it's less than. 

James: Correct. Correct. Correct. And price per door is one I think one of the most flawed metrics that people are talking about. Price per door and also how many doors do people own?

Omar: And also cap rate, man. [inaudible 10:09] 

James: Cap rate, price per door and--

Omar: How many doors have you got?

James: How many doors do you have? Three metrics is so popular, there is so much marketing happening based on these three metrics. I mean for me you can take it and throw it into the trash paper, right?

Omar: The way I look at it is I would much rather have one or two really nice things, as opposed to 10 really crappy things. 

James: Correct. Correct. Correct. Like I don't mind buying a deal in Austin for a hundred a door compared to buying a same deal in a strong Market in another-- like for example, North Atlanta, right? I would rather buy it in Austin. It's just different market, right? So. Absolutely different. So price per door, number of doors and cap rate, especially entry cap rate, right? I went back and cap rate you can't really predict, right? So it's a bit hard to really predict all that. But that's--

Omar: Yes but my point is with all of these things you have, and when people tell me cap rate I'm like, look, are you buying stabilized properties? Because that's the only time you can apply this.

James: Correct. Correct.

Omar: Otherwise, what you really going to have to look at is how much upside do I have because at the end of the day, you know this better than I do. Regardless of what somebody says, what somebody does, everything is valued on [inaudible11:15]

James: Correct.

Omar: Pretty much. You can say it's a low cap rate and the broker will tell you, well yes the guy down the street bought it for a hundred and fifty thousand a unit so you got to pay me a hundred fifty, right? And then that's the end of the conversation. 

James: Yes.

Omar: Literally, I mean that is the end of the conversation, right? What are you going to do about it? 

James: Yes. Correct. I mean the Brokers they have a fiduciary responsibility to market their product as much as possible, but I think it's our responsibility as Sponsor to really underwrite that deal to make sure that--

Omar: Oh yes.

James: --what is the true potential.

Omar: And look, to be honest with you sometimes the deal, that is say a hundred and fifty thousand dollars a unit might actually be a better deal--

James: Oh absolutely.

Omar: [inaudible 11:51] fifty thousand dollars a unit. I mean, you don't know till you run the numbers.

James: Correct. Absolutely. Absolutely. I've seen deals which I know a hundred sixty a door and still have much better deal than something that you know, I can buy for 50 a door, right? So. You have to underwrite all deals. There's no such thing as cap rate or no, such thing as price per door. I mean you can use price per door to a certain level. 

Omar: [inaudible 12:15] in this market what is the price per door? That's the extent of what you might potentially say, in the submarket. 

James: Correct.

Omar: All the comps are trading at 75,000 a door. Why is this at 95 a door? 

James: Yes.

Omar: That's it. 

James: I like to look at price per door divided by net square, rentable square footage because that would neutralize all measurements.

Omar: Yes, see, you know we had a little back and forth on this, I was talking to my Analyst on this but my point is that I would understand [inaudible 12:46] at least to my mind. Okay. I'm not, because I know a lot of Brokers use it. 

James: Sure.

Omar: In my mind that would apply to say, Commercial and Industrial properties more.

But any time I've gone to buy or say rent an apartment complex, I never really go and say like, hmm the rent is $800. It's 800 square feet. Hmm on a per square foot basis. I'm getting one dollar and then I go--

James: No, no, no, I'm not talking about that measurement. I'm talking about price per door divided by square footage rentable because that would neutralize between you have like whether you have a lot of smaller units, or whether you have a larger unit and you have to look-- but you have to plot it based on location. Right? So.

Omar: Yes, so you know as you get into those sort of issues right? Well, is it worth more than that corner? 

James: Yes. Yes. You're right. Yes. You have to still do rent comes and analyze it. 

Omar: Yes.

James: So let's all--

Omar: I mean look, I get it, especially I think it works if you know one or two submarkets really well. Then you can really--

James: Correct. Correct. That's like my market I know price because I know the market pretty well. I just ask you this information, just tell me price per door. How much average square feet on the units and then I can tell you very quickly because I know the market pretty well.

Omar: Because you know your Market, because you already know all the rents. You already know [crosstalk13:57]

James: [crosstalk13:57] You have to know the rent. I said you have to build that database in your mind, on your spreadsheet to really underwrite things very quickly. So that's good. So let's go back to Jacksonville, right? So you looked-- what are the top three things that you look at when you chose Jacksonville at a high level in terms of like the macroeconomic indicators?

Omar: Oh see, I wasn't necessarily just looking at Jackson. What I did is I did a relative value comparison saying what is the relative value I get in Jacksonville versus a value say I get in a Tampa, Atlanta or in Orlando and how does that relatively compare to each other? 

James: So, how do you measure relative--

Omar: What I did is for instance for a similar type of say vintage, right? Say a mid 80s, mid 70s vintage, and for a similar type of median income which was giving me a similar type of rent. Say a median income say 40 Grand a year or 38 to 40 Grand a year resulting in an average rate of about $800. Right? And a vintage say mid 70s, right? Board construction. Now what am I getting, again this is very basic maths, right? This is not I'm not trying to like make up. 

James: Yes. Absolutely.

Omar: A model out of this, right? So the basic math is, okay what is the price per unit I'm getting in say, what I have a certain crime rating, I have a certain median income rating and I have a certain amount of growth rating. And by growth I mean not just some market growth, [inaudible 15:21] are Elementary Schools nearby? Are there shopping and amenities nearby? Is Transportation accessible, you know, one or two highways that sort of stuff. Right? So for those types of similar things in specific submarkets, [inaudible 15:33] Jacksonville had three, Tampa had two and Orlando had three and Atlanta had four, right? What is the average price per unit I'm facing for similar type of demographics with a similar type of rent profile? With similar type of growth profile I mean you just plot them on a spreadsheet, right? And with the similar type of basically, you know how they performed after 2008 and when I was looking at that, what I was looking at again, is this precise? No, it's not a crystal ball. But these are just to wrap your head around a certain problem. Right? You have to frame it a certain way. 

James: Okay.

Omar: And what I was seeing across the board was that it all boils down to when you take these things because at the end of the day, all you're really concerned is what price am I getting this at, right? Once you normalize for all the other things, right?

James: Correct. Correct.

Omar: Right? And what I was seeing was just generally Jacksonville, the pricing was just like I said compared to Tampa which by the way is a fantastic market, right? But pricing was just 15 to 20% below Tampa. I mean Tampa pricing is just crazy. I mean right now I can look at the flyer and tell you their 60s and mid 70s vintage is going for $130,000 $120,000 a unit in an area where the median income is 38 to 40 Grand.

James: Why is that?

Omar: I don't know. It's not one of this is that the state Tampa is actually a very good market, okay. Let's be [inaudible 16:47] it's very good market. It's a very hot market now. People are willing to pay money for that. Right? So now maybe I'm not the one paying money for it, but there's obviously enough people out there that are taking that back. So.

James: But why is that? Is it because they hope that Tampa is going to grow because--

Omar: Well, yes. Well if Tampa doesn't grow they're all screwed James.

James: No, but are they assuming that growth or are they seeing something that we are not seeing? Because, if people are earning 30, 40 thousand median household income and the amount of apartment prices that much, they could be some of the metrics that they are seeing that they think--

Omar: Well, yes. Tampa's growth has been off the charts in the past few years, right? James: Okay. Okay.

Omar: So what look-- first of all this is the obvious disclaimer is I don't know what I don't know. Right? So I don't know what everybody else is looking at. Our Tampa's growth has been off the charts, there is a lot of development and redevelopment and all that stuff happening in the wider metro area. So people are underwriting five, six, seven, eight percent growth. 

James: Okay. So the growth is being--

Omar: No, the growth is very-- look the growth has been very high so far.

James: Okay. Got it.

Omar: My underlying assumption is, as I go in with the assumption that the growth must be high but as soon as I get in the growth will go down. 

James: But why is that growth? I mean that is specific macroeconomic. 

Omar: Oh yes, yes. There's first of all, there's a port there, number one. The port --

James: In Tampa. Okay. You're talking about Jacksonville or Tampa right now?

Omar: No, I'm talking Tampa.

James: Okay.

Omar: Jacksonville also has it, but Tampa also has it, okay.

James: Okay. Got it. Got it.

Omar: Tampa is also fast becoming, Tampa and Orlando by the way are connected with this, what is it? I to or I for whatever, it's connected by. So they're faster like, you know San Antonio and Austin how their kind of converging like this?

James: Correct. Correct.

Omar: Tampa and Orlando are sort of converging like this.

James: Got it. Got it.

Omar: Number one. Number two, they're very diversified employment base, you know all the typical Medical, Government, Finance, Healthcare all of that sort of stuff, right? Logistics this and that. And plus the deal is man, they're also repositioning themselves as a tourist destination and they've been very successful at it.

James: Okay. 

Omar: Because there's lots to do you know you have a nice beach. So, you know that kind of helps all this, right? Have a nice beach.

James: Correct. Correct.

Omar: Really nice weather, you know. So they're really positioning it that way and it also helps that you've got Disneyland which is about 90 minutes away from you in Orlando. So you can kind of get some of the acts things while you come to Tampa you enjoy all the stuff here. Because Orlando relative to Tampa is not, I mean outside of Disneyland there's not a lot to do though. But a lot of like nightlife and entertainment and all that. 

James: But I also heard from someone saying that like Orlando because it is more of a central location of Florida and because of all the hurricane and people are less worried about hurricane in the central because it you know, it has less impact.

Omar: James. James.

James: Can you hear me?

Omar: When people don't get a hurricane, they are not going to be the people who get the hurricane. Other people get hurricanes. Not us.

James: Correct, correct.

Omar: But that's not always the case but that's the assumption. 

James: Okay. By Tampa is the same case as well? Like, you know because of--

Omar: I don't know exactly how many hurricanes they've got but look man, they seem to be doing fine. I mean if they receive the hurricane they seem to be doing very fine after a hurricane. 

James: Okay. Okay. So let's go to Jacksonville, that's a market that did not exist in the map of hotness, of apartment and recently in the past three, four years or maybe more than that. Maybe you can tell me a lot more history than that. Why did it pop out as a good market to invest as an apartment?

Omar: Well, because Jackson actually, we talk to the Chamber of Commerce actually about this. And the Chamber of Commerce has done a fantastic job in attracting people, number one. Because first of all Florida has no state income tax. What they've also done is a very low otherwise state a low or minimum tax environment [inaudible20:29] What they've also done is, they reconfigured their whole thing as a logistical Center as well. So they already had the military and people always used to say, oh Tampa, Jacksonville's got a lot of military, but it turns out military's only 11% of the economy now.

James: Okay. Okay.

Omar: So they've reposition themselves as a leading Health Care Center provider, all that sort of, Mayo Clinic has an offshoot there by the way, just to let you know. It's a number one ranked Hospital. 

James: Oh Mayo Clinic. Okay. Okay. We always wonder what is Mayo Clinic, but now you clarified that.

Omar: Right? So Mayo Clinic is in Rochester I think. One of my wise colleagues is there actually. Think it's in Rochester Minnesota. It's one of the leading hospitals in the world.

James: Okay. Got it.

Omar: And now they've actually had an offshoot in basically Jacksonville, which is the number one ranked Hospital in Florida. Plus they've got a lot of good healthcare jobs. They've really repositioned themselves not only as a great Port because the port of Jacksonville is really good and they're really expanding their ports. You know Chicon, the owner of Jacksonville Jaguars, man he's going crazy. He is spending like two or three or four billion dollars redeveloping everything. 

James: Got it. Got it.

Omar: [inaudible 21:32] what they've done is because of their location, because they're right, I mean Georgia is about 90 minutes away, Southern Georgia, right? And now you have to go into basically, Florida and basically go to the Panhandle. What they've also done is because of their poor, because of their transportation Network and then proximity to the East Coast they repositioned themselves as a Logistical Center as well. 

James: Got it. That's what I heard is one of the big drivers for Jacksonville. And I also heard about the opening of Panama Canal has given that option from like importing things from China. It's much, much faster to go through Panama Canal and go through Jacksonville.

Omar: Oh, yes.

James: Makes it a very good distribution centre.

Omar: Because the other board right after Jacksonville in which by the way is also going through a big redevelopment and vitalization is Savannah, Georgia. 

James: Okay. Yes.

Omar: [inaudible 22:17] big enough and I think Jacksonville does something like, I mean don't quote me on this but like 31% of all the cars that are imported into the U.S. come through the Jacksonville Port. So there's a lot of activity there, right? But they've really done a good job. The Government there has done a fantastic job in attracting all this talent and all these businesses. 

James: Okay. Okay. Got it. So let me recap on the process that you came to Jacksonville and going to the submarket. So you looked at a few big hot markets for apartments and looked at similar characteristics for that submarket that you want like for closer to school, in a good location and you look at the deal flow that you are getting from each of these markets. And then you, I mean from your assessment Jacksonville has a good value that you can go and buy right now for that specific demographic of location I guess, right?

Omar: Look I love Atlanta as well. I was actually in Atlanta a few weeks ago looking at some, touring some properties. So that doesn't mean Atlanta isn't good or say Tampa or Orlando is good. We were just finding the best deals in Jacksonville. 

James: Okay. Okay. So the approach you're taking is like basically looking at the market and shifting it to look for deals in specific locations of submarket where you think there is a good value to be created rather than just randomly looking at deals, right? Because--

Omar: Because man it doesn't really help you, right? If you really go crazy if you try to randomly look at deals. 

James: Yes. Yes. I think a lot of people just look at deals. What, where is the deal? What's the deal that exist? Start underwriting the deals right? So--

Omar: Oh I don't have that much free time and I have a son who's like 18 months old man My wife is going to leave me if I start underwriting every deal that comes across my desk. 

James: Yes, I don't do all the deals that comes across.

Omar: I'm going to kill myself trying to do all that. Yes man it's very surprising I see a lot of people especially on Facebook posting. I mean I get up in the morning and I see this, [inaudible 24:05] who loves to underwrite deals? And I'm like, dude it's 1 a.m. Go get a beer. Why are you underwriting a deal at 1 a.m., man? 

James: Yes. Yes. Yes I think some people think that you can open up a big funnel and make sure you know out of that funnel you get one or two good deals, right? But also if you have experience enough you can get the right funnel to make sure you only get quality data in, so that whatever comes in is more quality.

Omar: My point is man, why do you want to underwrite more deals? Why don't you underwrite the right deal and spend more time on that deal or that set of deals.

James: Correct.

Omar: Because there's just so many transactions in the U.S. man. There's no way I can keep up man.

James: Correct. Correct. Correct. So let's go to your underwriting Jacksonville because I think that's important, right? So now you already select a few submarkets in Jacksonville, right and then you start networking with Brokers, is that what you did? 

Omar: Yes. Yes but you know with Brokers also, you kind of have to train them, right? Because what happened is every time what are you looking at? All that after all that jazz, wine and dining and all that stuff. We had to train Brokers [inaudible25:08] here are only specific submarkets we're looking at. So for instance Jacksonville, it was San Jose, San Marcos, it's the beaches, it was Mandarin and orange [inaudible25:16] 

James: Okay.

Omar: And Argyle Forest was certainly, right? If it's anything outside of that, unless I don't know it's like the deal of the century, right? Literally, somebody is just handing it away. We don't want to look at it. Don't waste my time. And invariably what the Brokers will do, because it's their job they have to do it. They'll send you deals from other submarkets because they want to sell. Hey, I think this is great. You will love this.

James: Yes.

Omar: And you have to keep telling them, hey man I really appreciative that you send me this stuff, not interested. Not interested. So, but what that does is you do this a few times and then the Broker really remembers your name when a deal in your particular submarket does show up. Because then you go to the top of the pile.

James: Correct. Because they know that you asked specifically for these right now. 

Omar: Yes. [inaudible25:58] You know the deal. Right? So that's kind of what we get, right?

James: So let's say they send a deal that matches your location. So what is the next thing we look at?

Omar: So what I basically look at is what are the demographics. Median income has got to be at the minimum 38 to 40 thousand dollars minimum.

James: What, at median household income?

Omar: Median household income. Right?

James: Got it. Got it. Why do you think median household income is important?

Omar: Because look, again this is rough math I didn't do a PhD in [inaudible 26:27] 

James: Sure, sure, sure. Go ahead.

Omar: Typically, you know, where [inaudible 26:30] everybody says BC but really everybody is doing C. Okay, you can just-- I think people just say B to sound nice. Right? It's really C. Okay, let's be honest. Right? Typically with a C if you're going to push [inaudible 26:41] within one or two years, in these submarkets at least, I don't know about other areas. Typically you want to push the rents to around a thousand dollars a month, give or take. Average rate. I'm just talking very cool terms, right? Which basically means that if you're pushing it to a thousand dollars a month and the affordability index is it should be 33%, 1000 times 12 is 12, 12 times 3 is 36. So I just added an extra 2,000 on top or 4000 on top just to give a margin of safety. 

James: Okay.

Omar: Right? It's very simple math, right? There's nothing complex in it. Right? 

James: Correct.

Omar: Because my point is if you're in an area where the average income is 30,000, man you can raise your rent all you like. Nobody's going to pay you.

James: Yes. Yes, correct. So I think we can let me clarify to the listeners, right? So basically when you rent to an apartment, we basically look for 3x income, right? So that's how it translates to the household income, average household income and if you want to do a value-add or where deals, you have a margin of buffer in our site and you're buying it lower than what the median household income, that's basically upside. That means you can find enough renters to fill up that upside, right? 

Omar: Yes.

James: Just to clarify to the listeners. So go ahead. So you basically look up median household income. What is the next step do you look for?

Omar: Then I basically look at crime. Basically, I just-- I mean look, there's going to be a level of crime, what I'm really looking at is violent crime. Right?

James: Violent crime. Okay. How do you look for which tools to use? 

Omar: Well, you can go to crime map, crime ratings, you can subscribe to certain databases and they can give you neighborhood Scout is one by the way. 

James: Okay. Okay.

Omar: You can use that. And then on top of that because it's harder to do this for Texas, but you can do this in other states like Florida, Georgia and all of that. But for instance, what you can do is see what the comps in the submarket are. Right? And that kind of helps you in determining basically, look if all the properties for a certain vintage around you have traded for a certain amount of money, then if something is up or below that there's got to be a compelling reason for that. Now I'm not saying if it's above it's a bad reason and don't do it. There's got to be a compelling reason. Now they might be actually a very good reason. Right?

James: Got it.

Omar: So, you know that's like a rough idea and then basically I'm looking at rent upside. Basically look at co-stars and see what the average rents are for this property. What is roughly the average rent upside and you can also seek [inaudible29:04] place that I had a few contacts in Jacksonville and you can also call those up. Right? Again, rough math kind of gives you hey, do I send five hundred two hundred dollars and then basically see what is the amount of value [inaudible29:16]. Because for instance, if all the units have been renovated which by the way happened yesterday. Yesterday we came across [inaudible29:22] in Jackson where I know the Broker and I mean he sent me the email. You know, the email blast out and basically what we saw was the location was great, there's a lot of rent up, supposedly there's rent upside, but when I called the guy up, we know each other. He's like, bro, all the units have been renovated. There's maybe 50, 75, I know you so I'm going to tell you there's only 50, 75 so the price isn't going to be worth it.

James: Yes, and they'll ask you to do some weird stuff, right? Like go there, washer, dryer, rent the washer dryer out.

Omar: Yes. Yes.

James: But charge for assigned parking, right? So very small amount in terms of upside, right?

Omar: My point is if it was so easy why don't you do it?

James: Yes. Correct.

Omar: That's the way I look at it. 

James: Yes, usually I mean when I talk to the Brokers I will know within the few seconds whether it's a good deal or not. They'll be really excited if it matches what we are looking for, right? Especially--

Omar: Yes because I think the other deal is if you develop a good relationship with Brokers and they know what you're specifically looking for, good Brokers can kind of again look they have to sell but they can also give you some guidance along the way.

James: Correct. Correct.

Omar: Right? They can do a lot bro, it doesn't really work for you I think, but I'm just going to be honest with you, and look you still have to take it with a grain of salt but it is what it is. 

James: Correct, correct. Okay. So look for rent upside by looking at rent comps and you said in Texas which is a non-disclosure state it's hard to find sales comp but… 

Omar: Yes, but look, you know if you're in a market you're going to know who the people are doing deals. Which people are doing deals. 

James: Okay.

Omar: And even if you don't know it, say your property manager kind of knows it, or your  loan broker or lender knows kind of what deals have traded in the market. You got me. You can pick up a phone and call some people, right? Maybe you don't get all the information but you can get, I mean if you're in submarket or sometimes even in Texas, you can't know. 

James: Yes, exactly. Exactly. So when do you start underwriting on your Excel sheet? 

Omar: Oh bro after I've done the property tour because if these don't even pass this stuff why you even bothering to underwrite it. 

James: Oh really? So okay. So you basically look at market--

Omar: [inaudible 31:28] My point is, if it passes all these filters and then I have a conversation, I talk to my property manager, I talk to the Broker, I talk to my local contacts there and if it's all a go and these are all five-minute conversations or less. It's not like a two hour long conversation if it passes through all this they're just going to [inaudible 31:45] property door, man. 

James: Okay, so you basically-- but what about the price? How do you determine whether the price they asking is reasonable or not.

Omar: Well, obviously because I can do a rough math and compare it against the comps, right? 

James: Okay. Okay. Got it. Got it. So you basically do [inaudible 31:59] 

Omar: Oh, yes. Yes, because my point is why waste myself? Because look, the price could make sense, all the Brokers pictures we all know look fantastic. It looks like you're in like Beverly Hills, you know. So the pictures you know are kind of misleading, right? And the location might be really good but hey, you might go there and realize you know, the approach is really weird. Or for instance we were touring this one property and then 90% of I think the residents were just hanging out at 12:00 noon.

James: Correct.

Omar: Outside smoking. 

James: At 12 o'clock. Wow.

Omar: I said, well what the hell is this. Right? So my point is some things you only know when you do tour a property, there's no amount of videos and photos because the Broker isn't going to put a bad photo on. 

James: Yes. Yes. Their Excel spreadsheets are going to tell you that, right? 

Omar: Yes.

James: So basically, you know, you have to go. What about what else do you look for when you do a property tour other than… 

Omar: So you know when they're doing a property tour, like obviously I'm taking a lot of notes, I'm taking a lot of pictures, a lot of times the Broker will say one thing and then you kind of turn back around and ask the same question a different way just to kind of see.

But what I also like to do is I also like to tour the property. On the property tour I like to have the current property manager and look I'm not stupid enough to say that the Broker hasn't coached the property manager. The broker has obviously coached the property manager that's his job. But a lot of times you'll realize that they haven't been coached enough. So if you ask the right questions the right way you can get some level of information. Again you have to verify everything and another trick I also figured out is. You should also try to talk to the maintenance guy and have him on the property tour and then take these people aside and so the Broker can be with somebody else. Ideally you should tour with two people. So if one guy takes care of the Broker and you take care of the property manager or the other way around. Because then you can isolate and ask questions, right? So especially if you take like say a maintenance guy and you ask him, hey man so what kind of cap X you think we should do? What do you think about the [inaudible 33:54]? A lot of times those people haven't been coached as much or at all.

James: Correct. 

Omar: And to be honest with you, man, we are in a high trust society. Most people aren't going to completely just lie to your face. They might lie a little bit but people aren't going to say red is blue and blue is purple.

James: Correct.

Omar: You know you can see that. You know when somebody says it, you can feel it. Come on.

James: You can feel, yes. That's what I'm coming. You can actually see whether they are trying to hide stuff or not. But you're right, asking the maintenance guy is a better way than asking the property managers or even the other person is like leasing agent. 

Omar: Yes.

James: Who were assigned to you. They probably will tell you a lot more information.

Omar: And that's why I feel like it's better to have two people like you and a partner touring.

James: Okay.

Omar: Because then different people, like one because look, and there is nothing wrong. The Broker has to do this. The Broker always wants to be with you to see every question is answered the way he wants it to be answered. So then one of your partners or you can tackle the Broker and the other person can tackle somebody else.

James: Got it. Got it. So let's go to, okay so now you are done with the property tour. Now you're going to an [inaudible35:01] underwriting, right? So, how do you underwrite, I mean I want to talk especially about Jacksonville because it's a new market for you and you are looking at a new, how did you underwrite taxes, insurance and payroll because this--

Omar: Taxes was very easy to do. You talk to a tax consultant and you also see what historically the rate has been for the county. Right?

James: Okay.

Omar: But again, just because your new doesn't mean you don't know people.

James: Correct. But how do you underwrite tax post acquisition? Because I mean in taxes is always very complicated--

Omar: No but taxes is harder, right? But [inaudible 35:32] in Florida it's easier because the sale is reported. They already know what price it is.

James: So do they, so how much let's say how many percent do they increase it to after--

Omar: Typically in Duval County where we bought, it's about 80 to 85% [inaudible35:46] 

James: Okay. Okay. That's it. 

Omar: But the tax rate is low, right? Just to give you an idea the tax rate is [inaudible35:51] in Texas a tax rate is higher. So you understand there's lots of things and for instance in Florida there's an early payment discount. So if you pay in November, so it's November, December, January, February, right? So if you pay in November, which is four months before you should be paying you get 4% off your tax return. 

James: Oh, that's really good.

Omar: And if you pay in December you get 3% off, if you pay January you get well, whatever 2% off. In February you get 1% off.

James: So what is the average tax rate in Florida? 

Omar: I don't know about Florida. I know about Douval. It was like 1.81. 

James: Wow, that's pretty low. Yes compared to--

Omar: Yes, but you also have to realize you have the percentage of assessed value is higher, right? Depending on which county you are in. You're in San Antonio and Austin where Bear county is just crazy.

James: Bear Travis County, yes.

Omar: Yes. Bear and Travis are just crazy but there are other counties in for instance Texas where the tax might be high but percentage of assessed value is really low. 

James: Correct. 

Omar: No, I mean it balances out. Right? My point is--

James: Yes. So but what about the, do you get to protest the tax and all that in the Duval County in Jacksonville?

Omar: I think you can. No you were not, I think I know you can because we're going to do it. But you need to have a pretty good reason, right? 

James: Okay. Okay.

Omar: Right? And obviously look, you can show that yea, look I bought it for this price, but my income doesn't support this tax or this or that. I mean you have to hire the right people.

I'm not going to go stand and do it myself. 

James: So basically they do bump up the price of the acquisition, but it's very easy to determine that and 80 to 85% of whatever. 

Omar; Yes. Yes. Yes.

James: That's--

Omar: But look man, on the flip side is that when you go in, you kind of have a better control of your taxes in Texas where taxes can just go up and you [inaudible37:29] 

James: Yes. Yes. You have no control in Texas. So we usually go very very conservative to a hundred percent. So which--

Omar: Look my point is it's good and bad, right? It depends where you are. So now people will say, oh the tax person knows all your numbers and like, yes but I can plan for it. 

James: Yes, yes, correct. But it also gives you an expectation difference between buyer and seller because the buyer is saying this is my cap rate whereas the seller is saying, this is what, I mean the seller is going to say this is one of the cap rate whereas the buyer is going to say this is my cap rate will be after acquisition because--

Omar: Yes. Of course.

James: So when it's smaller [inaudible38:03] between these two, the expectation is more aligned compared to in Texas because you know, it can jump up a lot and there's a lot of mismatch of expectations. Right?

Omar: Well actually a deal in Houston, it's near Sugar Land and yesterday I was talking to this guy who wanted me on the deal and the other deal isn't going anywhere because the taxes were reassessed at double last year. Now he has to go to this the next week to fight it. Man, there's no way you're going to get double taxes in Florida or Georgia where there's our disclosure state, right?

James: Correct. Correct, correct. So that's a good part because the buyer would be saying that's not my, the seller would be saying that's not my problem and buyer is going to say I have to underwrite that, right? So.

Omar: I mean man, you can have a good case, right? Because it's not like somebody is saying something to you like, look man this is the law. 

James: Yes, correct. So let's go back to Insurance. How do you underwrite Jacksonville Insurance? Because I know in Florida there is a lot of hurricane and all that--

Omar: [inaudible 38:58] just to give you an idea that is a complete myth because Jacksonville has only had one hurricane in the past eight years. 

James: So is it lower than other parts of Florida? Or it just--

Omar: Yes. So the first it only depends where you are in Florida. Number one, right? Number two, it depends if you're in a flood plain or not, but that's in Texas as well. Right? And number three, it also depends a lot of times, well how many other claims have happened in your area? Right? Because that kind of for the insurance people that's kind of like a you know, how risky your area is quote unquote for them. So yes, so in Jacksonville, and apparently I did not need to know this information but we were told this information. Like the coast of Florida where Jacksonville is the golf coast is really warm where Jacksonville is, not golf courses on the other side, it's the Atlantic side. These are really warm waters relatively speaking. So apparently there's like some weather system which makes it really hard for hurricanes to come into Jacksonville. So that's why it's only had one hurricane in the 80 years. 

James: So when you get your insurance quote, when you compare that to other parts of other markets--

Omar: Oh yes, Tampa was way higher, man.

James: What about like Houston and Dallas? 

Omar: I don't know about Houston because I haven't really lately looked at something in Houston. Right? So I can't really say about Houston and Dallas was maybe like say $25, $50 less maybe.

James: Oh really. Okay. 

Omar: Yes. It wasn't because that was a big question that came up for everybody. I was like look man, literally here's all the information and you don't even have to take my word for it because I'm giving you sources for all the information. Right? [crosstalk40:24]

James: [crosstalk40:25] rate at different markets?

Omar: Sorry?

James: Are you talking about the insurance rate for--

Omar: Yes. Yes. Yes. Because a lot of guys from Chicago, I had a few investors they were like, but Florida has real hurricanes. I was like, yes but Jacksonville doesn't.

James: Okay, got it. So you basically got a code from the insurance guy for the--

Omar: Oh yes man, I wasn't just going to go in and just put my own number that has no basis in reality. 

James: Correct, correct. So, what about payroll? How did you determine the payroll? 

Omar: So the payroll is pretty easy man. You know how much people get paid on per whatever hour. You know, you can have a rough idea how many people you are going to put on site and then you know what the load is, so then it gets pretty easy to calculate what your payroll is going to be.

James: What was the load that you put in?

Omar: So the load in this particular case was like 40% which is very high.

James: Okay--

Omar: Yes it is pretty high. But the--

James: That is pretty high is very high.

Omar: No. No. No. But hold on. They put our wages really low, right? 

James: Oh really? Okay.

Omar: Then you have got to [inaudible41:16] around. I was paying roughly the same that I was paying in [inaudible41:19] 

James: Really? So why is that market… 

Omar: I have no idea man, and I tried to check I asked multiple people. We did all that song and dancing. It's all kind of the same. 

James: So you looked at the current financials and looked at the payroll?

Omar: No. No, I was talking about my payroll would be going forward. I don't really care what the guy before me paid. Why do I care?

James: So you got that from your property management? 

Omar: Yes. Yes. Yes. And then I verified it with other property managers and blah blah blah blah blah checked everything, you know did all the due diligence.

James: Got it. Yes. It's interesting that because 40% is really high. I mean usually--

Omar: Yes but [inaudible41:52] basis was really low. Like people salaries are really lower. 

James: Is that a Jacksonville specific?

Omar: I don't know what it is specifically. I think it's a Florida-based thing relatively speaking. But yes, that's what I mean. I thought it was kind of weird too. But then I mean I checked with other people. 

James: So the deal that you're doing, I presume is a value ad deal. Is that right?

Omar: Oh yes, all the deals--

James: How deep is the value at? I mean roughly at high level, how much are you putting in?

Omar: Man, nothing has been touched for ten years. In fact, let's put it this way. We have enough land we checked with the city that we have enough land at the back to develop 32 more units. 

James: That's really good because it's hard to find deals now, you know. Like ten years not touched, right? All deals are being flip right now, right? So within a couple of years. So that's good. That should be a really good deal. And what is the--

Omar: A hundred percent we could do basically. 

James: What was your expense ratio that you see based on income divided by your expenses? I mean first--

Omar: Hold on man, let me just take it out. I don't even have to tell you. Hold on. 

James: Okay.

Omar: Why even bother you know? 

James: Because usually like 50 to 55% is common in the [inaudible 42:59] industry.

Omar: Oh no in basically in Jacksonville. You can get really lower expense ratios. 

James: Okay. 

Omar: It depends if it's submarket [inaudible43:05] 

James: Yes, and I know like in Phoenix, I think it was like 45, or 40% which was surprising to me [crosstalk43:13] 

Omar: [crosstalk43:13] this right now. Hold on let me open this model I can tell you right now. I don't want to give you something [inaudible 43:21] then variably one person's going to be like, I looked at your deal your numbers--Like, yes I'm sorry. I don't like have like numbers with second decimal points. Because people always do that to try to catch you. Right? And they're like, yes it's off by like $2 man. So hold on, divided by, oh yes so it was operating at 52 and yes first year we're going to be at 56 because you know we are repositioning--

James: Yes. First year of course, it will be higher--

Omar: And then we just go down. 

James: Okay. Okay, okay that's interesting, that's good. So, and then as the income grows and your expenses stabilize, I think that expenses should be--

Omar: That's the only reason why the expense ratio goes down. Right? Because you're basically your top Line growth is way higher than your basically your expense growth. 

James: Got it. Got it. Got it. Okay, that's really good. And you look for mid teens IRR.

Omar: Mid teens IRR, a 10% cash flow and stabilized, all that jazz.

James: Got it. Got it. Got it. Okay, that sounds good in terms of the underwriting. So--

Omar: Am I giving you all my secrets James? 

James: Yes, absolutely. I will be very specific to Jacksonville. Right? I like to see you know, how each market is being underwritten and so that a business can learn and you know, it's very specific to people who do a lot of analysis on the market because I think that's important, right? You can't just go and buy any deal out of the gate right there, right? So it's good to know that. And these three things like payroll, insurance and taxes are very tricky when you--

Omar: Oh yes.

James: --in different markets. So it's good to understand how does that county or that particular city or state determines their property taxes? Because we have different things in taxes here where I buy so it's good to understand. That's good. What is the most valuable value ad that you think that you're going to be doing to this deal?

Omar: Oh well look man, because nothing had been touched. I think everything is valuable. 

James: Okay.

Omar: Hold on but that we lucked out also, right? There's a part of this is work and preparation. Or part of this is luck also. I mean you can't just take that portion away, right?

James: Oh yes yes. Absolutely.

Omar: All my hard work. Right?

James: Absolutely. Absolutely.

Omar: Because there's lots of people--

James: It's really hard to find that kind of deals nowadays, right? So how much was your rehab budget? 

Omar: So rehab is about a million dollars.

James: A million dollars. So let's say your million-dollar today become 500,000 right? I'm showing million dollar you're bringing into your exterior everything upgrade. Right? So let's say then--

Omar: Your exterior is roughly split 70/30. Interior [inaudible46:01] 

James: Okay. Okay. So between interior and exterior which one do you think is more important? 

Omar: I think if you only had a few dollars, exterior.

James: Exterior, okay.

Omar: Because people make a-- again this doesn't mean you should ignore the interior. Just to add a disclaimer. The point is, my point is a lot of times we as humans make decisions on first impressions. So if you come into a property and the clubhouse looks [inaudible 46:28] the approach looks [inaudible 46:29] the trees are trimmed, the parking lot is done nicely, then you go to an apartment which may, I mean I'm not saying it should be a complete disaster, but it might not be the best apartment in the world. You can overcome that. Right? But if you come in and the approach looks like you know, somebody got murdered here, right and the clubhouse looks like you know fights happen here, then no matter how good your indeed a renovation is, there's a good chance people will say well, I mean, it looks like I might get killed to just get into my apartment.

James: Yes.

Omar: Right? So it's the first impression thing more than anything else. It's like any other thing in life I feel.

James: Absolutely. So let's say you are 300,000 for exterior. Right? Let's say that 300,000 become a 150,000, what are the important exterior renovation that you would focus on?

Omar: So we did all the tree trimming because man, there's first of all living in Texas you realize how much a mystery still [inaudible 47:26] right? So first of all, tree trimming. Trees hadn't been trimmed for 10 years man. They were beautiful Spanish [inaudible 47:34] oak trees with Spanish moss on them. But they just hadn't been trimmed.

James: Okay. Okay.

Omar: So doing all the tree trimming, all the landscaping, then basically resealing the driveway and then making sure all the flower beds and all the approach leading up to all of that was done properly and the monument signage. 

James: Okay, got it. So this is what you would focus on. And what about--

Omar: But also putting a dog park by the way. [inaudible 47:57] you said if my $300,000 budget went to 150 what I do and that's--

James: Yes. Dog park is not very expensive.

Omar: Yes. But I'm saying it's stuff like dog park and [inaudible 48:06] to your outdoor kitchen, you're swimming pool, put a bigger sign in. You know [inaudible48:11] 

James: Yes and dog park is one of the most valuable value ad because you spend less on it, but a lot of people want it, right? So for some reason, I mean people like pets and all that. So what about the interior? You have 700,000, how much per door are you planning to put for each--

Omar: So roughly say I can do the math roughly. There was six something. Right? So and

James: [inaudible48:32] 

Omar: Yes, so we're not even-- so we're planning on doing roughly say 75% of the unit's right? So I think that's  104 units if you go 700 divided by 104, roughly we were going to be around $6500 per unit.

James; Okay. That's a pretty large budget. 

Omar: Yes, man you should see some of these units man, I was like why God how do people even live here? 

James: Yes.

Omar: Because it's a very affluent. I mean relatively middle class, upper middle class submarket, right? They just haven't done anything. 

James: So are you going to be using the property management company to do the renovations?

Omar: They have a very fantastic reputation and they were highly recommended a few of our other contacts also use them so that's why.

James: Okay.

Omar: Because we were seeing problems with a lot of other people's property managers. Either they didn't have the right staff or didn't have the right professionals and this and that indeed these guys were properly integrated across the value chain.

James: So at high level, what are you doing on the interiors?

Omar: High level Interiors, it's a typical, [inaudible 49:29] back splashes, change the kitchen appliances, countertops, medicine cabinets, lighting packages. The other small little thing which we realized was a very big value add but was cost us less than two dollars and fifty cents per outlet was the [inaudible 49:45] Yes it was the biggest value add--

James: Yeah, biggest value add; that is the most valuable value add. Right?

Omar: Yes.

James: Like I've never done it in any of my properties but I was telling my wife, Shanti and I said, hey, you know, we should do these, you know, because it's so cheap and a lot of people, a lot of--

Omar: Yes, it was like two dollars or whatever, it was cheaper than that and people cannot get over the fact that they have so many USB out, I was like, everywhere there is a plug there's got to be a USB outlet.

James: So do you put for every outlet? The USB?

Omar: Not for every, I was dramatizing but I mean for the ones that are accessible say around the kitchen, living room.

James: Okay interesting I should steal that idea. 

Omar: I didn't invent the idea go for it man. 

James: Yes.

Omar: [inaudible 50:25] USB port so take it. 

James: I know a few other people who do it mentioned that too but I'm not sure for some reason we are not doing it. But that should be a very simple--

Omar: People love it man. And I don't blame them man. Like it's freaking aggravating sometimes, you know, when you got to put like a little thing on top of your USB and then you plug it in.

James: Yes, imagine how much you know, this life has changed around all this electronic [crosstalk50:46] devices and all that. So interesting. So did you get a lot of advice from your property management companies on how to work and what are the things to renovate and all that? Or how--

Omar: Yes, and no because we had been developing a relationship with them six months prior to this acquisition. So we had a good relationship with not just them but with other vendors in the market. And especially luckily for us the regional we have for this property right now, actually in an earlier life and with an earlier employer had actually started working on this asset 15 years ago as a property manager. This is sheer dumb luck. This is not by design. So she really knew where all the [inaudible51:24] 

James: Yes. Yes, that's interesting. Sometimes you get people who have been in the industry for some time. They say yes, I've worked on that property before they, which is good for us because they know. Got it. Got it. So let's go to a more personal side of things. Right? So you have been pretty successful now and you're doing an apartment syndication now and all that, right? So why do you do what you do?

Omar: James, I know a lot of people try to say they have a big "why" and they have a really philosophical reason James, my big "why" is James, I really like-- my lifestyle is very expensive James. So all these nice suits.

James: Okay.

Omar: All these nice vacations man, they're not cheap. Okay. Real estate is a pretty good way to make a lot of money man. 

James: Okay. 

Omar: I want to give you a philosophical reason, I know a lot of people say they have the Immigrant success story, Oh I came from India or I came from Pakistan, I ate out of a dumpster, I worked in a gas station and no I had five dollars in my pocket, and everybody tells me that and I say, okay what did you do man? I don't know did you just swim from India, you had two dollars in your pocket you need to get on a plane buddy. 

James: You can't be here, right? 

Omar: No Indian shows up to America and [inaudible 52:37] Are you kidding me? All the Indians are educated. Everybody's an engineer or doctor or lawyer. You kidding me. He shows up with five dollars, man. So no I didn't show up to this country with five dollars James. I didn't eat out of a dumpster. I didn't work at a gas station, and I'm very grateful for that. Right? I've always had a very good lifestyle and I don't need to have a philosophical reason to say I'm doing this to, I don't know, solve world hunger or poverty or whatever. I have a pretty good lifestyle. I'm very grateful and very blessed. And the biggest thing in my life is being that, look I moved to Texas man I didn't know anybody. Right? But people have been so generous, people have been so kind to me. I'm not just saying investing with us, which is very nice, which I'm very grateful but also connecting me with other people, right? Hey, hey just opening a door. They didn't have to do it, but people have been so generous and so kind, So I quite enjoy the fact man that it's a good way to  make an honest living, right? I have a very expensive lifestyle that needs to get financed and that's just the way it is. And I didn't show up with two dollars in my pocket. So I'm very  grateful for that. 

James: That sounds good. So, can you give some, do you have any daily habits that you think makes you more successful?

Omar: No man, I just get up every day and I try to put one step after the other but consistently work in the same direction. So every day I'm reaching out to people and that's a lot of small little tasks. First of all, I never like getting up early but I've always known the value of getting up early. So I get up in the morning, right? 5:45, 550 ish I kind of up. Most days not always, right? I read a lot of books man. I reach out to Brokers all the time.

I'm always looking at deals, coordinating with my team to do stuff and a lot of these like you do in your business there are a lot of small little tasks there's no one task that is, oh my God, you do this and [inaudible 54:33] But it's just small little tasks that you do daily, every single day in and day out. So even if you're feeling sick, even if your head is hurting you just do it. 

James: So can you give a few advice to people who want to start in this business?

Omar: Regularly communicating. So in my particular case, I don't know like when you're starting out specifically everybody has a different pain point, right? So in my particular case for instance on a daily, I can't say about weekly I can tell you, staying in touch with my marketing people, emailing Brokers, emailing investors, following up with people I've had conversations with, especially leads, you know people who use this stuff. A lot of word of mouth and just doing the stuff over and over and over. But it's not like I have a 9:00 to 5:00 now, right? It's not like oh Friday, I'm done and Saturday, Sunday I'm relaxing. I mean I could relax on a Monday now, but Saturday and Sunday I'm working. Right? So that's a good-- but it's like the same as you were doing with your business, right? 

James: Yes. Absolutely. Absolutely. Well, Omar it has been really a pleasure to have you on this podcast. Is there anything that you have never mentioned in other podcasts that you want to mention?

Omar: No James, I don't want to go down that route man. 

James: Is there something that you want to tell, you know people who listen to you that you think that would be a good thing to talk about?

Omar: Yes, what I want to tell people is listen, I don't think you should take words of wisdom for me. But what I should tell people is guys, honestly, I don't listen to a lot of gurus. I would highly suggest that you don't attend any boot camps. Okay, please if you have an education, anything above a high school level, please instead of paying some joker on the internet $25,000 because he's going to become your Mentor, he himself doesn't do any deals to begin with. Okay.

James: Yes. Most of them don't do deals. Right? They just sign other people deals and claim the numbers.

Omar: Yes. It's very easy to basically say I'm an educator. I'm a mentor. I feel like these days anybody who couldn't get a real job or doesn't have a career is certainly a life coach. They're doing coaching or a mentor right? It's [inaudible 56:30] you don't want-- you hear all these people on podcasts. You're hearing James. You hear all the other guests getting interviews and other people, right? It's a lot better for you to reach out to a guy like James or me for instance for that matter, or especially James because he has a track record than to pay some jackass mentor or Guru 25, $30,000. Guys, honestly, if you want to burn your money just send it to me and James. We'll have way better than 25, 30 than some mentor who has no idea what he's doing.

James: Yes, there's so much of knowledge-based nowadays. Right? I mean if you really want to do something, you can definitely do it. You just have to really really want it.

Omar: Yes, don't pay some scammy guy on the internet twenty-five thirty thousand dollars, you know, [inaudible 57:09] we're way better people.

James: Awesome. Awesome. All right. Yes, if you guys want to join us in Multifamily Investors Group in Facebook, there's so much of discussions there so much of data that's being shared. You can learn a lot of things to come there. And I think that's it. Omar, thanks for joining us today.

Omar: Thank you very much for having me. 

James: Before I forget let everybody know how people should be able to reach you.

Omar: Oh, yes. I thought you'd never ask me James. 

James: No, no, sure absolutely go for it.

Omar: So you can reach me Omar, O M A R at Boardwalkwealth.com. Guys, you can also go on to our web page Boardwalkwealth.com and I made it super simple for people, okay. Anybody, even a dummy can do it. Type your name, type your email address and say how you heard about us and press submit. That's it. You don't got to do anything else. We'll get in touch with you. 

James: All right. Thanks Omar. Thanks for being on the show.

Omar: Take is easy sir. Have a good one. Bye. 

James: Bye.

James: Hi, audience. This is James Kandasamy. You're listening to Achieve Wealth Podcast through Value at Real Estate Investing. Today, we have an awesome guest. His name is Nikolaï Ray. He's who's the founder and CEO of MREX, which is an acronym for Multifamily Real Estate Exchange; is considered by many of his peers in North America as the leading expert in apartment investing with over $1 billion analysis, underwriting and transactions. He's also a pioneer in mid-cap, multifamily financial engineering, which is, you know, he's regarded as the teacher, advisor and also the keynote speaker. He's also a real estate tech innovator to his current work on the multifamily real estate big data, artificial intelligence and property tokenization using blockchain technology. Hey, Nikolaï, welcome to the show.

Nikolaï: Hi, James. Thanks for having me.

James: Okay, so do you want to mention anything that I missed out about your credibility?

Nikolaï: No, that sounded like a mouthful.

James: It's going to be ready technology-centric discussion today, right?

Nikolaï: Yeah, the full story is that it should probably a lot longer, but I mean, that could be for, that could be for a whole other episode of the origin story of how, how'd you get to, you know, how you get to where we get in life, and professionally and personally, but yeah, that's, that's the gist of it, you know, everything that's underwriting and, you know, acquisitions, dispositions, refinancing, obviously, portfolio management, whether it be the small market, small cap market, you know, between 500 units, all the way up to the mid-market, you know, market cycles, and obviously, have a very strong penchant for data and for technology.

So, so that's, that's pretty much what I've done over the last, I guess, over the last seven or eight years, is focused on, you know, for the most part, I focused mostly on acquisitions. So I was in charge of an investment banking firm, we worked, you know, on both sides of the transaction advisory side of things, for investors and we also work with a lot of ultra high net worth investors, that's kind of where I built my speciality. Eventually, ultra high net worth investors and private equity firms and family offices, you know, by doing all that I kept on, kept on getting annoyed with the fact that the multifamily market is so fragmented, and the data is so packed, I just kept on thinking to myself, you know, this, this market this, which is an important market, I mean, the apartment building investment market is a almost a $10 trillion market worldwide.

It's a, quite, house is a primary need of human beings, which is to have somewhere to live. And yet, you know, we're kind of in the dark ages as multifamily investors, because number one, we don't have access to any centralized marketplace. If you compare us to a stock investor who can go on the NASDAQ and trade every type of tech stock or stock market investing world, the New York Stock Exchange, and we don't have access to any data, the data is very raw, it's very, it's kind of, you know, what I call legacy data, as you look at like Costar and, and all these various data providers who provide this very raw and inert data, without any actual, you know, context around the data, and without any helps with regards to making decisions business intelligence wise, as a multifamily real estate investor. So that's kind of how that's how my career has gone so far. That's why I went from transactions and more towards data technologies because I felt like there was so much work to be done to help investors just you know, be better investors for once.

James: Okay, so let me understand MREX because I think it's important since you have a lot of passion we need right now. Right? So --

Nikolaï: Yeah.

James: Multifamily Real Estate Exchange, if I understand it correctly, so what you're saying is right now, the data is so fragmented, and a lot of times when, you know, people like me underwrite deals, we have to do so much work, I did too. I mean, I really learn to write [inaudible 04:05] for four hours because I did all the property management financial, that there are so much of mistakes in the property management financials, you have to do T-3, T-12, you had to do expense ratio, you have to do market comps, and all that. So what you're saying is, you are going to summarize all that, and make it so easy to look at so that it can be treated as a commodity, commodity, is that right?

Nikolaï: Not necessarily. So, so the idea is taking you as an example or any of your listeners, right now, who are multifamily real estate investors actually acquiring properties, let's say you have the capital ready, or your investors have the capital ready to allocate to an acquisition, you know, just actually finding that first property to buy or the next property to buy is a very time intensive and energy intensive job, right. You have to go on, you have to go on all the different MLS, you have to go on the loop that's of this world, the [inaudible 00:05:00] and the [inaudible :00:05:01] and, you know, just --

James: [inaudible00:05:02]

Nikolaï: Right, and then you have all the brokers, and then you have all the broker websites, then you have all the pocket listings and you have not even really touched the majority of the market, you're actually still missing probably, you know, anywhere between 25% and 50%, of actual transactional inventory, depending which metro area you're in. So it's a lot of work, even just looking at the stuff that's on websites. That's a lot of work because you have to go on between five and fifteen websites, each website has a different user interface, this different user experience, and actually shows different information. On one site, maybe on [inaudible 00:05:42] you might have a cap rate, maybe on the MLS, you won't have cap rate, you'll just have gross revenue.

So then you have to figure out your own cap rate off of that. It's a lot of work, you know, and for me, I just never thought it made sense, to not be able to say, hey, I want to buy a multifamily property, whether it be a five unit, whether it be a 50 unit or 500 units, I want to go on to one marketplace, we're all properties are centralized in a unified, and normalized manner. Because that's the second point of it, is you have to be able to normalize expenses, if you want to start comparing apples with apples, and oranges with oranges. So that's the second phase.

So what we're doing with MREX is we're building a unified, standardized marketplace for multifamily investors, where they will be able to see every single property that exists, that is for sale, despite on the way it's being sold or listed or marketed. We're going to be working with brokers obviously, the goal is not to get rid of brokers or anything like that, that's not, that's not what our goal is. Our goal is to help brokers, help investors just make the whole transaction process much quicker and more time efficient. And that way, you know, we're making the market more, you know, just a more efficient market.

James: Okay, okay. Got it. Got it. So you are basically streaming lining the whole selling and buying process, I guess, just to make --?

Nikolaï: Absolutely. Absolutely.

James: Okay, got it.

Nikolaï: And the analysis process as you said too, right, because it's one, it's one thing finding the properties and having them all in one marketplace. Okay, let's say, let's say you have the NASDAQ, let's say I wanted Lesson TechStars rather than multifamily properties. I go the NASDAQ and I can see every single company, I could have access to inventory, now that's the first step. Now the second step is, once you have access to inventory, and the information provided on all that inventory is normalized and standardize, well, I still have to be able to start comparing and start, you know, building my own models to say, well, if I'm a cash flow investor, which stocks are generating the most cash flow relative to the other, to the rest of the inventory. So that's where you know, context and alternative data comes into play with our platform, is that we want to be able to, to offer data and tools to you as a multifamily investor, to help you streamline your underwriting of the inventory that you've seen. So that's really the two things we're focused on at the moment.

James: Okay, got it. Got it. So interesting. So that'll be, that'll make a lot of, I mean, for investors or for buyers, they would be able to see what kind of deals that they want to buy,--

Nikolaï: Right.

James: Not just what they want to get the yield out of --

Nikolaï: Exactly and instead of going on fifteen websites, well, they've only one website, instead of having to, you know, start normalizing expense ratios and sifting through, through T-12 and T-3, and doing all that, it already kind of be all chewed up and kind of built up already. So you can actually focus, focus on analyzing, focus on comparing and establish, okay, I want to buy this property using this strategy. And why would I do that versus the other property that I see over there? That's ultimately what's the most important thing.

James: Okay, okay. So could it then be a good idea to match this with a crowdfunding platform, because during the crowdfunding, they can choose what deal they want, right?

Nikolaï: Right. So crowdfunding is an interesting thing. The problem is crowdfunding, obviously, crowdfunding, crowdfunding has tried to kind of attack two things. Number one is liquidity, right? Because, as a multifamily investor, the more properties that you acquire, you increase your net value, right, you're a richer person. But the problem with that, is that you have to leave equity in every single deal, right. The banks won't finance you 100%. So you always have to leave equity. So as you get richer and richer, value wise, you are actually cash poor, because you're leaving so much equity in each property that you acquire. And there's always a part of the equity that has to stay in those properties.

But the problem, the second problem is that as you get, as you become a bigger investor, and you acquire more properties, and you're more well known in the market, well, you get access to better deals, but now you have less access to more money, even though you're richer. That's kind of the liquidity conundrum of multifamily investors. So that's why crowdfunding is interesting, because it gives kind of, you know, after the JOBS Act, it helps multifamily investors, particularly syndicators, to go and raise capital from, you know, from investors either through the regulation CF, you know, and obviously, regulation D506C was quite an upgrade also to be able to start to, to market capital raises.

But what we're doing is we're actually building a second platform that is shadowing the Emirates platform. And what that platform will be doing is, we're actually going to create a sort of stock market and take the crowdfunding thing a bit further, because crowdfunding, as I said, tries to attack the liquidity conundrum. But the problem is, is that when you invest in a crowdfunding deal, you as an LP, are stuck in that deal for the lifetime of the deal. So if it's a five, it's a three to five year exit, well, your money stuck in that, so you, you as a passive investor, or as an LP, do not have liquidity. That's, that's one problem. And obviously, crowdfunding also helps with accessibility, right.

So obviously, regulation D506C is only for accredited investors, which doesn't really help accessibility that much. Regulation CF has helped that because now then, that kind of lowers the barrier to entry for everyday retail investors who don't have that much money, but it's still a fairly limited regulation. At the moment, I know, they're trying to pass a couple of bills to increase the opportunity for regulation CF investors. So what we're doing is we're building a second platform, that's going to be basically a stock market, in its own sense, where, you know, through a broker-dealer partner that we hope to get. And then also through eventually a, an ATS license with the SEC, we would like to be able to take it a step further, and allow a multifamily investor to pretty much offer his property through one the various regulations on that marketplace. That way people could invest as passive investors, as LPs, either through Reg D, Reg CF, or eventually maybe even Reg A plus, but then they would also be able to acquire or access a secondary trading market so that they're not stuck in an illiquid period of three to five years. They would actually eventually be able to re trade part of their shares or all of their shares, kind of like you would at the stock market.

James: Wow. So it looks like you are trying to really disrupt the industry.

Nikolaï: Yeah, definitely. [inaudible 00:12:36]. You know, multifamily real estate looks like the stock market before the arrival of NASDAQ. Right? It's like before the internet, even though we have internet and multifamily real estate, it's as if people are still trading kind of like stock market investors were trading on floors, you know, with papers and screaming and doing all that stuff. It, you know, it doesn't make sense.

James: Yeah, yeah. It's so private nowadays, right? I mean, everybody has priority, we do not know how, even multi families performing under a different private LLC.

Nikolaï: Exactly.

James: There's a lot of good news out there. But there's also bad news, but nobody talks about it. right. So I think,--

Nikolaï: Oh, right. And the data, the data out there, like look at any of the data from, you know, even from the really big organization like NCREIF so the National Council of Real Estate Investment Trusts, NCREIT sorry. Even their data, when they know these indexes based on multifamily markets is based on a very low volume of the actual number of transactions. So when say a, a company, various data company says, well, the cap rate right now of say Atlanta is 5%, for example, well, that's actually based on a very small portion of overall transactions. So it's hard for us as multifamily investors, to really be sure are about the numbers that we're inputting into our underwriting models, because we're basing it off so little data.

James: Got it. Got it. Yeah, it's, it is just so limited, right? Because everything is done on a private basis on syndication, which is not much of the data being published out there, right. So --

Nikolaï: It's like investing in the stock market, but not knowing how the stocks have performed historically.

James: Yeah. Correct. Correct. So but why do you think this would work? And because if you look at the demographics of the, I mean, because I'm looking at syndication, when we whenever we buy for multifamily.

Nikolaï: Right.

James: But for me, it's just a small part of the whole market.

Nikolaï: Right.

James: Even though we are I mean, maybe my group or my network thinks that that's the whole thing how people buy multifamily. I don't know, that's true, because I network with a lot of different type of people, right. So looking at the classes of investors who are buying multifamily, I think I know for me, my thing is maybe we are one of the, I am one the lowest level part of it, right, because we are buying Class B and C using high net worth individuals and all that, but there are a lot of higher network, higher calibre people who are playing at a different level, which we don't have, which I don't have visibility, maybe you have it right so. So are you trying to look at different classes of investors and cut through all of them? Are you looking at only some classes of people?

Nikolaï: So we're trying to help what we call the small cap to mid middle market investors.

James: Okay.

Nikolaï: So anyone who owns between five units and about, you know, I'd say around 2500 to 5000 units.

James: Okay.

Nikolaï: That's kind of where we stopped, you know, that's where we're focusing on because that, you know, the majority of transactions are actually done by, by small cap to mid-market investors.

James: Okay.

Nikolaï: You know, the multifamily market is historically a mom and pop market. Now, it's, you know, it has transition a bit, investors are getting bigger and bigger. But the reality is the majority of the market is not an institutional market, you know, at the root level, or the private equity firm level or family office level, depending obviously, which metro area you're in, right. New York City is obviously more of an institutional market. Canada, Toronto is a very institutional market, but the majority of cities and metro areas are still, you know, very small cap market. And the problem is that, you know, take you for an example as a syndicator, or even take someone who's not a syndicator, right, because a lot of investors, multifamily aren't syndicators, they just buy their own properties, you know, they end up with maybe, you know, anywhere between 50 and 500 units as time goes by.

Now, the problem with with those types of investors and syndicators as yourself is that you do not have access to a team of underwriters, you don't have access to, you know, expensive data that say a real estate investment trust has more than a very big private equity firm has, you don't have access to all those analysts. So, you know, we want to try and make sure that the market stays very level and stays is a level playing field. Because, you know, ultimately, I think the multifamily real estate market is very important for a couple of reasons. Number one, you know, everyone talks about the disparity of wealth, right of the 1%, and how the disparity is getting bigger and bigger. And we could do a whole podcast on that and why it's happened and where it's kind of going.

But ultimately, I think, you know, the multifamily market is probably, the market, it's probably the asset class that offers the best returns based on risk, with the best risk-adjusted returns. If you look at Sharpe ratios, and Sortino ratios and all these things. Now, it's also been proven, there's a lot of studies about this, a lot of university studies done on this, that, you know, social mobility comes from education, and access to property, right. The reason why people have been so poor for so long, and like the Brazilian favelas, or the Indian shanty towns, is because people don't have education, and they do not have access to property, they are not able to become landowners, or owners of their own homes, even less become investment property owners, right.

So I think multifamily stays as a very important asset class, because, on top of filling a basic need of human beings, that means providing somewhere to live, it also is a very important mover, for the everyday investor, the mom and pop, just the normal person need you to be able to access a very good, very safe, wealth building asset class that does not have the same volatility, or the same pitfalls as say, the stock market and other types of asset classes. So I think it's very important that we provide, you know, tools and data and allow for the smaller investor, the investor that has less than 1000, or even less than 5000 units to be able to continue on performing, continue on from this, this asset class.

James: Got it. Got it. So let's go to a bit more details on some of the big data and artificial intelligence, right.

Nikolaï: Yeah.

James: So yeah, I studied artificial intelligence almost 24 years ago, every now it has become really popular, a lot of startups with artificial intelligence, right.

Nikolaï: Absolutely.

James: So the question is, how do you, I mean, first of all, let's define what, can you define artificial intelligence in your terms in terms of real estate? Because I studied engineering standpoint.

Nikolaï: Yeah, well, I'm not an engineer, by trade, so at least I'll give more of a generalist definition to the people listening which I think is probably gonna be very good. The important thing is to understand, kind of the difference between machine learning and artificial intelligence. So you know, machine learning is more of a, it's a less automated process, right. So a lot of what people are calling artificial intelligence is ultimately just machine learning. And what it is, is that let's say, let's say, you know, I'm a data scientist or an economist, and I build a predictive model using, say, Monte Carlo simulations. Well, I set a, I build a set of hypotheses, I plugged them into my Monte Carlo simulation, and then that runs.

Now, with machine learning and artificial intelligence, what becomes very fun as you know, statistics are a funny thing, right? And economic modeling is a very funny thing because even though, you know, people in the economics world swear by predictive analytics, the reality is in data science, it's garbage in garbage out, right. So the outputs always depend on the inputs. So let's say you're doing an underwriting model, and you're looking at an apartment building, and and you say, well if I buy this apartment build in this way, my internal rate of return is going to be 25%. Okay. Now, internal rate of return, net present value is a, is an output or their outputs based ultimately on the strength of those outputs are only as good as the strength of the inputs.

James: Correct.

Nikolaï: And the very important inputs that affect an IRR and NPV, which ultimately led to two of the most important metrics to help you decide whether it's a buy a property or not are rent growth, expense inflation, refinancing interest rate; if your IRR and NPV is based on on refinance, because obviously IRR and NPV has to be based on an exit model. And the exit model can either be a refi or it can be a sale; disposition. And then if it's a disposition, while your IRR and NPV is based, ultimately off the reverse, the reversion cap rates, so the exit cap rate upon sale. Now what everyone's doing right now, in the multifamily market, especially small investors, and mid-market investors is they're just entering these inputs. You know, they're just playing it by ear, and they're not even playing it by ear. They're coming up with these random inputs that are based off absolutely nothing.

I just had a huge discussion on LinkedIn about this, with a couple of investors where one guy was saying, well, you know, if I buy it at 5% cap rate, my underwriting model, what I do is, to establish the reversion cap rate. So the cap rate upon eventual sale, let's say five years, is I add 20 basis points to the purchase cap rate per year. So if I bought it at five today at a 5% cap rate, well, then five years from now, I predict that I'll sell it as 6% cap rate, okay. And, you know, people kind of hide behind this type of rule of thumb model, say, well, I'm being conservative, therefore, my underwriting models very good. The reality of it is your underwriting model is bullshit. Okay. It's not worth the the Excel spreadsheet that it's been written upon. The reality is, where are you pulling this, this expansion of 10% or 20%,10 or 20 basis points per year? What are you basing that off? Right? That's what anyone should be asking, What are you basing this off? While being conservative. How do you know you're being conservative?

James: Yeah.

Nikolaï: How do you know you're not being optimistic? Right? You could be being you could actually be very optimistic with that. And conservative might be and then an increase of 0.25 a year, right? The reality of it is that everyone underwriting deals, right now, they're not basing their inputs off any data, right. And they're definitely not basing it off any predictive analytics, because it's one thing to have the data, the historical data. But you know, just because you have historical data doesn't mean necessarily, that's going to repeat itself in the future. That's why we have predictive analytics. So let's say that based on historical data, your 5% acquisition cap rates will actually be a 5.5 in five years. Now, the problem with that is that the future, that history is never guaranteed of the future, right. So that's why you then have to plug in various scenarios where you're considering this. And that's where predictive analytics come very difficult because you're pretty much just kind of taking a shot in the dark and basing things off the past, but you're putting in like a margin of error.

With machine learning and artificial intelligence, you're able to make your predictive models better ex post based on ex ante results. So let's say you create a model to predict the future cap rates, well, you want to predict the future cap rate of in five years, it's your goals to sell within five years. Well, if you predict that today, the probability that your five-year cap rate from now is going to be precise, is a lot lower than let's say, in four years, you predict the cap that same cap rate, right, because you'll be closer to your exit. So there'll be less room for margin of error. So what machine learning and artificial intelligence will allow you to do is to consistently kind of reset your model as time advances.

So maybe your initial model based upon acquisition was off. But as you advance in time, the artificial intelligence and machine learning continues on training that same model, the same algorithm that you had, and adapts the various inputs and algorithms to make it more and more precise as you get, as you get closer. And on top of that, as you get closer, the range of distribution of property probabilities get smaller. So it's a double effect, your predictive models get even tighter and tighter as time goes by. And that's where [inaudible00:26:03] machine learning and artificial intelligence can really help out. Is that instead of just plugging in these ridiculous exit cap rates, and ridiculous growth rates and ridiculous inflation of expenses, and absolutely ridiculous refinancing interest rates, when we get closer and closer to being able to actually put in inputs that are based on something very, very solid and then, therefore, our underwriting models will become more and more precise.

And what we want in underwriting when you're buying a property, whether you're a syndicator, and you're responsible for money of your LPs, or whether it's your own money, the goal of underwriting is not to be conservative. That's not what the goal of underwriting is. And anyone who says that they underwrite, and they're concerned, their underwriting is conservative, what they're really telling you is they don't know how to underwrite, okay.

James: Yeah.

Nikolaï: You don't want to be conservative, you want to be right on the dot, that's what you want to do with underwriting, you want to be as precise as possible because the reason that you buy the property today is you buy it for future cash flows. And cash flows can come in various ways, they come in an annualized cash flow so, so free cash flow, they come in the appreciation of the asset, so the value of that asset gains because of various market dynamics and because of the way you're, you're managing that property. And they also come through the capitalization of your mortgage. So there's a part of your mortgage that you're paying down, which is principal, right. So those are the three cash flows that you can receive.

Now, when you're underwriting a deal, and you're looking at how much you should pay for, say, this hundred unit building you're looking at, well, if your inputs are off, you might buy that property. But it's a bad acquisition because you were too optimistic in your inputs. But it also happens that you were too conservative in your books, therefore, you didn't buy the property. Because if you input that at the exit capital, that property is 7%, but, in reality, five years from now, the exit cap rate is five and three quarters, well guess what? You missed one hell of an opportunity.

James: Correct.

Nikolaï: And in real estate investing, the most important thing is time value of money, we only have a very limited time during our lifetimes in which we can invest and create wealth. And we only have so many hours during the day. Therefore the cost of opportunity, the time value of money are the things that we should consider the most in our underwrite. And that's really where machine learning and artificial intelligence will help investors become much, much better. Obviously, you also need education, right? You have to understand these, I mean, this is advanced stuff. And I'm trying to kind of explain it in a simple way, where people who don't have master's degrees and PhDs in finance and engineering can understand it. But the reality of the matter is that multifamily investing is very, it's a very complex, it's a very sophisticated asset class, and you need a certain level of education.The problem being right now, despite the very high level of education that some investors have, we just don't have solid, predictive analytics tools and data to be able to make sure that we're actually able to transfer education into decent acquisitions.

James: Yeah. Well, that's very interesting, because exit cap rate is always being misused or mis-conservative right? So --

Nikolaï: Well, even entering cap rates, even acquisition cap rates, I see people saying, well, you know, I'm not gonna buy that property because it's a five cap rate and the markets trading at 5.5. Okay, is that a stabilized property? No, it's a value add property. Well, the cap rate doesn't, the cap rate is meaningless then. A cap rate is a metric of a stabilized asset. If the asset is not stabilized, there is no cap rate, because a cap rate is a perpetual annuity. It's a return metric, based on an unlevel perpetual annuity, which means the same cash flow every year forever.

James: Correct.

Nikolaï: Now, if you want to be able to calculate that your property has to be stabilized. So if you're not buying a property, because it's a five cap rate, and the market sharing at 5.5, but it's a value add deal, well, I'm sorry, I'm sorry to tell you, you should change, you should change fields, you should go play, you should go to Las Vegas and put it on red.

James: Not only that, I mean, not only new investors don't understand the entry cap rate doesn't matter [inaudible 00:30:46] and I don't know, I never see a reason not to do a stabilized deal. Not on commercial, right? So for me, I'm always [inaudible00:30:53] guy, that's why I --

Nikolaï: Well, unless you're a private equity firm or your family office or you're a RET or you're an ultra high net worth individual who now has, you know, net value of anywhere between ten and hundred and fifty million dollars, there's no real reason to do stabilize deals, right. The reason you wanted to stabilize deals is, because you have a very high net worth, or because you're trying to de-risk your portfolio. Right?

James: Correct.

Nikolaï: That's why you would just stabilize deals for small cap or mid cap investor.

James: Yeah, yeah. Most of the time. I mean, commercials always value at play. I mean,

Nikolaï: Of course.

James: I mean, there's a lot of people doing stabilized deal nowadays, just by getting a higher mortgage and getting slightly lower price, play on the mortgage side with the interest to get a cash flow, but --

Nikolaï: And that can work if you're a neurosurgeon, right? If you're a surgeon making a million and a half a year, and you're 35 and you say, well, you know, I want to start buying multifamily property because I like, I like real estate and I like the tangible part of the asset class. But I don't need any money right now, because I'm making a million, I'm making a million and a half a year. I don't need any cash flow. And I'm very long term and I just want to build myself a nice retirement, you know, because you know, that's what I want as objective. Well, then yes, buy stabilize property or be an LP and syndication, or purchase that stock in the [inaudible00:32:23], that's fine. But if your goal is to increase your wealth exponentially, in a short period of time, and what I mean by a short period of time is fifteen to, five to fifteen years. Well, then, yeah, you're gonna have to do some kind of value add, you can't just do financial arbitrage all the time.

James: Yeah. Yeah, there's a lot of deals out there in different asset class, which can give you that cash flow, right. I mean, you can buy a stabilized mobile home park, you know, it'll give you higher cash in cash than any multifamily deals.

Nikolaï: Right.

James: So even self-storage, or even multifamily, which has been stabilized, you get, you'll get good cash flow. But how long will that cash be guaranteed? Because you have a very tight DSER at that point of time. And let's say the market turn, you may not be, your DSER might be compromised right now, because you don't have any buffer. Right?

Nikolaï: Especially if you did not properly manage the terms of your mortgages. Right. So that's very dangerous. Like if you feel that you're, if you feel that the markets going to shift, say interest rate wise, the easiest way to kind of pull yourself out of that situation you just talk about is, you know, just take longer-term mortgages, you know, make sure that the mortgage does not end in five years, make sure it's a 10 year term, or even maybe a 30 year term. Right? That's, that's the easiest way to manage that risk.

James: Yeah, just do a hard loan.

Nikolaï: Right.

James: Which gives you like, 45 years. I mean, there's the other trick that a lot of people play is, you know, showing you need cash in cash based during IO period. And nowadays, people are getting five years, seven years, IO period and sometimes people think, oh, I will not hold, you know, that deal for long term. I mean, you are hoping on not holding, holding, right. But you do not know what's going to be happening to the economy, right?

Nikolaï: It's a dangerous game to play. And I'm not saying don't play it, but make sure you have the, make sure you have the education and the know-how to be able to manage that risk. It's all risk management. Ultimately, that's what it is.

James: Yeah, yeah.

Nikolaï: The problem, the problem is a lot of people are doing this, and they don't know what the hell they're doing.

James: Yeah, I mean, I think so there's so much of capital out there right now, looking for money to be placed in some way.

Nikolaï: Oh definitely.

James: And people don't think that are they going to putting 1% in the CD, I might as well put here and get like six, seven per cent, right? Cash Flow, right? And,--

Nikolaï: And that's, that's the retail market. Like that's, that's small investors like me and you the reality of is the real cap, the real capital flow right now is at the institutional level, there is so much higher level money and smart money searching for returns right now. I mean, we can't even fathom small investors, how much money, I mean, family offices, typically, if you take the family office market, typically always allocated maybe like, I don't know, depending on the family office in the region, but usually anywhere between, you know, maybe eight to twelve per cent of their overall asset allocation, capital allocation to what they call alternative assets, right.

And real estate as part of alternative assets. Now, over the last 10, I'd say over the last 10 years, the last decade, family offices have become more and more in tune to the real estate markets. High net worth families also, especially towards like multifamily real estate, and more and more real estate is no longer considered just as, as something under the alternative asset umbrella. But now it's kind of becoming its own umbrella. And what that's doing is that instead of family offices, and we're talking about family offices that have trillions of dollars, right. These are not these are not small things, these are big moving bodies with a lot of capital, we're talking about multi-billions of dollars, not trillions, multi-billion dollar family offices, that are now instead of allocating, you know, 8% to real estate, well, now they're allocating 20% to real estate.

So and that's, that's a scale like, there's a lot of them out there. And we haven't even talked about the private equity firms. We haven't even talked about the pension funds, the International pension funds, you know, people talking about globalization and international money, thinking that it's just, you know, rich Russians is going to Sunny Isles, Florida, buy $10 million condominiums. That's not what it is. The global movement of money to American and Canadian Real Estate are things like the Amsterdam teachers pension fund, or government workers pension fund, you know, allocating, allocating, you know, 100 billion dollars to the American real estate market. Now that's, that has a big, that puts a big dent on the supply and demand of real estate. And that's what ultimately drives property value is much more than interest rates. Interest rates only, only influence property values, like people were talking about, especially the last couple of years, all we know, if interest rates go up, cap rates will follow up, they'll go up. That's not true. Capital flow drives cap rates and values and properties and multifamily; interest rates only influence cap rates and values.

James: Very interesting perspective, that's you are right. There's so many, too much money, even out of United States is looking for money to place, right. Like the other dad had a call from the UK. It's a family office who want to invest in the UK and they're looking for like operators like me, and I was asking them, what's the return expectation? They say this 22% IRR credits and I said, well, I [inaudible 00:37:58] you guys, I can get better money in the United States right, so --

Nikolaï: Exactly. And all the, all the money from the quantitative easing the follow the 2008 crash, I mean, all that quantitative easing money, a lot of it still, after even 10 years, has not even found a place for it yet. Right? So there, there's a lot of money chasing deals, there's a lot of money chasing deals.

James: Correct. Correct. Right. That's true. That's true. So coming back to the exit cap rate. So I know that's one of the hardest parameters to measure. Right? So.

Nikolaï: Absolutely.

James: But can you clarify again, how did you, how would you use artificial intelligence to find that a more accurate exit cap rate? You know, T minus five, my T minus 5, five years earlier, before you hit that five years mark of selling, assuming five years of selling.

Nikolaï: So it's the computing power, right. So it's a computer, what we do is, we'll build, so we'll do we'll say, I'm sorry for anyone who hasn't studied, you know, high level university finance, but or statistics, you know, we'll build a, say, a regression model. So we'll look at past data. We'll plug all that in, in order to build a predictive model, a future model being able to come out with future cap rates, and, you know, the more data that we're able to plug into our regression model. So historically, what real estate institutions and economists have use is what they call the linear regression model, use the Monte Carlo simulations. Now, the problem with the linear regression model is that you know, past transactions or data are, are, are also affected a lot by various things like, you know, political environment, and capital markets. And there's a whole bunch of factors.

So there's a new model that's being used more and more, especially with a lot of postdoctoral students in statistics, it's called a Quantile regression model. So that's where we're able to create that same kind of, I'm saying this in layman's terms as much as possible, we're able to take past historical data, build that kind of linear model, kind of, like build that line chart for people to understand, and we kind of repeat that line chart in the future. But we're also able to start to weigh that those data points with various things like a new government, with quantitative easing, with the war, with various factors that may be affected that models to make it less linear. And then we're able to start to better predict future stats and future cap rates. So that's the first step of it.

The second step is, let's say, right now, we built our Quantile regression model. And now we compute it and what it says to us is well, T minus five cap rates, or five-year cap rate is going to be between, let's say, we have a couple of tracks, it's hard to explain to people who have not done statistics. But we have a couple of tracks. And ultimately, what it says is that the highest probabilities are that cap rate is going to be between 5.75 and 6.10% in five years for that specific market. Now, like I said, as we get closer to the five year period from now, the less the margin of error is, because we're closer and multifamily market moves very slowly. So predicting, the easiest way to understand is predicting 25 years out from now, it's very hard? Your 25 year prediction is going to be way more, there's more room for it to be completely off than your two-year prediction.

So we build a model for the five-year prediction, and then starting tomorrow, every day, our artificial intelligence recalculates that model. So as it recalculates, the model gets more and more precise, because let's say we took statistics from today to 20 years ago, let's say we took the cap rate of that market, starting from today, and 20 years back. Well, obviously, the next 20 years are not going to be exactly the last 20 years. But that's ultimately what statistics do, we try and kind of say, well, let's take the last 20 years, there's a margin of error, that's what's going to be the next 20 years.

So what's cool with the artificial intelligence is without actually having to do anything, every day, the artificial intelligence kind of brings the model a day closer and adapts the model with more and more weight on what's going on right now, rather than what happened 20 years ago. And the artificial intelligence is also able to measure what today it predicted for yesterday, versus what actually happened. And what's the spreading difference and what caused that spread? And therefore, once it's able to determine what caused that spread, it'll add that into the equation for the future cap rate model so it becomes much more precise.

James: Yes, but don't try to run it in iteration on a daily or monthly basis to watch the whole investment process. But how do you make it on day zero? Well, today we're buying today how does it iterate then when on a day zero?

Nikolai: Well, what it is I don't understand the question.

James: So my question is, you said the data is being fed into the system to get more accurate exit cap rate. But you're making a decision to buy today? Is the iteration happening from today to all the investment cycle? Or do you do it earlier before you decide to buy a deal?

Nikolai: Okay, I understand what you mean. So like, for determining your actual purchase cap rate,

James: Yes, correct whatever price that I'm going to pay today because that's what I'm getting into the deal. That's the point of me making a decision, whether this is a good deal, and I'm going to be raising money and telling everybody it's a good deal.

Nikolai: The purchase cap rate is a whole other set of statistics and data models. That's more I'd say, determining today's cap rate is much more endeavor of collecting more historical data. Because like I said, let's say JLL Jones Lang LaSalle which is one of the biggest brokerages, they come out with reports and say, Okay, well, the cap rate, let's say in Austin is, 5.2%. Let's say the mean cap rate is 5.2%. Well, that's based on maybe what like 30 or 40%, of actual transactions that happen because they don't have data on like the off-market transactions, or the pocket listings or this and that, right.

And on top of that, they haven't normalized the cap rates on whether, let's say, a building traded at a 4.6 cap rate. Well, as we said, if that property wasn't stabilized, well, then that cap rate is off. That's not a good cap rate. So that's a second thing. So for establishing what you should pay to the intrinsic, what's intrinsic value today. that's ultimately what I think the question is, and correct me if I'm wrong, but let's say you're looking at a 100 unit property, what is the actual intrinsic value of that property? What's the real capital I should be buying at?

Well, that's a question of having the proper volume of data, Okay, number one. So that's what we're working on right now is making sure we keep on building our database. So instead of our market cap rates being based on the off 30 or 40%, of inventory, or transactions. Well, it'll be based off maybe 60, 70, 75%, therefore, that cap rate becomes more precise. Secondly, we actually look at every transaction and say, qualitatively because that's the first thing is a quantitative aspect, in statistics, we have quantitative, qualitative.

So the quality of the data, once we have the quantity, we look at the cap rates and say, okay, that property traded for a 4.2 cap rate. Was that a stabilized property? No, it was not. Once we add the cap x, we have the new revenues. And we adjust the sales price for cap x, but we also adjust NOI. Now we can look at the stabilized cap rate. So that's the qualitative aspects of it. And now we're able to say, here are the market cap rates, here's the low end of cap rates, here's the high end of cap rates, here's the mean, or the media. And here's that range of cap rates.

Because cap rates are based on the Capri calculation ultimately, even though people think it's NOI divided by sale price, I'm sure that's not what a cap rate is, that's how you find the cap rate of a soul stabilized property. The actual cap rate calculation or formula is a mathematical equation of R minus G, it's algebra, so are being returned minus g, which is growth. And R is defined as RF plus RP. So the risk-free rate plus the risk premium that you as an investor are looking for or that the market is looking for, a perceived risk premium, obviously.

So what we want to do then, that would be like a third step, and we're not at that level right now. But I hope within the next couple of years, we will be, and I'm sure you as an engineer, probably understanding how valuable our ability to do that would become for the market. Is that then you're starting to be able to say, well, right now, that property is being listed at a say, let's say the range for cap rates in Austin is really five to six, obviously, six is going to be in the worst neighborhoods. Five is going to be the best neighborhoods because it's a matter of risk.

Well, then you're looking at the property, let's say it's at a 5.7 cap rate. But it's kind of on the limit of a bad neighborhood, good neighborhood. And then you're able to intrinsically say, but the intrinsic cap rate of that property, the real intrinsic value of that cap rate is actually 5.3. Now, if you didn't know that, and you just said, well, the average cap rate is 5.7 well, it's not so much of a deal, I'm not gonna buy that property. But now with this new data, what you're able to see is, wait a minute, it looks more expensive than what it should be but in reality it's not, it's actually cheaper because the real intrinsic value is a 5.3 cap rate.

And that would really unlock the potential of what we call value investing, what like a Warren Buffett has built his entire career off of the stock market? Well, he was able to build that value investing exists so much, in the stock market, because of the quantity and the quality of the data. The quantity of data is accessible to everyone, the quality of the data is a bit harder to get the qualitative aspects. That's why Warren Buffett was has been such a great investor, because he invested so heavily into being able to pull out the qualitative aspects of the data, well, now we would be able to do the same thing, you would be able to do the same thing as a multifamily investor.

You would have access to the quantity of data needed for you, then to increase your knowledge based on the qualitative aspects of it, and then be able to properly price that acquisition. And then once you're able to do that, well, then you can go say to your investors, look, this is why I'm buying this deal. This is why it's a good deal. And if on top of that, you're able to be more precise with your exit cap rate, and the growth rates of your revenues and expenses and your refinancing rates. Well, you're going to be a much more confident investor.

James: You are making it really what you call a --

Nikolai: It's a more efficient market.

James: It's a more efficient way of actually determining your purchase because you can really just say generally, Austin is what five cap, it's not true, [inaudible00:50:46].

Nikolai: It's kind of scary to say, but we're all kind of invested in multifamily kind of half blindfold. The guys like me and you, and there's a whole bunch of other guys out there really intelligent wrestlers. We're all invested, based on intuition experience, a very strong knowledge base. But we're ultimately kind of invested with one eye closed. Now it's even worse for people who don't have our knowledge base and experience because they're all invested in completely blindfolded.

James: Interesting. So, if you can get that kind of data where you can look at the stock market, and what's the potential, especially if it's in the path of growth. And what's the risk that you're buying? There are some deals, even though you buy it at the lowest cap rate for that market, it could be still the best growth because it could be just like another big explosion, in terms of jobs, is going to be happening in that area just because of the path of growth.

Nikolai: That's so important because if you're a pro forma and you're underwriting you predicted a 2% growth rate in revenue. But in those five years, the analyze growth radio was six. Well, you probably didn't buy that property, when you should have. And the other thing is the same if you predicted a 6% growth rate, and it was two, then you bought that property you shouldn't have, But what most people will say is well, the guy who predicted 6%, he should have put in 2%, like he should have been conservative, but that's not necessarily true. That's a half-truth. That's actually a mistake in logical reasoning because the other guy who says, I'm going to plug in a 2% growth rate because that's what historically happens.

What happens if you invest in a market where the growth rate is actually 6%? And that the other intelligent investors knew or predicted that it would be 6%, while they're willing to overpay, according to you for a property, and then you're not buying anything, you're not generating any returns, you're not building your wealth, and you're just kind of sitting on the sidelines there, Bah, humbugging saying, well, the markets paying way too much for the properties and these guys are stupid, stupid money, blah, blah, blah, I'm going to wait for the market to crash and blah, blah, blah,

I know guys who've been saying this since 2012. And they have not bought anything since 2012. They haven't generated any returns. All under the pretext of being conservative investors. You know what, they're not conservative investors, you know why because they're not investors. They haven't bought anything, because they take themselves out of the market, and they're sitting on the sidelines, and they're just making up for lack of precision in their underwriting through, this kind of pseudo-conservatism.

James: I think it just depends on the sophistication of the investors. If you look at nowadays, multifamily has become so popular, so many people who did not have the financial education background or the way to analyze a deal. There's a lot of parameters that go into any deals. That's what you mentioned, you mentioned so many parameters, nobody will look at that. Everybody said multifamily is good. I bought it and it went 300%. And they say, Oh, I'm a really good operator. Well, actually, you should have made 500% because the market gave you at least 400%. 100%, you just did 300%, why did you do 300%?

Nikolai: That comes down to what we call the search for alpha. We want to outperform the market. And all these people and there's a whole bunch of them now there's gurus and mentors and coaches, and they're giving all these online classes or seminars or whatnot, or they're boasting about being such great real estate investors. And the reality of it is they don't even know what they did. They're like, well, I generated X percent returns, and I've created X amount of millions of dollars in profit over the last five and 10 years. But that's actually quite average.

That's what the market does, as long as you are in the market. Of course, that's what you generated. Now, did you generate more than what the market did? That's the real question. And unfortunately, there are not enough people in the market asking that question. And if you're a passive investor, that's the question you should be asking your syndicator or your GP is not this is what you generated, great. That sounds awesome. You generated 22% IRR annually over the last five years. What did the market generate? The market generated 23.

James: I remember the other day I saw someone, he said, I made 60%. In one year, I bought it in the first year and I sold it in twelve months, I made 60%, I said well, you should have made that 100% because the market went up by that much.

Nikolai: And that's why I'm so bullish on education, and why I think it's so important that multifamily investors get educated and push their knowledge base, because, this is not Nintendo, this is not Xbox, we're not just playing, baseball on our PlayStation three, or Playstation four, this is serious business, and even more, so if you're syndicator. Just in the knowledge base, you know needs to continuously be expanded. And that's why data also needs to be there because knowledge without data is also quite useless.

James: Correct. So coming back to being the alpha in the market. I know you can look at different market appreciation versus how much you are making money. So coming to, let's say, for a decision where you have a deal in your hand, and you're deciding whether you want to sell or you want to refile, or you 10:31 exchange. So can you give us a good methodology to do to make that decision?

Nikolai: To make the decision on whether you beat the market or...

James: Whether you want to sell a deal, or whether you want to refinance, whether you want to hold it for long term or you want to do a 10:31 exchange? How would you approach it?

Nikolai: Well, I'd approach it on a very individual basis. Number one, I think everyone has a very different investor profile. What I mean by investor profile is, what type of returns do you want? And when? What are the strengths and weaknesses that you possess as either an owner-operator or syndicator or whatnot? What access to capital do you have? How patient is that capital? What's the cost of the capital? Now, if it's your own money, obviously, it's probably the most patient money with the cheapest cost of capital.

If you're raising money from other people, well, then obviously, there's a less patient aspect to it, and the cost of capital is going to be higher. If you're taking money from bridge loans, well, that's even worse. So if you're taking money from hard money lenders, well, then obviously, your cost of capital is going to be very, very high. So these are all things that you have to consider, you also have to consider where you are in your career with regards to what it is that you want to achieve, either as annual cash flow or just overall that value and what type of risk you're willing to accept.

So ultimately, you have to be able to answer those questions initially, to be able to decide on the strategies. Because ultimately, people in multifamily investing, what they do not understand is the difference between philosophy and strategies. Now, everyone should have their own investment philosophy, based on their investor profile. Now, once you have that philosophy, what you want to do is adapt your strategies according to where you are in the market, and where you are in your career. That's something that is very misunderstood. People say, I'm a buy and hold investor. We hear that a lot in multifamily.

So ultimately, what you're saying that you do not have an investment philosophy, that you think you do. You think your philosophy is to buy and hold. But buy and hold is not a philosophy, it's a strategy. So what you're saying is, ultimately, you're investing all the time throughout the whole of your career, using just one strategy. That's very dangerous because let's say the exit point of that strategy eventually, say the day that you do have to sell upon retirement because even though you're buying a whole, you might not be a legacy buy and hold investor.

What I mean by that is a legacy buy and hold investor is someone who's just going to pass down the properties to their children, upon death, or upon retirement, whereas most buy and hold investors, what they really need is, I'm going to buy and hold until my retirement, then I'll start selling off. Well, what happens if, during your retirement, you're in a trough of the market cycle. What if you're in that part of the market cycle, or you're at the bottom of it, that's a really bad time to sell? Well, that's the mistake of always investing using only one strategy.

So what I would say is that you have to establish your philosophy, understand that your investor profile is going to change over time. And the market cycle moves through phases, there are different phases of the market cycle and your strategies, you have to be able to use different strategies at different phases of the cycle, and at different phases of your career as your profile changes, or adapts or morphs. And that's how you then establish well, with this property, should I buy it and hold it or should I sell it? Or should I just refinance it? What should I do? And I'll give you a very concrete answer. Once I've explained all this.

I have a student here because I do teach real estate investing courses. We actually built a college we call it The College of the Emmerich's. Now you don't have to, it's not college level education. But what we're saying is that from everyday multifamily investors, if you really want to learn college level stuff without having to go to college, well, we have a couple of courses that we teach you very high-level stuff, very concrete work. You still need coaching from coaches and mentors and all that stuff. We actually teach courses.

So one of my students in these courses, he's a very successful real estate investor in Montreal, Canada, Montreal is the most important multifamily market in Canada. It's a very strong multifamily market, very competitive. Now he's up to about I guess, 150 units, all on his own, no outside money, no passive money. And he started having trouble refinancing out of his properties because what he was doing, it seems a very big value add investor.

So he was using two strategies value added buy and hold. But he was erroneously thinking that value-added and buy and hold was his investment philosophy, which is not, those are two strategies that are part of the philosophy. So he came to me and he said, well, look, banks have now started to tighten their DSCR ratings, and their LTV, therefore, I'm buying a property at a billion dollars, and putting in $300,000 into it. And now the market value of that property is $2 million. But I'm not able to refine it $2 million, because of the banking standards, they're only allowing me to refine out of 1.6.

So now, if they're letting you refine out at 1.6, on a 75%, LTV, what they're saying is when you have to leave in 25% of 1.6 plus $400,000, that's a lot of equity, that it is unable to pull out because he was doing too much of a good job at value add. And the capital markets, the banks are not able to follow market value, banks, especially in Canada, are much more conservative than in the US, but even in the US, there is a lot of people buying properties.

And they're not able to refine the whole value, because their total loan dollars are blocked by either LTV or DSCR. What I call economic value, the economic value is not as high as market transaction value. Therefore, instead of leaving 25% of equity, you're leaving 25 plus, in this case, $400,000.00. Now that's where I said to him perfect, I looked at his portfolio, I said, well, you have to adapt your strategies, you have to change the strategies, you can no longer at this moment, use the buy and hold strategy, you have to use the fix and flip strategy.

Because you're too good at fixing value add. And you're not able to pull out as much equity as you used to be through refinancing. Therefore, now you have to seriously consider selling that property. Because you can go and get $2 million for other markets right now. So that's an extra $400,000. Because he was able only to refinance 1.6 out of it. So now he's able to get the full market value, pull that cash out, and he has access to a lot of opportunities.

He has a really strong bird document work. So his cost of opportunity is very high. If he's leaving all that equity, in these properties that are all stabilized, he's making way more money by doing more value-add stuff. So he made the decision and now he holds zero properties. He sold all of his 140 units because that has allowed him to get more and more cash rich, with less and less money and equity and properties and gain access to more and more opportunities. And ultimately, his annual portfolio, the total return on investment is in the 40 to 70% IRR. Whereas while he was doing buy and hold his overall portfolio was only returned to him maybe 20% if you consider the weighted average return on investment. So that's how I would attack that. I know, that's a very long-winded answer.

James: I think that's the right answer. So I mean, the return on equity, which is date right now, I mean, on this deal. There's so much of dead equity not producing cash. And if your cost of capital, which is also equal to an opportunity outside is much higher, you might as well just cash that out by selling it off.

Nikolai: Because the refinancing is living you to a liquid.

James: Recently, I mean the banks have been more stringent on refine. So the last refine they did ask me to leave 5% my cash basis, which they never did in the past, things have changed. I think that's okay. That's how the banks work now.

Nikolai: It's okay. But the problem is that on a $15 million property, you know, that's two and a half million dollars less cash you have for the next acquisition.

James: Correct. I mean, it depends on what is the cost of capital outside plus how much you can pull out and how much your equity stuck on it. So, coming back to market cycles, because I think this is one thing that I want to ask you because I think you have studied with Dr. Glenn Mueller. So right now, if I look at the latest Q1 forecast for apartments in the hyper supply market. I don't know if that's something that you are aware or not, but...

Nikolai: Nationally?

James: Nationally yes it's not a local, but lots of markets are in it for supply. It's very, very few markets are in the expansion cycle. And even though they are in the expansion cycle, they are at the last stage of the expansion cycle. And all the markets that are on expansion cycle, or the market that recovered late like Las Vegas, Phoenix and a lot of Econo markets. So can you give an overview of what do you think the market is? And what would the strategy be for investors now?

Nikolai: Well, I think number one, I would say that I try not to look at national or macro market cycles. I think that's the first thing to consider. Because multifamily real estate is so hyperlocal. So I look much more at those markets, cycles of hyper supply and expansion and contraction, I look at more of like a metro area. So like you're in Austin, Texas, I look at Austin, I wouldn't really consider the multifamily market at large, because it's kind of like looking at cap rates on an unstabilize property, it's kind of a waste of time.

Now, I'd say that I haven't looked at recent data of where all the cycle, where all the markets are, the phases of the cycle. But I mean, I think it is safe to say that, most of the markets right now are in the later phases of the game, or later innings, as Howard Marks likes to say, in the stock market and capital markets. But also, as he says, we don't really know, see the thing with market cycles, and whether it be with Dr. Mueller, whether it be with Karen Trice, out of Australia, and also all the other various professors and researchers of market cycles, is that they are predictable in the sense that we know the phases of the cycle.

And each cycle pretty much runs but they're not exactly the same, and we never know what the friction points are going to be between the phases, how intense they'll be. So let's say you go from the hyper supplier in the market, to the contraction phase, well, that might be a very weak transition, there might not actually be that big of a difference. It's not like necessarily, the cap rates are 5% in Austin, and then, all of a sudden, six months the cap rates will be 7%. And that's not how the multifamily market works anyway, it doesn't move that way. It's not the stock market, we don't have to even trade on the fractional stock. So it's not as volatile.

And, because a very important portion of the market multifamily is, in majority buy and hold. Well, even though the market does change. They don't move, therefore, the market doesn't move that much. So what I say is to not be over-indexed on where we are in the phases of the market cycle but to just kind of be aware of it. Because what we can then do and as I said, we don't know how intense the transition is, we don't know how long each phase will last.

We might go into contraction, it might only last like a quarter or two quarters. And we'll transition out of that quite rapidly. So that's the other thing to consider. So what I'd say is, if you're underwriting a deal, and you're in the oversupply phase of the cycle in the city that you're looking at, well, then I'd try and be conservative and not that airy-fairy conservatism that we were talking about earlier. I just tried to be more conservative, if, I'm not sure of the deal. I'm kind of on the fence. Well, if I'm an oversupply right now, I might not do the deal.

Or I might decide to oversubscribed, my deal. Or to have more cash reserves, in case the market does the transition. So it's risk management at that point, that's the way I see it, you never stop biting, okay, you never stopped being active in the market. If you do then you're not an investor, you don't know how to invest, you don't know what you're doing. An investor must be invested and is always invested. And an investor is ultimately risk management. So it's just your risk management, that changes, you want to be less aggressive.

Now it's the opposite. If you feel that now you at the end of the contraction phase of the cycle, and you're kind of on the fence for a property, well, then I jumped into it, even more. I'd be more aggressive on that acquisition, I'd fight maybe a bit harder for it. So that's kind of how I would modulate my decision making. And the parameters that I would use, I'd modulate the aggressiveness or the conservativeness. I'd also modulate the amount of capital I should go to deal with, I buy it in a place where I think the markets going to downturn well, obviously, I might use less leverage and I'd keep a lower LTV and a higher DSR. I'd keep a higher cash reserve just in case. And I might also do a longer term on my mortgage, just so I don't end up with having to refinance in five years in the middle of a poor capital market or property market.

James: Awesome answer. So Nikolai, I think that's been quite some time. So thanks for coming for the show. You want to tell the audience how to reach you and about you. And [inaudible01:12:49]

Nikolai: So there's a new model that's being used more and more, especially with a lot of postdoctoral students in statistics, it's called a Quantile regression model. So that's where we're able to create that same kind of, I'm saying this in layman's terms as much as possible, we're able to take past historical data, build that kind of linear model, kind of, like build that line chart for people to understand, and we kind of repeat that line chart in the future. But we're also able to start to weigh that those data points with various things like a new government, with quantitative easing, with the war, with various factors that may be affected that models to make it less linear. And then we're able to start to better predict future stats and future cap rates. So that's the first step of it.

The second step is, let's say, right now, we built our Quantile regression model. And now we compute it and what it says to us is well, T minus five cap rates, or five-year cap rate is going to be between, let's say, we have a couple of tracks, it's hard to explain to people who have not done statistics. But we have a couple of tracks. And ultimately, what it says is that the highest probabilities are that cap rate is going to be between 5.75 and 6.10% in five years for that specific market.

Now, like I said, as we get closer to the five year period from now, the less the margin of error is, because we're closer and multifamily market moves very slowly. So predicting, the easiest way to understand is predicting 25 years out from now, it's very hard? Your 25 year prediction is going to be way more, there's more room for it to be completely off than your two-year prediction.

So we build a model for the five-year prediction, and then starting tomorrow, every day, our artificial intelligence recalculates that model. So as it recalculates, the model gets more and more precise, because let's say we took statistics from today to 20 years ago, let's say we took the cap rate of that market, starting from today, and 20 years back. Well, obviously, the next 20 years are not going to be exactly the last 20 years. But that's ultimately what statistics do, we try and kind of say, well, let's take the last 20 years, there's a margin of error, that's what's going to be the next 20 years.

So what's cool with the artificial intelligence is without actually having to do anything, every day, the artificial intelligence kind of brings the model a day closer and adapts the model with more and more weight on what's going on right now, rather than what happened 20 years ago. And the artificial intelligence is also able to measure what today it predicted for yesterday, versus what actually happened. And what's the spreading difference and what caused that spread? And therefore, once it's able to determine what caused that spread, it'll add that into the equation for the future cap rate model so it becomes much more precise.

James: Yes, but don't try to run it in iteration on a daily or monthly basis to watch the whole investment process. But how do you make it on day zero? Well, today we're buying today how does it iterate then when on a day zero?

Nikolai: Well, what it is I don't understand the question.

James: So my question is, you said the data is being fed into the system to get more accurate exit cap rate. But you're making a decision to buy today? Is the iteration happening from today to all the investment cycle? Or do you do it earlier before you decide to buy a deal?

Nikolai: Okay, I understand what you mean. So like, for determining your actual purchase cap rate,

James: Yes, whatever price that I'm going to pay today because that's what I'm getting into the deal. That's the point of me making a decision, whether this is a good deal, and I'm going to be raising money and telling everybody it's a good deal.

Nikolai: The purchase cap rate is a whole other set of statistics and data models. That's more I'd say, determining today's cap rate is much more endeavor of collecting more historical data. Because like I said, let's say JLL Jones Lang LaSalle which is one of the biggest brokerages, they come out with reports and say, Okay, well, the cap rate, let's say in Austin is, 5.2%. Let's say the mean cap rate is 5.2%. Well, that's based on maybe what like 30 or 40%, of actual transactions that happen because they don't have data on like the off-market transactions, or the pocket listings or this and that, right.

And on top of that, they haven't normalized the cap rates on whether, let's say, a building traded at a 4.6 cap rate. Well, as we said, if that property wasn't stabilized, well, then that cap rate is off. That's not a good cap rate. So that's a second thing. So for establishing what you should pay to the intrinsic, what's intrinsic value today. that's ultimately what I think the question is, and correct me if I'm wrong, but let's say you're looking at a 100 unit property, what is the actual intrinsic value of that property? What's the real capital I should be buying at?

Well, that's a question of having the proper volume of data, Okay, number one. So that's what we're working on right now is making sure we keep on building our database. So instead of our market cap rates being based on the off 30 or 40%, of inventory, or transactions. Well, it'll be based off maybe 60, 70, 75%, therefore, that cap rate becomes more precise. Secondly, we actually look at every transaction and say, qualitatively because that's the first thing is a quantitative aspect, in statistics, we have quantitative, qualitative.

So the quality of the data, once we have the quantity, we look at the cap rates and say, okay, that property traded for a 4.2 cap rate. Was that a stabilized property? No, it was not. Once we add the cap x, we have the new revenues. And we adjust the sales price for cap x, but we also adjust NOI. Now we can look at the stabilized cap rate. So that's the qualitative aspects of it. And now we're able to say, here are the market cap rates, here's the low end of cap rates, here's the high end of cap rates, here's the mean, or the media. And here's that range of cap rates.

Because cap rates are based on the Capri calculation ultimately, even though people think it's NOI divided by sale price, I'm sure that's not what a cap rate is, that's how you find the cap rate of a soul stabilized property. The actual cap rate calculation or formula is a mathematical equation of R minus G, it's algebra, so are being returned minus g, which is growth. And R is defined as RF plus RP. So the risk-free rate plus the risk premium that you as an investor are looking for or that the market is looking for, a perceived risk premium, obviously.

So what we want to do then, that would be like a third step, and we're not at that level right now. But I hope within the next couple of years, we will be, and I'm sure you as an engineer, probably understanding how valuable our ability to do that would become for the market. Is that then you're starting to be able to say, well, right now, that property is being listed at a say, let's say the range for cap rates in Austin is really five to six, obviously, six is going to be in the worst neighborhoods. Five is going to be the best neighborhoods because it's a matter of risk.

Well, then you're looking at the property, let's say it's at a 5.7 cap rate. But it's kind of on the limit of a bad neighborhood, good neighborhood. And then you're able to intrinsically say, but the intrinsic cap rate of that property, the real intrinsic value of that cap rate is actually 5.3. Now, if you didn't know that, and you just said, well, the average cap rate is 5.7 well, it's not so much of a deal, I'm not gonna buy that property. But now with this new data, what you're able to see is, wait a minute, it looks more expensive than what it should be but in reality it's not, it's actually cheaper because the real intrinsic value is a 5.3 cap rate.

And that would really unlock the potential of what we call value investing, what like a Warren Buffett has built his entire career off of the stock market? Well, he was able to build that value investing exists so much, in the stock market, because of the quantity and the quality of the data. The quantity of data is accessible to everyone, the quality of the data is a bit harder to get the qualitative aspects. That's why Warren Buffett was has been such a great investor, because he invested so heavily into being able to pull out the qualitative aspects of the data, well, now we would be able to do the same thing, you would be able to do the same thing as a multifamily investor.

You would have access to the quantity of data needed for you, then to increase your knowledge based on the qualitative aspects of it, and then be able to properly price that acquisition. And then once you're able to do that, well, then you can go say to your investors, look, this is why I'm buying this deal. This is why it's a good deal. And if on top of that, you're able to be more precise with your exit cap rate, and the growth rates of your revenues and expenses and your refinancing rates. Well, you're going to be a much more confident investor.

James: You are making it really what you call a...

Nikolai: It's a more efficient market.

James: It's a more efficient way of actually determining your purchase. Because you can really just say generally, Austin is what five cap it's not true, (inaudible00:50:46).

Nikolai: It's kind of scary to say, but we're all kind of invested in multifamily kind of half blindfold. The guys like me and you, and there's a whole bunch of other guys out there really intelligent wrestlers. We're all invested, based on intuition experience, a very strong knowledge base. But we're ultimately kind of invested with one eye closed. Now it's even worse for people who don't have our knowledge base and experience because they're all invested in completely blindfolded.

James: Interesting. So, if you can get that kind of data where you can look at the stock market, and what's the potential, especially if it's in the path of growth. And what's the risk that you're buying? There are some deals, even though you buy it at the lowest cap rate for that market, it could be still the best growth because it could be just like another big explosion, in terms of jobs, is going to be happening in that area just because of the path of growth.

Nikolai: That's so important because if you're a pro forma and you're underwriting you predicted a 2% growth rate in revenue. But in those five years, the analyze growth radio was six. Well, you probably didn't buy that property, when you should have. And the other thing is the same if you predicted a 6% growth rate, and it was two, then you bought that property you shouldn't have, But what most people will say is well, the guy who predicted 6%, he should have put in 2%, like he should have been conservative, but that's not necessarily true. That's a half-truth. That's actually a mistake in logical reasoning because the other guy who says, I'm going to plug in a 2% growth rate because that's what historically happens.

What happens if you invest in a market where the growth rate is actually 6%? And that the other intelligent investors knew or predicted that it would be 6%, while they're willing to overpay, according to you for a property, and then you're not buying anything, you're not generating any returns, you're not building your wealth, and you're just kind of sitting on the sidelines there, Bah, humbugging saying, well, the markets paying way too much for the properties and these guys are stupid, stupid money, blah, blah, blah, I'm going to wait for the market to crash and blah, blah, blah,

I know guys who've been saying this since 2012. And they have not bought anything since 2012. They haven't generated any returns. All under the pretext of being conservative investors. You know what, they're not conservative investors, you know why because they're not investors. They haven't bought anything, because they take themselves out of the market, and they're sitting on the sidelines, and they're just making up for lack of precision in their underwriting through, this kind of pseudo-conservatism.

James: I think it just depends on the sophistication of the investors. If you look at nowadays, multifamily has become so popular, so many people who did not have the financial education background or the way to analyze a deal. There's a lot of parameters that go into any deals. That's what you mentioned, you mentioned so many parameters, nobody will look at that. Everybody said multifamily is good. I bought it and it went 300%. And they say, Oh, I'm a really good operator. Well, actually, you should have made 500% because the market gave you at least 400% (crosstalk00:54:09) 100%, you just did 300%, why did you do 300%?

Nikolai: That comes down to what we call the search for alpha. We want to outperform the market. And all these people and there's a whole bunch of them now there's gurus and mentors and coaches, and they're giving all these online classes or seminars or whatnot, or they're boasting about being such great real estate investors. And the reality of it is they don't even know what they did. They're like, well, I generated X percent returns, and I've created X amount of millions of dollars in profit over the last five and 10 years. But that's actually quite average.

That's what the market does, as long as you are in the market. Of course, that's what you generated. Now, did you generate more than what the market did? That's the real question. And unfortunately, there are not enough people in the market asking that question. And if you're a passive investor, that's the question you should be asking your syndicator or your GP is not this is what you generated, great. That sounds awesome. You generated 22% IRR annually over the last five years. What did the market generate? The market generated 23.

James: I remember the other day I saw someone, he said, I made 60%. In one year, I bought it in the first year and I sold it in twelve months, I made 60%, I said well, you should have made that 100% because the market went up by that much.

Nikolai: And that's why I'm so bullish on education, and why I think it's so important that multifamily investors get educated and push their knowledge base, because, this is not Nintendo, this is not Xbox, we're not just playing, baseball on our PlayStation three, or Playstation four, this is serious business, and even more, so if you're syndicator. Just in the knowledge base, you know needs to continuously be expanded. And that's why data also needs to be there because knowledge without data is also quite useless.

James: Correct. So coming back to being the alpha in the market. I know you can look at different market appreciation versus how much you are making money. So coming to, let's say, for a decision where you have a deal in your hand, and you're deciding whether you want to sell or you want to refile, or you 10:31 exchange. So can you give us a good methodology to do to make that decision?

Nikolai: To make the decision on whether you beat the market or...

James: Whether you want to sell a deal, or whether you want to refinance, whether you want to hold it for long term or you want to do a 10:31 exchange? How would you approach it?

Nikolai: Well, I'd approach it on a very individual basis. Number one, I think everyone has a very different investor profile. What I mean by investor profile is, what type of returns do you want? And when? What are the strengths and weaknesses that you possess as either an owner-operator or syndicator or whatnot? What access to capital do you have? How patient is that capital? What's the cost of the capital? Now, if it's your own money, obviously, it's probably the most patient money with the cheapest cost of capital.

If you're raising money from other people, well, then obviously, there's a less patient aspect to it, and the cost of capital is going to be higher. If you're taking money from bridge loans, well, that's even worse. So if you're taking money from hard money lenders, well, then obviously, your cost of capital is going to be very, very high. So these are all things that you have to consider, you also have to consider where you are in your career with regards to what it is that you want to achieve, either as annual cash flow or just overall that value and what type of risk you're willing to accept.

So ultimately, you have to be able to answer those questions initially, to be able to decide on the strategies. Because ultimately, people in multifamily investing, what they do not understand is the difference between philosophy and strategies. Now, everyone should have their own investment philosophy, based on their investor profile. Now, once you have that philosophy, what you want to do is adapt your strategies according to where you are in the market, and where you are in your career. That's something that is very misunderstood. People say, I'm a buy and hold investor. We hear that a lot in multifamily.

So ultimately, what you're saying that you do not have an investment philosophy, that you think you do. You think your philosophy is to buy and hold. But buy and hold is not a philosophy, it's a strategy. So what you're saying is, ultimately, you're investing all the time throughout the whole of your career, using just one strategy. That's very dangerous because let's say the exit point of that strategy eventually, say the day that you do have to sell upon retirement because even though you're buying a whole, you might not be a legacy buy and hold investor.

What I mean by that is a legacy buy and hold investor is someone who's just going to pass down the properties to their children, upon death, or upon retirement, whereas most buy and hold investors, what they really need is, I'm going to buy and hold until my retirement, then I'll start selling off. Well, what happens if, during your retirement, you're in a trough of the market cycle. What if you're in that part of the market cycle, or you're at the bottom of it, that's a really bad time to sell? Well, that's the mistake of always investing using only one strategy.

So what I would say is that you have to establish your philosophy, understand that your investor profile is going to change over time. And the market cycle moves through phases, there are different phases of the market cycle and your strategies, you have to be able to use different strategies at different phases of the cycle, and at different phases of your career as your profile changes, or adapts or morphs. And that's how you then establish well, with this property, should I buy it and hold it or should I sell it? Or should I just refinance it? What should I do? And I'll give you a very concrete answer. Once I've explained all this.

I have a student here because I do teach real estate investing courses. We actually built a college we call it The College of the Emmerich's. Now you don't have to, it's not college level education. But what we're saying is that from everyday multifamily investors, if you really want to learn college level stuff without having to go to college, well, we have a couple of courses that we teach you very high-level stuff, very concrete work. You still need coaching from coaches and mentors and all that stuff. We actually teach courses.

So one of my students in these courses, he's a very successful real estate investor in Montreal, Canada, Montreal is the most important multifamily market in Canada. It's a very strong multifamily market, very competitive. Now he's up to about I guess, 150 units, all on his own, no outside money, no passive money. And he started having trouble refinancing out of his properties because what he was doing, it seems a very big value add investor.

So he was using two strategies value added buy and hold. But he was erroneously thinking that value-added and buy and hold was his investment philosophy, which is not, those are two strategies that are part of the philosophy. So he came to me and he said, well, look, banks have now started to tighten their DSCR ratings, and their LTV, therefore, I'm buying a property at a billion dollars, and putting in $300,000 into it. And now the market value of that property is $2 million. But I'm not able to refine it $2 million, because of the banking standards, they're only allowing me to refine out of 1.6.

So now, if they're letting you refine out at 1.6, on a 75%, LTV, what they're saying is when you have to leave in 25% of 1.6 plus $400,000, that's a lot of equity, that it is unable to pull out because he was doing too much of a good job at value add. And the capital markets, the banks are not able to follow market value, banks, especially in Canada, are much more conservative than in the US, but even in the US, there is a lot of people buying properties.

And they're not able to refine the whole value, because their total loan dollars are blocked by either LTV or DSCR. What I call economic value, the economic value is not as high as market transaction value. Therefore, instead of leaving 25% of equity, you're leaving 25 plus, in this case, $400,000.00. Now that's where I said to him perfect, I looked at his portfolio, I said, well, you have to adapt your strategies, you have to change the strategies, you can no longer at this moment, use the buy and hold strategy, you have to use the fix and flip strategy.

Because you're too good at fixing value add. And you're not able to pull out as much equity as you used to be through refinancing. Therefore, now you have to seriously consider selling that property. Because you can go and get $2 million for other markets right now. So that's an extra $400,000. Because he was able only to refinance 1.6 out of it. So now he's able to get the full market value, pull that cash out, and he has access to a lot of opportunities.

He has a really strong bird document work. So his cost of opportunity is very high. If he's leaving all that equity, in these properties that are all stabilized, he's making way more money by doing more value-add stuff. So he made the decision and now he holds zero properties. He sold all of his 140 units because that has allowed him to get more and more cash rich, with less and less money and equity and properties and gain access to more and more opportunities. And ultimately, his annual portfolio, the total return on investment is in the 40 to 70% IRR. Whereas while he was doing buy and hold his overall portfolio was only returned to him maybe 20% if you consider the weighted average return on investment. So that's how I would attack that. I know, that's a very long-winded answer.

James: I think that's the right answer. So I mean, the return on equity, which is date right now, I mean, on this deal. There's so much of dead equity not producing cash. And if your cost of capital, which is also equal to an opportunity outside is much higher, you might as well just cash that out by selling it off.

Nikolai: Because the refinancing is living you to a liquid.

James: Recently, I mean the banks have been more stringent on refine. So the last refine they did ask me to leave 5% my cash basis, which they never did in the past, things have changed. I think that's okay. That's how the banks work now.

Nikolai: It's okay. But the problem is that on a $15 million property, you know, that's two and a half million dollars less cash you have for the next acquisition.

James: Correct. I mean, it depends on what is the cost of capital outside plus how much you can pull out and how much your equity stuck on it. So, coming back to market cycles, because I think this is one thing that I want to ask you because I think you have studied with Dr. Glenn Mueller. So right now, if I look at the latest Q1 forecast for apartments in the hyper supply market. I don't know if that's something that you are aware or not, but...

Nikolai: Nationally?

James: Nationally yes it's not a local, but lots of markets are in it for supply. It's very, very few markets are in the expansion cycle. And even though they are in the expansion cycle, they are at the last stage of the expansion cycle. And all the markets that are on expansion cycle, or the market that recovered late like Las Vegas, Phoenix and a lot of Econo markets. So can you give an overview of what do you think the market is? And what would the strategy be for investors now?

Nikolai: Well, I think number one, I would say that I try not to look at national or macro market cycles. I think that's the first thing to consider. Because multifamily real estate is so hyper-local. So I look much more at those markets, hyper supply and expansion and contraction, I look at more of like a metro area. So you're in Austin, Texas, I look at Austin, I wouldn't really consider the multifamily market at large, because it's kind of like looking at cap rates on an unstabilized property, it's kind of a waste of time. Now, I'd say that I haven't looked at recent data of where all the markets are and the phases of the cycle.

But I think it is safe to say that, most of the markets right now are in the later phases of the game, or later innings, as Howard Marks likes to say, in the stock market and capital markets. But also, as he says, you know, we don't really know, see the thing with market cycles, and whether it be with Dr. Mueller, whether it be with Karen Trice, out of Australia, and also all the other various professors and researchers of market cycles, is that they are predictable in the sense that we know the phases of the cycle. And each cycle pretty much runs but they're not exactly the same, and we never know what the fraction points are going to be between the phases, how intense they'll be.

So let's say you go from the hyper supplier in the market to the contraction phase, well, that might be a very weak transition, there might not actually be that big of a difference. It's not like necessarily, the cap rates are 5% in Austin, and then, all of a sudden, six months the cap rates are going to be 7%. And that's not how the multifamily market works anyway, it doesn't move that way. It's not the stock market, we don't have to even trade on the fractional stock. So it's not as volatile. And, a very important portion of the market in multifamily is, in majority buy and hold.

Well, even though the market does change. They don't move, therefore, the market doesn't move that much. So what I say is to not be over-indexed on where we are in the phases of the market cycle but to just kind of be aware of it. Because what you can then do, and as I said, we don't know how intense the transition is, we don't know how long each phase will last. We might go into contraction, it might only last like a quarter or two quarters. And then we'll transition out of that quite rapidly. So that's the other thing to consider.

So what I'd say is, if you're underwriting a deal, and you're in the oversupply phase of the cycle in the city that you're looking at, well, then I'd try and be conservative and not that airy-fairy conservatism that we were talking about earlier. I'd just tried to be more conservative, if you know, I'm not sure of the deal. I'm kind of on the fence. Well, if I'm an oversupply right now, I might not do the deal. Or I might decide to oversubscribed, my deal. Or to have more cash reserves, in case the market does transition so it's a risk management at that point, that's the way I see it, you never stop biting, you never stopped being active in the market. If you do then you're not an investor, you don't know how to invest, you don't know what you're doing. An investor must be invested and is always invested.

An investor is ultimately risk management. So it's just your risk management, that changes, you want to be less aggressive. Now it's the opposite. If you feel that now you are at the end of the contraction phase of the cycle, and you're kind of on the fence for a property, well, then I'd jumped into it, even more, I'd be more aggressive on that acquisition, I'd fight maybe a bit harder for it. So that's kind of how I would modulate my decision making. And the parameters that I would use, I modulate the aggressiveness or the conservativeness. I'd also modulate the amount of capital I should go to deal with, if I buy it in a place where I think the markets going to downturn well, obviously I might use less leverage and I'd keep a lower LTV and a higher DSR. I'd keep a higher cash reserve just in case. And I might also do a longer term on my mortgage, just so I don't end up with having to refinance in five years in the middle of a poor capital market or property market.

James: Awesome answer. So, Nikolai, I think that's been quite some time. So thanks for coming for the show. You want to tell the audience how to reach you and about you and MREX [inaudible 01:12:49]

Nikolai: Absolutely, you can reach me on Facebook, I'm quite active. LinkedIn also and Instagram, Nikolai Ray, there are not hundreds of me there's only one. Also, you can go on the website of the MREX. If you type MREX in Google, or www.mrex.co, make sure you press out the English tab part of the site because you know the site is in English and in French because of our, part our business in Canada. And I will be present at the multifamily real estate week in July in Jacksonville, Florida, which is going to be an amazing event. So if anyone invests in that market or is around Florida, you should definitely be there. And also be back at that event, the multifamily real estate week in Tampa in August and Orlando in August. You can find all the information on the MREX website. And I hope to have the chance to speak to some of your listeners at one of those events.

James: Great. Thank you very much, Nikolai.

Nikolai: Thanks a lot. It was really a pleasure talking to you.

ow how to deploy it and learn about real estate. Started with the single-family space. And so, the first thing I bought was a fourplex than a bunch of houses. And then I realized it was too much brain damage in terms of just scaling. Right. I mean it's, having 12 insurance policies, 12 tenants and 12 loans and 12 of everything is kind of a pain. And so, learn about multifamily and then kind of the rest of the history. So, I've been running with that since.

James: Yes. I really disliked, the insurance part of the single family because--

Feras Moussa: Yes.

James: --lot of it expires at different times of the year.

Feras Moussa: That's my biggest pain point honestly and I literally will, I'm willing to pay a premium for a broker that'll just take care of it and I just don't have to think about it because it's just not worth the hassle of thinking through and spending the time and effort there.

James: Yes. Yes. I think you can pay like a monthly is the same amount and it's all automated, but insurance is one thing you have to print out and you have to scan, and you have to do all kinds of things.

Feras Moussa: Yes.

James: So, let's go a bit more into the thought process here before we go into the details of your deals and all that. So, three IT guys, right? I'm also with an electrical engineering background with some software. Why do you think a lot of these IT guys like commercial real estate investing, especially in multifamily?

Feras Moussa: Yeah, I mean.

Ben Suttles: From my perspective, I think it's the numbers right. I think it's-- you come from a kind of an analytical side of the brain, right? And I think in real estate, a lot of it is numbers driven. Now there's a relationship side of the business, right? Which we all have to have. We have to have that side of it to raise equity and obviously work with the brokers and stuff like that, but at the end of the day, it's a numbers game, right? You've got to be able to underwrite the deals. You've got to be able to make, projections, financial projections and all that as numbers and spreadsheet driven. And I think that's a lot of why the IT and engineering guys, get into this space. Also, I think the other thing is too is that allows us to be creative. When we're not able to be creative in some, some respects, whenever you're able to kind of put your stamp on the rehab of a property and improve that and, and kind of get out and roll your sleeves up. That's another thing that we were lacking probably in a lot of our jobs. And so, I think, at least personally for me, that that might be part of the reason why, I don't know, Feras might have another take on it as well.

Feras Moussa: Well, no, I think the numbers things. Definitely one of the biggest factors, but it's also, it's a space that you can learn it yourself, right? Meaning, you know, a lot of engineers are willing to go above and beyond, spend the effort, research, read books and learn it. You can do that in this space and, there's not like an engineering exam at the end of it where you have to do, you can pass. Right?

James: Yes.

Feras Moussa: And so, it's the kind of thing where you can learn it and it makes sense, right? The numbers don't lie. And so, two engineers, right? It's like, you can see a clear path of the progression, right? There's not like a leap of faith any point in time. And then the other part of it too is problem-solving, right? I think all engineers like problem-solving as part of the challenge. And to me, that's what I like about multifamily. It's bigger and harder, right? Sure. I could've probably scaled out a rental portfolio part, really wanted to, but I mean, it's just not fun to buy, hundred thousand-dollar assets, $150,000. It's a lot more fun to do bigger projects, a bigger team, and really, work through each issue as it comes up.

James: Yes. Yes. I mean in my mind is a lot about-- I mean real estates, there's a lot of creative thinking that you need to put on and that's really fun, right? Because you want to, I mean, I'm sure when you guys handle deals, we want to solve that problem. Right?

Feras Moussa: Yes, absolutely.

James: You want to break; I'm going to break that deal. Right? Hey, why? Like for me, I always say, how can I break this deal? Why you should, why you should work for me. Right? That's why I think, I'm sure you guys do that too.

Ben Suttles: I was doing that earlier yesterday, man. Yes, man, [inaudible 13:36], how do you blow up the deal, right? And--

James: How do you blow up the deal? There must be something wrong with this deal. Let's find that out.

Ben Suttles: [crosstalk 13:42].

Feras Moussa: Oh yes that's fun. Let's have a deal that makes sense. It's like, this not right, I'm just going to offer a lower, I might've otherwise because something doesn't make me, go 100%.

James: Yes. If that [inaudible] make sense, you are like, let's say to break it. Something must be wrong and when you can't break it then, then it makes sense. That okay, that's [inaudible 13:58].

Feras Moussa: Yes.

Ben Suttles: That's the one.

Feras Moussa: And then the other part too is that it's a people game, right? I mean, so something, some engineers might not like it, but at least me, I mean nothing. Ben, same. We like it because it's a team effort. It's not one person. It's how do you combine people really get the thing done both on, on the GP side as well as the operations side, right? How do you build rapport with your manager, with your regional, whoever it is? Right. And kind of help accomplish the goals and give them motivated. To me, that's part of the fun.

James: Yes.

Feras Moussa: I guess what we do is like project management on steroids.

Ben Suttles: Feras, if you touch us up on that, that was really interesting to earlier which was the project management piece, which I had forgotten about. I mean a lot of us to come from big, we've done big projects, we've worked with teams and let's be honest, and this is a team sport, right?

James: Absolutely.

Ben Suttles: This is, yes you could maybe be solo and respectful, you've got a team in the background that's helping you accomplish your goal and you've got project management or manage that whole entire process in order to get it to close. And then even after you're closing it, right? In order to asset management or to do the asset management, to do the construction management and for you James too, you do the property management.

James: Okay.

Ben Suttles: All of that stuff is, you're juggling a lot of different pieces and making sure that the ball is continuously moving forward towards that goal. And I think a lot of IT and engineering folks come from that background, understand that. So, once you can kind of segue that into the commercial real estate state space, it's just essentially just project management at the end of the day.

James: Yes. Yes. You one might, throughout my 22 years in the corporate world, I think 16 years I was a manager and I was also a project manager and I was a very good project manager. I need all that translates to this multimillion-dollar business that you're managing, right?

Ben Suttles: Yes.

James: Because to make sure your transactions happen correctly; you need to make sure you communicate to people. And that's what we all learned in project management. But how do you over communicate? How do you make sure people don't mess up? How do you take proactive action to de-risk a project? Right? So that's, that's how the game is played. Even in the commercial real estate with this [crosstalk 16:00].

Ben Suttles: And it's never going to be straight forward. Right? There are always challenges.

James: Yes.

Ben Suttles: So, I mean, that's where, we're those project management skills really kind of come into play because, anybody can run a smooth project, right? And we're nothing ever bad happened, but let's just be honest. There's always something that happens.

James: Yes, yes.

Ben Suttles: And so, you have to, you have to have that, that acumen to be able to, to keep that ball moving forward towards that common goal.

James: Yes. So apart from the, IT education itself, do you guys think that your work experience, the classes that you have been at your workplace and the environment that you have gone through? I mean as given certain edge to you guys as well.

Feras Moussa: I will say absolutely. Like I said, I mean what we do is project management on steroids. Right? And so, having done that for years had-- knowing how to keep track of multiple projects simultaneously. That's another thing too, right? A lot of people will get into the business and they realize like, hey, syndicating start to finish is not a walk in the park. There's a lot that happens, both lending and legal and issues come up and they, it's a lot to keep track of. But then she tried to do two deals at a time. Right. And how would, it's not really two weeks, it's kind of a square, issues. So, I would say absolutely. Right.

And then the other thing that we've seen, being on the tech side is how do we differentiate ourselves from other people too, right? How do we, create a better impression for investors? How do you position, everything professionally, right? All of our stuff is mobile friendly. All of our stuff, certain ways. And those are the things that I've brought at least from the tech world, to make sure that we kind of do and do well.

Ben Suttles: Yes, I think, I think efficiencies, right? That you come from that IT engineering background, it's all about productivity, efficiency, how can we automate things and James you probably saw the same thing when he got into space and to completely fracture. A lot of it is backward or outdated and there's a, there's a lot of low hanging fruit stuff, ways that can be improved and I'm sure your team is looking to do that constantly and so are we. And that's all come that comes from our background, right?

James: Background, yes.

Feras Moussa: I told Ben I have to stop myself from wanting to start a software company every few months. Being an entrepreneur and being a software guy, it's like man, this place some of the stuff we do is pretty archaic.

James: Yes.

Ben Suttles: Yes.

Ben Suttles: I think real estate is the last, most, what it called?

Feras Moussa: [crosstalk 18:28].

James: Fragmented industry, you know, that is, they're like something like AI or something is going to take over soon, right. Because there's so much inefficiency.

Ben Suttles: Yes. But it's, you can take it to an extent, but then there's that personal side, that relationship side. Right. And I think that's kind of, that's, that's one of the parts that I took from my former job, which was, a lot of sales and business development work as well. Right. Taking that, that networking, that relationship building side, that building rapport side into this space. But, I mean, I agree. I think there's their software and AI and these types of things are going to automate a lot of that back-office part of the process and maybe even the analysis piece. But there's always going to have to be those two people coming together to make a deal happen, right?

James: Yes.

Ben Suttles: Because ultimately, it's going to be one person or one group and trying to sell on one group trying to buy, and you have to come with some kind of an agreement. Right. And then even after you buy it, right, there's always those relationships with vendors and employees and all those different things that you have to kind of manage to. But anything that we can bring and that we've seen in our past gig where we could make that more efficient here, we're, we're obviously trying to introduce that.

James: Got It. Got It, got it. So, let's go back to the business side of it. So, what are your guys' focus, in terms of market? Right now, currently Atlanta and some cities in Texas, right? Why don't you guys talk about, why did you choose these two markets?

Feras Moussa: Yes. So, in terms of why we chose them, I mean, the same reason you're probably in San Antonio to some degree, right? We're looking for strong, attractive markets that are not a single industry that is growing right. Population and the business side. And then, really the important thing for us to is the yield, right. So that's why we got into San Antonio too, was that we can't find returns in Houston. We look at a lot of bills and use of our base and we don't own anything in Houston, right? We're looking for returns that we can, that that will actually, you are looking for deals that'll give actual turns, foreign investors. That's also why we don't look in Dallas, right? Price points are too high that you having to pay so much that you basically have no yield on the deal.

And so that's kind of what really got us into Atlanta. We got us into San Antonio as well and yes, Beaumont's kind of a slight story, but those are the things that we look for. And then in terms of future deals, right? If future markets, so, we've really kind of manage to, I would say streamline a lot more of our acquisition pipeline, right? In terms of underwriting deals, identifying deals and really keeping a pipeline going. And so, what that's allowed us to do, especially with a fulltime asset manager now, is we can look at a lot more deals. So, we've kind of identified two markets that we want to get into, hopefully, this year. Orlando in North Carolina. And that just, just to give us, just to keep our pipeline going. Right. We can keep looking at more and more and more deals. Yes, we'll hopefully be finding something that makes sense.

Ben Suttles: Absolutely.

James: So how do you guys choose your market? So, like now you say Orlando and not Carolina, right? So, I have a lot of stats on Orlando because I know it's growing very quickly. So, let's take, not Carolina. Why did you guys identify? Not Carolina?

Ben Suttles: I mean, I think, I think all of it boils down to population growth, job growth. We also like to find areas and that's not every single market, but I like to see a good concentration of different universities and colleges as well because I feel like a lot of the bigger corporations are going to follow where they're going to have a good funnel of potential students to take from it as well. So, we'll look in college towns as well too, because, but let's be honest, North Carolina, it's got, the research triangle, it's got a ton of universities. And, it's calling to be called the Wall Street of the south. The problem with North Carolina is that we're not the only ones looking there. So, it's, it's pretty competitive there too. But it's got a lot of those good data points that we like to see in terms of population economic growth--

James: Okay.

Ben Suttles: --that you see in Texas and in Georgia. And really, we are, we look at in Texas for quite some time and we found Georgia was very, very similar in a lot of ways to Texas. And so that's the reason we started kind of focusing on Atlanta as well. But it ultimately boils down to, is there enough population job growth to continue to drive demand for the workforce housing that we're, that we're looking for. So, people are always like, well, you're not renting out to fortune 500 folks. So why do you care about that? I'm saying, well, the ancillary service companies and service jobs, they're going to feed into this white-collar job is what we're looking for. So, if you don't have any of the fortune 500 stuff rights, then there's not any real need for a lot of the infrastructure where a lot of these people are going to be working.

So, when you, when you look at it in Texas, when you look at it and Georgia, right? One of those people is there. So there has to be serviced workforce type jobs that are going to have to be feeding into that. And that's why we like those markets. And, we see a lot of that same type of thing happening in Orlando and some other markets and Florida and as well as North Carolina. And we've looked in Tennessee, we've looked in some other spots as well. From us we've got so much deal flow coming in that in order for us to be a little bit more strategic work as a team, we've decided to focus on about three or four major markets and then just go deep on those and then we can go horizontal and find out that markets in the future.

James: Got It. So, let's say now today you're getting a deal, right? Let's say from North Carolina, what other steps that you guys take? So today let's say, I mean how do you guys get deals nowadays. Is it through broker relationship, off-market, on the market? How are you guys sorting out the deal flow?

Ben Suttles: Yes, everything in between. A lot of it is brokers. A lot of is people that know what's his buyers, people that you know, we will get the deal closed, right? Whether it's the broker that knows it and they might know. Seller. One thing I tell every broker is like, hey, if you have a deal that you don't have the exclusive on and you need someone to make a pre-emptive offer to try to get that locked down. Like, where are your guys? Right? So, you find ways to motivate the broker is motivated. Other people that know someone that knows someone. So, we, I mean really deals come in all shapes and forms. And so, for us, the biggest volume is definitely the brokers, but it's really, it's not about the ones that they just email outlasted, right? It's really about the follow-up deals that maybe are near, getting to the finish line and getting the finish line in terms of the-- in terms of the marketing, but they haven't had any such interest or for whatever reason. Right. So, I think that's important. So, once the deal comes through in terms of the analysis side of LLC, dig into the P12, dig into the OEM, but more importantly, talk to them. Sorry, go ahead.

James: I'm just saying, what do you look for first in the deal? Do you get a-- so you get a deal, what do you look for? What are the, what do you, what's your sniff test because I --

Ben Suttles: Yes.

James: underwrite everything, right? What's the sniff test?

Feras Moussa: I'll tell you what my first sniff test. I look at what the average rents are and what their price point is, and then I can deduce from that, right.

James: Okay.

Feras Moussa: Is this going to be anywhere. And really what I'm doing kind of mentally ballparking what the cap might be. Right? But really, I'm looking at what are the average rents and what does the purchase price. Right. And then yield. Is there, are they close enough that I think that there's some meat on the bone, right? It's really what it boils down to. I'll give you a real example. There was a deal in Atlanta that I-- so North Atlanta, Atlanta has a really unique market. North Atlanta is really expensive. South Atlanta is the complete opposite. There's a deal that came through on the northern side and I think the average rents on that deal were like, 850 $900. So, I'm okay, this one might be at a reasonable price point. Right? And so, I'm like in my head, mentally I'm like, okay, let me call the broker. If this is 80 maybe 90 you know, there's a deal to be had here. Hey, call the broker. And it's 130 a door, right? So, I mean, that already instantly ruled it out. And so, you're really looking for some of those kinds of low hanging fruit just to figure out, okay, is this still even in the ballpark for us to look into it anymore.

Ben Suttles: Yes, absolutely. And I think the first sniff test James is really, I mean then the location of it too, right? Do you know what I mean? We're getting the deal flow and these places that we want to be, and we've identified different pockets within those submarkets that we want to be in. So, if it's not within one of those pockets and we're automatically, putting that to the side. Now that doesn't mean that there's not a deal there. Right.

James: Yes.

Ben Suttles: So those are usually kind of the maybe deals and we're, we want to kind of circle back maybe we're bored or something. Let's do that one-- -

Feras Moussa: Exactly, whether we are bored, we go back and look at those deals.

Ben Suttles: Yes, we'll go back and take a look at those. Right. But we're looking for that are going to be the net, that those are some market pockets, right? That we like. And then from there, right, just like what Feras was saying, you can almost, you can almost immediately tell if it's going to work. Right. And you pencil out so many deals. I mean, we, at this point we've analysed hundreds and hundreds of deals. So, you can on them almost look and say, oh, that's not going to work for us. Right. Just based on what they're asking for. And you can also kind of tell that to, by the price per pound versus, sometimes the median income of the area. Right. I mean, are you going to be able to achieve the rent that it's going to, it's going to take to make that deal work. And if you're going to be maxing out your median income, then it's not going to work either.

Ben Suttles: So, a lot of the things that we look at, population growth, we look at job growth, all those things too. But one of the things that we also look at as the median income, right? And a lot of these is workforce housing, right? So, I mean, you look at, what's the, what's the average rent? We're usually doing the three-x income test. Whenever we're taking perspective tenants in, right? Like everybody should, and then you determine, what the median income level is and if you're going to be maxing that out, you're above that, then the first sign that something is going wrong, let's get ready to skip. They're going to stop paying rent, right? So, you want to make sure that you're under that, right? You don't want to; you don't want to be at the top of the market. Yes. Maybe they can keep up with it for a month or two where they're going to get behind. And so very, very cognizant of that.

Feras Moussa: And to add those, it's not that, if it's a lower income area, we won't buy a deal very well. It's really these are just kind of rules of thumb. And then from that, you start to work back, okay, well if it's a lower income area, can assume they are economic occupancy is going to be much slower. So, you should underwrite it that way. Right? Cause there's a deal to be had anywhere, right? I mean I'll buy any deal at the right price point, right? Assuming as long as it's, to me at least this has been new instead of a growing market. Right. And that's not a deal at f four worry about the city, essentially no one even wanted to live in that general area. But in terms of price points, in terms of, average incomes, all of that, it's really, again, depending on what price point are we buying it at.

James: So, let's say the rent and the price seems reasonable right? At the first sniff test, what's your next level sniff test? What do you guys do?

Feras Moussa: Then and actually started this. The thing I do before that is actually called the broker and just get there [inaudible 29:18].

James: Okay.

Feras Moussa: Right? And that's the first, usually, right? Because a lot of times there's more to this story, right? Is it, is it a partnership where you know, one of the sellers passed away and they're looking, you know, they're a little bit more motivated or is it a deal that just, the Bro, I've had brokers a little bit tell me these sellers are terrible operators, right? And you can kind of, and if you have a relationship with a broker, there'll be honest with you about that aspect. Right? Brokers are all, a lot of times brokers, I don't want to say always, but there'll always be, a lot of times we'll say, yeah, you know, you could do this and this and get, a $200 rent pop. Right?

James: Yes.

Feras Moussa: Take that with a grain of salt. But I'm looking for something that's kind of that ancillary information to help the deuce. Like, Hey, is there an actual opportunity to do, what's the value add that we can do is we can kind of take that into what we just talked about. Then kind of once, like you said, once you know the numbers make sense or the deals make sense, then you start to dig in and near. That's where we really do just to, go down to the numbers, right. Look at the t 12, look at where they are today on expenses. Look at where we think we will be on expenses. Where, what does the rent currently, right? What's the spread on just the rent, the market rents versus what their marketing right. Today. I mean kind of, we really starting to put the bigger picture together. Right. And then understanding is, hey, does this make sense at a high level? Right? Yes. That's us. Sorry, go ahead.

Ben Suttles: Oh, I was just going to say, what I mean, we don't even look at the OEM. Right. Do you know what I mean? We're going straight from our perspective, right. That just use your, you'll get, you'll get the skinny from the broker, right? Because they'll usually-- but the marketing packages is the marketing package. Right. And I feel like that sometimes skews people's numbers when they look in. Concentrate on that a little bit too closely. So, it's always best than if it passes your initial test and you talked to the broker and there might be something there and you just go straight to the spreadsheet analysis. Right. Because, I mean if you start trying to dissect what they're going-- what they have in terms of pro forma income and expenses, then you start getting that none of those numbers in your mind. And guess what, there, they're making those numbers work. So, we always, we always go straight to that and then only then do I then look at the OEM and I see how far apart we are. And usually, it's pretty significant. But, it's those classic sales tips, like, below replacement costs and all of these things that they love to say, that makes it sound so sexy.

James: Yes, its--

Ben Suttles: At the end of the day and it has to pencil out. It's all about the numbers.

James: Yes. I remember in one of the deals I never look at the OM until I close because I need a logo for that property. And I say where is the logo and then I called the broker, you understand the OM, I say yes.

Feras Moussa: Oh, you had the floor plan. Yes, we had that for the floor plan. You go back to the OM and grab the floor plan that [inaudible 31:56]--

James: Exactly.

Feras Moussa: --time and effort on.

James: Yes, yes, we did a floor plan and the logo from the OM, that's it.

Ben Suttles: There you go.

James: So, it's interesting. And so, the type of deals that you guys do, I mean, where do you categorize it? Value add deep value add or [inaudible 32:14] yield play or core type of tails.

Feras Moussa: I mean right now we're focused on value add. I mean we would like to do a more, really to me, the ideal deal for us now or given where we are given, our network, et cetera. It's really kind of that B minus space. Right? We've done the heavy value add, it's a lot of work. Right? And those skills have worked out. They performed, but for us, I mean it's just she consumes you, right to some degree. And so, we're trying to less of those and we try to vary it up. Right. Always have a value add going on, having a stabilized going on. Just cause from a bandwidth perspective, right, we can kind of handle one at a time, but we don't want to take on three big value add the one time because then he would get lost in that. And so, I think for us we're typically in that C plus B minus space is really the focus for us.

Ben Suttles: Yes, yes.

Feras Moussa: One day we'll do an ADL but not in, but not-- but it's about matching it to the right equity pool. Right. If we have equity that's okay with the lesser returns. Right. We can go do a B plus or a minus. But so far, we've been kind of in the C plus B minus space.

Ben Suttles: Yes. Yes.

James: Got It. Got It. So, what about that, that strategy? Do you guys do only agency Loan, Bridge, Bridge through an agency?

Ben Suttles: I think we're doing all this. It's really deals dependent. Right. Do you know what I mean? I think the bridge has gotten a little bit of a bad rap. I mean there's, there obviously you have to be careful with it, right? You have to understand that your exit strategy, you have to be able to hit those targets in terms of, especially if it's a value add, tell him the hair on it, which is, it's going to with a bridge, right? You got to be able to hit those timetables in terms of your construction, your rehab in order to refi out of it quickly. And then at the best price point that you can write, because obviously, you don't want to have to bring money to the table. So, we'll do a little bit of the bridge, but for the most part, where everyone, just like every other smart operator, you're looking for agency debt when you can.

But at the end of the day, we're looking to maximize returns for our investors. And so sometimes, going bridge versus agency has been a better way in order to do that. And people understand that there's a little bit higher of risk tolerance with those. But we always get a three-year term with two years' extension. So, at the end of the day, it's still five years on a bridge that, it's not something like an 18-month deal. So, I think that that gives people a little bit of, they feel a little bit better about it as well. But we've done agency all the way up to 12 years too. So, it's a little bit about, just depends on the deal.

Feras Moussa: Yes. For anyone listening, I mean I think we have a Ph.D. in the agency space. Unfortunately, we've had issues that people that do 50 deals never hit. So, we've seen it all. And so, if anyone has any questions, feel free to reach out. But we've seen the good, the bad and the ugly on the dead space. So, it's, you kind of, you work through those problems, right? If you get the closing, which is the good news, but then you kind of learn from it and you know, start to figure out what are the things that could be learned from this to basically avoid the situation in the future. Right. We've had, we've really seen a variety of things. Unfortunately--

James: Oh, let's talk about--

Feras Moussa: --that's where Ben lost all this hair.

Ben Suttles: Just one. Just one lender, which I'll tell if you want to email me, I'll tell you which linear it was.

James: Okay, tell me the worst story with an agency, just let's just go--

Feras Moussa: The worst agency story. I'll tell you one, and this is one near and to you James. So, it's in San Antonio.

James: Okay.

Feras Moussa: San Antonio deal its a, a deal that pencils in really well. And for those of you that know on the agency side, right? With a standing loan, you can do what's called fully delegated, which means that fanny lets the dust lender, which in our case could be Arbor, could be haunted, it can be any variety of them. For us, it was an Arbor deal and lets them operate in the wrong capacity, right. To some degree. And so, there's kind of a box. As long as they're within the box, Arbor could approve the deal, no questions asked. Well yes, we're like three weeks from closing pretty much at the finish line. Money's in the bank. Well, we're already looking at the next field that we had to go on and then kind of going back, what happened was that because it's the San Antonio deal and the deal pencils in really, really well, right from a financial perspective, the lender said, well hey, we can go get your five years IO.

And we didn't think much of it. Right. It was like, okay, that's fine. Well, at least we'll back out to where we are today because we run the road at one-year IO. Well, long story short, this deal essentially used to be on a watch list three years ago. The sellers are only deal in San Antonio. They struggled with it. Plus, it was kind of whenever they're in the midst of a lot of rehabs. So, he got on the watch list, it wasn't on the watch list the past few years. And that whole you, that market better than we do James. And that whole area has really turned around from where it was three years ago. But guess what, it was already flagged by Fannie and they just wanted to essentially get it off their books. Right. And so, this is something very, I actually did this just the other day where I, I was talking to a broker about a deal and asked him was the saber on a watch list.

Feras Moussa: That's something I've learned to ask now because and what sucks about it is that once a lender, a dus lender, this gets Arbor went to fanny, right? Once Fannie times in, Fannie is the authority, right?

James: Correct.

Ben Suttles: Versus if we would have just not ever done that, we could have closed the deal agency with Arbor, no questions asked. And so, it's a very unique situation. I don't know anyone that's actually ever encountered that. Right. But these kinds of things do happen. And so just knowing that they can happen, figure on how much risk you want to take because we would have been happy with what we had-- what we could have closed. Right. We were happy with the one-year IO. That was great. That was fine. But it's your kind of get a little bit more than that and then now completely bag of worms. So.

James: Yes, I learn, even I learned about this watch list, last week when was looking at another dealer then someone says, Oh, I backed out because of watch list, I say what is that? Right? Then we realize there are so many other issues with the deal. Right? So that's crazy. Yes. I mean for listeners, just FYI most dus lenders, they have one-year authority on a delegated underwriting. So within, if they give one-year IO, they don't have to go back to Fannie Mae and get approval. But once they go above that they have to go to Fannie Mae. And a lot of things can change when you go to Fannie Mae.

Feras Moussa: Yes. So, I have learned that there are different tiers. Right? So, there's the tier two, tier three. So, if you're at higher leverage that can only give you one. But if you're willing to go down to 65% they can actually approve 5 years IO, no questions.

James: Okay.

Feras Moussa: So, you start to learn. And again, why did I learn that from a different deal? So, start to understand really the mechanics of what's going on behind the scene. And this is where having the right mortgage broker makes all the difference, right? They can help steer you in the right direction and help catch some of these. So, I mean for the-- for the watch list, the sellers were actually more pissed that we were about the whole, they didn't think that was going to be an issue in terms of us getting the next one. Right.

James: Okay.

Feras Moussa: And they never thought to just close it. You don't think it's going to be an issue.

Ben Suttles: No, they thought it was off too.

Feras Moussa: Yes.

Ben Suttles: But, do you know what I mean? I think there's that just like, like our earlier part of the conversation. Right. You know, we're project managing these things, things are going to pop up. So, we were able to make it through that process--

James: Right.

Ben Suttles: --and still come out on top in terms of the debt. But yes, I mean we're always looking to maximize returns and risk and minimize risk for our investors. And I think that having this different background and different debt products and having a good experience with some of these different lenders really gives us a good broad overview of the debt market and which deals are going to make sense where, and I think that that's huge when you're looking at who to invest your money with, because know some people, let's be honest. So, they'll just go straight to Fannie, if it's not Fannie or if it's not Fannie then I'm not doing it. Right.

James: Correct.

Ben Suttles: But I think sometimes you're missing out on opportunities there as well.

James: So, wasn't, like three weeks before closing, didn't you guys had a rate lock at that time?

Feras Moussa: No, we're supposed to [inaudible 40:01] lock a few days later.

James: Oh okay.

Feras Moussa: Like little, they're just waiting on the final. Oh, because they went to Fannie, Fannie kind of asked-- this is where really, I think we could have-- it's about positioning the story. Right. Again, I think the lender just went in thinking that it's going to be easy down the middle because really that's what they told us. Right?

James: Okay.

Feras Moussa: They didn't even bother. We had a great story for the deal, for the sponsorship team. They tried to do it retroactively and kind of wants Fannie comes in it's really hard to change. But we were literally at the point of rate locking and getting, being done with the steel. Like we will do, so.

James: Yes. [crosstalk 40:36].

Feras Moussa: You do full 360 and charge full 180 and change things and kind of Redo. So, in my mind, it was really, we did, it took us to close if get that deal done.

James: Yes, it's, yes, it's, it's a day just to do it at the end because you're almost at the closing table. Right. So,

Ben Suttles: Yes.

Feras Moussa: Yes. So, so in that situation, just maybe to complete the story, right. The seller realized kind of what happened. They gave us more time, right? They gave us another 30 days they knew that wasn't really for lack of use or lack of anything that we did. And so, we're able to buy more time and then redo the process and kind of, get to where we needed to be.

James: So, did you do a different loan?

Feras Moussa: Yes. So that one we call back every investor because I mean we basically what we did Arbor realized the mistake that they made, which was they should not have gone to the lender, tell Fannie, they should have just closed. And so, they basically gave us a balance sheet loan, right? Which is like a bridge loan on their books that essentially, the short term just to get it off of Fannie's book, --

James: Okay.

Ben Suttles: --then in nine months. Right. So, for us, we kind of turned it into a value add reprice scenario. Right.

James: Okay.

Feras Moussa: And so, when that case, we will, nine months, 12 months, somewhere around there. Right. We're also pushing our NOI as hard as you can. We'll refi, pull equity out and get back into a panty permanent loan.

James: Got it.

Feras Moussa: And so, but the deal changed, right? And so, we had to call every investor, tell every investor here's what changed, here's what happened. Then thankfully pretty much everyone stayed in the deal. Right? So that kind of-- for us that it's a sigh of relief. But also, it's like, everyone just doubled down on us. Right? So, we're--

James: Right.

Ben Suttles: --going to get babysat through the finish line.

James: Yes, the amount of pressure for you to go, on the contact to rate lock it so much. Right. So, I mean, I don't know, I mean-- there's a lot of pressure on, responsibility. You have so much money tied, and you are under the gun and you have all your reputation out there. You are doing the deal, investors are looking at you, you are to be a leader. You have very strong leaders. So.

Ben Suttles: Yes.

James: Yes, it's a lot of work.

Feras Moussa: Absolutely.

James: So, kind of back to value add, right? So, you guys do value add strategy. So, what's your, what do you think is the most valuable value add?

Ben Suttles: I think, ultimately, what tenants care most about, right? I mean, whenever you're doing value add, unfortunately, you have to cure a lot of [inaudible 42:52]. You have to do a lot of things that you not going to get the best return on your investment on. But the two things that tenants care about, first being their interiors. So, what was actually in my unit, the second thing that they care about is amenities, right. Probably a distance second. Most of the time with the workforce housing, they're caring about what their units look like. And I think that's where you're going to get the best return on your investment when you're doing value add. And then you can obviously update and add on amenities as a secondary thing to that. But unfortunately, with those value adds, you got to do things like roofs and HVAC replacement and other things that just people just say, hey if I'm renting from you, I expect that to be working.

So, you know, but you might be spending a hundred or two hundred grand on some of this stuff, right? So, your return on investment is almost nothing, but you have to do it. So, you've got to balance those two things, right? You've got to work in curing that deferred maintenance along with how do I push the NOI and the revenue side by, really updating the property for the way that the tenants are looking at it. So, I mean that's kind of how we look at every value-add play that we do. A combination of those two things.

Feras Moussa: So, James, is your question really specific about ROI? Like what are the things that we putting kind of deferred maintenance aside, what other things would we do to really try to maximize our return?

James: Yes, other than deferred maintenance, like the roof and all the big stuff [crosstalk 44:21].

Feras Moussa: Yes, so I mean it's, its properties specific, right? It's really depending on the asset, what it looks like currently and what is the market doing right now? That said from our experience, right? The most common thing, flooring, two-tone paint, right? And pimping out the kitchen some degree. Right? And you can go as crazy as replacing all the cabinets or you really replacing the front or even just putting fixtures, right? Like for us, fixtures are definitely cheap. Easy to do. It gives a different, pop to the thing, right? Flooring almost always, painted and really two-tone paint. It's important. And the other thing too that we like to do is really putting a backsplash. You can do backsplashes with this kind of stick on backsplash, really, really cheap to do per unit. And it gives the kitchen, which is usually known the seventies, eighties build kitchen, a bit of Pop, right? It gives it something to modernize it. Right? We didn't go as far as putting granted in. Right. But you are putting that in kind of coupled with a resurfacing. It actually looks pretty good. And then, the obvious is white and black appliances. Right?

James: So, let's say--

Feras Moussa: And that's all, white, black or aluminium.

James: Let's say how the interiors, right. So, let's say you guys lost for some reason you thought you had 100% of your interior budget, but now you need like 50% of the budget. What would you focus on, on the interior?

Ben Suttles: Yes, if the property needed any flooring or paint. Right? [crosstalk 45:38] Those are important things to think.

James: Okay.

Feras Moussa: Yes, I mean, you got appliances too right, but I mean appliances, you're going to be two x in your interior budgeted, just adding those in. But a lot of people they take, there's a price difference between white and black appliances are really not, but there's a perception that they're a little bit higher quality. So, you can even do that too. Right? You got to replace the appliances, but you don't have a whole big budget for that. You can just go from white to black to and I think that adds a nice pop too.

James: Yes, that's a really good point. I mean I realize a lot of times if you give them even white, really nice appliances, people are happy. Right?

Ben Suttles: No. Yes, you can do, right. It's-- I mean, but like, you'll see people like, they're just ecstatic that they've got black appliances. Right now, the market is about the same in terms of pricing.

James: Correct.

Ben Suttles: So, but it's just a perception thing or just, like I said, backslash 150 bucks.

James: Yes.

Ben Suttles: [crosstalk 46:38].

Feras Moussa: Let me turn the question around to you, James. Would you, the same question to you, right, would you do the same thing, or would you do something else?

James: So, we, so for me, I think my most valuable value add would be just giving them good management, right? So, there are so many bad operators out there, which is mismanaging not respecting the tenants, not taking care of it. So, we just want to make sure, really good management that's on the management side. But if you go back to the interiors, I would say, of course, we do the appliances and we do the painting and flooring. That's what we would, I would say the most, so, but I think, a lot of people just love having good management people who take care of them. Everything--

Ben Suttles: Oh, absolutely. I mean, they want to feel comfortable and who miss their right. People that understand what's going on. I mean, that's to me, and that's why for all of our properties, we're big people, putting, doing parties, doing tenant events, pretending retention vents. Because from the operations side, right. This is, you have the backdoor and you have the front door, right? You don't have people renewing, right. You're going to have delinquency problems, not a delinquency problem, you're going to have an oxygen problem, right? And so really keeping people happy, renewing, right. Well, then it makes it easier on the front end to start the push friends, right? Because you have people that are enjoy working there, living there. Right. You know, for another 10, $20. Sure enough, it's more than the cost of moving. Right. And so that's absolutely.

James: Yes. I think at the end of the day the tenants just want to be felt appreciated. That you just-- so many properties out there. You don't have to be being mismanaged.

Ben Suttles: Yes, clean, quality, safe housing, man. I mean, it seems so easy and the way that I describe it, but so many operators, I've just run some of these properties in the ground and they don't take care of it. Right? And so, the tenants, therefore, don't consider home and they don't take care of it. So when you get a good operator, I know you get a good management company in there and they showed that they're taking care of the property, then by default you're going to get more loyal 10 tenants, you're going to have people that are going to be more apt to take a renewal increase, cause they like, they like coming home again. Right? It's home.

James: Yes.

Ben Suttles: Versus just a place just to sleep.

James: Yes. Yes. I think one of the episodes, maybe episode five or six, I interviewed, Addie Lauren from California strategic alliance and he had been doing this for 30 years, more than 1 billion in a transaction. And he told me very simple, clean, basic and functional quality is what his motto is that's it. Right?

Ben Suttles: You don't have to get; you don't have to be creative about it. Right. I mean, you know, the space that we plan is essentially workforce housing. I mean, across our whole entire portfolio, our average rents are less than a thousand bucks, right. So, folks aren't looking for crazy amenities and crazy things even in their interiors. They just want a good quality place to come home to and then, and the management side is a big piece of that too.

James: Correct, correct, correct.

Ben Suttles: Yes, she bought up a good point.

Feras Moussa: And then another thing too with good management, right. You get lower delinquency. So, for us, I mean that's night and day. We had a deal that we, one of our heavy value add deals where essentially where we were, I went back and looked at numbers July versus where we are today. We have three times more revenue collected than we will, we did before total, like literally straight revenue you and that's a combination of, cutting back the delinquency, bringing units, align, updating. But I mean, it’s, once people know that it's, someone taking care of the property and enjoying it, people want to stay there.

All right. People are eating $200 rep push because guess what, this place has been completely turned around. It's more family oriented and even just bringing more families on board helps to come back for delinquency. So, for us really looking at how do you build that community and some people really cheap about it, but like, hosting these parties is you, I mean, do the math, right? How much does it cost to go get a hundred hot dog and a hundred burgers? Right?

James: Yes.

Feras Moussa: I mean it's very, very cheap, right? To be there and grill it out, have like a little patio, you know, a party, whatever it is. These things are almost, you know, half of the units rented a month, right. It's kind of thing. And so, they're almost rounding errors, errors where we are, but guess what? It changes the dynamics in the property. And so, I mean, some people don't really-- people are very short-sighted. I see. And really it has a much bigger kind of longer-term impact.

James: Yes.

Ben Suttles: And I think going along with the value add, right? I mean, you know, a lot of what we're doing is repositioning the property too, which is kind of where you're going with this James. Is bringing in better management. You're getting a better tenant profile at the same time too. So that's part of the value-add strategy as well, so once you, and once you show them that you care, you've got tenants in there that care than the properties just starts performing. There's a whole-- the energy shifts are palpable. Do you know what I mean? You go from a bad energy deal to a very good energy deal and you have less delinquency. Yes. Better occupancy people more apt to take a renewal increase and you can, you can rent that out more easily because people that prospective tenants that are walking around fuel that same thing too. So that's a huge part of what we do. We don't like to focus the value add just on the what the aesthetic of the property to, it's how you manage it and tenants that you have in there as well. A huge part of it.

James: So, you guys operators, which is the definition. What I mean is very active asset management because you know the details of what's happening on the side by side. Right. So, is that a correct assumption? Right? So.

Ben Suttles: Absolutely.

Feras Moussa: Yes, absolutely.

James: How do you guys manage this third-party property management companies?

Feras Moussa: Man, that's, that's part of the secret sauce. But I mean, it's really is nothing to it. There's nothing secret about it. So, we have an asset manager now that we've brought in who very experienced, 20 plus years if families a property, he manages family really. And so that's starting to help, but we plan to keep a pulse in general on what's going on in every deal. And so, for us, it's really about putting systems in place with each of your property managers, right? And having accountability. Right? And so, we have not brought in property management in house, but we've been successful with managing our property managers. Right? Yes. And it's a partnership, right? It's not like they're your employee. You really need to get on the level of like where they understand like, hey, we're partnering, we're growing together. Right? And so, they've seen that, and you know, yes. Identify the good property managers from the batch. So, there's a whole betting cycle. I don't want to get too far into, but really, we have the weekly calls, we have the weekly reports come in at a certain time. We have certain expectations that within a few days we expect them to follow up with hearing all the action items and did these all get done? Yes or no? Why not? Right? And how do we, I can keep them accountable, so.

Ben Suttles: Yes, it's all about obviously keep it to an agenda, keep into the processes that we put in place to templates and checklists. And we're very upfront when we get into a partnership with these property management companies that this is what we expect, that this is when we expect it. Right. And then we, like we said, we keep them accountable through--

Feras Moussa: And this is the format that we expect, that these are the numbers that we need and sent out.

James: Okay.

Feras Moussa: Just to help us track everything the way we want. And then you learn from it. Right. We're not perfect. It's not, it's an iterative process, right. Anytime we identify something that we can improve from one property manager, we applied to the portfolio. The nice thing is really is that having different property managers, we see the strengths and weaknesses of each property manager and you figure out how do we make them all better and so what things can we do across the board to make everything better?

Ben Suttles: Yes.

James: So, can you name like three things that you guys always look out for in the property management performance? When you realize that someone of these three things is not going well, things are not going right.

Feras Moussa: Oh Man. I would say renewals is the lowest hanging fruit. Look and understand what's going on in renewals and how important it is because early renewals are indicative of a lot of other things. Are they following up with tenants for the renewal? Right. Did they really? That's just a-- that's the number that you can kind of look at and realize that there must be other problems going on. I would say that's my answer. I don't know about you, Ben.

Ben Suttles: No, I think, yes, I think you're right, man. Totally. Yes. I think my biggest, my biggest hanging out in delinquency because it's like that's the properties money. Like you know, go out there, how are you going to collect the rent that is owed? And so, when you start seeing that slipping and we're increasing, that's my big red flag that hey, there's something going on here, right?

As our management on site, not, not doing their job, or are we getting bad tenants in there that aren't capable of paying the rent that we're asking of them may be what's the, there's a, there's usually a bigger problem going on, but yes, I mean all of these, these metrics we expect on our Monday morning report. And so, we're looking at each of these things weekly and we're also having follow-up calls throughout the week to either our asset management or asset manager or us or having calls with the property manager to track these things. So, it's not like a weekly thing. And that we don't have any kind of insight into what's happening for the rest of the week. If there's a challenge, we're having a follow-up call that week about it as well.

James: Okay. So, do you convert like renewal to percentage and look at, give that as a goal, that what you guys delinquency at two percentage and give that as a goal?

Feras Moussa: It's a balancing act depending on how hard you're pushing. Right? So, it's not like you can just say, hey, we expect 50% renewals across the board. I think it's really, it's deal specific and I mean we're looking at renewals, we're looking at least as we're looking at delinquency, right? We're looking at how much traffic came in versus how much leases got closed and then going in and really both on leases, we didn't close. What's the story? What's the story? What's the story? Sometimes there are cases where you, maybe you, no, you can go save that, that person. Similarly, on the delinquency, we go through what's this person's story? Are they going to pay? Cause really in Atlanta, our delinquency is higher than it isn't and Texas, right? It's just by nature of the market. And so, you, you kind of need to be more flexible in one market versus the other. And so really go through and understand what's the story behind me. Just like whenever we, you asked me earlier about the properties, how we analyse it, you're looking for that story. And so, we talked through each one of these and figure out what makes sense to kind of do moving forward. Because to us, it is very different between different properties.

Ben Suttles: Yes, and I, I would say targeted for delinquency, right? It's always zero. And do you know what I mean? So, the property management companies will say, oh yes, we got zero across our whole portfolio, I'm like, yes right. Do you know what I mean? Not, not the workforce housing stuff. So, you got to be realistic. But I would say your target, there's probably one to 2%, you know, on a stabilized property if you're dealing in the workforce housing space that we are and so that's usually the metric that we're pushing towards. But on the renewal side too. One thing I want to point out, right? When you're doing a heavy value add and you've got a lot of interior budget to kind of burn through and you have units that you need to update too, right? You're not going to be chasing after those folks as aggressively as you would on a stabilized property because maybe you don't have a lot of down units are a lot of vacancies and you need to free up, you know, units actually update them, right?

So, you're not going to be as aggressive in renewing those folks. So, we've been able to connect like Feras says, right? I mean, you don't want to, you're not going to burn that bridge completely. So, you're constantly looking at occupancy, versus how much, how many units are we supposed to be turning a month in order to hit that target of, 60, 70, 80 units a year. Right. Because people have, people aren't moving out. What are we going to do? We can't sit on the money and there's usually a finite amount of time that we can, we can actually use that cash. So.

Feras Moussa: To expand on Ben's point too. It's almost like, we have a deal where we almost went the opposite. We don't want renewal. And what I mean by that is that one of our deals in Atlanta, we've pushed rents an insane amount on this deal. Like we're probably up 30% honestly, you know, 30 40% and we still have 98% occupants are choke when they're property managers at one day on the call, it felt to 97 and a half. And then, we called her out on it like, Oh, you're at 97 and a half, you're not a 98% anymore. And she's like, no, no, I just had someone who fucking renewed. She's back at 98, but in that deal, we have interior budgets that we need to go spend. We were literally just sitting on the side-lines. Right. Trying to, so you were kind of that balancing act is because we knew what was below market. Right. And figure out, where can we land on to where we have some people not renewing and we can go in and actually spend the money to even get, you know, that better push.

James: Yes. I think you need to look for where is the base rank, where's the base rank before you really go and spend all that rehab money. Otherwise, you can't be spending, spending, spending.

Ben Suttles: Exactly.

James: You don't know where's your base. Where is your starting point? Right. So, yes, I've had properties where we didn't even spend, we have the money yet, but we already bumped up just because people like it just because we are just a better operator than the previous guy. Right. So, --

Ben Suttles: And you'll get that. Right. Do you know what I mean? You'll just, you're amazed that how much they'll take it on renewal too. And that's great. You know, I mean, I just think it's a balancing act sometimes, but yeah, you have that, you have to kind of see where the market is and, and obviously be strategic with those dollars as well.

James: Yes, correct. Correct. That's right. So, can you give us some advice on how do you choose third-party property management? Because you guys are going in multiple markets, right? How would you give them expectations? Because a lot of, I'm sure a lot of property management company don't like, active asset managers. I couldn't control, [inaudible 59:57] I guess.

Ben Suttles: Well, hey now. [crosstalk 01:00:01].

Feras Moussa: Ben. I think, yes, I think.

James: [inaudible 01:00:04].

Feras Moussa: Well I will say though all of our property managers literally, you ask them, they say we're one of their favourites.

James: Oh okay.

Feras Moussa: So, let's not because we're active or inactive. [crosstalk 01:00:15]. Well, it's, we're doing maybe some of it, but it's more so that we're realistic. Right. I think what I was surprised to hear from them as a lot of people will just sell their property may, here's your budget, here's what you have to go, you know, accomplish. And sometimes it's not realistic. Right. I said before any of your deals because we've already worked on a budget with a property manager, we have an agreement on what that looks like, what the plan is, and we're not just picking numbers out of a hat just to make our deal work. Right. And really kind of do it the other way around. And then, yes, whenever issues come up, we're both, I mean, I hope people on the audience, I get this impression. Ben and I are pretty level headed, pretty easy to work with. And so, they understand things happen. And so, the property management companies, at least they enjoy because we're easy to get a hold of. We understand what's going on the deal. And we're realistic. And so, because I've asked them and pretty much all of them have said that we're one of, we're one of their favourites. Right. And so, --

James: Okay.

Feras Moussa: Now, that said, maybe to answer your question, Ben, do you want to answer? Do you want me to answer?

Ben Suttles: I mean, I, I think, I mean, you've got to be stern, but at the same time, you can have a friendly relationship with them at the same time. Right. But I think it's all about setting the right expectations and just betting them in general. I think it's, it's all you usually start off with referrals. Right?

James: Okay.

Ben Suttles: But I think some of the big things are as, go take a look at some of their properties too. Go secret shop those deals, so you're going to say, okay, hey you, you're a good referral on whatever market. Right. Give me three of the assets that you, and then you fly out there and you go shopping. What does the property look like? Is it clean? Is the management, is the leasing agent and the manager, are they friendly, are they knowledgeable of the property?

Are they good or are they leasing it properly? All of these things go back to the property management side and, and as long as that's, that's kind of coalesces with what you've heard about them and everything. That is good. Obviously, the fee has to be online and those roles have, the references have to be there. But I think the biggest, the biggest asset test for us is, vetting the deals that they currently have, and do we like what we see, and they call them out, right? I mean, if they don't, if there's a deficiency saying, hey we went to Xyz property and there's trash on the ground, what's the deal with that and then how do they respond to that? Because that's going to be, -- there are always challenges, but it’s how you respond to those challenges is what I'm looking for on the property management side.

James: Yeah.

Feras Moussa: And then a couple of things too, just to add, I mean it's about what's kind of, what's the impression and feeling you're getting from them? Right. And, and working on a budget with a property management company is actually a great exercise to understand how they look at things and how are they going to meet what you're looking for. And I mean that in multiple, always, right? A, are they, -- is their budget realistic? Right. And B, is there pushback? I mean we actually like when they push back, right? If we say, well we think we can run payroll at x amount and they're like, well no, payroll is going to be this amount. Here are the 10 properties we have nearby to prove it. Right? That's good. Versus we've had property managers that are essential yes people, right? That'll say yes to everything and that's not at all what you want because we need something realistic.

We're not trying to, we have millions of dollars at stake, we have other people's money. We're not here to just take a gamble. So, looking at that and kind of what we've found success in is really the people that are in that five to 15,000-unit range, right? The 40,000 guys in too much, they don't care about you. The guys that are smaller, there's just a lot of them. You know this first-hand. There's a lot of back offices that need to happen for a successful property management company. Right. And so, we found that sweet spot seems to be that five to 15 and then to where there our portfolio is enough volume for them, right? That we kind of get that professional preferential treatment where needed and at the same time, right, they're developed enough to be able to, kind of take on and succeed with it.

James: Got It. Got It. Very interesting, very interesting. So, let me ask some question about more the personal side, right? So maybe each one of you can add in on your own site. So, what's, what do you think is the top three things that are the secret sauce, for the success that you guys have been having in terms of closing deals?

Ben Suttles: All right. Go for it man.

Feras Moussa: Partnerships and relationships, right? Most important, first and foremost, right? Being willing to partner with brokers, property managers, other partners, partners, right? On the GP. People that can help us, would the deal, right? Whether it's helping with construction, helping with equity or whatever it is. I think that's been one thing. Another one is just differentiating ourselves a little different, right? Doing things, a little bit different than what the norm is, right? Not doing the same thing as everyone else. Finding ways to be unique, right? Whether it's, putting on our conference, whether it's formatting or emails a certain way, doing our webinars a certain way, right? We really do look at how do you do these things differently. And then third, I'd say, I mean, I mean, maybe it's going back to the basics. Running it like a business, right?

A lot of people, it's a side hustle, right? But really, it's a business. There's a method to the madness and doing things in that way, right? Our goal is to do a hundred deals. Our goal is not to do one, two, three deals from retire, right? And so how do you build up the track record for that? How do we, keeping our fee structure simple, right? We're, we don't have 10 fees like some people do, right? Our goal is really simple fee structure because again, we're not out to just, make it quick, fuck on one or two deals and then disappear. And so, I think I'd say those are the, maybe the three, three things that we've done that have helped us kind of succeed.

James: Do you want to add?

Ben Suttles: Yes. And, and just, add onto what Feras, I mean those are, those are probably my top three. I'll just add a few extra ones that I kind of see.

Feras Moussa: I made it hard for Ben.

Ben Suttles: I know right. Yes. I think the biggest thing for your listeners is that you got to take action. Right. Do you know what I mean? We can, we can hear about it, we can read about it, we can go to conferences and see other people talk about it. But at the end of the day, you've got to get out there and you got to start talking to brokers. You've got to start underwriting deals. So, you guys start making offers. And if you're, if you're not willing to work and do and go the extra mile and you're never going to be successful in this business. And I think that's where I and Feras or we're burning the candle at both ends. I mean, we're working evenings and weekends and 12-hour days. And some people just aren't willing to do that, right? They're not willing to put in the work and take action and get it done.

So, I think that that's another thing, that's another reason why I think we've been successful too. Right? And I think, going back to running it as a business too, I think the other thing is we're pouring all of the money into the business as well to improve those processes and then, and establish a good platform that we can then grow the business even bigger in the future. And I think a lot of people, they do one or two or three deals, they retire, then they're taking all the money out of those one or two or three deals, and then they really can't build from there. There, there's no foundation because they've taken it all away. And so, I think that's another thing that disrupts equity has done a very good job at it. We've poured all the money back into making disrupt equity better and then continuing to improve on that. And I think that's another thing that differentiated us from some other folks that are in the space.

James: Yes.

Ben Suttles: So.

James: Interesting. So, let me ask one, two questions, but I'm going to ask each one of you at the same time. So why do you do what you're doing right now, right? What's your big why? And describe some, you know, some important habits that you take in your life that's making that success happen.

Ben Suttles: So, I'm going first on this one, man.

James: Yes.

Feras Moussa: All Right.

James: He insists.

Feras Moussa: But I can say, yes, a bit.

James: [inaudible 01:07:58].

Feras Moussa: Whatever Ben said.

James: No, no, it's individual.

Ben Suttles: No, no. The why is important for everybody, every individual out there, right? You've got a why and I think mine is my family, right? I, I'm out of here right now while I'm young hustling so I can buy back time, so I can, I can retire and I'm putting that in quotations in three to five years because I'm never going to retire. Right? But I want to, you want to get to a point where you could do the business when you want to do the business from wherever you want to do the business. Right? This is not, you don't always unless you're just doing the property tour or you're doing your due diligence, everything else can be remote. So, for us, we want to get to that point. So, my why is I'll put in the time now so I could spend more time with my family, even more, time with my family and be able to provide for them, wherever I was, not being able to be provided to whenever I was growing up.

Right. So, you're always wanting to give your children more than what you got when you were younger. And that's, that's my biggest thing too, right. And to show them that you can build something from scratch and go out and be successful in this country. And I think that that's important to show your children as well. So that's another big why for me.

James: What about daily, daily habits?

Ben Suttles: I think daily habits, I think for my perspective, I think it's, it's all about time blocking. I'm a big proponent of this and I'm to, it's a struggle, right? Everybody has to continue to do that, but you need to, you need to time block your day out for specific things because otherwise, you've got messages coming in, you've got text messages, you got phone calls, you've got meetings, you've got emails, you got all these different things, right? We need to say, okay, from nine to 10 I'm going to just do this, and you completely block out the rest. And then from 10 to 11, I'm going to do this, right? And that is really, -- and once again, it's a constant, it's a struggle. I'm still improving on that. But as I've gotten better at that, it's got easier.

And then also the other thing that I'm a big proponent of, this is just an action item list. Every day before I leave the office, I'm writing out a list of important things that I need to be doing. And I stick to that very rigidly too, right? I mean, if I get to the end of the day and I haven't done something, I'm like, okay, I, that's not one of the things I'm just going to roll over. Right. Maybe there's a reason why I had it on that day. And so, I stick to that. A lot of this can be automated too. I've just jot it down because it just helps me memorize it. But for me, I think those two things have really helped me structure my day where I've been more productive, then I was in the past and so that's kind of helped me grow and be able to multitask and do some of the stuff that we've done in the commercial real estate space.

James: Feras, yours?

Feras Moussa: All right. So, Ben kind of took my thunder but it's the same why right? Family and kind of doing that. The other one part. Yes. I don't want to go too far into that one. The other thing too, to me is just the challenge, right? Building a successful large company from thin air, for lack of a better word, right? Where people will enjoy coming to work, work there. And at the same time, you're providing income to all the employees, you're providing good housing, all the tenants and you know, being able to take on that deep value add where you take the diamond, sorry, not the diamond, you taking the rough poverty in the area and turning it into the diamond. Right? And seeing kind of the, just to the tenant's eyes light up. Right. That's actually, I didn't expect that I guess, but from one of our deals we did, it was actually pretty cool to see where they just enjoy, living there. Right. I mean from where it was before. So, kind of to me the combination of the two, it's pretty awesome to experience and see. That's probably the other why.

James: What about your daily habits?

Feras Moussa: Daily habits, man system sizing the hell out of everything. So, bringing software into things where I can and keeping everything accounted for and measured and rolling forward. Right. And so, both personally and the company. And so, I don't do yoga at 5:00 AM in the morning. I'd love to, I don't, I'm, I'm not, I'm more of a night person than a morning person. Y'all be first to admit that I'd love to. Although I feel like I'll admit, I need to be better about consistency, right. With my schedule. But I mean definitely, time blocking. That's important. I think most Ben and I do that right. We're basically Ben, it doesn't work from five to seven and then I don't work from seven to nine. The rest of the 22 hours we work. No, but we, time blocking is important. Okay. Keeping everything track because the sausage making for its indication. I mean it's a lot of project management going back to what we started, the conversational, right. Keeping everything diligently tracked in. Yes. To where you don't drop the ball on something because guess what, your investors see that your property managers see that. Your partners see that. And so, whenever they see that things don't get dropped. Right. Creates a different dynamic.

James: Got it. Got it. Is there anything else that you guys want to share with the listeners that you think, hey, I want to share this because I think it's a good tip and or have never shared it in any of the podcasts?

Feras Moussa: Well I'll think about that one.

James: Now you guys are thinking?

Feras Moussa: [crosstalk 01:13:05] think about it.

Ben Suttles: Feras is going first on this.

Feras Moussa: Let's see a big important tip. And it can be, I'm going to reiterate, it's one I mentioned earlier softly, but the follow-up with the brokers, people keep saying there are no deals to be had, but it's all timing. Did you call the broker on the right day that the deal happens to fall through and that now they are more motivated, right? An example or did you follow up whenever the deal blew up and the seller is really determined, right? Or is it the day that the broker's going to lose the exclusive and they're looking to get something in front of the seller? Right. So, the seller has to start over the process. I mean it's, that's how you find the deals and you really got to get out there having the conversations keep, -- another thing we didn't even talk about its CRM and tracking notes of brokers and all that stuff. I mean my brokers are my friends, right? And I mean that not just from a business perspective but like, legitimately right. He'd try to build friendships, try to, I send them pictures of things. I do all this random stuff to build rapport, right? Just to be more front and top, front and centre and top of mind. That's what helps you get the deals. And so, being willing to kind of go and about and do that I think is key to kind of finding deals right now in this environment.

Ben Suttles: And I think just as a good Segway for that, and I think on the equity side, I think what our investors are looking for and what all investors are looking for, right? It's somebody that they're genuine, they're transparent, they're open, they're honest, and there, and they're willing to answer some of these questions. A lot of these people that are getting into this space, they're investing in deals, but they want it. They want to eventually probably do their own deals, right? So, they're kind of trying to answer questions. And I've seen a lot of people that just, they blocked that out. They don't answer questions or not helpful. And so, from us, we're trying to go the extra mile with our investors and people that are looking to get into space and, we're not doing any coaching or mentoring.

We have no desire to do that. But we answer a lot of questions. And I think that that has been very, very helpful for us, and lining up equity partners for our deals because people appreciate that type of stuff. So that, Feras kind of hand on how are we getting deals? And I'm kind of hitting on how we're getting money and this stuff is not rocket science. It's just, getting out there and actually just doing what you need to be doing. And there's still stuff out there still deals out there.

James: Yes, yes, absolutely. And I think project management is something that, you know, if, if any listeners, you guys, I think that's an important skill and if you're working right now at number two job and for companies offering or if you want to go do some project management classes, it's very, very useful, especially in real estate on a syndicated deal as well because everything is so many moving parts there. Right? So, thanks for coming for the show. And can you tell the listeners how can they find you guys? Where's the best place and fastest way to get hold of you guys?

Ben Suttles: All right. All right, so go to our website, www.disruptequity.com is our website and then [email protected]. [email protected]. One thing that we didn't want to mention, we do host, some conferences each year. We're going to be in LA, June 22nd so, if he, if this drops before then or, or even after, then check us out msinvestornetwork.com. These are no sales pitch events or just bringing our friends up that are industry leaders, doing a lot of speaking a lot of panels and just give back a lot of knowledge that we've learned over the years in the space and people who enjoy that stuff. So, check us out on that website as well.

James: Okay. All right. Sounds good. Thank you, guys, for coming into the podcast and thanks for all the value that you guys give, and I think it was a really good discussion. There's a lot of details being discussed, and I think, I'm sure the listeners will be appreciative of that. Thank you.

Ben Suttles: We appreciate you.

Feras Moussa: Thank you.

Title: Live in Dallas, Invest in Lubbock and When to fire your Property management Company with Joseph Gozlan

James: Hi Audience. Welcome to Achieve Wealth Podcast where we talk about value-add commercial real estate. Today I have Joseph Gozlan from Dallas, Texas. Joseph run's the record business group, which is a brokerage firm and also a sponsor of 500 units in Lubbock. And now let's welcome Joseph; and why not just have you tell about yourself?

Joseph: Awesome. Thank you. James. It's an honor to be on your podcast, I love everything you do. We're in the same mastermind, so it's an honor to be here.

James: Sure, absolutely. So, yeah, I mean, we like to talk details, right? There's no fluff here and there's no marketing as well. So let's go deep down into details about how you run your operation between being a broker, at the same time being a sponsor where you syndicate deal. So can you tell me how you split your roles there?

Joseph: Yeah, so it's actually very complimentary and it brings value to everybody in the transactions. So when we work with our acquisition groups, we have access to the tools that most sponsors don't have. We have access to Yardi matrix that gives us information about properties, comps, sales, rents and loans that are on the property that really give us access to information that is beyond what most sponsors have. And if a sponsor wants to get comps on the area, he either depends on whatever the broker provides him or they have to go out and shop those properties themselves. 

So we have all that advantage of talking to other people in the industry, talking to other workers and really understanding the market better than most out there. So that's really the value that we can bring to our investors. On the other hand, we also bring a lot of value to our customers because unlike working with a 25-year-old kid for Marcus and Millichap or CVRE, we actually know what we're doing, we actually own those properties. We operate the properties so we can really get our clients through everything they need help with so if they need us to extend our lenders connections or insurance agents or so on, we can help that. We can help them calm down when Fanny Mae drives them crazy and tell them that's normal, that's just how Fannie Mae works. And that's not to say that there are no veteran agents at Marcus and Millichap or CVRE that don't know what they're doing, they definitely have some superior people over there that are more capable than most agents there. 

But for the most part, if you're a new sponsor, you'll be working with the lower level agents in the agencies there. For sellers, what we can help with is because we have the operations experience, we can come in and take a look at the financials, take a look at the operations and offer tweaks here and there to their operations to help them really maximize their NOI, which as you know, maximizes the property value, the price we can sell. And I can give examples if you want.

James: Sure, sure. I mean, before we go there, I want to touch on one thing because you can see the seller's mind right? I mean, I've not sold one property yet so, I don't know how the mindset is going to be, but you work with a lot of sellers, right? So tell me why sellers sell?

Joseph: Oh, there's a lot of reasons. All the way from syndication groups that have completed the renovation plan, extracted the value that they were planning to and they're ready to sell just like they promised their investors two, three years later. And on the very far end of that spectrum, you have the older ownership that, and I see that and I cringe a little bit every time, but their kids want nothing to do with apartments. And that is just sad to see a 70 80-year-old person that worked so hard all his life to build a portfolio and now instead of being happy to build that generational wealth and to hand it over to the kids, they want nothing of it so they're forced to sell. So it's everywhere in between, but usually it's either a completion of a pre-planned execution plan or the kids don't want it. I got to get rid of it. Sometimes we come across distressed owners that went into something that was just not ready for and they want out. That happens too.

James: Okay. I mean, we had like nine years of expansion run right now, right? So the dynamic of buyers and sellers has changed. So, people who bought it in 2010, they have made a lot of money up to now, I mean, in terms of equity, they are brought up a lot of equity and they would have sold it somewhere 2013 or 2015. But there's a lot of people who are jumping in right now late in the game, as a buyer. And what do you think, they need to be watching here right now because we had one of the longest expansion markets right now.

Joseph: Yeah. So here's the thing, everybody that bought in 2010 and sold in 2015 regret it now because people that were in 2015 are selling now in 2019 and they still made a lot more money. So nobody has a crystal ball, we don't know where it's going. We don't know if it's going to end in six months so it's going to take another six years until we see a difference. Personally, I believe we are about 18 to 24 months away from seeing quite a few properties go on a distress sale but I don't think it has anything to do the way the market is going to behave. So we kind of reach to a place where the market is no longer steeping up and just a crazy incline, we're getting into a place where it's a plateau or maybe a little bit of a downturn in some of the markets in the country, but for the most part it just plateaus or creeping up a little bit in other markets.

 But that's not going to be enough if people made a mistake buying. So I always say about multifamily, you make your money when you buy, but you lose your money on operations and who better than you know how critical operation efficiency is, right? Then I see a lot of sponsors out there that are not very good operators and I think that is going to cost them the property in the long run if they don't pay attention to the details and they don't really follow everything that happens on the property. 

James: Got It. So I talk a lot about operators in my book, Passive Investing in Commercial Real Estate because I think they are the backbone of the success of a deal. Can you define an operator?

Joseph: Yes. Anybody that is involved in the day to day of the properties. If that person is not talking to the property managers, is not talking to the supervisor, is not talking to the owners of the property management or the VPs that are assigned to these accounts and just hands over the keys and forget about it, it's not gonna work. Because at the end of the day, and this is kind of like a little bit of a joke in this business where we buy 5 10 $20 million properties but we hand over the keys to people that have 50 $60,000 pay grade and they are phenomenal people at what they do but they still don't have the capacity or the business knowledge to make decisions for $20 million properties.

So each level in the chain has their own decision rights and obviously, I don't make a decision of who is going to fix the faucet in J7 or is it more critical to do that faucet versus the plumbing in K9? This is a decision that happens on the property level. There are decision levels with the regional supervisor and then there are decision levels at the property management level company, the corporate office and there are certain decisions that we keep to ourselves like brand, right?

If it has our name on it, it better run through us. It doesn't matter if it's a website or a flyer or advertising somewhere, we're going to make sure we control our brand so this is a decision that stays within our control. We also work with partnerships. We don't just come from all the way up top and we drop it down heel to the people on the property. We listened to our property managers, we get ideas from them, we work together to encourage them to be more than just order takers.

James: Got it. Yeah. Some asset manager, they want to be a sponsor, but actually, they tried to do more passive investor, where they give the keys to the third party property management and they hope that things will run well. I mean, market could have helped a lot of people in the past nine years, because market is booming even though you make mistakes, even though you did not do well as an operator or you have no clue of a multifamily operation, you would have still made like 100%, I don't know how many percent, but he could have made at least a minimum 50% right? If you bought it in 2015 and sell now a minimum of 50%  but I think that's a market, right? As an operator, you would have increased the value a lot more if you're a really good operator. So can you define why or can you let us know why did you go to Lubbock when you're living in Dallas, which is one of the hottest markets in the country?

Joseph: Well, we got priced out of the market, honestly. There's a lot of education groups that that push bids up. There is a lot of foreign money that came in. You've got to look at it from this perspective; everybody has their own strategy. Everybody has their own set of investors and those investors have their own expectations for returns. So, I'll give a few examples, right? The Japanese for investors, there's a tax law back home that if they buy anything in the states that is over 20 something years old, they get to accelerate depreciation and write it off in about three, four years. They don't need to make money, it's a write off for them. Their strategy is a tax write off so they can out beat us at any given point. If your strategy is working with foreign investors, we both know another syndicator that works with foreign German investors and he says that they're thrilled to get 5% returns. If that's the money he needs to pay his investors, if that's the returns he's got to achieve, he can overpay what we can afford because our investors expect more. So that's what I'm saying is you got to look at it. It's not just foreign investors, it's also family offices, it's also institutional money that came in and all these groups are looking for core markets. Dallas, Austin, Houston, LA in New York, Miami and Atlanta, Georgia. That's the kind of markets that they know. So we just got out priced from the market so we went out and went to the secondary markets in Texas.

James: Yeah. I think it's strange. Sometimes we see a deal is expensive but it could be just, it's expensive for you. Your investor base thinks that your returns are too low but there could be another investor base who is okay with that deal and they may get a benefit from other factors like tax benefits, which is for them is a great deal at this market. So yeah, there's no expensive deals, it's just who's your investment base, I guess. If you have Japanese as the investor base and maybe we can buy, the priciest deal in town and still make everybody happy.

Joseph: I've seen them buy [12:18unintelligible] so yeah, you're absolutely right. If you're a 10 31 money and you're backed against the wall with the clock running down against you, you're looking at it and say, okay, all of that loss of potential taxes is my income now because I'm going to be able to recover that instead of paying that. So there's a lot of reasoning behind people's strategy and I learned not to judge somebody for [quote-unquote] over-paying without knowing what the background and where the funds are and what's the alternative they had.

James: Got It. Yeah. I think the biggest problem we see is over-beating when people over-beat on a deal, that's where you're paying the highest price whether you know or not, you may have won the deal, but you actually lost the war.

Joseph: Well, and that's where the smaller boutique shops like ours are a little bit better to work with as a sponsor because if you go to bid on a Marcus and Millichap deal or CVRE deal or JLLHFF, any one of the big brokers, they have hundreds of thousands of people in their distribution lists so you will be bidding against a lot of people.

 Small brokers like us, we don't have a database that large; I wish I had, but we don't. So then the circulation of the properties that we have on our marketing is much smaller than the ones that the Marcus and Millichap guys have. And as part of that, we've learned to build a network of smaller brokers that we call broker with. So when you approach someone like me and there are quite a few small firms out there that are doing the same thing, not only that you get access to my less circulated listings, but I can also get you access to somebody else' less circulated listings that you wouldn't have been able to access because you don't know that small broker.

James: Yeah. So let me ask you, I mean, you are a broker and we go to your role as an investor because it's interesting to talk to a broker, I've not talked to a broker on this podcast yet. So how does broker market deals in this hot market? Obviously, you're going to get a deal, we should think is a good deal; there are two types of deals, one is a deal that you think a lot of people will want to jump on it and there's another deal which you think is a bit pricey that are sellers testing the water right now, right? They want to check out how much they can get in terms of price. So let's say the first scenario where they are, it's a good deal and how would you go about marketing that deal? 

Joseph: Yeah. So we try not to work with sellers that are completely delusional. If the property is worth $2 million and they're asking for 4, my chances of getting them a buyer is zero. I can't afford to spend all that time on a property I know I can't sell. So we have honest conversations with our sellers about what's realistic and what's optimistic and what's unreasonable. So we'll work with them on this and we will not take owners that are just unreasonable so that's just to address the types that you mentioned. 

The way we get our listings out is when we get a listing, we first make a few phone calls and those few phone calls are to the buyers that have closed a deal with us, it's for the buyers that we know are capable of closing, the buyers that are, in our opinion, ready to pull the trigger and the most qualified buyers. And if we can get that property sold within those few phone calls, then that's great. If not, then we'll expand the phone call circle and then we'll send an email to a smaller group of investor, then a bigger email to a larger group of our investors and it's basically like a growing ripple in a lake. When you throw that stone first, there's a small circle, then there is a larger and larger all the way up until if we have no choice, we'll get it all the way out to those websites out there that are doing listings for apartments and so on. So we'll start small and we'll grow as we need. 

James: Okay. Yeah, that's my theory in terms of off-market because usually, the brokers will try to sell within the people that they know because it's a multi-million dollar deal and brokers have the fiduciary responsibility to sell it as soon as possible to the seller, to the right qualified buyer.

Joseph: It depends on the seller. If you go to one of the big brokerages out there, then you are willingly putting the property into the blender. They will have 30 40 tours and they will have a lot of people interested and there is going to be a call for offers in maybe two of those and then there's going to be a best and final round so it'll take about four to six months of just a lot of disruption to the property. At the end of it, you might get a contract that will go through, you might fall for the first one and go to the second one, but eventually, they'll get it sold and they're probably going to get a top possible dollar for that property but in that time, that property went through the blender.

 The way we operate and what we offer our sellers is a quiet, smoother transaction without disrupting the property with qualified buyer. Part of what we do, our responsibility to the seller is to qualify the buyer. And if it's not a qualified buyer, we're not going to get him on the property, we're not going to disrupt the property and we're not going to let him lock in on the contract.

James: Yeah, I mean, just to give a story, I had a guy who was a Newbie called me like two days ago. He said, "James, I found this 20 something plus unit deal and I'm evaluating with the broker." And I asked him, my first question is, "Why they need to sell to you?" And he cannot answer that question. So if they're now coming to you who are a Newbie, that means they cannot really sell it to a lot of experienced buyers. I mean 20 something units are the same across a hundred, 200 units; there are so many of qualified buyers out there where the brokers will have relationships with, where they want to sell to the qualified people rather than just go and give it to the Newbie.

Joseph: 10 to 20 unit is kind of like the first property so we're going to have to work with newbies anyway. 

James: Yeah, that could be the reason.

Joseph:  But it's just a matter of is it a qualifying Newbie or is it a non-qualified Newbie. The question is that the broker should have probably asked him is where is the financing coming over from? Do you have a proof of funds and did you talk to the bank? This is a full recourse loan itself. There are ways for us to qualify even Newbies.

James: Okay. Okay. Got It. So let's go to your role as a sponsor. So let's go back to the market itself, why do you like Lubbock?

Joseph: Yeah. So Lubbock is, well, no longer, but it used to be a well-kept secret of a great economy market, it's in the middle of the panhandles, it's called the hub city, that's the nickname. And that's because it's one of the most important cities in over a hundred-mile radius. And it has Texas Tech University, it's the biggest engineering school in Texas, and they have over 37,000 students over there. And while we don't do student housing, there's a lot of student housing in the city, but we don't do student housing but the math is simple. For every four or five students the university adds, there's a new job in town. So today, Texas Tech supports over 13,000 jobs, on its own bring one point $2 billion to the city and just retail shopping alone, their students are doing more than $300 million a year.

 So add that to a few other factors; economic factors in town that drive a really good economy, a lot of jobs, the unemployment rate in Lubbock is anywhere between 2.5 and 3.2. That's what I've been seeing in the last year and a half out there, which has a downside for a sponsor but we can talk about it later, but for the most part, having such a low unemployment rate in so much job opportunities really gives you more comfort in the B&C class environment because in the B and C class environment, if those tenants lose their job, they don't have a lot of financial depth. If they lose the job and they can't find a job within a week or two, they won't have money to pay the rent. So that's why picking a market that has strong jobs, strong economics was super critical for us.

James: So what is the downside? I don't get that.

Joseph: Oh, the downside is finding good employees.

James:  Oh, got it. Because everybody's being employed.

Joseph:  Because they always have options and they always move and we lost so many maintenance people just because they don't want to work hard. They can easily find a job where they don't have to work so hard so that's just has been a constant struggle out there. But that's just part of the pros and cons of every place.

James: So did you end up buying a deal in Lubbock because you got your first deal there or did you look in a few cities and you chose it or how was it? 

Joseph: That's a good question. It's a combination of both. So, it wasn't our first deal, but it was our first big one and it just came through a relationship that we had with the property manager and a broker and we had a chance to take a deal off completely off-market and go for it.

 James: Okay. Okay. So once you got a deal, you look at the market, then you think it's a really great market and you continue doing deals in the same market.

Joseph: Yeah, we operate a little bit different today, but that's just how we got to Lubbock back then. Today we are I analyzing markets with a big set of criteria that we're looking for and right now specifically because we try to get out of the way of our brokerage customers, we're looking at a few out of state markets.

James: Okay. Got It. Got It. So when you look at a deal, I mean, can you describe the type of things that you look forward to that describe to you that that is a good deal? Can you describe what are the things you look for in a deal that you would say, okay, I want to do this deal?

Joseph: Yeah. So, the market is the most important thing, it's that simple.  Jobs,  jobs economy, what do they do for a living, is that a one employer town kind of a situation, what's the risk with the market, what the market did back in 2010 when unemployment was high everywhere in the country, that's the things that we first take care of. I'm obviously making sure if we're talking about out of state, we'll always only go to landlord friendly states, that's another very important criteria for us.

 But when you look at the actual deal, the actual property, we're looking for value add opportunities. Everything we've done was a heavy lift in value add and it's not easy and it's a lot of work, but it's the only way to really make money. So if I buy a stabilized property, I'm going to have to go find those German investors that are happy with 5% returns. So really, looking for the right value add opportunity when we know we can come in and make a difference and increased the rent and reduce expenses and basically a bump on the NOI that's what we're looking for.

James: Okay. So apart from increasing the rent and reducing expenses, is there any other value add that you think that you find it unique and you think that that's something that can share with the audience?

Joseph: Yeah, so there's a lot of strategies out there when you can leverage to either increase income or reduce expenses, but adding amenities is a good attraction that can help you increase rent. So if you have an on-site gym versus the property that doesn't have an on-site gym, people would be willing to pay a little bit more. A pool is a very big attraction in the C class environment. So we have one property that had a pool, years ago, way before we bought it, and they cemented it in so right now there's just an ugly area that has a fallen apart shed with a cemented pool. So what we're going to do is we're going to convert it to an outdoor kitchen with some picnic tables and shade, just to create a place where the residents can go and have an activity and have fun outdoors. So stuff like that really helps, obviously in-unit amenities is super critical. Upgrading the appliances, resurfacing the counters, replacing old carpets with vinyl planks, that's the kind of thing that people are willing to pay more for.

James: So what, what do you think, let's say, for example, increasing the rent. So let's say you had a million dollar budget to increase rent, but somehow after you buy it, you realize that you only have 500,000 so your budget has significantly reduced. So what's the most important value add that you would do? 

Joseph: That's a great question, are we talking interior only?

James: Which one you think is the biggest bang for the buck? You have a reduced budget right now.

Joseph: Well, here's the reality of things, it really depends on the property. If the property looks like crap from the outside, it doesn't matter how nice you make the units look, nobody wants to live on a property that has no exterior light, a green pool and a laundry room that doesn't work. And if the property looks fine outside, I would put the money inside the units because the prettier the unit, the more they're willing to pay. So it depends on the property and what we have to do. Certain properties, if you gate them, it'll be great. Certain properties if you can fence the backyards and create small backyards for the first level unit, it can significantly increase your cost. In-unit washer/dryer connections, that is a big difference maker that people are willing to pay more for in our environment so if I can generate those, then maybe I'll do that.

James: Okay. So let's talk about fencing versus non-fencing property because that's something new for me. So can you elaborate a bit more? Which property makes sense to fence and which one doesn't make sense to fence?

Joseph: First, you got to have the fee the actual space to do that. So if they have sliding doors on the back and it just goes out to the street or just goes out to the green area, then you have the opportunity to just put two panels of fence and either close it or put it like the rod iron and now you created a small backyard for them. People love the opportunity of a private backyard. And I know that because we have two properties that are literally across the street from each other, one of them has larger layouts, the other one has smaller layouts but have fenced backyards and Patios and we constantly have to take people across the street based on the preferences. And you can clearly see that some people prefer to have fenced backyard over larger layouts, even at the same price point. And then some people prefer the larger layout so there's definitely a preference over there to some people.

James: So your fenced backyard, is that a single story unit or is there like a double story but you only fence the ground floor? 

Joseph: Those mostly are a single story or townhomes.

James: Townhomes, yeah, I have a property, which is a townhome where it does very well with the backyard, people love the backyard.

Joseph: Yeah. We also have a property that is a two-story building. The first story has a fenced little patio, it's not a backyard, it's not big, but it's a fenced little patio. And then the second floor has a balcony right on top of it. So it obviously works for both the first floor and the second floor.

James: Okay. Okay. So you said this ground floor you put in a fenced backyard but the second floor's balcony, but don't the second-floor people can see the ground floor backyard?

Joseph: No, like I said to call it a back yard is a stretch, it's a small fenced patio. 

James: Okay. Got It, got it, got it. 

Joseph: It's about the size of the balcony from up top.

James: Oh, okay, maybe that's a good idea. Yeah, I have a deal right now, which we are trying to put a fenced backyard, but it's always like someone on the top will be looking at, so I'm just trying to figure that out and see where they are.

Joseph: You can go to linksupapts.com and see pictures of our property, you'll see what I'm talking about.

James: Ah, cool. Cool. And what about the inside? What do you think is the most valuable remodeling that you can do if you have a very strained budget? What do you think you have the biggest bang for the buck on the inside?

Joseph: Okay. Painting floors.

James: Painting floors. Okay.  So that's what you would do, I guess, just to make it look nice inside and the flooring is more for turnover reduction, right? 

Joseph: Yeah. People don't need a lot on the inside but seeing the vinyl planks that have, that wood-looking style and a fresh coat of paint on the walls, make a complete big difference versus the old run down carpet or even a new carpet. There's big research I read that talks about the first thing people are looking for, are pet-friendly communities. So obviously hard floors are a lot better with pets then carpets. If you look at any of our property websites, you'll see that the first list in the community amenity is pet-friendly and by the way, if you are not pet-friendly, that is the first thing I'm going to do to increase income.

James: Got It, got it. So you think thinking in terms of miscellaneous income, that's one of the easy value addition, right?

Joseph: Absolutely. Whether it's the pet deposit fee or is it pet rent or whatever you structure it at or just the fact that you allow pets is going to help you with occupancy so pets is definitely an easy one.

James: Got it, got it. So let's say you buy a deal now, it's a value add deal so what would be your first 30-day plan, 60 Day plan and 90-day plan or maybe one year plan on achieving your business plan?

Joseph: Yeah, so the 30-day plan is just to find our way around the property. Every property we picked up in the first 30 days, it's just a lot of dust and you've got to let the dust settle. There's going to be people that have not paid to the previous owner and you're going to have to evict them because they're not paying, period. You will have people that are going to just walk away because in their head it's new management so they're going to increase the rents tomorrow, even though we have contracts, we can't do that. There will be people that are going to try it, ah, new management, let's try not to pay and see what happens, right? So you'll have all that going on in the first 30 days. You've got to figure out who is the maintenance crew, what are they doing, take control over the employees what are they doing. Did you inherit the employees from the previous owner or not? Did some of them got up and moved with the previous ownership, that happens too.

So first 30 days is just wrapping our heads around the property and trying to figure out what is where and who does what. After that, we better have our contractors out there and then we'll get started working. We have all that lined up during due diligence. We get bids during due diligence, we set starting work during due diligence and if there are any critical items then there'll be there day one. So our King David property, when we bought it, it was pitch black. There was not a single light on after hours and we had the electricians out there working on the lights the day we took the keys, we didn't wait 30 days or 60 days or anything else. The day we took the keys over, that's when that person was over there.

James: Yeah. The lighting at night it's just super critical. We focus a lot on lighting at night, make sure it's really, really bright. You know, it hinders a lot of crime, it just gives a lot more confidence to the current residents, they know there's a change coming, right? Because it's super easy to do that. Right? We just get the electrician to go and fix all the lights.

Joseph: Yeah. And then we have contractors come out to give us bids and they ask me questions like, well, do you want 3000 lumens or 5,000 lumens? It's like, guys, I don't care. Here's the definition; when you're done, I want it to look like a prison.

James: Fort Knox. 

Joseph: If I don't get complaints from some of the residents that it's too bright, then you didn't do your job, that's our definition. So some of my contractors laugh and say, yeah, I know, prison.

James: So, going back to like one year,  within one year, your contractors is done and all that but when do you think you have to step in and what's the trigger point for you that you say, okay, we are not going in the right direction? What are the clues that you look for in the operation that, hey, I thought this is going this direction but we are not in that direction and what would you do in that case?

Joseph: Yeah, so I don't know how many of your properties were exactly on plan.

James: Of course, it's all 100% wrong. 

Joseph: Life is what happens when you're busy making plans, right? So it's not about checkpoints, I'm going to check in at 30 days, check in at night, just checking out the year, that's not going to work. You've got to be constantly involved and you constantly have to adapt to whatever life throws at you and turn around. We had one property that when we bought it, it had three-year-old boilers in, so they were practically new that a year later, went up, $25,000 expense. That comes at you out of the blue, you're going to have to adapt, you're gonna have to work with that and figure it out. 

The contractor tells you he'll be done by April and it's June and he's barely half-way through, you gotta roll with the punches, that's what it is. Just closer control, monitoring the numbers, working as a partner with the property management team, onsite and corporate, that's the critical things and you've got to work with it. If you made it in a year, that's great. If it takes a year and a half, takes two and a half, takes three, it takes three.

James: But what numbers would you be looking at in the P&L that you are thinking whether you're going the right direction or you're going in the wrong direction?

Joseph: Yeah, so every month we take the actual numbers and we put them right next to our projections. So it's kind of like a constant check of where we are compared to the plant and did we spend the capitals that we were supposed to or not? Did we get the units upgraded or not? Did we make time or not? Do we see the increase in rente that we expected or is it below or you did we exceed that? We also have constant market surveys; just because I projected going from, I don't know, 800 to $900, it's great, but if the market went to $700, my projections are going to go flying out the window because that's what the market is. And the other way around, if I projected 900 and the market went to a thousand, I'm not going to stay at 900, I'm going to go to 1000. So, it's like a living organism, right? You got to adapt, you've got to follow, feel the polls, understand where the market is going, where your property's going, where you are and that's really what you got to focus on; it's everything, not just one.

James: I think that's the job often operator, where you are looking on a day to day, month to month detail planning in terms of numbers and where you're going, whether you're going towards your business plan goals or you're going to divert from there. That's an important thing. That's what I see as an operator because if you look at nowadays, the GP ship I call it the general partnership, the ship. It's too many people when any investors come and invest in any deals but there'll be like one guy or maybe maximum two guys who are the operators.

Joseph: Sometimes there is none.

James: And probably you're right. Yeah. But I think if you look for the backbone of the deal, I mean, it may not be the guy who was raising money from you, it may be someone else who's going to be the operator and as I told in my book, just make sure that you look for who's behind the deal, who's the operator, who is the backbone of the deal, that person is the key person in that, going to make the deal whether it's successful or not.

Joseph: Yeah, and you really got to look at it from the perspective of everybody is focusing on getting the deal closed, but getting the deal close is just a little sprint run;  that sprint finish line is the starting line of a marathon and if that was a relay race, it doesn't matter what happened to the sprinter if he comes in two seconds behind or five seconds behind, because that marathon is going to take 24 hours and a lot can happen in that 24 hours. So the guy that runs the property that does the operation for three, five, seven, 10 years, the projection that the whole period is, it's a lot more critical than the 60 days that it took to put the deal together, raise the equity and secure the financing.

James: Yeah. Yeah, that's what has been happening. It's not bad, but I think as passive investors, they just need to know who is the person behind the whole deal. So coming back to some of your personal experience, I know you don't have your own property management company right now. You are using a third-party property management company and I know you did look at setting up your own property management company to take control and all that but can you describe what are the pros and cons that you see on both paradigm and why did you choose the current paradigm or are you planning to change in the future?

Joseph: Yeah, so for us, we had the transition property management last year and it wasn't fun; It was very painful, actually. So I was at the point where I said, okay, let's evaluate it, maybe I should just take on myself. And my conclusion, my personal conclusion, everybody's going to be different, was that, at this point, property management is its own business and you've got to operate it as a business. You've got to build the infrastructure of a company. So I knew that if I'm going to have to build my own property management company, I'm going to have to put aside my acquisition business and my brokerage business and put them away for about a year until I set up all the infrastructure and all the other things. So, for that purpose, I decided to just move on and get another third-party property management.

 The advantages you get with third-party property management is you get decades worth of experience combined. If I would have opened my own property management, I would probably hire a regional supervisor and that person would probably have 10, 20 years of experience but when you go to a property management company, you have the owners, you have multiple regional supervisors, you have the back office people, and that's decades, if not centuries of combined experience that you're not going to get doing your own thing. So for us, the brain damage was just not worth it and not to pause to the other two businesses that we were running, maybe in the future, it will make sense. We'll reevaluate then, but at this point, we're not gonna do any of that.

James: Okay. So yeah, that's important. I mean, it's a lot of work to set up property management and running it and whether you want to do it or not, it's your personal preference and all that. But I'm more interested in how did you get the signal? Hold on.

 So my question to you is you change the property management but then halfway through one of your deal, in your property in Lubbock, what was the signal that you look for that triggered you that something's not doing right and I need to make this change now. I mean, how long did you wait to pull the trigger to change the property management? How did you change it because it's hard for a lot of asset manager to make that call, it's hard?

Joseph: Yeah. It wasn't an easy decision to make because you have this relationship that you've built with the team in the property management, but there was just, let's take a step back. I think from my experience, the most important skill for a property management company is hiring skills, everything else is secondary to that because if they don't hire the right people, it's not going to work. And that's really what was the trigger on our transition is we just had a series of unfortunate hiring decisions, that we had to go through multiple supervisors and onsite managers that did not follow what we wanted to do and did not execute the way we wanted them to execute, did not treat our residents right. So that was really the last straw for us is kind of like we gave them a 'get better by this date' and it didn't so we just decided to move on and break the package. 

There was no hard feeling, and I still talked to the previous property manager ownership, but we have accountability to our investors and we have accountability to our partners and we got to make sure that if things are not moving in the right direction, then we make a change.

James: But what was the signal? Because you are sitting in Dallas and this isn't Lubbock. And what is the signal that gives you that hint that something is not right?

Joseph: We had a property that we had a big surge of non-renewals; residents that didn't want to renew the lease. And that was really one of our big flags and since then we've already implemented a process where we bypassed the property management company and sent surveys directly to the residents to get a feel of what's going on in the property; how do they feel, how were they getting treated? So we just had a manager that when we were on site, she was all wonderful and great, but when we were not on site, she didn't treat the residents right and that was just really bad because retention is critical and when residents don't want to renew because the manager is not treating them with respect, that's a big problem.

James: So, was the property management company with you sending survey direct to the residents? 

Joseph: That was non-negotiable at that point. 

James: Okay. Okay. So when you saw a lot of non-renewal then you said, okay, I'm going to just do a survey on our own, which is a very good thing because I think a lot of people struggle to identify that weakness, right? But you're right, non-renewal can be a good indication of how the management is treating them or whether the work orders are not being completed as to what the residents want. Because as you know, turnover is going to be the biggest expense in any market family operation, especially in Class B and C. And once you see that, that's a red flag there. So let me ask you a few other things that you want to give advice to Newbies, right? So can you name like three to five tips for Newbies who tried to start at this stage of the market in multifamily?

Joseph: Yes. Start with, don't be optimistic. There's a lot of really optimistic underwriting out there that come across my desk and it's scary. Yes, the market might still go up, we don't have a crystal ball but if your exit strategy depends on you being better than the market today, then you've got a problem. If the entire market is at 90% occupancy and your exit strategy depends on you being 96% occupied, there is a problem there. If you plan on rents going up, but you don't plan on expenses going up, you've got a problem. So these are the little things in your underwriting that can really trip you because it's excels live, very easily. All you have to do is to tweak a number here and tweak a number there and you take a five cap transaction and make it an eight cap transaction.

and that's just not something that you should risk. One thing I don't like in underwriting that you see a lot from big brokerages is a 1% loss to lease. I see you laugh; as an operator, I don't want a 1% loss to lease. If I have a unit that rents for $700 market rent, but I have a residence in it for 650, I'm not going to kick him out if it's time to renew; $50 a month, that's $600 a year; it's going to take me about $1,500 to renovate the unit, that means it's going to be more than a year and a half before I see my money back.

James: Yeah. And you have vacancies too and you have all the stress of turning around the property.

Joseph: That's what I said, it's like more than a year and a half at least so it's kind of like, why would I do that? And if you look at $50 out of 700 that's more than 1% so that's really where you see an underwriting like this, you need to scratch it off and put a more reasonable number in there. And don't ask me what is a reasonable number because it depends on the property. If your rents are $1,000 a month, you can take 2 or 3% but if your rents are 400 and you're not going to kick them out for $25, but $25 out of $400, that's 7- 8%, so that's really where you got to be realistic; you've got to look at the numbers. So when we have, for example, in the underwriting, we underwrite occupancy and we've projected occupancy for the next three, five, seven, 10 years, whatever the whole period is, I also have another table right next to it in the excel file that shows me what it looks in unit numbers because when you put 7% or 8%, it's easy to just think, oh, it's just 7% but if you have 7% out of a hundred units, that's seven units vacant but if it's 300 units, now it's 21 vacant units. So I always like to kind of put things back in perspective; percentages to dollars, dollars to percentages and so on just so people will kind of realize that, okay, it's not just a number that I throw on there. So that's what it's going to meet.

James: Got It. Got It. So let's say for passive investors looking at a deal that's being presented to them, right? So we talked about the things that we want to watch out for even for newbies who are sponsors, but as a passive investor, how can they identify that this sponsor is being aggressive? 

Joseph: So for a passive investor that looks at an offer, any offer, I say they have to focus on four different things. First, they got to look at the market. Just like we talked at the beginning, what is that market? What is the job worth? What is the economy? If you're going to have a property that has a 7% unemployment rate today in 2019 when the market is hot and there are more job openings than people that request unemployment, then that's not a great market to be in when the market shifts. So where's the market?

 The second thing they need to look at is the opportunity, the actual deal itself. This is where you look at, how conservative is the underwriting, did they underwrite for vacancies, did they underwrite for economic vacancies, did they underwrite for capital that's going to have to be done capital reserves and so on?

And the third thing they need to look for is the team, like you said earlier, who's the operator? What's their track record, what's their background? And then the fourth thing, which is something I just added recently, they need to look for one letter in 150 legal documents and that letter is, unfortunately, the letter F, just to make sure they don't get f'd. So my distribution is going to be considered the return on investment, return on capital, or is it going to be the return of capital with an 'F' because it's gonna make a huge difference between the two if you get a return on capital or return of capital.

James: Yeah, I know what exactly you're talking about. Can you briefly explain the two scenarios so people can get it very clearly? What is the difference between the return on capital and return of capital?

Joseph: Yeah, so if you give me $100,000 and I structure our returns as return on capital and I give you, let's say, a 10% preferred return, then in the first year, I'll give you $10,000 that's 10% of everything that has happened. The next year, if I want to give you 10%, I have to give you another $10,000 because your capital in the deal did not change, right? However, if I'm doing a return of capital, then the first year I gave you 10,000, your remaining of the capital in the deal is now 90,000. For me to satisfy the 10% preferred return, I'm going to just in a year a half to give you $9,000 this year and the next year it's going to be 8,100 and the year after, so on and so on so that's one thing. 

The other thing is when we get to the sale part on the return on capital, if we had no capital event, like a refi' or something of that in the middle, then I first have to pay you back all your $100,000 and then whatever is left, we get to split whatever the split is between the sponsors and the and the passive investors. However, if I've depleted your remaining capital basis in the deal, so now you have let's say $50,000 remaining, all I have to do is give you your $50,000 and then we split. So by putting one letter in that document and there are usually 150 pages that you're going to get handed over as a passive investor and all they have to do is change one letter, just one. So I think that if a sponsor does that and they don't clearly explain that to you, then that's in my opinion, not so ethical.

James: Got It. Got It. Yeah. A lot of times passive investors who jumping into investing passively in commercial real estate, know a lot about the deal two to three years after they started investing.  A lot of times they did not know all these types of details in the beginning because it's a fear of missing out, everybody wants to invest because they didn't want to miss out; that all their friends are making money in the same asset class and they didn't want to miss out. They forget about all the legal structures that they have in the PPM or the company agreement that's given to them.  Let me look at one last question; so tell us, where can the audience find you? 

Joseph: Yeah, it's very easy. You can find us on our website, my email, my phone number, it's all there. It's Ebgtexas.com. That's our brokerage website, easy to find us. 

James: Okay. Awesome. All right, audience, thanks for joining me on Achieve Wealth Podcast. And one thing to not miss out is make sure you guys go and look at Facebook; we have a new Facebook group called Multifamily Investors Group. We have grown up to like 680 members right now within two or three weeks. The first week, it's we have like 500 people. And that Facebook group we have created to show live operations from the ground up and talk just specifically about multifamily. We don't have a lot of promotions or spam there and hopefully, everybody's getting value. So I encourage you guys to go and check it out, Multifamily Investors Group on Facebook and join them. Thank you. Thank you.

James: Hey audience, welcome to Achieve Wealth Podcast. Today, we have Adam Triple A Adams. Adam's one of the Facebook stars, I would say, in the real estate business in the multifamily space because he does a lot of things using social media and I'm proud to have him here. Adam owns, almost sounded at 770 units worth 54 million. And right now, he has been focusing on Oklahoma City to buy their deals and he's the Master Investor of the Year, nominated by Thing Realty. So Adam, do you want to introduce yourself?  

Adam: Yeah, hi. Adam Adams, originally from Utah, I live in Denver, the host of the Creative Real Estate Lunch Club, host of the Creative Real Estate Podcast and very focused on syndicating deals. So raising equity and buying larger apartments, we closed on 150 units last week and we just want to keep that momentum going.  

James: Hey audience, just a quick note, this is the first time we are streaming live into our Multifamily Investors Group to add value and to allow people to answer questions, real time. I mean, this is almost the ninth recording of the podcast and Adam definitely helped me here today. He helped me to set up this live streaming, which I always want to do from the beginning, but there's a lot of tricks to get it working and I'm so happy to have him help me here. And you can definitely ask questions in the comment box. So go ahead and ask and I'll try to answer as fast as possible, but thanks for joining today. This is the Achieve Wealth Podcast where we focus on value add real estate investing.  

So Adam, Why don't you tell what has been your recent focus on the multifamily space? 

Adam: Yeah, the main focus is trying to do what we can as a company to add value to other syndicators. So helping other people raise equity, helping other people learn how to do the business. Some of the people watching are personal friends of ours on Facebook right now, Mike Upload, Vincent John, Jesse's on here. Van2 says 'awesome'. It's what we're trying to focus on right now, is just add the most amount of value. See if we can help other people and inspire them to get into multifamily syndication. And we partnered with other people often, we'll help raise equity for deals that you're closing on so that's really what we focus on. 300 of the 700 doors that you mentioned, we personally operate every day and we're always looking for more of those deals, but we've also raised equity for other people's deals. 

James: Awesome. Awesome. So, Adam, can you tell us, I mean, value add is important in value adding to other people's lives and just giving out content is very, very important as well. But in your experience, what has been the best business plan that you have seen in terms of value adding to a multifamily deal? 

Adam: Okay. So when you're talking about value add to a multifamily deal, you mean the actual property, right? And you don't just mean adding value to other people?  

James: No, no. We'll come to that some other time. 

Adam: Yeah, we do small things. Like upgrading kitchens, flooring, the bathrooms, painting. So generally what we do for value add is that. We've also implemented what's called RUBS- ratio utility billing system to kind of make it so that the burden of paying for the utilities goes on the tenant instead of us. So we've done a few different things with five syndications that we've closed and it's always different. Just because I say I like RUBS, it doesn't mean you can do that in every single market or in every single neighborhood. Sometimes you can do it on a B class, but not on a C class. So there's not one thing that we do, but we obviously try to raise rents and cut every expense that we can and make the property run more efficiently.  

James: Okay. Awesome. I mean, you have been nominated by Thing Reality as the Master Investor of the Year because you add a lot of value, right? But what do you think is the secret sauce to your success in adding value to others? 

Adam: Honestly, I would say the one thing that kind of sets me apart or my team apart is that the way that we give is we give fully and willingly. A lot of folks that are doing the business either want to charge for every ounce of advice that they give or they want to not share it with other people because they feel like that's their secret sauce and they're only going to be able to make money if you don't make money. And I think that I've noticed that with some people, they're like, well, I don't want to teach people how to do RUBS because then all of a sudden they're going to make all this money. I want to buy them from them where I can start implementing this. And for us, it's a little bit different. We decide what do people need to know, what are the problems, what have we gone through? Like our own personal issues with running certain properties. And we try our best to just give those pieces of advice and not just part of them, but like in detail.  

So when we share things like how we're utilizing Facebook algorithms to get our name out, like we share that. Most people would charge tens of thousands of dollars for that piece of Info on how to do that but we just want other people to grow with us. And I think because of that, people talk about us, they say: you should go to our conferences, you need to go to blue spruce conferences, you need to listen to Adam Adams or whatever because we don't hold back. And that's probably the big thing is as I see most people holding back or only doing it when they're getting charged or giving you some of it and saying, if you want to know the rest, you have to like, come and pay me or you have to do this or you have to do that. But not us, we just give freely. 

James: Got It. So yeah, I think it's important to take leadership, right? I mean, not everybody wants to take that leadership. Leadership is really hard and I mean, I commend you for taking leadership and taking like what? Four different conferences in Denver, is that what do you guys do? That's hard. But I think you took the leadership and I commend you for getting that attention and the value that you bring, which is a win-win situation for you, for your investors and for the people who are attending the conference. So coming back to some of the engagement in Facebook, I think you are really good in understanding the algorithm of Facebook, right? So can you give a few tips to our audience and how can they grow their brand? How can they grow their presence on Facebook? And what should they use Facebook for? What should they use LinkedIn for? Because I think you are pretty well-established even on LinkedIn, right? So can you give us some tips on that? 

Adam: Yeah, yeah. So to try to give that in a fast--- there's a lot of info there. And the reason I say that is because we have a 13-week raising money course that like teaches you. There are a lot of modules on Facebook and there are modules on LinkedIn and it just goes into tons of detail and I could never give you 13 weeks of info but the way I look at both of them is that this is how people are going to find you. I believe that one of the things that people do for vetting, vetting a new operator to go with or vetting a coach to hire or vetting a private money lender is they check out their references by going on their Facebook and scrolling through and seeing the types of content that they give. People don't do business with businesses anymore. People do business with people that they know, like, and trust.  

So we use Facebook and LinkedIn to allow people to know who we are and they are different. And you said you think I'm pretty active on LinkedIn? I'm not that active on LinkedIn. I have a profile because I know I have to have a profile and Chad from our office has optimized the LinkedIn so that it has a whole bunch of keywords so that when people are looking for a syndicator that they find me instead of someone else. I have that and I need that and we use it and we do a private messaging on there and connecting with people. But where I really post the most is on Facebook. And that's one thing that I suggest to a listener is not to worry about having Twitter and LinkedIn and Instagram and all the other things, but to have Facebook and LinkedIn and a focus on one, where you just going to add value every day as much as you can. 

 And think about it like this, add value to your target audience. Now us, we have conferences, real estate conferences, and so I want to be able to sell more tickets to come to our conferences so I know who my target audiences are. It is somebody who's getting new into syndication so that's who I play to, that's who I help. I give the most amount of value as I can to teach that and I put that all over my Facebook so everybody knows exactly what we're doing. And as far as your listener, they might be only wanting to target accredited investors. So it just depends on who you're targeting. You might find more accredited investors on LinkedIn, but I find more aspiring syndicators on Facebook so that's how it works for me. Does that make sense? 

James: Yeah. Yeah, absolutely. Absolutely. So that makes sense. In terms of who do you want to engage in both different platforms, right? So that's good. And also let's go to your favorite topic because you're one of the top 1% in the world in meetups, right? So tell me, I mean, I'm thinking about starting a meetup, but if I start one, what should I do to grow that meet up to the next level?You are the master of meetups.  

Adam: I certainly try and as on our raising money course, there's a giant part for just the meetups and I'll give you the most I can in a short amount of time right now. Is number one, people want to be heard. This is big. So you're running a meetup and you're going to fail your people and they're going to stop coming if you don't let them be heard. So how can you let them be heard? This is how. You can allow every single person in the group to be able to share their name and what they're looking for. Why are they here today? Or what is their business? Or how can they help? Or even randomly enough to say, where do you plan to be in five years? And when people get to share, you know, I plan to be in multifamily or I need to close this, or I have a wholesale deal for you, whatever, when they are allowed and able to share that with the group, they feel like they got a ton of value. 

 And if you can just imagine being at one of these meetings, if you have something to say, and most people are shy, even extroverted people are pretty shy. And so if what you do in your group is make everybody, like if they want to talk to people, they have to literally go and reach out to everybody and say, hi, my name's Adam Adams. I buy apartment buildings with my friends. If you want to be my friend, come and talk to me. If they had to shake everyone's hand to say something like that, then it would be very difficult for them. They would only get a few people in the group. So when you give them a chance to be heard, hey, let's go around and introduce yourself, tell us what you're looking for. And then I get to say the same thing. My quick pitch. I'm Adam Adams. So I buy apartment buildings with my friends. If you want to be friends, come and let me know. 

 And if I can feel that I shared that with the whole room, I already know that the specific people in the room that resonate with that thing that I said, will come to me. So I get a ton of value by actually being able to do that. And so that's the first thing, let them all be heard. The second thing is I would say... 

James: Can I ask a question on the number one? 

Adam: Yeah, yeah.  

James: So don't you think it's going to take up a lot of time? Let's say you have like 40 people in the first meetup, isn't that going to take a lot more time from the meetup? Because a lot of time, we want to do a lot of networking or presentation so that people learn. I mean some of the introduction itself can take a lot more, right? So how important is that introduction by everybody in every meetup? 

Adam: It's extremely important. It takes time, but it doesn't take time from the meetup. It takes time, but it actually adds a lot of value to the meetup. And when you are saying, oh, I want them to be able to network instead, well, this is the best way to let them start networking. Because then somebody's going to say, Hey, I just want to lend passively. I just want to lend my money passively. Someone else is going to say, Hey, I'm an operator, I'm raising equity. Someone else might be saying, I have a wholesale deal available. Somebody else might say, I'm an fix and flipper and I need a wholesale deal. But if you don't let them share that with everybody, then they're going to have a harder time finding that right person. And if it's your group, James that they're just going to have to network just to get that out, there's a high probability, an extremely high probability that the wholesaler might not be able to find the fix and flipper and the syndicator might not be able to find the passive investor and the passive investor might not be able to find the syndicator. So you have to intentionally facilitate it.  

And when we think that we're taking time away, then we're already destroying ourselves. It's not taking time away, it's giving a lot of time and value to everybody in there to be able to share that. And they're going to keep coming back and back and back and your group, instead of having 40 next week, it's going to have 45 the week after. But if you start with 40 and you don't let them share that, a lot of them are going to be like, Eh, I didn't really get value out of it so some of them won't come. So now it will be 35 and then it'll be 30 and then 20 and then it will diminish and dwindle. And I see this happen all the time. That's one of the big things that set my meetup apart is that we do a few different things that nobody does, even if they sound counter-intuitive, but because we do them and we do them regularly and religiously and continue to do them, people grow. 

 So we grew a group, it was a lunch club and I don't know how many people you think would go to a lunch club, but I used to think it'd be like six people, maybe a dozen people. I dreamed I was like, oh, what if I could have 30 people at lunch? That'd be crazy. And all of a sudden, we had it where it was 40 every week, then 60 every week and then we went all the way up to 176 people, weekly on Thursday in the middle of lunch, people drove, came, networked, learned, and then drove home. Spent four hours in the middle of Thursday. I would never could have imagined that we would have had a hundred people a few weeks in a row or 176 people. But we did and that's because we did it differently.  

James: Okay, awesome. Continue to your second point.  

Adam: The second point was to not sell. And I think it's important to sell. I mean, it's a benefit to your business to sell, but like we're talking about the conferences, which directly correlate with the meetups. I don't have anyone selling at my conferences. 

 You've been to one of my conferences, right?   

James: No. Not yet. I need to make it to Denver.  

Adam: Okay. So the conferences are no sales pitch and I needed you to say that you've been there because like most people think that obviously, you're going to have a sales pitch. How are you going to afford to have a conference? So it's just we never sell anything. We don't have a product. We don't have a service. We don't do anything. We don't have any of the speakers that are flying in on their own dime, they're not allowed to share a coaching program. They're not allowed to share a product or a service that they're going to sell. The only people that are allowed to even share that are just the booth sponsors. We have some sponsors that can sell, but the speakers are there just to add value. 

 And that's the same thing that should happen with your meetup groups. A lot of people, they bring in outside speakers. The REIAs that's how they make money is these outside coaches come and sell and like once you've seen the same selling speaker like two years in a row and you're going to the same REIA and it's that same no investor coming to sell more of their note course, you don't want to go anymore. You've decided, I've already gotten sales pitched by this guy twice, there's no reason to go again. So you actually stay away from it. With mine, every single attendee understands that they're not going to be sold anything and so they attend over and over and over and that's something that we've built in. We just added that or not added that, something that we built in in the beginning. We wanted to make sure that we had that when nobody else did. 

 Because regardless of what you're doing or what you're not doing, James and Listener, the best way to be different, the best way to get people to come to your events is to do something 100% different. So if everybody else is meeting at dinner, you need to meet at lunch. If everybody else has a free meeting and ours were free but if everyone else is just free, free, free, free, I'm sorry, but you've got to charge 200 or even 2000 a year because now, you can set yourself apart. You can say everyone in this group is more serious than anyone in any other groups because we're paying 2000 to be here instead of all those free groups. So it's not like you down-talk, talk badly about any other group, but you always set yourself apart some way. 

 Every other group out has a $200 a year or a $20 per day meeting. Well, then you say, hey, we don't need that, we're just going to be free. And you capitalize on the thing that makes you different. You capitalize that you're the only group in the city that doesn't sell, you capitalize that you're the only group that's 100% focused on multifamily or you capitalize that you're the only group that facilitates letting people introduce themselves. All the other places, they're so worried about being rigid and strict and nobody feels like they get heard. And that's why we do it differently.  

Whatever you are doing differently and that's the third thing, is just make sure that you find a way to set yourself apart. I don't care if you charge more, charge less, charge nothing, meet at lunch, meet on Saturday, meet on Sunday, just do it differently and that will set you apart. So those are three really good points.  

James: Okay, awesome. I think that's a huge value that you're giving out there. So I think apart from that, I mean, I want to go to a more personal level, right? So I mean, why do you do what you do? So I mean, why do you do so much of work and in terms of getting into real estate, multifamily, you know, why do you do what you do? 

Adam:  All right, so I buy apartments and syndicate deals because I like passive income and I go the extra step and do something that no one else is doing. Like hosting conferences every year, hosting meetups. Last year we hosted over 200 events. It's insane. I'm hosting a podcast. Why do I do those extra things is because I legitimately want to add value and give back and at the same time, it's just wanting to passionately see other people succeed. I know and understand that I can partner with somebody. If I can teach you how to find a deal, but you don't know how to raise money, all of a sudden, you'll find a deal and I'll raise all the money. We'll manage it, right? If I can teach you how to raise money and I go and find a deal, well you can partner with me and now we can do this together. You get value and I get value.  

So to me, why do I go the extra mile and to put out content, put out videos, podcasts? Why did I teach you today James? I hope we don't mind sharing this, but we walked through before this, we walked through a Facebook live, right? And so that benefits me a lot, right? It benefited you and it's going to continue to help you and I love that.  

But at the same time, well, I get to be your very first guest that goes Live in your Facebook group, right? So I just believe that in giving first, if you always give first, somehow you'll get it back. You don't have to worry about life if you can just focus on, how can I add value to James today? How can I add value to the listener today on their own meetup groups? And all of a sudden, I helped you with your meetup group or someone else with their meetup group and their meetup become super famous because they just heard this one podcast and learn three random things. And now they call me and say, Adam Adams, I want you to be my first speaker. I want you to be one of my speakers next year at my meetup group, will you accept the invitation? And now I have the opportunity to go and grow my name across the US because a lot of different people heard this podcast guest. So it's just give first and you'll always be able to grow. 

James:  Awesome. Awesome. So can you tell me a proud moment in your real estate journey, one moment where you really felt proud that you did something? Can you share it with us?  

Adam: Yeah.  I'll give you one that you weren't even expecting. For two years, I grew my business. For two years, I focused on my business so much and one day my son came up to me and unfortunately, I was on Instagram trying to grow my brand. And my son said to me, hey, can you play this game with me? I said, sure, give me one minute. And I thought it would take one minute, but it took like five or 10 minutes. And so he came back up. He goes, Dad, you always do this. You're always on your phone growing your brand. He didn't say that, but he's seven. But he's like, Dad, this is what you always do. You're always working. And I looked at him and then I got a tear in my eye and I was like, holy cow. Then I went to a mastermind group with Rod Cleef. He runs this awesome Mastermind group. So I went there and Jason Peril, he's listening now, he was one of the people at the group and I poured my heart out and I just said, man, I feel like my business is going well. I'll tell you, I just got my feelings hurt and I never knew how like this impacted my kids that I was focusing on working. So James, when you say, what's something that you're proud of It's ever since then, I actually made a conscious change and I found a way to spend a little bit more time with my kiddos. When I'm with them, I'm not on my phone, I'm not on my Instagram. I'm looking at them in the eye. And I try now and it happens most of the time. One of my kids comes up, dad, can you play this game with me? I shut everything else off, I look at them in the eye and said, I'd love to, let's play that game. It sounds so good and then I play it, I put my heart and soul into it, we play for an hour. So if there's anything that I'm proud of is that the business is going fine, it's growing, people know who we are, we're getting deals, we're closing deals, we're raising money. But I finally found a way to start focusing on my kids more and that's really what makes me feel so choked up. 

James: Yeah. Yeah. I mean I was in the Mastermind too, so I remembered that time when you went up there and tell that story. 

Adam: And I was crying, right? 

James: Yeah. You had a teary eye and very vulnerable. It's a moment. I know in social media sometimes it can be addictive and you are trying to respond to one and sometimes your kid needs that one minute and sometimes that one minute becomes five minutes and it's just not good. So that's good. So let's go to newbie questions. What are the top three to five different types of advice that you want to give to newbies who want to get started into this syndication and being operative for multifamily? What do you want to give us an advice? 

Adam: All right, I think this is an important question. So I'm really grateful that on your podcast you ask this to guests. So the top three to five things that I would say to a Newbie, and hopefully these are impactful for anyone. So if you're listening and you are new, take super good note of this and pay close attention because I'm trying to give you value from the mistakes that I've made. So here's a couple of things.  

Number one, just freaking start. Just start. Everybody has all this fear and it holds them back. So just find a way to get over that. That's number one.  

Number two, when partnering, don't let the blind lead the blind. It's insane. So what I'm saying is, you're a Newbie and you think you're going to partner with one or two or three other brand new people, none of you have ever done a deal, but you think that like somehow this is going to work. I'll tell you, it's way too hard still to raise money. It's way too hard to get a broker to take you seriously and give you a deal. It's way too hard to manage a property with no experience. So instead of partnering and letting the blind lead the blind, align yourself with somebody who's already doing the business. Find a way to add value to James. Find a way to add value to Adam Adams. Find a way to add value to somebody and you take on a responsibility of raising equity, managing the property, finding the deal, whatever. Putting in earnest money, putting in passive money, however you want to do it but align with somebody who has a track record. Very, very important.  

The next one that I would say is when partnering, it's very critical that you understand that you do not have to get married on the first date. It's critical. What I mean by that is all of a sudden you say this is a good person, I'm a good person, we should just partner. And all of a sudden, you form a team but you've never done business. What I would say instead is to court or date that person for a while. Go on a date with them with the first property, go on a date with them with the second property. And then if you just absolutely just bond so much, then get married. Then say, we've been connecting so well as we've gone. So instead of just doing this, how we've been doing this, how about we decided to form a brand new company and we really make this something special; now you get married. So those would be the three main pieces of advice that I would share with a new listener. 

James: Okay. Yeah. If you guys want to start dating some experience sponsor, I mean just be more active in the group. Ask simple questions. I mean, there's so many people in the group. I mean, I'm so proud of the group. We have like 770 people right now and I just look at the stats, almost like 650 people are active in the group, which is really good. And just start asking simple questions and there are so many people help each other, right? So do that and add value to others, whatever you know you want to share and you can actually absorb as well. So you can start from there if you want to start the dating game that Adams has been talking about.  

All right, Adam, thanks for joining us today. Do you want to let the listeners know how to get hold of you? 

Adam: Sure. For those of the listeners who are active on Facebook right now, if you're not already friends with me, feel free to add me. But I'll tell you one quick thing; I won't accept you unless you write a message. I get so many randoms and I don't know like what country they're in, if they're real, if they're a robot. So just send me a message and an invite and I'll definitely add you if you haven't already. The other place that I would say is if you're just listening on the podcast, just go to realbluespruce.com, real like real estate and then blue spruce, the tree. And that way you can find my bio, you can find my email, you find anything about me there and you can get ahold of me. So realbluespruce.com 

James: All right Adam, thanks guys for joining us. This is actually almost the ninth recording of our podcast and we are planning to launch our podcasts by the end of this month, end of April. So hopefully, I'm right now on track to launch it and it's going to be a blast because there's going to be a lot of commercial operators and people are going to be coming and sharing their real style, how do they add value in their properties? And I hope to get good reviews from everybody after we launch and that's it. Thanks, Adam for joining us. 

Adam: Thank you.