\n<\/p>\n
Is multifamily real estate investing<\/strong><\/a> as complicated as investors make it out to be? If you\u2019re Andrew Cushman<\/strong> of Vantage Point Acquisitions, you\u2019d probably argue that although multifamily has a bit more complexity than single-family rentals, it\u2019s still, by all means, profitable for the everyday investor<\/strong>.<\/p>\n In the early 2000s, Andrew didn\u2019t know anything about pro formas<\/a>, apartment underwriting, or the best type of mulch to use on large-scale landscaping. Now, more than a decade later, Andrew has been able to lead his team in acquiring, syndicating, and repositioning over 2,500 multifamily units<\/strong>. He\u2019s here with David Greene to answer live questions surrounding anything and everything related to multifamily investing. He gives stellar takes on the current state of the market<\/strong>, how rising interest rates<\/strong><\/a> will affect multifamily investing over the next few years, and the best way to increase your ROI<\/strong> (return on investment) on a multifamily acquisition.<\/p>\n You don\u2019t need to be a large-scale apartment investor to take away some golden nuggets from this episode. Even if you\u2019ve never thought of investing in multifamily, Andrew frames multifamily in a way that\u2019ll have you wondering, \u201ccould I buy that apartment down the street?\u201d<\/p>\n David Greene: Andrew Cushman: David Greene: Andrew Cushman: David Greene: Andrew Cushman: David Greene: Andrew Cushman: David Greene: Whitney Boling: David Greene: Whitney Boling: David Greene: Andrew Cushman: David Greene: Andrew Cushman: Whitney Boling: Andrew Cushman: Whitney Boling: Andrew Cushman: Whitney Boling: Andrew Cushman: Whitney Boling: Andrew Cushman: David Greene: Pete: David Greene: Pete: Andrew Cushman: Pete: Andrew Cushman: Pete: Andrew Cushman: Pete: David Greene: Pete: Andrew Cushman: Pete: Andrew Cushman: David Greene: Matt: David Greene: Matt: Andrew Cushman: Matt: Andrew Cushman: Matt: Andrew Cushman: David Greene: Matt: Andrew Cushman: Matt: Andrew Cushman: Matt: Andrew Cushman: Matt: Andrew Cushman: Matt: David Greene: Andrew Cushman: David Greene: Matt: Andrew Cushman: David Greene: Andrew Cushman: David Greene: Andrew Cushman: David Greene: Andrew Cushman: David Greene: Andrew Cushman: Matt: Andrew Cushman: David Greene: Jake Harris: Andrew Cushman: David Greene: Jake Harris: David Greene: Jake Harris: David Greene: Jake Harris: Andrew Cushman: Jake Harris: Andrew Cushman: Jake Harris: Andrew Cushman: Jake Harris: Andrew Cushman: Jake Harris: David Greene: Andrew Cushman: David Greene: Andrew Cushman: David Greene: Andrew Cushman: David Greene: Jake Harris: David Greene: Andrew Cushman: Jake Harris: Andrew Cushman: David Greene: \u00a0<\/p>\n<\/div>\n Help us reach new listeners on iTunes by leaving us a rating and review! It takes just 30 seconds and instructions can be found here<\/a>. Thanks! We really appreciate it!<\/p>\n
This is the BiggerPockets Podcast, show 607.<\/p>\n
That\u2019s one of the beautiful things about multifamily. In single family, you buy a house and the average price in that market goes down 30%. Well, yours probably went down 30% too. In multifamily, you\u2019re valued on the net operating income so if you\u2019re a really good operator, you can still increase the value of your property in a flat or down market, even if everyone else is struggling. That\u2019s one of the really cool things. That\u2019s part of why, again, with caveat, it\u2019s somewhat okay to pay a little bit for future performance, because it is something that\u2019s in your control.<\/p>\n
What\u2019s going on, everyone? This is David Greene, and I am your host of the BiggerPockets Real Estate Podcast. At BiggerPockets, we want to teach you how to build financial freedom through real estate. We do that through formats like this podcast, where we bring in experts on specific topics like my good friend, Andrew Cushman, who is here with me today.
Andrew and I will be co-hosting this one. We invest in properties together. Andrew\u2019s the best multifamily investor that I know. I call him Hawkeye from the Avengers because when this guy lets an arrow go, he never misses.
In today\u2019s episode, we do a deep dive into multifamily apartment investing with a specific bend towards how to make it work in this hot environment while interest rates are rising. Andrew and I tackle several difficult questions and I think it came out really good. Andrew, how are you today?<\/p>\n
I\u2019m doing really well. Yeah, that was a whole lot of fun. We talked about a lot of stuff. Is it okay to ever pay proforma value for a multifamily apartment? We talked about, how do you find deals in today\u2019s hot market? The low-hanging fruit\u2019s gone, so how do you get up to that one that\u2019s hanging on the branch way up there that no one can get to? Then we talked about some ways to add value that maybe some people haven\u2019t thought of before.<\/p>\n
Yeah, this was very unique. I thought you gave some answers that I have never heard anybody else say, and the guests asked some really good questions. Make sure you check this one out and listen all the way to the end, because Andrew gives some fantastic advice of how you can add value to multifamily property that I can almost guarantee you\u2019ve never heard anybody say before. It\u2019s very creative and very insightful.<\/p>\n
We\u2019re going to talk about pine straw and I won\u2019t explain what that is. You need to go to the end and listen.<\/p>\n
That is the word of the day. When you hear pine straw, make sure you pay attention. Today\u2019s quick tip consider going to BPCON. Open registration\u2019s started and you can go to biggerpockets.com\/events to get your ticket. I will be there. Andrew might be there. My co-host, Rob Abasolo, will be there. A lot of BiggerPockets personalities will be there as well as a lot of members. Probably, some of the people that you heard on today\u2019s show.
I\u2019ve never, ever, ever seen a sad face at a BPCON in my entire life. It\u2019s just a lot of people having a really good time, learning a lot of fun stuff, and having a great time. You always learn something at an event, but it\u2019s often like a bran muffin. Just who really wants to be eating that? This tastes really good. This is fun and entertaining at the same time, so do not miss out.
These events will sell out. Get your ticket there. Events like these are also a way that you can meet other people that will help you in your business. Too many people underestimate the value of helping somebody else and then learning from them in that process.<\/p>\n
Yeah. We\u2019re actually looking for someone to help us right now. If you\u2019re listening to this podcast, you\u2019re probably someone who has a general interest in real estate. That\u2019s a base requirement, but we need someone on our team who would make an awesome investor relations manager. If you\u2019ve got strong organizational and system skills, you\u2019re detail-oriented, you\u2019re a strong communicator, then reach out to us.
Just go to vpacq.com. There\u2019s a \u201cwe\u2019re hiring\u201d tab on there. Fill out the application and we look to, hopefully, add another BP community member to our team. We just hired a BP community member this week and we\u2019re looking to do that again. There\u2019s no better people out there than the BP community.<\/p>\n
That is right. If you like what you hear from today\u2019s show and you want to invest with Andrew and I, you can go to investwithdavidgreene.com. Register there. Accredited investors only please, but we are still raising money for an apartment deal that we are buying and it\u2019s a really good one.
All right. Without any further ado, let\u2019s get to our first caller. Whitney Boling, welcome to the BiggerPockets Podcast. How are you today?<\/p>\n
Hey. Doing good, David. How are you, man?<\/p>\n
I\u2019m pretty good. I\u2019m excited. I got my buddy, Andrew, here with me today and he\u2019s my \u2026 I\u2019m putting together the investing Avengers, so Andrew\u2019s like Hawkeye. He\u2019s the sniper He just does not miss on anything that he does, so you\u2019ll get some really good advice today. What\u2019s on your mind? What do you got for us?<\/p>\n
Awesome, yeah. Thanks for having me on. I\u2019m an investor out of Phoenix. Been listening to the show a long time. Got some single family rentals going right now, some condos, some single family homes, but ultimately, looking to try to make the transition into a multifamily right now.
Being in Phoenix, I\u2019ve built up a decent equity position. I feel like the timing is right, but I just wanted to try to see, in making that transition, what are some of the top five things that don\u2019t stick out in researching single family that might stick out when you\u2019re looking at multifamily?<\/p>\n
That\u2019s really good. Andrew, you want to start there?<\/p>\n
Yeah. Top five things. I could probably list off about 50, but I\u2019ll try to narrow it down to the five that come to mind first. One is learning. Committing the time to learn how to underwrite a multifamily. It\u2019s definitely a lot different than a single family where you\u2019re looking, you might start with an ARV, after repair value, and then work backwards to determine, \u201cOkay. What can I pay for it? What\u2019s my mortgage going to be, and my expenses.\u201d Then, \u201cIs my rent going to cover that?\u201d
You can do that pretty simply on a small Excel spreadsheet or even sometimes on the back of a napkin once you get good at it in single family. Multifamily gets a little bit more complicated, especially as you move into the bigger stuff where you\u2019ve got 80 units, 100 units, 200 units, and you have things like ongoing vacancy factor.
You\u2019re going to renovate, in many cases, and raise rents but it\u2019s not 100% of the time. You buy a house, you fix it up, you re-rent it, boom, you\u2019re done. Well, if you\u2019ve got 100 units, you\u2019re not going to renovate all 100 units the first day you move in. You have to plan on, \u201cWell, how do I schedule that? How do I account for the fact that maybe I\u2019m going to do eight units a month for the next 12 or 14 months?\u201d
Then just all the other factors that go into underwriting. What do you do with \u2026 How do cap rates affect things? \u201cHow do I determine a going in cap rate and then what do I put for an exit cap rate? How do I underwrite the cost of debt?\u201d You get into things like not only management companies, which you typically have with a single family, but then also actually having staff that are dedicated to the property.
One of the biggest things is just learning how to underwrite. Every operator that I know does it a little bit differently, so the key is to either purchase, or develop, or borrow a template for underwriting multifamily, and then get to learn that, and then maybe develop your own down the road. That\u2019s what I did. This was not something I was going to figure out on my own from scratch. I\u2019m not the creative guy, so I literally hired a mentor, got his underwriting spreadsheet, and then have built it out far greater over the last 11 year.
The number one thing is, learn how to properly underwrite. There\u2019s courses, there\u2019s books. Find a mentor. Partner with somebody who\u2019s already in the business. You\u2019ve got to learn how to underwrite properly. Or if that\u2019s totally not your thing, partner with somebody who\u2019s already got that nailed. Underwriting is number one.
The second big thing I would say is really important to commit to learning about, as you move into multifamily, is the debt is far different than what you\u2019re used to dealing with in single family. In a single family, you might just go get FHA, 30-year amortized loan, boom, you\u2019re done. Everything\u2019s good, don\u2019t worry about it.
In multifamily, and I should define multifamily. We\u2019re talking commercial-size multifamily, five units and up. In commercial-size multifamily, the loans, number one, they\u2019re typically nonrecourse, unless you get a bank loan, so that\u2019s a benefit. Recourse meaning they\u2019re not going to come after you. You really need to understand recourse versus nonrecourse. Then they also have things called bad boy carve-outs, which means if you commit fraud, then they can come after you no matter what.
You have to commit to learning all the different types and terms of debt, and then not only that, but just how does it work in terms of your property? Again, if you get a single family house, many cases, you\u2019ll slap a 30-year loan on there and you\u2019re good for as long as you want to hold it. In the commercial world, your loan is typically only good for five, seven, or 10 years. There are exceptions to that, but in most case, you have to pick. Is this going to be a five-year loan, seven-year, 10-year? Maybe 25, if you\u2019re going bank, or HUD, or something like that. The second big thing to commit to learning is definitely how multifamily commercial debt works. It\u2019s very different than the single family world.
A third thing, and this piggybacks or parallels with that is matching that debt with your business plan. One of the biggest mistakes that we see people making, even experienced people, is not properly matching your debt with your business plan. If you buy a house and you put a residential mortgage on it, or a duplex, even a fourplex, you can basically sell that and pay it off anytime, no problem, in most circumstances. In the commercial world, you can\u2019t necessarily do that.
We have what\u2019s called prepayment penalties, which most people understand what that means, meaning if you pay off the loan too early, if you said, \u201cThis is a 10-year loan\u201d and two years in, you\u2019re like, \u201cHey, I want to pay this off,\u201d the lender says, \u201cGreat, but you\u2019re also going to owe me 10, 15% of the loan balance as a penalty,\u201d which is huge. We also have yield maintenance, which is effectively the same thing. Meaning the lender wants to protect their yield, and if you pay off the loan early, they\u2019re going to make you pay them extra interest in advance.
If you plan on holding a property for three years, you probably don\u2019t want to put 10-year fixed debt on it, because when you go pay it off, you\u2019re going to have a huge penalty, so the third key thing to commit to learning and understanding is how debt affects your business plan. It definitely has a lot more strategy and thought to it than you typically have in the single family world.
A fourth thing is \u2026 We just talked about debt and the loan. Typically, your lender\u2019s your biggest partner in any deal. The other half of that is, where is the equity piece going to come from? Commit to learning the equity side. Now, if you\u2019re just putting in your own money into deals, it\u2019s pretty simple.
You might be putting in 30% or 35, or 40% of whatever the total cost is, but if you\u2019re taking money from outside sources, which of course, is syndication, or raising money from investors, or partnering with other people, commit to learning the legalities and the rules around doing that. It\u2019s actually not that complicated. Most BiggerPockets listeners could probably pick it up in a day and have a really good handle on it.
It\u2019s one of the those things where if you do it wrong, you can get into a whole lot of trouble, and there\u2019s lots of people out there doing it wrong right now. Everyone\u2019s getting away with it because the market\u2019s been fantastic, but the minute something shifts, and deals start to go bad, and someone complains to the SEC, if you didn\u2019t follow those rules, you can be in a world of hurt.
Once they find out that you did one deal wrong, what they typically do is they will ask you to open your kimono on every single deal you\u2019ve ever done, and they don\u2019t limit it. They say, \u201cAll right. If we\u2019re looking into Andrew or Whitney, we\u2019re going to look at everything they\u2019ve ever done,\u201d so the fourth thing would be, if you\u2019re taking outside money, make sure you\u2019re doing it right.
Again, this isn\u2019t something, you don\u2019t need to become a syndication attorney or an SEC attorney. You just hire one that knows what they\u2019re doing to keep you protected. David, before I jump into number five, is there anything that you would put in the top five that maybe I\u2019ve missed or that you would add to that?<\/p>\n
The only thing that I would have added, and I don\u2019t think I can sum it up as concisely as you were, so I won\u2019t get into it, but the idea would be, with residential real estate, we have rules of thumb that we tend to follow. When you see something that is close to the 1% rule, you\u2019re like, \u201cOoh, I should probably look at that.\u201d Or when you see a property with more square footage at the same price as other homes in the area, or that\u2019s listed lower, comparable sales is a much easier way to establish a baseline of value, so when something falls outside of the norm of what you\u2019re used to seeing, it catches your attention, you look into it.
Anytime you\u2019re changing asset classes, one of the first things you want to do is try to figure out what that baseline is for that asset class and what\u2019s falling outside of the norm so you can key in and then implement everything that Andrew\u2019s saying. We just take for granted how many deals are out there, and that you do not have the resources to analyze all of them.
Part of being good at this, like what Andrew hasn\u2019t said, but I know him so I see him crushing it, is his criteria are so incredibly defined that he subconsciously gets rid of 98% of what comes his way. He doesn\u2019t even look at it. All of the efforts he\u2019s giving are on 2% of deals that could actually work. If you don\u2019t learn how to do that, you\u2019re going to be like me at jiu-jitsu. You burn all our energy in the first 90 seconds, and then you get your butt kicked for the rest of it because you haven\u2019t learned how to be efficient. It\u2019s an important part of business.<\/p>\n
Actually, that was the next thing I was going to say, so thanks, David. That\u2019s perfect, and is define exactly what you\u2019re looking for, and then learn how to go find it. We talked about that in some of the previous episodes of how to screen markets. Then once you screen for the market, how do you screen those deals and just take 100 and whittle it down to two that are worth your time? That would be the fifth thing. Great question.<\/p>\n
Yeah, that\u2019s great, Andrew. I appreciate it, man.<\/p>\n
Whitney, do you have any follow-up questions or any clarity you wanted on anything?<\/p>\n
I think just in terms of the loan piece of it. That\u2019s where the biggest hurdle is for me, and trying to understand the structure behind the five or seven-year loan. I just am not exactly clear on how that works.<\/p>\n
When they say a five, or let\u2019s just say a seven-year loan, and you could maybe do that with a bank or agency, so Fannie Mae, Freddie Mac. Could be a bridge loan. Most bridge loans are five years, but the principle is the same. Typically, what that\u2019ll look like is, let\u2019s say you\u2019ve got a seven-year loan. You might have two years of interest only, so you\u2019re not paying the principal down, you\u2019re just paying the interest. Then the remaining five years, you\u2019re going to be paying interest and principal.
What they do is they\u2019ll amortize it over 25 or 30 years, so in that sense, it\u2019s very much like a residential loan in terms of the amortization, except you just can\u2019t keep it for 30 years like you can with a residential loan. When you get to year seven, you have to pay off that loan. You can do it through either refinance, sell the property, or if you\u2019ve come into a lot of cash, you just pay it off. You have to pay it off in whatever year that loan comes to term. That could be, again, year five, year seven, something along those lines, so that\u2019s how they\u2019re structured.
Then something else that\u2019s negotiable, and when I say negotiable, it\u2019s not just like, \u201cOh, I want this,\u201d and they\u2019ll say, \u201cOkay, fine.\u201d You often will pay for these things, meaning you can pay a higher rate or you can pay a higher fee in exchange for some of the things I\u2019m about to talk about.
We\u2019re actually in the process of doing this on a deal right now where we are paying a slighter higher rate on a seven-year loan in exchange for the ability to pay it off early in year three without having a big prepayment penalty or yield maintenance. Well, you say, \u201cOkay. Well, Andrew, why would you do that? Because it increases your rate a little bit.\u201d We are in a place in the market where the fundamentals of multifamily are rock solid, however, we do have increasing rates. The debt markets, it\u2019s not inconceivable that everything that\u2019s going on in the world right now that something could spook the debt markets over the next couple of years, or the economy could go into recession.
There are risks out there that really weren\u2019t as prevalent just a couple years ago, and so we want to have, and this gets back to, I think it was point number two or point number three about matching your debt with your business model. We\u2019re paying a little bit higher rate to be able to exit early just in case there\u2019s some market force that dictates, \u201cHey, it\u2019s best for us to get out now, rather than hold for seven years.\u201d Or vice-versa. That\u2019s why we\u2019re not getting a three-year loan.
We don\u2019t want to be forced to get out in three years. Many bridge loans, it\u2019s a 25-year amortization, but you have to pay it off in three years. What if in three years we\u2019re in another March of 2020 or fall of 2008 and the debt markets are just locked up and not available? You don\u2019t want to be in that situation. That\u2019s how you lose money in commercial real estate is being forced to sell or refinance at a time when you really can\u2019t or shouldn\u2019t, and so you take the debut structure and work it to your advantage.
That\u2019s generally how it works is you may amortize for a long period of time, but you then, you can pick a menu of \u2026 They literally will give you, in many cases, a matrix. Says, \u201cAll right, if you want a five-year term, here\u2019s your rate and other terms, one-year IO. If you want seven-years, we\u2019ll give you two years of IO, and your interest rate\u2019s a little bit higher. If you want 10 years, we\u2019ll give you four years of IO and the pre-payment penalty burn goes away in five years,\u201d and whatever the other terms are.
That\u2019s how they structure it and, literally, it\u2019s like a menu. Whereas, with a residential mortgage, correct me if I\u2019m wrong, David. It\u2019s been a while since I\u2019ve been in residential. It\u2019s basically like, \u201cHey, here\u2019s your rate. It\u2019s 30 years. This is what we\u2019re going to give you. Maybe you can pay a point to lower the rate a little bit, but that\u2019s it.\u201d
Then also, another thing you can do in multifamily that can be really beneficial, especially if you don\u2019t have as much equity or cash available, is you can do lender-funded renovations. If you\u2019re buying a property and you\u2019re going to do $800,000 in renovations, many cases, the lender will not only give you, let\u2019s say 75% of the purchase price, they\u2019ll give you 75% of that renovation budget, and then you do the work. The contractor invoices you. You send that to the lender. They release the funds. That\u2019s another piece of the structure to factor in. Any other follow-up questions or, hopefully, that helped a little bit.<\/p>\n
Yeah, that definitely helps. I just want to try to understand, with the rising interest rates and things moving rapidly, I don\u2019t want to be stuck in a situation where I can\u2019t refinance or I\u2019m stuck with a higher interest.<\/p>\n
You know what? To me, that is the biggest risk to the multifamily market right now, and to a lot of deals that have been done over the last two, three years. I think it was 2021, 70% of deals were done with bridge loans, at 75 to 80% LTV.
Well, when they go to refinance or sell a couple of years from now, if rates are still significantly higher, many of those loans aren\u2019t going to be able to refinance out because the debt coverage ratio won\u2019t be there. What I mean by that is the net operating income won\u2019t be enough to cover the new debt load at a much higher interest rate, and those deals are going to run into problems.
Real quick, how you mitigate that is, number one, go in with lower leverage. Our last couple of deals, we just went in at 60 and 65% LTV, just to make sure we had that extra room. That\u2019s the biggest way to mitigate it. Number two, a whole nother discussion, but there\u2019s fixed-rate and there\u2019s floating-rate with multifamily debt.
Floating rate, actually, typically is cheaper. However, what we\u2019ve been doing recently, and for the foreseeable future, is we will get fixed-rate debt but then make sure that we can either get a supplemental loan, which is the equivalent of getting a second mortgage and pulling out cash, or going back to our previous discussion, we can pay it off early.
That way, we\u2019re eliminating the risk of rates going way up on us. We know, \u201cHey, we can ride this thing out for seven or 10 years, but if everything goes to plan and it works out really well, we can still pull cash out and give that back to investors.\u201d That\u2019s how you work with the structure of multifamily debt to still do deals in an uncertain environment, but not increase your risk. It\u2019s all about, there\u2019s so many creative ways to do debt, and equity in multifamily deals. You just have to adjust it as the market adjusts, and that\u2019s just some of the ways to do that.<\/p>\n
Yeah, that\u2019s exactly what I was looking for, so I appreciate it, Andrew.<\/p>\n
Oh, awesome. Thank you.<\/p>\n
All right. Thank you for that, Whitney. Before we get on to our next caller, I want to make a comment about people that have invested in somebody else\u2019s syndication with rates going up because there is risk. Now, one of the things that Andrew and I have noticed is a lot of deals have been put together by more amateur, they haven\u2019t done as much, and they just shoot from the hip.
They\u2019re raising more money than they should be. They\u2019re paying more money than they should for the property. They\u2019re not experienced with the management, so their operating costs and ratio is higher than it would be with the more experienced operator.
While we\u2019ve had just the best bull market we\u2019ve ever seen, you get away with playing sloppy, but rising rates is one thing that is very impactful on multifamily housing because your debt plays such a big role in making the numbers work. If you invested with someone who wasn\u2019t that great at doing this or wasn\u2019t that experienced, the odds of you being okay are higher if you got in the right area.
If you went in an area where rents have been going up and demand has been going up, you should see an increased NOI, even if the operator didn\u2019t do a great job and so therefore, you can afford the higher debt service that comes with the higher interest rate. If you chased after really high returns and you didn\u2019t get into a great area and you didn\u2019t get in with a great operator, your money might not be that safe.
Moving forward, one of the things that I\u2019m telling people is, don\u2019t chase the highest return possible. When they say, \u201cHey, we can get you a 20% IRR,\u201d and you say, \u201cWell, that\u2019s better than a 16% IRR. I\u2019m going with them.\u201d A lot of people got away with that for a long time. This is not the time to be doing that as the Fed is continuing to increase rates and people are moving at a faster rate across the country. After COVID, that jump-started this entire idea of, \u201cI want to live where I want to live. I don\u2019t want to live where I\u2019m stuck.\u201d
What could have been a great deal in New York five years ago is now not looking like a great deal. Rents aren\u2019t going up. It\u2019s hard to get people to want to live there. People are leaving that area. Now interest rates are coming, so in my opinion, when you\u2019re going to be investing in someone else\u2019s syndication or with a partner, safety should take priority over top-end return.
In a bull market, you can be a little riskier, chase after those big returns. In a bear market or a potential bear market, you want to put a higher weight towards safety, as opposed to just pure maximum profit you could get on your money. Thank you for that, Whitney. Appreciate you, man. All right, Pete, if we get you in here.<\/p>\n
Hey, guys. How are you doing?<\/p>\n
Good. Thanks for being here. What question do you have for us?<\/p>\n
Long-time listener, first-time caller, so appreciate you guys doing this. I\u2019m a real estate-friendly financial advisor up in the Seattle area. I\u2019ve done about 14 BRRRRs over the years with varying levels of success, as I\u2019m sure we can all attest to. I\u2019ve been trying to transition into the multifamily space for about a year and a half or two years now.
What I\u2019m consistently seeing is that it seems like, against the adage, making money going in, it seems like the pricing is based more on the proforma numbers or proforma NOI, so to speak, rather than on the current numbers.
I\u2019m trying to figure out if this is just symptomatic of the hot market and how I should be thinking about this because I don\u2019t want to give up that value-add opportunity, but I also don\u2019t want to sit on the sidelines forever.<\/p>\n
That\u2019s a really good one. That is definitely something that is a constant struggle and I would say it\u2019s always something to consider but it is, as you alluded to, it is very much a symptom that has been aggravated by the current market.
When you hear the stories of an apartment complex traded for two and a half cap in a place like Atlanta or Dallas, which are great markets, but historically, not two and a half cap markets. A two and a half percent cap rate, that\u2019s LA, that\u2019s San Francisco, that\u2019s New York. When you hear that a property traded at a two and a half cap in Atlanta and you\u2019re like, \u201cWhat the heck are they thinking?\u201d This is exactly it. What it is is it\u2019s somebody paying today for tomorrow\u2019s performance.
You\u2019ll see the brokers will advertise. They\u2019ll actually put it in print. I think this is going to start going away soon, but they\u2019ll put it in print, \u201cHey, this is a two and a half cap, but you can get it up to a four cap if you do all this work,\u201d and that\u2019s the value-add. The answer to this, to me, is double-sided.
One, is this gets to don\u2019t get overlay caught up on going in cap rate. Because some of the best deals that we\u2019ve done historically, yeah, our going in cap rate was between zero and two, and in some cases, it was even negative. The property was losing money when we bought it, but there was enough value-add there to make up for it.
On the other hand, Pete, like you said, you do not want to pay the seller for all the work that you\u2019re going to do, and so the answer lies somewhere in the middle. If you\u2019re looking at marketed deals, odds are there\u2019s going to be someone out there who\u2019ll pay that seller for all the work that the buyer\u2019s going to have to do, and you\u2019re probably not going to get that.
If you can \u2026 What we found is when we work with either, some cases, directly with sellers or in most cases, it\u2019s a broker bringing us an off-market deal where there\u2019s not this competitive bidding environment that gets everyone hyped up and like, \u201cI\u2019m going to win this, and I\u2019ve got to win this. My investors haven\u2019t seen a deal. I have to get something.\u201d That leads to exactly what you\u2019re talking about.
What you are aiming for is an environment where you can \u2026 This I like a one out of 100 type of thing right now, but it is still out there, whereas, you work with a seller where you can have a reasonable and non-hyped conversation and negotiation over the deal. We closed one last month where it was very similar to this, where a broker just connected us directly with the owner of the property. He had built it and developed it himself. He did have one off-market offer. Just someone had literally called him, and flown down, and looked at the property, and gave him an offer.
He was getting ready to sign that and the broker connected us. Said, \u201cWell, look. You should really let this one other group at least come visit,\u201d and so I went down. Literally, was there within an hour. Toured the guy, got the deal, and made him an offer, and eventually got the deal under contract and closed. It was one of those situations, I don\u2019t remember what the going in cap rate is, but the going in cap rate, it was low. It\u2019s probably somewhere, I think it was right around four, and this is for a 2011 construction property in a larger tertiary market in Georgia.
On the surface, that might not make sense. \u201cWhy would you pay a four cap for that?\u201d Well, this guy, his daughter was running this large, almost 200-unit property all by herself. Not doing a bad job, but just way too much work for one person. No website, no marketing, no nothing, so when you\u2019re in that situation, you know how you keep it full? You don\u2019t raise the rents. You don\u2019t want turnover because you don\u2019t have time for that, and so they hadn\u2019t raised rents since 2019.
We actually own another property about a mile away in that market, so we know for absolute certain, like, \u201cHoly cow. The rents on this are incredibly low.\u201d We took our market knowledge, and we went and looked at every other property in the market, and we said, \u201cAll right. This property as it is today should be renting for $200 more than it is. Without doing any work, it should automatically be 200.\u201d
We look at that and say, \u201cAll right. We\u2019ll pay somewhere, we\u2019ll pay, call it a four cap because we know this market and we have very high confidence that we can get it up to where it should be.\u201d Then at that point, it\u2019s like a six, or a seven, or something really high. The seller, all he wanted was just a reasonable offer on where his property was today.
Would I like to buy it a five cap going in? Yeah, of course, we would but it had such a clear value-add that we are willing to pay just a little bit more. To me, that\u2019s where the workable middle ground lies. In today\u2019s market, very few sellers are just going to give you a killer deal on a property. This property, I think we were buying, it was like 126 a unit or something like that. We have a very, very clear path to like 160 to 180 a unit in a very quick, near future so we can pay him 115 and we know we can very easily get it significantly above that, that deal works.
The key to what you\u2019re asking about, \u201cHey, I don\u2019t want to pay today for tomorrow\u2019s performance,\u201d number one, and we talked about this with the last caller, is really knowing your market and your property, and diving into the data so that when you say, \u201cYou know what? I can pay just a little bit more for this now because I will be able to get it to much higher value.\u201d You do that study, you do that analysis, you can go into it with the confidence of a four-year-old in a Batman shirt. Just like, \u201cGoing to do this. I\u2019ve got this nailed.\u201d That\u2019s really how we look at that. Any follow-up questions? Or hope that helps.<\/p>\n
Yeah, so on that one, in terms of the underwriting, it sounds like you\u2019re talking about a happy medium between the underwriting of what the cap is today or the NOI is today versus the proforma numbers, so you\u2019re trying to find the medium between that, but if they\u2019re starting out at the proforma numbers for their asking price, usually, the expectation is you need to come down from that a little bit. If they\u2019re not ready to do that, I guess, they\u2019re not ready to do that and maybe you need to move on.<\/p>\n
Exactly. Yeah-<\/p>\n
Which gets into your point too about the source of these leads. If you\u2019re going to go to the market, you\u2019re probably going to see somebody trying to value it based on proforma income numbers, but if you can get directly to the seller \u2026<\/p>\n
Yeah. You said that more concisely than I did. That\u2019s really what it comes down to is, you\u2019re absolutely right. You cannot pay today for 100% of the work you\u2019re going to do. It\u2019s got to be somewhere well below that, and you have to have high confidence that you\u2019re going to get there.
Now, five, 10 years ago, you could pay for the absolute dead bottom of what it is today and then it\u2019s all on you. It\u2019s just got to be a reasonable spot in the middle. Also, I would say it\u2019s common to say in single family you make your money when you buy. In multifamily, that\u2019s really not true. In multifamily, you make your money through operations. That\u2019s how you make your money, by \u2026
Again, we\u2019re assuming you bought the right asset, the right market, all that stuff we\u2019ve talked about in other episodes, but you make your money in solid operations and increasing that operating income by increasing collections, decreasing expenses, all those things that go into it. That\u2019s one of the beautiful things about multifamily. In single family, you buy a house and the average price in that market goes down 30%, well yours probably went down 30% too.
In multifamily, your valued on a net operating income, so if you\u2019re a really good operator, you can still increase the value of your property in a flat or down market, even if everyone else is struggling. That\u2019s one of the really cool things, and that\u2019s part of why, again, with caveat, it\u2019s somewhat okay to pay a little bit for future performance because it is something that\u2019s in your control.<\/p>\n
Makes sense.<\/p>\n
I like your question, Pete. I\u2019m going to provide the same answer Andrew gave from a single family perspective so that people who are used to that investing asset class, which is a little more common, can understand the principle we\u2019re trying to make here.
When we say you make your money when you buy, it\u2019s based off of an understanding that you cannot rely on appreciation, which is a single family concept, like other homes selling for more in the area pushes up the value of this home, and so it drags it all up. Commercial properties, multifamily properties are not quite, they\u2019re not as simple as appreciation.
If someone buys an apartment complex across the street from you and pays more, it doesn\u2019t automatically make yours the same value. It depends on what rents you\u2019re getting, how well you\u2019re operating at the net operating income or just the profit at the end of the day is how you base it. There\u2019s certain times where you make your money when you buy is more important than in others.
Part of it could be the time, like the market in general. 2010, prices aren\u2019t going anywhere fast. It\u2019s very important that you get in under market value if you want to get what we call a deal. 2013, prices are kind of starting to move forward. You still want to be below market value, but maybe it doesn\u2019t have to be at 80% or 70% of value. If you\u2019re at 90% of value, it\u2019s still a pretty good opportunity.
Then you have 2022 or 2020. Rampant inflation, a very irresponsible fiscal policy by our country fueling fires everywhere, where we\u2019ve literally had buyers that two years ago, had a house appraise at 550, and they had it under contract at 560, and they walked away and said, \u201cI\u2019m not going to overpay,\u201d and two years later, it\u2019s worth 780. That principle doesn\u2019t age well. It ages like milk, not like wine.
I like what you\u2019re saying, and that is how we should be looking at it, but we can\u2019t be so rigid that we don\u2019t understand the overall macro principles that are at play and how they affect how we operate by these principles. To Andrew\u2019s point, if I had a chance to buy a single family home in Gary, Indiana, that I did not think would be appreciating much at all and I could get it at 95% of ARV, I would have to wait 10, 15 years before that started to make a lot of sense for me.
If I\u2019m buying it in South Florida in a suburb outside of Miami that\u2019s the next big thing to go off, I could pay 105, 110% of ARV, but in nine months it might have appreciated much more than that. In single family investing, the time you wait is equivalent to commercial investing, the effort you put. Those are the two resources that we measure.
There\u2019s only so much you can do to make a house worth more in a single family sense. You have to wait, but in multifamily investing, the effort you put into it can have a significant impact on increasing the value, so what you\u2019re looking for is, \u201cHow do I get maximum NOI for minimum effort?\u201d Any deal will work if you just stare at it all day long, and constantly talk to people, and market the crap out of it, and just study all day long. You could turn it into a job, but that\u2019s what we\u2019re trying to avoid.
That\u2019s what Andrew\u2019s getting into is, it\u2019s okay to pay over what it is worth, in quotes, if you see a very clear path to value-add that is not a lot of effort. That\u2019s easier money than if you\u2019re paying more than it would be worth on paper and it\u2019s going to be like walking through sand or mud to try to get there. Does that make sense?<\/p>\n
Yeah. It does, absolutely. I appreciate the insight. On that same note, real quick, Andrew, do you see, or David, do you see anything changing with rising rates?<\/p>\n
Yeah, that\u2019s, I do, definitely. One, already, we\u2019re starting to see overblown seller expectations get reined in a little bit. David, I think we see this in the single family too is, you\u2019ll hear media say, \u201cOh, prices are coming down.\u201d No, no, no, no. That\u2019s not happening.
It\u2019s just crazy, \u201cHey, I\u2019m going to sell for 20% more than the guy down the street who did last month.\u201d That\u2019s what\u2019s starting to go away is seller just saying, \u201cOkay. Well, the property next to me traded at a four cap, so I should get a four cap too.\u201d Instead of saying, \u201cWell, now I\u2019m going to get a three cap because that\u2019s one month later.\u201d That is starting to go away. The buyer pool is thinning out a little bit, whereas, six months ago, we might have had \u2026
We actually have two properties listed for sale right now. Where six months ago, we might have had 30 buyers, now we\u2019ve got 10. It\u2019s still a good buyer pool. It\u2019s just not the feeding frenzy that it was. That\u2019s what\u2019s happened so far. Going forward, I see, I\u2019m hoping for things like hard money going away. Five years ago, you had 30 days to do your inspections and then you had a financing contingency. Meaning if your loan blew up at the last minute, oh, well. Seller has to give you the money back and you\u2019re out.
Then, as you probably know, Pete, since you\u2019ve been listening to BP and checking out deals, now it\u2019s like, \u201cAll right. If it\u2019s a million dollar property, we want $100,000 nonrefundable deposit day one.\u201d That money is the seller\u2019s, almost no matter what. As the market shifts to a more balanced buyer-seller market, I think that will start to go away. Candidly, I hope that goes away. That\u2019s one of the things I\u2019m looking forward to as this market shifts.
Then the third thing is, well, I don\u2019t see, in most good markets, significant valuation declines for multifamily. For that to happen, there\u2019s going to have to be a whole lot of motivated sellers and that\u2019s tough to see right now because most sellers, if they don\u2019t get their price, they\u2019re just going to hold. Most multifamily are making so much money that it\u2019s like, \u201cWell, if I don\u2019t get my price, I\u2019m just going to keep it.\u201d
That\u2019s how our portfolio is. It\u2019s 35% LTV and rolling off all kinds of cashflow. If we can\u2019t get a good price, we\u2019re just going to keep it., so I don\u2019t foresee a huge decline in pricing, especially with inflation going up, and replacement cost going up, and all of that.
I do see the market shifting to be a little bit more balanced between buyers and sellers, which for those of you who have been out there for the last five years going, \u201cAh, I can\u2019t get a deal,\u201d I think it\u2019s going to start getting a little bit easier. Not easy, just easier.
The final thing I want to add in terms of what I think might be changing is, a lot of people took out really high-leveraged bridge loans in the last couple years. 70% of transactions were done that way, and if rates go up too far and stay that way for a couple years, there actually might be some motivated sellers who can\u2019t get out of their bridge loan that\u2019s due next year or the year after, and that\u2019s where savvy investors, like all of us, can come in and get a deal and not pay for future performance. Those are some of the things that we\u2019re seeing now and I think it\u2019s going to lead to.<\/p>\n
Sounds good. I appreciate that. I could pick your brains all day and ask you a bunch of questions, but I\u2019ll stop there. Appreciate it, guys. Thank you very much.<\/p>\n
All right. Take care, Pete.<\/p>\n
Thank you, Pete. Matt, the author of the BiggerPockets book on raising money. What\u2019s that? Raising Private Capital? Is that the name of it? Oh, there it is right there.<\/p>\n
Raising Private Capital. Thank you.<\/p>\n
Wonderful.<\/p>\n
I love that Andrew talked about raising money from investors for quite a while, and I\u2019m sitting here like, \u201cOf course, he\u2019s going to mention my book because we\u2019re friends. He knows my book. It\u2019s a BiggerPockets book,\u201d whatever. He didn\u2019t mention my book and that\u2019s okay, and that\u2019s okay. I still love you, Andrew.<\/p>\n
[inaudible 00:41:50]<\/p>\n
My book is Raising Private Capital. If you want to hear more about raising equity from investors, check out the Amazon bestseller, BiggerPockets book, Raising Private Capital.<\/p>\n
Well, hey, at least we know you\u2019re not going to ask the question about how to raise capital.<\/p>\n
I will not. Wouldn\u2019t that be great? \u201cI\u2019m looking to get started in raising money, Andrew. I want to talk to you about that.\u201d No, man. I want to talk \u2026 As you may know, I\u2019m leading the BiggerPockets multifamily bootcamp, and it\u2019s been going great. We just concluded our first one. We got another one coming up, which we can mention here.
I get a lot of recurring questions, guys, and I wanted to bring those questions here to you guys to discuss, bootcamp questions that come up on a regular basis, and just get your take on \u2026 Because I have my answers to these things, but I\u2019d love to hear what you guys think to these recurring questions that a lot of folks that are looking to get into or expand into multifamily have. What do you guys think?<\/p>\n
Let\u2019s do it.<\/p>\n
Let\u2019s do it.<\/p>\n
Okay. Both of you have already heard these questions, but I\u2019d love to know what you think. Number one, \u201cI\u2019m a new investor and I\u2019m having a problem finding deals. Then, I\u2019m going to the deal tree and the deal tree is not yielding fruit right there, right in my hand. I\u2019m not able to just pluck a deal right there off of the tree. Good deals are hard to find.\u201d Aka, \u201cHow do I find good deals? What are your tips to finding good deals in the multifamily market?\u201d<\/p>\n
If you\u2019re looking for deals in the deal tree these days, you\u2019re going to have to get a six-foot tall step ladder, one of those extendable fruit pickers, and aim for the very, very top of the tree. Then you might be able to get something, so-<\/p>\n
Cut the tree down, right?<\/p>\n
Yeah, or just cut the tree down. There you go. Like that story The Giving Tree. You pick the fruit and then you just cut the whole thing down.<\/p>\n
That\u2019s the worst tree ever.<\/p>\n
Oh, that\u2019s a sad story. It\u2019s a sad story.<\/p>\n
That dude is a jerk to that tree, but anyway \u2026<\/p>\n
Yeah, we talked about in the \u2026 Number one, I think the fruit on the tree\u2019s going to start regrowing a little bit lower in the future, so that\u2019s the good news for everybody, but it doesn\u2019t mean it\u2019s going to be really easy.
How to find deals, number one, I see a lot of people make the mistake of like, \u201cOh, I\u2019m looking at a deal in Indiana, and I\u2019m looking at one in Boston, and I\u2019ve got this one down in Florida.\u201d They\u2019re just all over the place. Just anything that shows up in their email inbox is something they\u2019re going to look at.
Number one, pick a geography and stick to it. When you pick that geography, pick one that has the right tailwinds for multifamily. Population growth, job growth, strong median income, all those things that we talked about back in, I think it was episode 571, of how you pick a market and submarket.
The first thing is be very firm and decide on, \u201cThis is where I\u2019m going to look for deals.\u201d The second thing is, decide exactly what kind of deal you\u2019re looking for. Are you looking for 20 units or are you looking for 200? Are you looking for 1960s value-add or are you looking for 2010 construction that you just paint it and call it good?
Nail down exactly what you\u2019re looking for. That does two things. Number one, that helps you quickly process everything that comes into your inbox. At this point, I literally probably get 50 properties emailed to me every single day. Some of them are repeats, but literally, 50 or more a day. I can delete 49 of those because they\u2019re the wrong areas, they\u2019re the wrong size, they\u2019re the wrong age, they\u2019re tax credit, all these things that we don\u2019t do. I can get it down to one, \u201cOoh, this is the one that we need to look at,\u201d so clearly define what you\u2019re looking for, that you can do that, so you\u2019re only spending time on deals that fit your investment goals and your investment criteria. That\u2019s what Brandon talks about in his crystal clear criteria.
Now, once you have your crystal clear criteria, this other benefit of that is you make sure that all of your relationships understand your crystal clear criteria so that all the brokers you work with, all the, maybe if you\u2019re dealing with wholesalers or any source of deal that you work with, make sure that they understand that criteria.
If you\u2019re looking for a 20-unit property in Dallas or Fort Worth that was built between 1990 and 2010, and you keep looking at those, and every time a broker has one of those, you talk to that broker, and you give them feedback, so that after six months or whatever, that broker talks to a guy who\u2019s owned it for 10 years and he\u2019s like, \u201cYeah, I might consider selling it.\u201d That broker goes, \u201cOh, Matt is the guy for this deal.\u201d
He calls you, says, \u201cHey, I\u2019m going to send you this off-market deal. Let\u2019s see if we can just put it together. I think it\u2019s a great fit for you. This guy might sell if you give him the right number.\u201d That\u2019s how you get the off-market deals that are really good deals and that you\u2019re not necessarily overpaying or getting into bidding wars.
That\u2019s really the key to doing it in these markets, is knowing clearly where you\u2019re looking, what you\u2019re looking for, and then building the relationships to not only bring you those deals, but so that keeping those relationships fresh and active so that when that deal pops up, whoever sees it thinks of you first. That is how we get 90% of our deals.<\/p>\n
That\u2019s brilliant. Thank you.<\/p>\n
I think that is great advice. I would say that\u2019s better than the advice I\u2019m going to give, but because \u2026 Sorry. Because Andrew took the best donut in the box, I\u2019m going to try to be like, well, this one\u2019s kind of crumbling falling apart, but it\u2019s better than-<\/p>\n
I got the chocolate sprinkles one.<\/p>\n
That\u2019s it, man. I got the plain, like there\u2019s no glaze or there\u2019s no topping. It\u2019s just like the boring donut that I don\u2019t even know why they make. It\u2019s just the bread, but for some reason, they make them, and even a more weird reason people buy them. That\u2019s what I am. I\u2019m that donut that has no topping.
Here\u2019s the advice that I was going to give. Andrew\u2019s advice is better. It is safer and it is going to build you wealth better. If you can get the better deal by just working harder to get it, yes. There\u2019s also a scenario, like where I\u2019m saying, your strategy has to adapt to the market itself.
When you\u2019re in a situation where prices are just solid, rigid, they\u2019re not going to move because demand has gone down, or you\u2019re in a market where it\u2019s like that, you have to be extra careful when you buy. When you\u2019re in a market where a reasonable person would expect that demand is going to continue to increase and maybe supply is constrained. The deal that Andrew and I are buying together right now, they can\u2019t build there. It\u2019s incredibly difficult to get any real estate. It\u2019s landlocked and there\u2019s a buttload, that\u2019s a technical term, of Americans that are moving into this city.
As we see demand increasing, we see supply is restrained, it would be almost an act of God in order to see that not happening. In those situations, it\u2019s not always about the price. It\u2019s about, like Andrew said earlier, the management. In today\u2019s market, you need to ask yourself, where do you have a competitive advantage? Do you have a contactor that you know that can do the job for 80,000 and you\u2019re being bid 150,000 by everyone else? Well, your competition\u2019s probably getting $150,000 bid, so if you can get someone you know that you trust that can do that work, you can pay more than somebody else and still get a good deal.
Now, in this case of the deal we\u2019re putting together in Fort Walton, we have management that is already there that is already managing other properties and we believe we can do it much more efficiently than other people, so that deal makes a lot more sense for us than it would be for someone else.
Long story short, yes, beat the bushes, turn over the rocks. Find the deals before they hit the market, but even if it is on-market, if you have some kind of a competitive advantage that allows you to operate it cheaper, or better, or add value in ways other people don\u2019t see, that\u2019s a good plan B.<\/p>\n
That\u2019s awesome. I want to \u2026 Here\u2019s what I tell people, and I\u2019m going to sum up both what you guys said with here\u2019s my icing on the top of the cake that you guys just baked right there, is that, yes, pick a market. Drill down, have your crystal clear criteria. Have your unfair advantages, the contractor that can do it for cheaper, whatever.
You obtain those things, you drill into those markets, you build those relationships by going to the market in person. I cannot tell you how many people I\u2019ve talked to in the bootcamp and in my travels, and people say, \u201cMan, I really want to buy a deal in Columbus, Ohio. I love that market. I\u2019ve done my research and my homework. That\u2019s my jam. I want to buy a deal there.\u201d
I\u2019ll say, \u201cOkay, great. How many times have you been to Columbus?\u201d \u201cOh, I\u2019ve never been there.\u201d It\u2019s like, \u201cWell, I\u2019ll bet you\u2019ll never do a deal there because you\u2019ve never \u2026\u201d That is the bottom line. If you\u2019re going to choose a market, the way you\u2019re going to build an unfair advantage, the way you\u2019re going to meet that contractor that can do the job for 80 grand instead of 150 is go to that market, go to the local rehab, meet them on BiggerPockets, meet the broker that\u2019s going to truly send you off the market stuff.
Whatever it is. Build an unfair advantage by traveling to that market and networking yourself in person. Look at people dead in the eye, and buying them a cup of coffee, and sitting down and chatting with them face-to-face. Anyway, so that\u2019s what I tell people on finding deals. You guys know that as well, so good stuff.
That is far and away the most common question I get from those that are trying to get into or expand into multifamily is finding deals. It\u2019s a tough market, I get. All three of us still, we don\u2019t connect on every pitch that we swing at either. That\u2019s just the nature of the game right now. Another way to find good deals is by you look at a lot of deals. You know?<\/p>\n
Yep, yeah. It\u2019s not easy at all, but it is absolutely worth it.<\/p>\n
That\u2019s a good point. What I\u2019ve been telling the agents on my team when we talk about this is that things are either going to be easy on the front-end and hard on the back-end, or the other way around. There is no situation where both ever happen.<\/p>\n
Yep.<\/p>\n
What we see right now is that just about everybody buying real estate is making money. A lot of that\u2019s not because they\u2019re so great. It\u2019s because inflationary pressure\u2019s pushing things upward, so then everyone runs to that market and they go, \u201cOh my gosh. Everyone\u2019s making money in real estate. Let me do it.\u201d That\u2019s why a lot of people are listening to a podcast like this. The market is awesome.
Well, inherently in that scenario means it\u2019s going to be harder to get into it. There\u2019s other people that ran there and that\u2019s why it\u2019s good. When you see the opposite, like 2010 when it was very easy to get in, you heard a lot of people that didn\u2019t want to do it because the back-end looked like it was going to be rough.
You just have to accept that this is the way life works. If it\u2019s easy when you first get there, it\u2019s going to be difficult. I tell the agents it\u2019s like working with buyers. It\u2019s not hard to find a buyer that\u2019s willing to work with us right now. Everybody, all the buyers want to work with us, but there\u2019s no houses to sell them, so you get the buyer client, it was easy. Then the job is super hard to put them in a contract.
It\u2019s very difficult to get sellers, and so no one wants to do it. They\u2019re like, \u201cOh, but sellers, they\u2019re so demanding. They want me to interview against other agents. They call me every day, and it\u2019s easier with buyers.\u201d Well, yeah, but you get a listing, it\u2019s almost guaranteed to sell. It\u2019s easy on the back-end, so that\u2019s just something in life that I have learned.
Don\u2019t forget that because everyone hears talk of real estate is exploding, but their expectations when they get to the party is that it\u2019s easy to get in the door. It\u2019s not. That\u2019s why it\u2019s doing well, so like you guys just said, you got to look at more deals. You have to look for advantages that other people don\u2019t have. You have to have a knowledge base that other people \u2026 Literally because multifamily investing has been making people so much money, but that\u2019s why you want to do it, so just expect it\u2019s going to be hard when you get there.<\/p>\n
Yeah.<\/p>\n
You know what it is? It\u2019s like saying, \u201cMan, those guys at the CrossFit gym are in such good shape. I want to look like that.\u201d Then you get there and you\u2019re like, \u201cWhoa, this is so hard. What\u2019s the easy workout? Can I do that one?\u201d Then if you go do the easy workout one, you don\u2019t have the benefits of the CrossFit workout, right? You look the same.<\/p>\n
You\u2019re not going to look like the guys at CrossFit gym.<\/p>\n
Yes.<\/p>\n
Right.<\/p>\n
There you go. Andrew, it\u2019s hard work, as you said, and it is but it\u2019s worth it. That\u2019s how you get the shredded body. That\u2019s how you get the awesome portfolio. That\u2019s how you get the lifestyle that real estate can yield is through a ton of hard work, and yeah, it\u2019s hard. Most of it\u2019s fun. Sometimes, you got to pluck out thorns. As we were saying, Andrew, sometimes it gets tough but it\u2019s actually fun sometimes too.
Guys, interesting time to bring this up. Speaking of CrossFit gyms, and thank you for that analogy, David. BiggerPockets and I have put together a phenomenal bootcamp that\u2019s going to make you into the shredded real estate investor that you want to be, the shredded, multifamily investor. It is the BiggerPockets multifamily bootcamp.
You guys can access that by going to biggerpockets.com\/events, biggerpockets.com\/events. Seats are limited. I believe that the registration closes down on May 15th on that, so check that out now. It\u2019s something you guys can join in on. It is a 12-week program that\u2019s participated in by hundreds of other real estate investors you can network with, you can form small subgroups, accountability groups.
There are folks that have gotten together and done deals together from the last bootcamp, so if you want to meet people that are like-minded that have drank the BiggerPockets Kool-Aid, as you have, that are willing to get out there and do the capital W work that Andrew talked about, the BiggerPockets bootcamp is a great way to meet people, get the tools from myself and my team that\u2019s going to make you successful, and as David said, join the CrossFit gym of multifamily real estate investing that is the BiggerPockets multifamily bootcamp. See you there, guys.<\/p>\n
Our first question today was the five things to commit to learning. You\u2019ll learn all those things at Matt\u2019s bootcamp with BP.<\/p>\n
Hello, Jake. I am so glad you could join us on the podcast. How are you, my friend?<\/p>\n
I am fantastic, David, Andrew.<\/p>\n
Good to see you, man.<\/p>\n
Jake has had to wade through the swamp of scheduling craziness, then a bunch of technical difficulties that he had to fight his way through as well. He\u2019s also buying really good properties at a really hard time, and Jake is smarter than just about everybody that he comes across.
He\u2019s got that Elon Musk thing where it\u2019s very hard to communicate with people that are not him because he has to figure out to get a 3D perspective into a 2D brain. He often has this problem when he talks with me. Yet, in spite of all that, we\u2019ve got him here on the podcast. Jake Harris, thank you for joining us.<\/p>\n
Well, thank you for having me. It\u2019s a fun, pleasurable, nice Friday.<\/p>\n
I just realized, you look like you definitely could be my brother. We have the same head and beard thing happening right now.<\/p>\n
I think we go to the same barber, at least.<\/p>\n
That\u2019s probably true. What do you have for us? How can we help you today?<\/p>\n
I develop some multifamily, and the construction, we\u2019re doing real heavy value-add multifamily deals, and we\u2019re seeing a significant challenge coming in. A lot of projects are blowing up from interest rates. We have supply chain issues, material that\u2019s just not available for many, many months. Andrew, you\u2019d mentioned earlier some questions about your competitive advantage of operations or really forced appreciation items that you have when you\u2019re moving into a market.
What I\u2019m looking at is, the interest rates are making it so that some buyers will no longer be able to buy houses, and they\u2019re going to be renters for longer time periods. Supply will not be coming online because they\u2019re getting blown up from longer time periods, permitting issues, supply chain, all that, so there\u2019s not going to be new supply and there\u2019s now a big swath of new renters that were trying to be homeowners that have now been pushed back into that renter bucket.
What are some of those operations that you\u2019ve seen or the technical details of the operations and forced appreciation on that multifamily value-add that you\u2019ve seen that\u2019s been most successful, given somebody like me that\u2019s trying to get into that space? I\u2019ve never really done the value-add to your thing. I\u2019ve always just built the project.<\/p>\n
All right. Good questions. You bring up a lot of things that are 100% true and I think, if forgotten, is it\u2019s very easy for a lot of us to be like, \u201cOh my gosh. Interest rates are going up. The sky\u2019s going to fall. Everything\u2019s going down. Cap rates are going up. It\u2019s the end of the world. We got to get out and go back, and I\u2019m going to go work as a Walmart greeter.\u201d That\u2019s not the case because there\u2019s other factors.
Like you said, Jake, as interest rates go up, that makes it that much more difficult for people to purchase a house. What are they going to do? They\u2019re going to go rent apartments. Or they might rent a house, but either way, they\u2019re going to add to the demand of rentals. Then, again, something else that you said. It is getting harder and more expensive to build new apartments.
Same as you, I\u2019ve seen development deals either blow up or get delayed by years because of the supply chain issues, and because of rates going up. That\u2019s taking off the supply side so that increases the demand for rent. Well, it doesn\u2019t increase the demand, but the existing demand is harder to satisfy. Therefore, rent goes up. Then the properties that do still manage to get completed, they have to charge that much higher rent just to get the property to pencil out, and so as new properties come online with sky-high rents, it has a tendency to drag the entire rest of the market up with it.
Yeah, there\u2019s the negative effect of, okay, higher interest rates make it harder as a buyer to maybe underwrite an apartment complex, but it also creates all those other positive factors that you just brought up. That leads to, \u201cWell, okay. Either if I\u2019m not able to, or I don\u2019t have the education yet to take on the risk of development, what do I do?\u201d Okay, well, yeah, that\u2019s the value-add aspect.
What we\u2019re finding, the greatest value-add opportunities right now \u2026 I\u2019ll try to go in order of decreasing risk to increasing risk. What I mean by that is execution risk. The context of the question is, is operations. What is under your control? How do you adjust your operations to create value? The risk is, \u201cWell, are you able to execute that?\u201d
The lowest risk, in my opinion, one of the lowest risk value-add strategies, and the one that actually is quite abundant these days, we\u2019re finding it\u2019s not easy but it\u2019s out there. We\u2019re finding amazing opportunities in this, is that many property owners, for a variety of different reasons, have not kept up with the dramatic rent increases of the last 18 to 24 months.
I mentioned, a couple of questions ago, a deal that we had closed last month where the owner of it, it\u2019s a beautiful property. Built, it\u2019s only 10 years old. High-level finishes. It\u2019s a great, great asset, but they had not moved rents at all, not a dollar in three years. That is what, basically, we call loss to lease value-add, meaning the real market rent for a two bedroom at that property should be $1,100, but they\u2019re leasing it at 800, so they are losing $300 a month to that lease.
Once you do the analysis to confirm that that\u2019s the case, that is your lowest risk, highest return value-add strategy is coming in with good management, good marketing, all the things that go into pulling renters to your property and just leasing it for what it\u2019s worth. Bringing the property up to current market rents, like I said, we call that \u2026 Some people call it a management play but it\u2019s also just taking advantage of loss to lease. That is, by far, our best return risk ratio value-add that we find, and it is very abundant right now.
It\u2019s more abundant now than it has been in the last eight years, in my opinion, because there are quite a few owners who just did not keep up with the big ramp-up in rents that we had the last few years. An additional benefit of that and another thing that makes it a low-risk activity is you\u2019re not counting on market appreciation to create value. You\u2019re just saying, \u201cHey, I\u2019m just going to get it up to where it is today.\u201d
If rent growth were to go to zero and flatline for the next three years, your value-add strategy still works because all you\u2019re counting on is just getting it up to where it is now. Again, it\u2019s very low-risk. It\u2019s very typically not capital intensive. You\u2019re talking about a website. You\u2019re talking about marketing. You\u2019re talking about proper staff to handle leasing and all that. It\u2019s very low capital intensive, so that\u2019s another benefit of that.
The second one that we\u2019re finding is very effective in today\u2019s market is adding simple amenities such as dog parks, playgrounds, grilling stations, outdoor gazebos. If we buy a property with a pool, we\u2019ll go in and put beautiful new pool furniture.
Stuff where if you got 100-unit or even a 20-unit property, if you rehab one unit, your return on that investment is from that one unit. If you have a 20-unit property and you add nice landscaping or a nice dog park, the return is times 20 because that affects all 20 families that are living in your property. That\u2019s the next thing that we\u2019re finding is the lowest capital expenditure, and the highest impact, and the lowest risk is, I would call simple amenities. Again, the dog park, the grilling stations, gazebos, all that.
Then also, in the exterior is, just make sure your property looks nice. Seal and stripe the parking lot. What that is, is that\u2019s when they come in, they put the black tar on it. Then they let it dry, and then they paint the white stripes. It\u2019s not that expensive but has a huge visual impact on the property. When a potential resident comes in, they go, \u201cWow. They take care of this place. Look how fresh and clean this looks.\u201d
Landscaping is, in our experience, one of the best returns on investment also. Also, I think it\u2019s one of the most ignored aspects of property, especially multifamily. We spend a lot on landscape, and we get a huge return on that. It\u2019s hard to quantify exactly, is it $37 per azalea bush, or whatever? No one cares how the inside of your units look if the outside looks crappy, because they\u2019re never going to see the inside because the outside looks crappy. Landscaping and some simple exterior improvements are, I\u2019d say, number two.
Then number three is light to moderate interior value-add, especially if you\u2019re buying properties that are 10, 20, 30 years older. We find we\u2019re getting huge returns on simple things like tile backsplashes. If you do it with your own labor, it might only cost $300. If you have a vendor do it, it might cost 1,000, and you can get 50, $100 rent increases a month. That pays for itself in a year.
If you\u2019re in the South, in the Sunbelt like a lot of listeners are, ceiling fans. Add ceiling fans to the bedrooms, and if you can, the living room. That is huge in places like Florida, and South Texas, and along the Gulf Coast. Think of things that people touch and see every day. Lighting fixtures, doorknobs. Again, those high-traffic, high-touch things that really aren\u2019t that expensive to replace.
We\u2019ll go into a property \u2026 That one that I talked about was built in 2011. They had very simple faucets in the kitchen. Beautiful kitchen. Granite countertops, nice cabinets, real wood, cherry wood, all this stuff, and then just like a faucet that belongs in a bathroom. We\u2019re putting in the nice gooseneck faucets where you can pull the little sprayer out and spray the kids to get them out of the way, or wash dishes easily, all that kind of stuff. A couple hundred dollars installed, but a huge impact.
Those are the, I\u2019d say, probably the top three things that come to mind in terms of executing a business plan and operations. I\u2019ll pause there in case you have any follow-up or any additional comments. There\u2019s also just ongoing operations things, but those are the first three big things that come to mind.<\/p>\n
Yeah, that\u2019s great advice. Obviously, I don\u2019t think I\u2019ve thought about that, the landscape being something that return on investment to every single unit. The percentage of increase versus \u2026 Actually, maybe some of those, just raising the rents. You can raise the rents a lot more just by doing some of that landscape.
With that, if you\u2019re doing, maybe the question is, is like are you looking into xeriscape or things that have lower expenses on some of your landscape when you do that? Meaning, less water, or mowing, or expenses and trying to drop some of those ratios as well? Or do you get into that technical detail of that when you\u2019re coming in and enacting a landscape plan?<\/p>\n
We do. Most of our markets, xeriscaping doesn\u2019t really apply because we\u2019re in the Southeast where it rains a lot most years. What we do do is we\u2019ll go \u2026 It\u2019s funny. If anyone\u2019s who\u2019s owned property in the Southeast is probably familiar with this, where it\u2019s called pine straw. It\u2019s where your landscapers come in, and they rake up all your pine needles.
They charge you to do that. They take it offsite, they package it up, and then they sell those pine needles back to you as pine straw, and they put that down in all the flowerbeds and, basically, it\u2019s like a cheap mulch. That\u2019s really common in places like Georgia, the Carolinas, and Florida, but there\u2019s a cost to that. It\u2019s like four and a half or $5 a bail for that pine straw. If you\u2019ve got a large property, that adds up to thousands of dollars a year.
One of the things we\u2019ve been doing, and had a lot of success with that goes along with what you\u2019re talking about, Jake, of not only does it have a one time impact of improving the look of the property, but it has an ongoing impact on your NOI, which is there\u2019s a big multiple applied to NOI, is we look at things like, okay, there\u2019s these flowerbeds, and we have to pay for pine straw or mulch twice a year. If we pay a little more upfront and change that over to stone, or lava rock, or something similar, then that ongoing expense goes away.
It saves on watering. You do it once and it\u2019s good for five years. You want to make sure you don\u2019t put something in a high-traffic area where kids are going to throw it through windows, but other than stuff like that, yeah, absolutely. We look at, can we eliminate irrigation? Because irrigation leaks. It costs when you irrigate. There\u2019s problems, there\u2019s maintenance costs on that, so yeah, absolutely, when you\u2019re looking at your upgrades and your operations, you\u2019re considering not only the one time cost but the ongoing, and so yeah, that\u2019s a great example that you brought up.<\/p>\n
One of the things, and I\u2019m going to maybe add onto a little bit more dynamic of question. In some of our projects, we are charging for internet, bulk, bringing in fiber, doing some things like that. Then we\u2019re getting batch or wholesale rates that we\u2019re then charging to tenants.
With some of these value-add projects that you have, or call it the \u2026 Is that a possibility? Are you doing that as well versus some of the new construction? Because we have open, empty walls, it\u2019s pretty easy to do that versus a value-add, \u201cHey, how can I get more internet charges, or chargeback?\u201d If that\u2019s five bucks, 10 bucks a month and times 12 months, times how many units, that\u2019s a very good toggle of NOI, and at a five cap, it represents hundreds of thousands or millions of dollars in very incremental ways.<\/p>\n
It\u2019s funny you bring that \u2026 I literally signed one of those agreements about 20 minutes before we started this podcast, to do that very thing. The short answer is, \u201cYeah, absolutely.\u201d Like you mentioned, it\u2019s a little easier when you\u2019re building a thing to put whatever you want in the walls. We do try to avoid stuff where you got to go in and cut open lots of walls. That can get really, really expensive.
As an example, the agreement that I signed today, it\u2019s for a company where they will come in at their expense, and they will lay fiber-optic throughout the entire property at no cost to us. In fact, actually, they pay us a fee for the right to do that. Then that gives our property incredible internet speeds.
Then it\u2019s up to that provider to market to the residents. It\u2019s not exclusive. The residents aren\u2019t forced to use it. I tend not to like stuff where we\u2019re forcing the resident to do something and take away their choice. Because I know, as a resident, I don\u2019t like that, so we prefer not to do that with our residents. It gives that provider the exclusive right to market to our residents, so they still have the choice but only one person\u2019s going to be directly marketing to them.
Then it\u2019s set up on a revenue share agreement. For every dollar that comes in, we get X percentage of that, and so every quarter, we get a check from the internet provider who laid the fiber-optics, and like you said, that goes straight to the NOI. Then you apply a four, or a five, or whatever cap rate to that, you just increased the value of your property quite a bit.
Another one we\u2019ve had pretty good success with is washer\/dryer leasing. If you look at surveys of tenants and renters over the years, consistently, the top amenity that everybody wants is in-unit washer\/dryer connections so they don\u2019t have to walk through the heat, or the rain, or the freezing cold to go to the laundry room, and then find out someone took all eight units and left their crap in there since this morning, and it\u2019s just sitting there.
Everyone wants their own washer\/dryer connections, but some people don\u2019t want to drag around the actual units. What we\u2019ll do is we will lease them for maybe $35 a month, and then have that company come put them in. Then we give residents the option to lease them from us for maybe $55 a month, so there\u2019s a $20 margin there, and like you said, times 100 units, or 200 units, or even 20, that adds a lot of value to your property because that goes straight on the NOI.
Some of the benefits of structuring that way is if the unit breaks, it\u2019s not our problem. The company that leased it, they come fix it. If the tenant moves out and the next tenant doesn\u2019t want a washer\/dryer, we don\u2019t have to move those things or figure out what to do with them. The leasing company comes and does that. That\u2019s a very easy, beneficial arrangement.
On some of our properties that only have one story, we actually will buy the units ourselves, and then just lease them, and it pays off in sometimes less than a year, so that\u2019s a pretty good return on investment. Yeah, those are two that we definitely, that we do regularly, and there\u2019s other along those lines that you can do.<\/p>\n
Awesome. Yeah, those are some nice \u2026 I haven\u2019t thought about that. Washers and dryers. Little nuggets like that, an extra $20 a month, times 50 units, times 12 months, times at a four cap, boom. Look at that.<\/p>\n
Well, and another really easy one that\u2019s like almost zero dollars, preferred parking. Just have your maintenance guy go out with a couple of stencils and some paint, and number a few parking spots that are right in front of units and say, \u201cHey, $15 a month, you get your own preferred parking spot.\u201d That\u2019s almost like free revenue. Now, I don\u2019t recommend doing the entire property that way because it can be a nightmare to manage, but if you do a select handful, it\u2019s almost like free extra income.<\/p>\n
Awesome.<\/p>\n
Jake, thank you very much for joining us. Also, I should mention I know Jake from a group I belong to, GoBundance. If you want to get to know me, Jake, and Andrew, who are actually all in that group, you should check out GoBundance because it\u2019s a good time and there\u2019s a lot of smart people there. As you can see, if you join, you\u2019ll become better looking like Jake, just by joining right there.
Thank you very much, Jake, for being here. Andrew, also, thanks to you, my man. This doesn\u2019t feel like a podcast when we do it with you. It feels more like a masterclass. This is what people usually pay money to get taught, and you come on and you don\u2019t hold anything back. You give a lot of actionable stuff, so everybody that\u2019s out there, send Andrew some love. Andrew, if people want to get ahold of you, what is the best place to find you, and how can they help you and your business?<\/p>\n
Yeah, first, of course, connect with me on BiggerPockets. LinkedIn, I\u2019m on there as well. Then the easiest way to get a direct connection is just if you search Vantage Point Acquisitions, you should easily find our website. It\u2019s vpacq.com. There\u2019s a number of ways to connect with us on there.
Anybody who happened to listen to our episode number 571, I mentioned that we were hiring an analyst, and that person came from the BiggerPockets community. We\u2019re adding another BiggerPockets member to our team. They are phenomenal, and we\u2019re super excited about that.
We\u2019re going to do that again. We are actually now looking for a full-time investor relations manager, so if you\u2019ve got strong organization and system skills, you\u2019re detail-oriented, you\u2019re a strong communicator, and you have a general interest in real estate, which I\u2019m guessing you do if you made it this far into the podcast, please go to our website. Click on the little thing, I think it\u2019s says, \u201cWe\u2019re hiring\u201d tab and apply there. We hope we can add another awesome BP community member to our team.<\/p>\n
That would be great. There\u2019s a lot of talent out there in BP that wants to get deeper into real estate, so if that\u2019s you and you know you have something to add, please do contact Andrew.
If you are looking to invest with us in the deal I talked about earlier in Fort Walton, we are still raising money for that. You can go investwithdavidgreene.com, register. Unfortunately, this is only for accredited investors. People always get mad at me when I say that. That\u2019s not my rule. I would prefer if it didn\u2019t have to be that way. That\u2019s the SEC\u2019s rule, and this is me trying to stay out of prison by saying that, so don\u2019t get mad at me. Get mad at the SEC or whoever it is that makes those rules.
Then, you can find me online at davidgreene24 on LinkedIn, Twitter, Instagram, pretty much everything other than TikTok, where I am official davidgreene because somebody stole davidgreene24, and maybe they stole davidgreene one through 23 while they were at it. I\u2019m not sure.
Hey, we want to hear from you, so if you\u2019d like to be featured on a podcast like this, you want to come in and ask your questions, whatever it is, please go to biggerpockets.com\/david. Leave your questions there. We will get you one of these Seeing Greene episodes. We need good questions, and we had great questions today from people like Jake, so please, we want to hear from you as well.
Last thing is, please leave us a comment if you\u2019re watching this on YouTube. It\u2019s really easy. You can hit the like and the subscribe button at the same time, and then go down there and tell us what you liked about the show, what you liked about what Andrew said, if you\u2019d like to have Andrew on more, what type of stuff you\u2019d like us to talk about. We look at those comments, so does our producer, and we make shows based on what we see people saying, so please don\u2019t be shy. Get in there and let us know. Andrew, any last words before we get out of here?<\/p>\n
No, I really enjoyed this. This was fun. I feel like I should be asking some of these guys questions myself, especially Jake here, but this was a good time. I enjoy it.<\/p>\n
All right. Well, thank you. Everybody listening, go listen to another episode if you\u2019ve got some spare time. If not, stay tuned for the next BiggerPockets show. This is David Greene for Andrew Hawkeye Cushman signing off.<\/p>\n
You went down the donut hole metaphor. I love it, yeah.<\/p>\n
I can make an analogy out of anything. It\u2019s literally the only reason I\u2019m on this podcast. I don\u2019t think I really know anything about real estate.<\/p>\n
I want to compliment, you were rubbing off on Andrew, by the way,<\/p>\n
\u201cHappier than a four-year-old in a Batman t-shirt.\u201d Not bad, not bad.<\/p>\n
Thank you. Thank you.<\/p>\n
That was awesome, but up there with, \u201cSome things age like wine, other things like milk.\u201d That was awesome too. I wrote both of those down because I\u2019m stealing both of them.<\/p>\n
Isn\u2019t a block of cheese really just a loaf of milk, if you think about it?<\/p>\n
All right. We\u2019re way off topic.<\/p>\n