REIA 299 Rama K Chunchu: Finding & Overcoming Limiting Beliefs to purchase first multifamily deal

Welcome to Real Estate Investing Abundance, the show for busy, fulfilled professionals like you to learn how to develop financial independence built on solid passive real estate investments. Now here is your host, Dr. Allen Lomax.

Hello, enlightened investors, and welcome back to the show. I'm your host, Dr. Allen Lomax. It's great to be with you today. As we explore other issues with multifamily investing with our expert today, Rama Chunju. He is the founder of USHA Investment Group. Rama is an active and passive investor in multifamily apartment syndications. He is an equity partner in 750 multifamily assets. and a general partner in 64 units. With more than 15 years of experience as an IT professional, Rama brings experience in analyzing markets, underwriting deals, raising capital, and asset management. So, Rama, we are pleased to have you with us today. So please share a memorable experience that helped you to be the person you are today.

Yeah, thank you very much, Alan. Thank you for this opportunity. I'm grateful for that, you know, and good morning. And so, yeah, so there are many things that helped me to be where I am today, but if I pinpoint one thing, so starting podcast has definitely helped me to, you know, connect with a lot of people in multifamily space. I will, you know, I'll share that as my, you know, memorable event.

Well, that is, uh, that is what has helped me connect with a whole lot of people as well. It was, it was a very frightening endeavor to get into, I can tell you. It was, uh, and there was really quite a learning curve, uh, but we've been doing it now. You're actually the, um, the 299th interview we've had under Real Estate Investing Abundance. And before that, we actually started off with another show in which we did about 150 programs. So I've got something like 450 interviews under my belt here. So we're really pleased to have you with us, Rama. So you started off in single-family like a lot of individuals do. So tell us about how you got started in single-family and why you made the decision to transition from single-family to multifamily investing.

Yeah, sure, sure, definitely. So I started, uh, single families around 2014 and '15 time. I invested in North Carolina markets mainly, you know, Wilson and Raleigh, Raleigh and Cary markets. So mainly, you know, um, so mainly I invested in some, you know, good location and also a few deals in bad locations. So there are some challenges investing in bad location, like from operating point of view, finding right tenants, and also from appreciation point of view. If you invest in good location, property will appreciate fast. And if you appreciate in bad locations, it may not appreciate much. And sometimes And also, you have to put same kind of effort, even more effort, managing and operating property in bad locations. And other challenges were like, I was working full-time in IT side, and also I was acquiring multiple properties in different locations. It's very challenging to operate when you're working full-time and also managing these properties. All this stuff. So that is the main reason I switched towards, you know, multifamily space. And also there are a lot of other benefits, you know, going towards, you know, multifamily, like, you know, scalability and managing or operating, you know, multiple, you know, units in single location versus multiple properties in scattered different locations. And also, you know, and also funding point of view, right? So with single families, there is some kind of limit. If you acquire 10 units, after that it's challenging to get more loans. So whereas in multifamily space, you can go for non-recourse loans and there's no restrictions from that point of view. And also you can scale fast, scalability point of view. So there are a lot of advantages going with multifamily. So that is the reason I switched towards multifamily.

Well, it's not at all unusual, of course, for real estate investors to begin in single-family because, well, I mean, most of us have at least purchased our own home, so we're at least familiar with the purchasing process of single families. And it just seems more doable. But as many of us have discovered, it is actually much more challenging and much more time-consuming in so many, many different ways to remain with a single-family. There are certainly individuals who have overcome those barriers. But as you mentioned, after you get 10 single-family homes through regular financing options, those financing options are often cut off at a cap of 10. And so, it becomes very challenging in the financing market. And then, as you mentioned, it becomes very, very difficult to maintain and manage properly properties that are scattered all over different neighborhoods and different kinds of tenant bases, and it just becomes a major headache. So in actuality, it really is, in many respects, it's much easier managing a multifamily portfolio rather than a single-family portfolio. But that takes not only understanding that, but it also takes a mindset. So tell us about you and the process you have gone through as an individual to find and overcome your limiting beliefs that allowed you to actually go from single-family to multifamily.

Yes. So when I started thinking about multifamily, I started reading a lot of books around multifamily space and also doing a lot of research on following a lot of stuff in BiggerPockets, started listening, you know, podcasts and also attending conferences and, you know, reaching out these operators and, you know, for both, you know, for passive investing side also, you know, for partnership, you know, point of view, you know. That's how I started into multifamily space. So, and also I was, you know, I started building relationship with the brokers, you know, and also started underwriting a lot of deals and, you know, and also multifamily is a team game and you cannot do it alone. So you have to partner with experienced partners and other operators in this space. So whenever initial stage, there are a lot of mindset-related issues like, how can I raise capital for this deal? And how can I purchase these bigger properties? And how can I manage these properties without expertise? I don't have track record in multifamily space. It's a business. So I don't have track record of business. So how can I overcome this? So then, you know, through mastermind groups and through other, you know, mentorship programs, helping me to overcome those limiting beliefs, you know, instead of thinking about how, you need to ask right question like, who can help me to, you know, raise capital? Who can, you know, help me in managing these properties? Who can be, you know, loan guarantor? Those kinds of stuff. So instead of asking how, you have to ask like, who can help you, you know? So that's how I you know, I overcome my limiting beliefs from, you know, in multifamily space during initial stages.

So just to give us kind of an idea here, from the time that you decided that you were going to embark upon multifamily investing and you began those educational and outreach and networking aspects. How long was it in terms of just a time period, a timeframe? How was it? What was the time period from when you began that until you purchased your first multifamily property?

So at least a couple of years, I can say. So I was also working full-time in IT side. And also I started with, you know, investing passively, a couple of deals, then, I mean, and also I was actively underwriting a lot of deals and, you know, touring properties and, you know, building that relationship With brokers. So at least it took, you know, a couple of years, I can say.

Well, yeah, I just asked that because a lot of people like things to happen instantaneously, but I've really never spoken to anybody who one day decides they're going to invest in multifamily and then the next day they go out and purchase multifamily properties. It's a pretty unusual thing. It takes time and it takes, uh, it takes education, it takes preparation. And of course, all of that contributes to actually us helping to develop a mindset where we can realize that it's something we can do. But it isn't just a mindset. I mean, we can think positively and we can focus our minds. But as you mentioned, through that 2-year period, you weren't just educating, you were also building a network. And multifamily is not something anyone is going to go out there and do on their own. I mean, even if they are trust babies and they have millions of dollars, they would actually be very foolish to go out there and go into multifamily without first studying it and also developing a network to support them in those endeavors.

Yeah, yeah, totally.

And so as So, Rama, tell us about those experiences of how it is. I mean, you did more than just study. You really did. I mean, you can go to all the networking events you want to and all the meetups you want to, but unless you're actually using those opportunities to develop the network and to develop the team, they're going to just be a waste of your time. So how did you go about that process of gathering partners together and building your first team to make that first investment?

Yeah, yeah, great question. So I started attending these, you know, meetups and virtual conferences, also listening to a lot of podcasts or reading books, you know. So during that, you know, attending mostly, initially I attended virtual conferences. And also live meetups. But so you will get opportunity to network with other operators in this space, you know, either Zoom, you know, uh, Zoom chat or something, you know, uh, some other way you can— you will get opportunity to interact with these operators, you know, and understanding what are their strengths, what are— what exactly they are looking, you know, in terms of investing point of view, what, what is your unique ability or what is your strong points, and, and looking for, you know, someone who can leverage your, you know, the missing points from your expertise. And, and also networking with those kind of people and, you know, and helping them and, you know, and asking right questions and also, you know, um, will help, you know, speed up the process. And also I started my own podcast also. So, and also that also helping me to reach out more number of experienced operators in this space, uh, and so virtual conferences and also my own podcast helped me to finding, you know, partners, I can say, definitely helped me in finding my partners, like, you know, yeah.

Well, you just mentioned that asking the right questions is a key part of developing those partnerships. Can you give us an idea here as to really what are What are the key questions that we should be asking when we are beginning this process of networking?

So main thing is like, what are your challenges? What challenges you're facing in investing space, multifamily space? And what kind of help you need in terms of raising capital or sourcing or finding deals Or sometimes, uh, some operate out-of-state, operate— they need someone in person on the ground. So, you know, those kind of stuff.

Okay.

Well, um, being, uh, a professional in IT, you, you have a sense of analytics. And so one of— I, I'm assuming one of your strong points has been that aspect of underwriting multifamily. Family Deals. Take us into underwriting. What is it? And, and how is it that you were able to leverage underwriting in the process of helping you to develop partnerships?

Yes. So yeah, my— because of my engineering background and IT background, so I'm strong at, you know, analytical skills and math side. So that helped me in, you know, underwriting a lot of deals, you know, Mainly like whenever we get, you know, T12 and rent roll from the brokers, so we need to, you know, assess like what is the value of that property, how much broker is asking, how much, uh, how much we can offer, you know. So the, that underwriting skill will help, you know, uh, uh, within like few hours or within, you know, uh, few or few days we can gauge the, you know, value of the property. So mainly once we get the, you know, T12 and rent roll, so we have like standard underwriting model. We plug in all the numbers like income and expenses and, you know, from T12, from T12 or T3, and also rent, current rents, and how much we can, you know, increase the rents, maybe sometimes organically, sometimes forced appreciation, like, you know, by renovating units, how much we can, you know, increase the rents and what kinds of debt Like, you know, agency debt or bridge debt, how much LTV and what kind of interest rates, and what would be the insurance premiums, and what would be the taxes for the next 5 years or next 3 to 5 years. And also different aspects like renovation budget or other marketing budget or admin kind of expense. All those kind of stuff will plug into underwriting and And also rent projections for next 3 years or 5 years, each year how much, 2%, 3%, 4%, and how much expenses escalations. Those kind of stuff will plug in and, you know, we'll get the values, you know, mainly. So from investor's point of view, always look for at least 6 to 10, 6 to 8% cash on cash, and IRR point of at least 15%, and ARR point of at least 18%. If that deal meets those criteria, then we'll go and submit LOI. So if it didn't meet, we'll try to negotiate the price and we'll submit with low, you know, lowball LOI. So that is a process we will follow.

Well, just to give us an idea here, the multifamily markets have been really tight for Well, since 2017, really going '18 and '19, they got very, very tight. We expected a break with COVID and that really didn't happen. Actually, cap rates continued to suppress and prices continued to increase. 2022 has been a year of disruption in markets nationwide. What have you seen in terms of the markets in multifamily?

Yeah, great points. So yeah, I totally agree on the points you mentioned. So we thought, you know, cap rates may go up because of COVID and it will impact negatively multifamily space, but it didn't. It went other side. So cap rates was compressed and prices went up like, you know, 20%, 30% in last 1 year, 2 years. But things have changed now, like from March and first or second quarter of 2022, because of high interest rates and also high interest rates, low debt, low LTV now, definitely. And also it impacting deal flow. So now number of deals coming to market is slow down and also that impacted The main factor is like interest rates. So that, that is impacting, you know, overall returns to investors, you know. So, and also we can expect interest rate will go up next couple of quarters. And after that, it may stay stable, and it may go down very slowly, it may come down slowly, not maybe 25 bps, something like that. But we are actually looking for deals, and we are underwriting deals Uh, and, and if you— if any of deal meets my investor criteria, we'll go for— we'll submit LOIs. Otherwise, we are actively looking for deals and, you know, uh, and also submitting LOIs.

Well, Raman, tell us what, uh, you have to offer investors and how it is that they can get in touch with you.

Yes, so, uh, investors can reach out to me through info@ushacapital.com or ushacapital.com/podcast. And also I'm organizing virtual conference in multifamily space. It's called multifamilyap360.com. So for your listeners, I will give you an additional discount, 15% discount if they use code AP15. ActivePassive15. That's how they can reach out to me. Okay, great.

And we will also have that information in our show notes. And just one last question here, Rama, and that is you talked here about the underwriting process. Talk to us about the after-purchase processes and the asset management of multifamily and how you are managing that?

Sure, sure. So after purchase, like for the deal we purchased, we are going with internal management. So not going with third-party management since it's a small deal, like 64 units, and going, you know, full— going with third party is challenging. And, you know, Hiring full-time PM or hiring full-time maintenance guy is challenging. So for this size of deals, so we are going with internal property management. So we hired, you know, full-time maintenance guy and also part-time leasing agent. And also, like, you know, so, so with this property, there are a lot of, you know, delinquency issues, you know, because like previous owner was out of state and it's not managed properly. So we are handling that stuff. We evicted a lot of bad tenants from that property and we are now stabilizing the property, I can say. And also, without doing much of interior renovations, we are able to achieve projected rents within 1 year. We projected those rents end of 2nd year, but we are achieving end of 1st year itself. And also we did some exterior, uh, exterior stuff like, you know, parking spaces, those kind of stuff. Yeah. And we were able to, you know, uh, we are stabilizing the property at this point, I can say. Okay. Well, very good.

Well, Rama, it has been a pleasure having you today. Thank you for being with us and thank you for sharing your expertise.

Thank you very much, and thank you. I really appreciate for this opportunity. I'm grateful for that.

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