Is This the BIGGEST Multifamily Opportunity in 10 Years?

Matt:
This is the Bigger Pockets podcast show number 711.

Andrew:
I feel like we’re going to see opportunities we haven’t seen in 10 years. When I look back at 2012, 2013 and 2014, my only regret is I didn’t buy more. I didn’t have the capability. My mom wrote my first check as a syndicator and then it took a long time to get everybody else to join in. So I’m looking at this now as this is coming up, probably starting mid 2023 is going to be the time to scoop up deals that otherwise were unobtainable for the last five, six, seven years. And for those listening who the last three years have been frustrating because you can’t get in the market because there’s no deals out there, the deals are coming. And then also, not to be morbid, but you’re going to have a lot less competition.

Matt:
Welcome everybody to the Bigger Pockets podcast. My name is Matt Faircloth and I am the co-host of the Bigger Pockets podcast. And I want to bring in one of my besties, one of my friends, the host of the Bigger Pockets podcast today. Not really the host, but you and I stole the microphone didn’t we Andrew? We stole the mic and we are now running the Bigger Pockets podcast. Who knows what’s going to come out of our mouths today, right?

Andrew:
Yeah. David went off to Mexico and left his link live and you and I are going to jump in and see what we can do.

Matt:
Oh, what could go wrong? It’s great. But quick Andrew, tell me how you are today.

Andrew:
I am good. I am staying positive and testing negative.

Matt:
Can I steal that?

Andrew:
Yeah, give me credit the first time and the rest of the time it’s yours.

Matt:
Okay, cool. If we’re going to be stealing the microphone, do you promise me you’ll have lots of awesome Andrew Kushman analogies and cool straight faced humors and David Greene analogies as well we can use throughout the show?

Andrew:
Yeah, I’ll do my best. I’m a little nervous filling in for the Green and I forgot to put on my tank top so I’ll channel him as best as I can.

Matt:
No way I’m filling those shoes but I’m happy to hold his microphone for him just for a second here.

Andrew:
Sounds like a good plan.

Matt:
Andrew, before we get going, there is an awesome thing that happens at the beginning of every Bigger Pockets podcast. You and I know because you’ve probably listened to 710 episodes of it, you and I both. So let us get going with the quick tip.

Andrew:
Quick tip. I’m actually going to go rogue on you and give you two, right? Since I’m not wearing my tank top, I’ll have to make up for it.

Matt:
Hey, it’s our microphone today man. Give it.

Andrew:
So first of all, we’re going to reference an article that Paul Moore wrote for Bigger Pockets on the blog. If you’re listening and you haven’t read that article, go back to November 15th and read it. It’s going to give a lot more background on what we’re talking about and then lots of other important stuff for today’s market. Second of all, some of the stuff we’re going to talk about might sound a bit gloomy, but that’s really not the case. That’s the farthest thing from the truth. We’re going to talk about risks and how the markets are shifting and is our pricing going down? That’s all stuff that should be exciting for you if you’re getting started in 2023 or looking to scale your business. So now is the time to be greedy when others are fearful. So don’t let what we’re talking about scare you off. Use it to get excited about diving into all the resources that Bigger Pockets has so that you can learn and scale and grow your business.

Matt:
Double the tip. There it is. Thank you so much Andrew. I appreciate that man. Let’s get into the market man. Let’s talk about the current market status. What do you think, you want to go?

Andrew:
Yeah, let’s do it. There’s lots to talk about.

Matt:
I’m in, following you.

Andrew:
All right, Matt, welcome to 2023. We are in a rapidly changing market. It’s funny, Paul Moore put out a great article back in November addressing some things that we’re seeing now. What are your thoughts on what’s going on out there?

Matt:
I didn’t get a chance to read the article yet and you and I are both friends with Paul Moore and I’ve heard a lot of great things about the article. I’ve actually seen some people referencing it. And yes, absolutely things are changing it seems like daily as well. So what did you get out of the article? Tell me about it.

Andrew:
There’s a lot in there. We could spend a whole hour on it, but I’d say the most important if I were to condense it into one sentence is that interest rates are higher than cap rates. And for those who are listening, it’s like okay, well so what? That’s a big problem, and that’s a huge problem. We haven’t seen that in the last 10 years and maybe even for multiple decades. The reason that’s a problem is it creates negative leverage. So what it means is if you’re buying, let’s say a million dollar 10 unit property and it produces a net operating income of $50,000 a year, that’s a 5% cap rate, a 5% yield, and you go borrow money at 6% in order to do that, you are losing money by borrowing to obtain that asset.
So let’s pretend you bought it all cash and you’re getting a 5% yield and then let’s pretend, to make it simple, you get 100% financing instead at 6%. Your annual debt service is 60,000, but your yield is 50,000. You have a built-in operating loss just on your debt of $10,000 a year. That’s a problem. If interest rates are higher than cap rates, it screws up the market big time. And just for the listeners who are like, whoa, hold on, slow down Andrew. NOI cap rates, you’re tossing these terms around. Cap rate stands for capitalization rate. It is basically the unleveraged yield on a property. So I mentioned buying it all cash. A cap rate is you buy a million dollar property, it produces a $50,000 net operating income. 50,000 divided by a million is 5%, the cap rate is 5%. Net operating income is basically kind of just what it sounds like. It’s your gross revenue minus your operating expenses. And then that is what is left over to pay the debt. And so when that NOI is less than the debt, that creates a huge problem.
So how does this resolve? There’s a handful of things that can resolve it. Number one, interest rates would have to go back down. They peaked a couple of months ago at four and a quarter and then dropped 80 basis points. Who knows where they’re going to go now? I left my crystal ball in my pocket and it went through the wash so it’s permanently foggy. I’m not going to pretend that I can predict where interest rates are going to go. So interest rates could go back down. NOI could go up. If you can increase rent and increase that NOI, then you can overcome to some degree the fact that the cost of debt is higher, or prices could come down. My personal thought, Matt, is that it’s going to be a combination of all three of those things, but I would like to toss it to you and see where you think we’re headed here in 2023.

Matt:
I also put my crystal ball in the shop and I can’t seem to get it out. They won’t give it back to me. So what the future will hold, I don’t know, but I’ll tell you what investors like you and I can control. We can control an OI. We can control pushing revenue on properties. That’s one factor that’s in our favor. Okay, what I know is going to happen, I don’t know, but what I think is probably something different. So what I think is going to happen is something like… Rates have gone up drastically, a lot more than a lot of people thought. Are they going to go up at that rate of acceleration again? I don’t think so. I think we maybe are getting towards the top of the ceiling. I don’t think they’re going to come back down. And so I think that if rates stay up like this Andrew, it’s going to force cap rates to go up a little bit.
And so cap rates are going to come up, rates maybe creep down a little bit but it’s still going to be in the five, six, seven range, somewhere in there to borrow money I think for the foreseeable future. I just think that is what it is. So that’s what I predict is going to happen. And I think that on both sides, the buyers and sellers and investors, because you and I both work a lot with investors, limited partner investors, all three are going to have to get more realistic and everybody’s going to have to take a deep breath and settle down and realize that this is no longer a seller puts a for sale sign on the front of their property and they get 10 bids.
This is likely not going to be the future of what we’re going into. I think that sellers are going to have to get realistic, buyers are going to get a little more strength in their voice in what they can command from a seller, and thirdly Andrew, I think investors are going to learn to get more patient. I can tell you that the scenario you gave on cap rates and interest rates is all valid. But what the truth of the matter is people likely don’t buy a property either free and clear or 100% financed. What they do is they buy it with some sort of an equity check that gets left in there. And if cap rates are lower than interest rates, as you said, there’s no money left in the property and most importantly, there’s no money left to go to the equity side, whether that’s LP investors or folks writing a check out of their own pocket to go to the property.
So the property’s either not going to cash flow very much, talking like low single digit rates of return either for investors or for the owner direct. And that means that the equity’s going to need to be a little more patient if you’re buying a big value add property that is going to cash for a little bit in the beginning and then make more money in the long term. I believe the world of producing a six to 7% guaranteed aka preferred rate of return for investors right under the gate when you buy a property may go away all completely or it may change drastically. Because if you’re going to buy a property today, likely it’s not going to produce any cash flow at all if a little bit, but certainly not enough to pay a six or 7% preferred return.

Andrew:
Yeah, you’re absolutely right. All these changes and shifts are affecting different market participants in different ways. So like sellers that I talked to, or I mean, Matt, you and I are both in different multi-family masterminds and we either know or have heard stories of sellers who they’re having trouble making the mortgage payments because they had an adjustable rate loan that has gone from three and a half to seven and a half. And yes, some people have caps on it, meaning it hits a certain level and it doesn’t go up anymore. But lots of others don’t, and they have watched their mortgage payments double or even two and a half sometimes triple in the last six months, and that’s creating financial stress for sellers. Also on the flip side, sellers who aren’t having trouble paying the mortgage or have fixed rate debt, it’s slowing volume down because they’re just sitting back going, well, I’m not going to sell in this market. I want to get the price I got in January of 2022 and no one’s offering me that so I’m not going to sell my property.
It’s kind of like the kid at the playground who’s just like, that’s it, I’m taking my toys and I’m leaving. They’re out of the game. They’re going to sit there and wait and they’re not motivated to sell because operations are still really good. That’s another kind of weird aspect of this market is the distress out there is financial, it’s not operations. Now some select sub-sectors in some markets could see operational distress going forward, especially if we get into a real recession with real job losses. But at the beginning of 2023, the distress is being caused by the financial markets, not operations. And as an investor evaluating potential acquisitions, that’s a key thing to look into.
Why is the property distressed? Is it because the market here is terrible or is it because the owner made a mistake, put the wrong kind of debt on there and now they’ve got to get out of this and it’s an opportunity for you as a new investor to get started by picking up a killer property in a killer location that otherwise would not have traded if the debt markets hadn’t shifted? So if you can’t tell, this stuff is getting me excited because I feel like we’re going to see opportunities we haven’t seen in 10 years. When I look back at 2012, 2013 and 2014, my only regret is I didn’t buy more. I didn’t have the capability. My mom wrote my first check as a syndicator and then it took a long time to get everybody else to join in. So I’m looking at this now as this is coming up, probably starting mid 2023 is going to be the time to scoop up deals that otherwise were unobtainable for the last five, six, seven years.
And for those listening who the last three years have been frustrating because you can’t get in the market because there’s no deals out there, the deals are coming. And then also, not to be morbid, but you’re going to have a lot less competition. I already know of sponsors who are closing up shop because their deals have imploded and the equity is gone and they’re out of the business. The beauty of starting out now is you don’t have that baggage. You can come in at a fresh bottom, low point in the cycle, take advantage of these opportunities, not have 27 people bidding against you and build the foundation of a great business. Wealth is made in the downturns. In five to seven years from now, anyone who accumulates properties the next two or three years is probably going to be sitting pretty.

Matt:
Love it. It’s a great time to get started. It’s a great time to be a new investor in this market and it’s a great time to be established as well if you made the right decisions coming into this place.

Andrew:
So looking forward, Matt, I’m curious as to what you’re seeing this year. To me, I think the Feds, they’re going to at least pause, right? And I think just doing that will open up the market a little bit because right now when the Fed’s raising rates 75 basis points every other month, no one knows how to underwrite. What’s my exit cap going to be? What’s my interest rate going to be? So at least when it pauses, everyone can kind of take a breath and say, okay, what are the rules now? How do I underwrite? I think that’s going to loosen up the market. Two, we already talked about. There’s going to be motivated sellers, people who can’t make their mortgage payments, unfortunately. So that’s going to bring some deals to the table. And by the way, those deals aren’t going to go to the highest bidder, they’re going to go to the buyer or the investor who can offer the most surety of clothes.
So again, that’s something else we’re looking for is not paying the highest price but being the most savvy buyer, that’s going to get deals going forward. And that’s another thing that’s been really tough lately. So we talked about competition’s going to drop, there’s going to be more motivated sellers because people can’t make the payments. We’re unfortunately already seeing that. And then my guess is going to be we will probably see pricing off anywhere from 15 to 30% from the peak, and I would call the peak maybe January of 2022.
So I’ll give you a perfect example. We put in an offer on a property this week that when we first started talking to the seller at the beginning of 2022, they wanted 220 a unit and at the beginning of 2023, we’re now talking 165 a unit. The property is still running really well and it’s in a great market. However, the pricing expectations have come down and could they come down a little bit more? Yes they could. Can any of us perfectly time the bottom? No we can’t. So the key is to go buy properties that are in great locations and cashflow well so that five to seven years from now we look like stinking geniuses. So that’s kind of my thought and my plan for 2023. Matt, you disagree or what would you add to that?

Matt:
Well, I’m not sure if I want to look like a stinking genius. I mean, that’s just not-

Andrew:
Maybe a regular genius.

Matt:
Yeah, just a regular. Can I be a good smelling genius? You can be the stinking genius. Is that okay? Your [inaudible 00:16:02].

Andrew:
All right, fine.

Matt:
Yeah. Okay good. So I agree. I don’t know if I agree with the 30% and that’s only because I think that a lot of properties out there that are legacy holds that have been out there forever, a lot of multi-families been held for generations by people. So I think that those that bought properties in the last say three to five years are going to be in a position to need to sell because of debt that’s graduating or debt that’s gone up or because they just can’t refinance anymore or whatever it may be. But I don’t think that it’s going to be blood in the streets like it was in 2007, 2008. I don’t correlate the two things. I think what you’re going to have is sellers are going to need to get more realistic with their numbers.
And I think that for the longest time, Andrew, it’s been this seller’s market. That’s it. And when you go to buy a multifamily property, it’s like you’re going to prom. You’ve got to get your best suit on, you got to do your hair and everything. You’ve got to wave your hands in the air to get the attention and everything like that, and it’s you and 17 of your best friends bidding on a multifamily property. Some buyers may get a little skittish and go away, but I think that the buyer conversation between buyer and seller is going to become more give and take. We’re looking at a property right now. Believe it or not, we’re actually looking to buy a multi-family property right now, Andrew. We’re looking at a deal and for the first time that I’ve ever seen it in the last five years anyway, there’s no concept called money hard day one. I’ll explain what that is.

Andrew:
Oh, beautiful thing that’s going away.

Matt:
It is, it’s going away and that never should have been a thing. Again, you had said before, you get two things in real estate when you’re making an offer, you get price or you get terms. Money hard day one is a term that gets negotiated in the purchase of real estate. What it means is if I’m buying a property and it’s a million dollar 10 unit multi-family property or something like that, I may lay down, say 50K is my earnest money deposit and they’re going to go get a mortgage beyond that or whatever. So I’m going to have to bring more to closing, but that earnest money deposit is something that goes along with a contract that shows I’m serious and here’s my money and if I do something wrong that’s outside of this contract, the seller may have the right under certain terms to claim that money. Likely through a court action, but they may have the right to claim that money.
And this happens in small real estate transactions and buying a three bedroom, two bath, you might write a check for $5,000 as your earnest money deposit or something like that. Bigger multi-family properties have bigger numbers that go for earnest money deposit. What money hard day one means is that a certain percent of that money, and sometimes in more aggressive markets all of it, is nonrefundable the day you sign the contract. Here’s the problem with that, Andrew. You don’t know what you’re getting yourself into. And that’s why there’s a concept called due diligence. Like Andrew’s got a 10 unit apartment building or a 30 unit or a 300 unit for sale, the buyer needs to have time to get their head around this thing to make sure that what I’m buying is what this seller told me it is, meaning seller says, yeah, my roofs are in good shape, all my sewer lines are in good shape, all my tenants are paying their rent and there’s only this much vacancy or whatever it is.
All the factors that the seller states, the buyer should have a period of time to go and validate those things. It’s called due diligence and the buyer should have the right to confirm. What money hard day one means is that, say it’s a $50,000 deposit, 10k of that or more is, oh, you found that my sewer lines were crushed or that my roof was leaking or that my vacancies was higher than I said it was. So sorry, I get to keep that money hard. And it was there in more aggressive seller markets to hold that seller and buyer to closing and to make the transaction happen. But as we’re normaling out the playing field, it was never a fair thing to begin with. Do you agree Andrew? It never should have been in the contract to begin with, but it’s been the way the game was played so we had to do it begrudgingly. But now I believe it’s going to go away personally.

Andrew:
It’s starting to, and for everybody listening, rejoice that the risk of hard money should hopefully not be something that you have to worry about anymore. And I love all of what you said, Matt. And something else I would add for those who are starting to evaluate properties, and this is again, not something we had to worry about as much in the previous 10 years, but look at your debt service coverage ratio. And Matt, I’m going to push back on you just a little because I think this, unless rates change dramatically, I think this is one of the things that’s going to lead to probably a temporary decline in prices is that when the cost of debt goes from let’s say three and a half to six or six and a half percent, the income coming off that property is no longer there to make the mortgage payment.
And so the lender’s going to say, well at 3%, at three and a half percent, I could have given you a million dollar loan, but at six and a half percent I can only give you 550,000. Sorry. It is what it is. And so then as a buyer, you go to the seller and say, well look, my lenders only going to give me 550. I’m only going to offer you 700 instead of a million. So I think that is going to be a piece of what’s going to lead to some decline in select properties in markets. Again, people who have had generational properties with low leverage, they’re not going to accept that. They’re just going to hold on. But there’s going to be some motivated people that have to sell.
And speaking of generational properties, Matt, I want everyone listening, keep in mind, this is a long game. It’s been a really, really popular business model, especially with syndicators for the last five years to do the whole two to three year buy it, do a quick fix up, flip it out and sell it in a short period of time, two to three years. That business model isn’t dead, but I’d say it’s going into hibernation for the short term. That is not going to be anywhere near as easy as it was in a rapidly rising market. When we’re looking at properties now, we’re looking at five, seven, 10 year hold times. And I would add on top of that, if you’re buying for your own portfolio and you’re going to hold for 15 or 20 years, what’s happening today, you’re not even going to remember it when you get 15 to 20 years down the road.
That property is going to be worth a whole lot more than it is today and you’re going to be glad that you bought it, especially if you buy the right property in the right location, good demographics, some of the things we’ve talked about in previous episodes. And then Matt, just to clarify, you’re talking about hard money. You’re referring to the non-refundable deposits, right? So the minute you put that into escrow, even if you find out that the seller is lying to you, the roof’s bad and half the place is vacant, they get to keep your deposit.

Matt:
They can try to, yeah. And remember, it’s a court action. The check actually doesn’t get written to them. It goes to a third party escrow and that escrow company can’t release it without both parties permissions and if both parties don’t get permission, then it’s got to go through court action. So it’s not as simple as it sounds, but yes, in the contract it will say that that money becomes the property of the seller if for any reason the buyer decides that they don’t want to do the deal. But just I think that things sway back towards the middle and I think that that’s what I believe the pendulum is going to swing towards. And you’re right about properties being debt yield restricted where you used to be able to borrow 80% loan to value for a multifamily. You did, even 75, 80% loan to value if you wanted to.
Now the best you’re going to get because rates are higher is 55, 60, 65% loan to value. That means you’ve got to raise more equity to go into your deal and that means you can borrow less, which is maybe a little conservative way to look at it, but if your equity investors are looking for a six or 7% rate of return on a deal that’s selling at a 4.5% capitalization rate, guess what? You can’t give them that rate of return. It’s just that the money, just the numbers aren’t there to pay a rate of return on properties. We’ve looked at deals that are producing like one to 2% cash on cash return for us and me and the investors have to split that, right? We have to carve that up from there. There’s just not enough yield to pay investors a reasonable rate of return. So I think that, as I said before, that everybody’s got to get more reasonable, buyers, sellers and our investors.

Andrew:
All right. So Matt, you mentioned you’re out making offers, you’re in the thick of it, you’re not on the sidelines. What are you doing that the rest of us and that everybody listening can duplicate or learn from or do to prepare to either start from scratch or start scaling in 2023?

Matt:
Well, the worst thing that somebody could do right now, Andrew, is sit on their hands and wait for things to change, right?

Andrew:
Yeah, agreed.

Matt:
I have young kids as you do and I read them the Oh, the Places You’ll Go! sometimes. And that book talks about a place called the waiting place where you’re waiting on a phone to ring, waiting on a train to come, waiting on this, waiting on that. Life continues to pass you by if you wait. Those that want to make things happen are going to get ahead of the curve and get out there and maintain relationships with brokers. Don’t just wait for prices to drop before you start calling brokers. What you can do now is to initiate, build or even just maintain broker relationships. Call brokers up. Hey, I’m Joe, I’m Jane, I’m looking to buy and I’m waiting on the right deal and this is what I’m looking for. Whatever it is.
Obviously don’t tell me you’re waiting on the market to crash before you buy a deal. They’re not going to want to hear that. But you can use the time now to build and deepen relationships with brokers and also with investors. Stay in communication with your investors. Your investors are going to forget about you if you don’t communicate with them on a regular basis. Even if you don’t have a deal, that’s okay. Call them, check in, call them and wish them a happy holidays. Send them a holiday card, send them a newsletter as we do. Stay in regular communication with people so they know that you’re there and that when a good deal comes up from that broker that you’ve maintained or built a relationship with, you’ve got an investor pool that’s there to hop in. The last thing you want to do is to have to rebuild your business.
When the great deal that Andrew and I are talking about shows up in three or four months, you don’t have to rebuild or restart your airplane engine to get it off the ground again. You want to be rip roaring and ready to go with investors lined up with debt that you’ve been maintaining relationship with and position and with brokers that are willing to give you the first look at those great deals when they show up.

Andrew:
Yeah. And I mean, that’s a whole other episode that we could spend diving into that. And for everyone listening, I want to reiterate what Matt said about not sit around and waiting. Waiting and sitting on the fence does nothing for you but hurt your crotch. I mean, now is the time to streamline your systems, build your team, add investors, and that’s what we are doing in our business. It’s slow right now. So we’re going back through, we’re cleaning up simple things like cleaning up our file systems so our team spends less time going, wait, wait, where’d that document go? We’re getting ready to hire another person, add to the team. Like wait, you’re hiring in a downturn? Yes, now is the time to find the best people and get them trained so when the deals come, you’re ready to jump on them like Matt said. And we’re still out there looking at a lot of deals and we’re talking with new lenders, we’re looking at new markets and we’re evaluating new… Well, not new but creative or different ways to buy properties, right?
BRRRR is coming back. When I started this in 2012 or 2011, we’d buy properties all cash, we’d get them running great and then we’d refinance it and give investors 100% of their money back. The last five years, we’re lucky to give investors 25% of their money back at refinance because we had to pay so much in the beginning. In this market, one way to eliminate interest rate risk is to go find a 10 unit for 500,000, raise 700,000, buy it all cash, fix it up, and then two or three years from now when the debt markets are hopefully improved, refinance it, give your investors all their money back and now you’ve got an asset that you can just sit there in cash flow with basically no risk. Those kind of opportunities are coming back.
We’re also looking at seller financing. That’s coming back. Assumptions are coming back, longer term holds. There’s no such thing as a bad market, just bad strategies. So think beyond the quick three year I’m going to buy this, fix it and sell it. Look at alternate ways to buy, alternate ways to finance and longer hold times and that can make for great deals to be found. And that’s kind of the quick version of what we’re doing in 2023.

Matt:
I love that. We’re hiring too and we are cautiously making bids on deals that makes sense to us. And I’m kind of having to straight face offer somebody 80% of what they’re asking and it is what it is. And I find that properties are still in the market. There’s one that the guy was asking 125,000 a unit on and he laughed at us when we offered them 115, and then they came back to us, they said, “Hey, is that 115 number still good?” And we looked at it and guess what? Rates had gone up a little bit since then. So we’re now talking to a manager at 105. And so there are still deals to be made, there are still conversations to be had in that. And one more thing that we’re doing on top of everything Andrew said, we’re doing a lot of that as well and I love the BRRRR is back stuff. That’s awesome.
The one thing we’re doing as well, and I know we’re talking multi-family today Andrew, but guess what? There are actually other real estate properties you can buy. They’re, believe it or not, Andrew, not multi-family apartment buildings.

Andrew:
That’s blasphemy.

Matt:
There are other kinds of real estate. So we’re looking at diversification for us and our investors in other asset classes such as Flex Industrial. Believe it or not, we’re looking at hotels. And not like swanky, boujee, boutique hotels. I’m talking about a courtyard Marriott like I’m standing in right now. Those kinds of things. We’re looking at that. We’re looking at unanchored retail. Not that we want to lead multi-family. Multi-family is where my heart and soul is, but I also want to be able to offer things to our investors that make fiscal sense. And while I’m waiting a bit for multi-family to start making more fiscal sense, we’re going to keep making bids, but we’re also going to be looking at other asset classes to diversify a bit so that our investors can diversify so that we can diversify too.

Andrew:
Yeah, that makes a lot of sense and I see a lot of operators doing that. And especially if you can kind of dovetail things together. A lot of times self storage right next to a multi-family, there’s a lot of cross pollination there that can work really well. And we’ve actually acquired apartment complexes that had some self-storage onsite and that’s a whole other revenue stream. And so if you’ve got that self-storage skill or tool in your tool belt, there’s ways to bring those two things together and like you said Matt, diversify a bit.

Matt:
Absolutely. Absolutely. And not that multi-family is not the core in that, but it doesn’t have to be the end, it doesn’t have to be the everything.

Andrew:
All right Matt, well that was a fun market discussion. I always love diving into that, especially with you. So I want to throw out a couple of my goals for 2023 and then I’d love to hear what yours are and then maybe we can see if we can help out some listeners and talk about some of theirs. So I know what I’m looking to do in 2023 is hopefully make four to eight significant acquisitions. That’s market dependent, they have to be great deals. But assuming the market shifts like we talked about, we’re looking to pick up hopefully four to eight.
We’re also looking to add a team member or two because if we add that many deals, we’re going to need more bandwidth to do a good job asset managing them. And then we’re looking to actually expand markets. Right now we’re in Georgia in North Florida and whenever people ask me where do you invest? I say Georgia, North Florida in the Carolinas, but we currently don’t own anything in the Carolinas. We’ve sold everything we had in Texas a couple years ago. We’re going to refocus that energy on the Carolinas and try to expand into markets and put some of the principles that we talked about into play and execute on those. So curious, Matt, are you similar or what are you up to?

Matt:
Yeah. Well, just as you said, we’re hiring. We’re going to hire two key folks this year. We’re going to be hiring a marketing director whose job is to get us eyeballs and get us attention and do super creative stuff and whatnot on online socials and things like that. Also, we are lucky enough to own a few multi-family properties in North Carolina so we want to expand there as you do as well. So come on and be my neighbor, it’s great. The water’s fine, come on in. We also want to hire an asset manager in North Carolina that can be regionally focused in the state that can go to the properties we have on a regular basis and make sure business plans being upheld in that. It’s great to have acquisition and capital goals and marketing goals, but above all else we want to take what we have performing and keep it performing and tighten up.
And as the market changes and things like that, it becomes more important to make sure the boats you have are floating properly. And so we are installing KPI programs and performance metrics and things like that into what we own already, which is already thousands of units of multi-family. But we’re going to keep that running well and it’s important whether you own thousands of units of multi-family or you own one property, it is very important to keep what you have running well. Too many times people focus on acquisitions goals and you and I just talked about that too, so we’re just in the same boat. But you should also talk about setting goals about performance of what you currently have. And so we’re going to be setting performance metrics and goals for our current portfolio just to keep it running healthy because that’s really what matters the most is what you already own, not what you’re going to buy but what you own already.

Andrew:
You know what? Man, that’s my mantra. I actually forgot to mention that. So that’s what we’re doing while things are slow. We are getting better at implementing EOS, we’re becoming better asset managers, we’re putting those systems in place, we’re doing additional training for everybody involved and as you said, making sure that the boats you already have are in really, really good shape.

Matt:
EOS, traction, quick plug. You and I are both raving fans of that book and it’s important for small and large sized businesses as well. And we’ll throw one more thing out about goals up by the way Andrew. If someone just happens to be listening to this episode and it’s not January and it’s like, oh okay, it’s not New Years so I don’t have to set goals, guess what? There’s actually not a rule. There’s not a law that says that you can only set goals on January 1st. You’re actually allowed to set a goal anytime. You can set a goal on December 31st, December 1st, or on your birthday, whatever it is. Anytime is a good time to make a goal or to set a hurdle for yourself. Go pick up Brandon Turner’s 90-day intention journal and use tools like that to help you meet that goal over a 90-day program whenever you decide you want to plant that flag and make it. You don’t have to say, oh, I can’t set a goal today because it’s not New Years yet. You don’t have to do that.

Andrew:
I thought once you hit February 2nd and it was Groundhog Day, you were doomed to just repeat that year for the rest of the year and then you couldn’t set any new goals.

Matt:
Right. If you haven’t taken [inaudible 00:36:06] on your goals by February 2nd by Groundhog’s Day, then you’ve got to be like Bill Murray and live that day over and over again. That’s the rule, right? So Andrew, listen, talking about mine and your goals, we need to help people achieve what they’re looking to manifest for their goals as well. So lots of folks have pumped in tons of questions on multifamily on the awesome Bigger Pockets forum. Quick plug by the way, quick tip, put questions in the Bigger Pockets forum because you never know where those questions are going to go, including right here on the Bigger Pockets podcast. So there are awesome questions here on the Bigger Pockets forums that I’d like to take a minute and go through with you. Are you down? Are you ready?

Andrew:
Oh, I love answering questions. Let’s do it.

Matt:
All right, let’s speed round some of these. Ready? Let’s go.

Andrew:
I’m going to pull a couple of questions and if you haven’t gone in there and posted questions yourself, please go do that. Let’s see, we’re going to start with this one right here. Question is, how do I confidently assess property class from out of state and how do I align my business strategy to the property class? Quick definition, when somebody is talking about property class, they’re often referring to A, B, C, and D. A is kind of the nice new shiny stuff. B is kind of more your working class people who can either rent or buy but are choosing to rent. C tends to be someone who might be a renter for life. They can’t afford to do anything but rent. They’re employed, they have good jobs, but they’re kind of in that workforce housing. And then D is often kind of referred to as if you’re going to be collecting rent in person, you might want to pack heat to do that. So it tends to be kind of the higher crime, much rougher, much older properties.
So that’s what they’re asking about when they talk about class. How do you assess that from out of state and how do you align your business strategy with it? Well, the first thing is go read David Greene’s long distance real estate investing. It is geared towards single family investment businesses. However, the same principles apply to multi-family in terms of how to operate a long distance real estate business. Building teams, selecting markets, doing due diligence, all of those kind of things. Now, when I am looking at a new market or even a sub market that I haven’t owned in, there’s a long checklist of things that I go through to do this very thing, to figure out, well, what class property is it and what’s the class of the neighborhood?
So one of the main things that I check is the median income, right? Higher median income is going to lend itself to more A and B class properties. Lower median income is going to be more C or possibly D. And you might ask, well Andrew, what’s the cutoff? That’s going to vary depending on what state you’re in. Some parts of California, $120,000 a year is poverty level. In Georgia, that’s an A class neighborhood. So you need to look at all the areas around your property, get a sense of what the spectrum is, and if you’re on the high end of the spectrum, you’re probably A, B. If you’re on the low end of the spectrum, you’re probably C and D. Also, look at year of construction. If it’s built in 2000 or newer, it’s probably B or A. If it’s built 1980 to 2000, that’s probably a solid B. If it’s 1960 to 1980, you’re probably looking at a C class property and if it’s older than that, it could be C or D depending on the neighborhood.
Look at relative rent levels. We talked about earlier, if you’re looking at a suburb of Atlanta, for example, and the median income ranges from 40,000 to 75,000, you’re going to see a similar pattern with rent. If you look at all of the apartments in that market, you’ll see, well, some two bedrooms are renting for 800 and other two bedrooms are renting for 1600 or 1800. Well, odds are the ones at the bottom of that spectrum that are renting for 800, that’s probably your class C property. And then if you look the property up, oh, it’s built in 1975, oh, okay, that’s another data point, probably a C class property. Then you’re going to look at the amenities. If it doesn’t have a pool, if it doesn’t have a playground, if it doesn’t have a dog park, that’s probably C or B because most A class properties are going to have fitness centers and grilling stations and pools and are going to be highly amenitized. So the more amenities, the more likely it’s class A. The less amenities, you’re getting down the spectrum, B, C, possibly D.
I would also evaluate the neighbors. So if you look at your property and then you jump into Google Street View and you take the yellow man and drive around and you see brand new retail or a nice new Sprouts or Whole Foods or Kroger, you’re probably in a B or an A neighborhood. If you see old kind of rundown strip mall centers with a cigar shop and a tattoo parlor and eyebrow threading and all this fun stuff, that’s probably class C. So again, that’s another data point. When you’re trying to figure out is this class A? Is this class B? Is this Class C? One of the frustrating things about it, especially as a new investor, is you can’t turn to page 365 of a book and figure out, oh, here’s what it is. It’s a spectrum. It’s a little bit vague. And so what I’m trying to do is give you the data points that we use to figure that out.
And then finally talk to other property managers and lenders and other people who know that market and they can give you a tremendous amount of insight. The best thing of course is to hop on a plane or get in the car and go drive to that market yourself. It’s amazing what you can gain with the internet in long distance these days. It is so different than it was 10 years ago, but nothing beats being there in person. So if you’re going to invest in a market, make sure you at least get out there once so you have a real good feel of it. So that’s kind of the short version of what I would do. Matt, have you got anything else that you would add on top of that?

Matt:
Andrew, every time that you answer a question before me, I find myself saying, I agree with Andrew because everything you said was so thorough, right? I really agree. I mean, honestly. And I love the end, I’m like, do I have a cigar shop or a tattoo parlor near any of my properties? I may, but what I’ll say on top of all that is that you the listener need to decide which angle of attack you want to get yourself into. There is more money to be made ever, but you’re going to have thick skin to do it is to buy underperforming really, really poorly run D class property where Andrew said you might have to wear a sidearm to go collect rent and turn that into a C or a B class property. Not everyone has the skin for that. Not everyone wants to take the risk, enormous, enormous 10 pounds of risk that it would take to take down a property like that.
So if you do not have the chops and the business plan and the team to do a D to a B or a D to a C conversion, then that’s not the right business plan for you. Everything Andrew said is correct in identifying property classes and determining neighborhoods, but you as the investor then need to figure out which business plan works for you. Do you want to set it and forget it? Maybe make a lot less cash flow, but that could be class A or class B for you. Maybe there’s small little tweaks in the business plan you can do over the years to make the property make more and more money and hold it for a really long period of time. So maybe higher class properties are the right fit for you. It really just has to do with what risk factors you’re willing to take on and the team that you can bring to the table.

Andrew:
Philip Hernandez, welcome to the Bigger Pockets podcast. How are you doing, sir?

Philip:
I’m doing well. I am super stoked to be here. Yeah, thank you so much, Andrew.

Andrew:
You are part of the inaugural group of the Bigger Pockets mentee program.

Philip:
Yes, sir.

Andrew:
And you’re here with a few questions that hopefully we can help out with today. Is that correct?

Philip:
Yeah, that’s right. Yeah, no, super stoked and thank you guys so much for your time. So as I’ve been reaching out to brokers and developing relationships with different brokers in markets that I have a good sense of how things should look, I have had a couple times those same brokers send me deals in smaller cities in MSAs, like tertiary markets with less than 50,000 people. And I don’t have any presence there. I don’t have any connections, I don’t really know anybody there. But when I run the numbers, it works. The deal works. But I’m also like, okay, I have no idea what I don’t know. So what would a deal have to look like for you to invest in a tertiary market where you don’t necessarily have a presence and how would you mitigate the risk of taking an opportunity like that? And yeah, let’s assume everything looks good about it, people are moving there, there’s diverse jobs, the property’s in decent condition. Yeah.

Andrew:
First off, tell me about this market because I want to know where it is. So we could do a whole podcast on this. I’ll try to just hit bullet point, real high level. Number one, I have passed on many opportunities like that because of the challenges of small markets. So keep that in mind. One good asset in property management is where the money is really made and that is one of the biggest challenges that you have in those small markets. Some of these challenges are why those properties look so good on paper because the prices are lower because of the challenges that are inherent with those types of properties in those markets. So not only are you going to have more trouble getting good management, you’re also going to have trouble getting contractors and vendors and staff and all of those kind of things.
But your question wasn’t hey Andrew, what are the problems I’m going to have? It was, how do I fix that? Right? So number one, like I said, in many cases I just pass even if it looks great on paper because sometimes the juice just isn’t worth the squeeze. Second of all, if I am considering doing it, I might say, well who can I partner with that solves these problems? Is there somebody else I can partner with that already has a presence in this market that knows the market, can just move this property into their current portfolio and manage it better than anybody else out there? If you can do that, that can turn a weakness into a tactical advantage. I have seen people do that very thing, go into markets that are fragmented and that they don’t have a presence in, find someone who is just local and knows that market inside and out, partner with them and all of a sudden they’ve got an advantage that just no one else has.
And then another question that I would ask is, how is the current owner managing it? And if they’re doing it well try to copy what they’re doing. If they’re not doing it well go look at all the other properties in town, find the ones that are the most well run, and either try to hire those people, maybe it’s the same management company, or contact the owners and say, hey, can I partner with you? Maybe there’s an opportunity there. That would probably be the biggest thing I would recommend is find some local connection, partner or advantage to help mitigate those risks and then that return might actually have a higher chance of actually coming true.

Matt:
So yet again, everything that Andrew said I agree with. And to expand on that, when my company DeRosa invests in a market… And this is why I wouldn’t do the deal you’re talking about Philip. So the short answer is no, I wouldn’t do that deal because we invest in markets first, and that’s for everything Andrew said. Labor, access to… Everything from the contractor that’s going to turn units over and upgrade them for me to the workforce that’s going to live in the property, access to jobs, those kinds of things, to the property manager themselves. You don’t want them commuting an hour to your property from where they personally live to your property. You want them to live in a reasonable sized metro, that there’s middle income housing for them to live in, that they can come to your property to work for your property as well.
So for those reasons, I wouldn’t do the deal. And above all else, when we invest in markets, it’s market first. And the reason for that is so that I can buy not one, not two, three properties, three multi-families in a market that we can expand. I mean, our goal is to get to at least a thousand units in every market. And that doesn’t have to be your goal, but you should never look at a deal and say, I want to do that one deal in this market. If you can’t see yourself doing at least another 10 deals in that market, if there’s just not the inventory to do 10 more deals, or if you’re not sure if you believe in the market that much to invest 10 more times in the market, I wouldn’t do the deal.
And what investing 10 times in that market does for you is it accesses everything that Andrew talked about. You get the best access to labor, you can really sway the market that way. You can really control the market a bit and direct what rents and amenities should look like, what really awesome housing should look like in that market if you’re a large owner. If you’re not willing to do that, then you’re going to be on the peripheral and you’re never going to be able to really control it or negotiate great labor contracts with folks to do the work for you or to really access full exposure to what that market can yield for you if you’re only willing to go in a little bit.
So everything you said does not get me excited about the deal that you have. It’s just, hey, this deal looks good on paper, it’s a market I know nothing about. That’s just what I heard. This deal looks good on paper, it’s a market I know nothing about, I don’t know anybody there, it’s kind of out in the middle of nowhere kind of thing. I’m saying that, you didn’t say that. But if it’s close to a big market, then maybe look at the big market and look at this tertiary as kind of part of a bigger picture you want to paint for yourself. So that’s my short answer. Cold water on you is no, I probably would not do that deal.

Philip:
No, that’s all good. Any shiny objects that I can take off of my radar will I think help my journey in the long run.

Matt:
It feels like a shiny object to me.

Andrew:
And I’d like to quickly reiterate two things. Number one like I said in being most of those I pass on. And then number two, I really like what Matt said for everybody listening, if you’re going to do that, if it’s a one-off deal, probably pass. But if you can do five, six, seven, 10 and grow it, you can turn that into an advantage. So Philip, we appreciate you coming on real quick and then also just asking questions in front of a quarter million people audience, takes some [inaudible 00:50:53] so we appreciate that. Other than storming your classroom, if people want to get in touch with you, how do they do that?

Philip:
So on Instagram, it’s the_educated_investor, and then I have a website, www.educatedinvest.com. Thanks for that shout out Andrew. Appreciate that.

Andrew:
I like it. Good stuff, man. Well, you’re going to do well. I think we’re going to be hearing a lot more from you here in the near future.

Philip:
Awesome. Thank you.

Matt:
Andrew. We’ve got another question lined up here. I’ve got Danny. Danny Zapata. Danny, welcome to the Bigger Pockets podcast man. How are you today?

Daniel:
I’m doing excellent. Thank you for having me on.

Matt:
You are quite welcome. What is on your mind? How can Andrew and I brighten your day a bit? What is your real estate question you want to bring for Andrew and I to answer and for the masses to hear our thoughts on?

Daniel:
Yeah, I had a thought around raising money. So I’ve had some success raising some friends and family private money. I wanted to get your thoughts on what are the pros and cons. I guess going to the next steps, I either go and I kind of tap out all of my friends and family or do I go and broaden into more less familiar folks. So I wanted to get your thoughts around how do you expand that.

Matt:
Danny’s passing a hat around at Thanksgiving dinner, right? Okay, pass the Turkey and then also pass your checkbook.

Andrew:
Go partner [inaudible 00:52:16] Philip.

Matt:
At the end of the day, Danny, most investors, I know I did and I believe Andrew, you’d be able to say the same, started with friends and family as their investors. And the reason why you do that is because people that are friends and family like and trust you because you’re you. You’re Danny and you’re awesome and they know that, not because you’re Danny, the awesome real estate investor, but because you’re their son and they love you or you’re their brother or they trust you because you’re you, not because you’ve developed this phenomenal real estate track record, whether you have or not. So most real estate investors should and do start with friends and family as their investor base and I highly… And if it gives you the heebie-jeebies talking to friends and family, I’m talking to listeners, not you Danny, but if it gives folks the heebie-jeebies talking to their family members… And in my book Raising Private Capital, I talk a bit about how to overcome personal objections you may have internally and objections that friends and family may have with you as well.
Bottom line, treat them like investors, whether they’re your friends and family or not. Don’t give them special treatment or oh, it’s okay, we don’t need to put this in writing. I’ll just take your check. No, give them every rights and benefit, including full documentation that you would anybody else. Everyone needs to expand beyond friends and family. If you’re going to grow Danny, you need to go beyond that. The way that I did it was to go to friends and family and then start asking them for referrals. Like, hey, who else do you know Uncle Charlie? Who else do you know person I went to high school with that may want to invest with me or may want to consider doing what I do as a passive investment vehicle? That’s how I grew. And then once you’ve done that, then you can expand to tier three, which is social media, picking up the big megaphone, talking into it about what you’re up to and attracting more and more folks.
But it sounds like Danny, you’ve achieved a certain level of success with friends and family capital. Awesome. I would go next level and start asking those folks that are happy for referrals to other folks that they think may be happy too working with you.

Andrew:
Well, that was fantastic. I can’t really add a whole lot to that. Matt, you should write a book about money raising or something and Danny, when he does, you should go order it and read it. Maybe another tip is raise money from pessimists because they don’t expect it back. But beyond that, I did the same thing. My first check as a syndicator was from my mom, and so shout out to mom for believing in her son. And Matt laid it out beautifully. You do that first, maybe skip the uncle if he’s going to bug the heck out of you at Thanksgiving or make life miserable if it doesn’t go perfectly. But other than that, friends and family are the place to start, and then ask for referrals.
And then even beyond referrals, it’s really tough for LP investors to jump in to be the first guy to jump into the pool with you. But if you’ve already got eight or 10 people at your party, then you don’t have to go tell everybody else that it’s your family. You can just say, hey, I’ve already got these eight investors, we’re 70% of the way there. It’s going to be much easier to get people you don’t know or that don’t know you as well to come in for that last 30%. So exactly what Matt said, start with friends and family, then go to referrals, then use that as a base to reach out to people that you don’t already have that relationship with.

Daniel:
I guess I shouldn’t also tout that my mom’s my biggest investor, right?

Andrew:
Hey, you know what? That’s a great thing.

Matt:
That’s a good thing. You shouldn’t discount that, man. I go telling people all the time, and by the way, my mama was one of my first investors as well, by the way. And I tell people that because it is a testament to your belief in your business, Danny. All joking aside, my mother has invested in my business. You should tell people that. I got my mama’s money. Not just somebody else’s mama’s money, I got my own mother’s money in my business and that’s how much I believe in what I do, that I’m willing to put my mother’s livelihood, my mother’s future wellbeing, her wealth goals into what I do. I tell people that all the time because it’s something that I… Not to get emotional about it, but I’m proud of that. I’m proud that I can take a bit of ownership of my mother’s financial future through what I do.

Andrew:
Matt, that’s beautiful. I tell our investors this. I tell them, I say, look, I can’t screw this up because I would have to get a new family and new friends because they’re all in this and I’d have to go out… Yeah, I can’t afford to do that.

Matt:
Yeah, I’m control alt deleting at that point, right?

Andrew:
Yeah.

Matt:
Danny, your thoughts, man. I hope this has been of value. Any final thoughts before we let you go?

Daniel:
No, that was awesome. Thank you for your insights there and I’m glad I was able to make you a little emotional during the podcast.

Matt:
Danny, been awesome having you here, man. Listen, you’ve delivered a lot of value today in your questions and your thoughts. Please tell those listening how they can get ahold of you if they’d like to hear more about what you’re up to.

Daniel:
Sure. I think the easiest way to get ahold of me is on Bigger Pockets. So Daniel Zapata is my legal name on Bigger Pockets. Also, I have somewhat of a Twitter presence, DZapata, my first initial and last name on Twitter.

Matt:
And that’s Z-A-P-A-T-A. I will not ask what your illegal name is. That’s your legal name only. So if you guys want to reach out to Danny and find out what his illegal name is, you can do that now. Good being with us today, Danny. Thank you.

Daniel:
Thank you.

Andrew:
All right. Take care, man.

Matt:
All right, Andrew. If people are living under a rock and they have no idea how to get ahold of the Andrew Kushman, how would they reach out to you to find out more about you as a person, a real estate investor, a visitor of Antarctica, all those kinds of things? How would they find out more about that?

Andrew:
Best way, connect with me on Bigger Pockets. You can also connect on LinkedIn or just Google Vantage Point Acquisitions. Our website is VPACQ.com, and there’s a contact us form on there that comes to my inbox.

Matt:
And folks can find me on our website from my company DeRosa Group, that is D-E-R-O-S-A group, derosagroup.com. They can get ahold of me and anybody on my team there to hear all kinds of cool stuff about what I’m up to derosagroup.com or follow me on Instagram at theMattFaircloth.

Andrew:
All right.

Matt:
All right, folks. This is Matt Faircloth here with my host Antarctica Andrew, and ask him more what that means. Signing off.