REIA 325 Randy Langenderfer: Building a portfolio while still employed and when to leave?

This is the Real Estate Investing Abundance Podcast. I'm your host, Dr. Allen. I just want to take a moment to introduce you to our company, Steedtucker Capital. Steedtucker Capital is a real estate investment firm. If you'd like to learn more about real estate investing, head over to our website, steedtucker.com. And while you're there, take a moment to get your one-page guide to the 10 steps to passive real estate investing. Downloading this PDF will also enroll you in our Enlightened Investor Circle, and by enrolling in the Enlightened Investor Circle, you'll be the first to know about any new investment opportunities that we are getting involved with. Look forward to hearing from you. Enjoy today's show. Hello, enlightened investors, and welcome back to Real Estate Investing Abundance. I'm your host, Dr. Allen, and what a pleasure it is to be back with you again today as we take a look at building a portfolio while employed and knowing when it is time to leave. Randy Langendorfer with us again today, and he is a returning guest who is full of wisdom. Randy is the president of InvestArc Properties, LLC, and they focus on creating investor value and passive income returns for the busy professional. Randy has been in multifamily real estate since 2014 as both a general partner in deals of 1,200 doors and a limited partner in over 4,000 doors. So Randy, take us into the show. And share with us a memorable experience that helped you to be who you are today.

Well, first of all, Alan, thanks so much again to be back on your show. I think I was one of the very early guests. I don't remember if it was—

You actually were. You were on our, on our old podcast as well. And then you were one of the very early ones on our new podcast. So yeah.

So it's a pleasure to be back and back with your audience and A memorable experience that helped shape me? Getting married, having 4 kids, finishing— the most memorable experiences I'm living right now is winding down a 42-year corporate career. I think we shared in the pre-meeting, I'm getting to step aside and do real estate full-time here. This is being recorded in late March, and so at the end of this week, I'll be full-time real estate and getting out of the corporate world. As my wife says, I'm going to one job versus 2 jobs.

Yeah. I'm sure you're going to find plenty to fill your time with here, for sure. As you mentioned, you served as Chief Compliance Officer and auditor for an academic medical institution in Houston, Texas. And with that, you had background as a business degree in your undergraduate degree and your MBA was in finance. Is that correct?

Yes, sir. Accounting, accounting undergrad, finance MBA, CPA, and also a CISA, Certified Information Systems Auditor. That doesn't mean anything for real estate though.

It's— Well, I think it means quite a lot for real estate as finance is a very critical aspect of real estate investing. And in fact, it is the first step in any real estate consideration is the underwriting. So Randy, I know that with your background, you are no stranger to the underwriting process. So tell us about that and what is important in looking into the underwriting. What is it that you look for?

That's a great question, Alan. And I think that's— people want to make that a science, but it's as much of an art as it is a science. Anybody who is familiar with numbers, my old boss used to tell me, what is it, figures never lie and liars never figure. So a good finance person, when you ask what 2+ 2 is, you say, what do you want it to be? So that's the— I'll say the art form in it because, yes, the spreadsheet, we all get enamored by what I would call the shiny object syndrome. You know, I see them, you see them, you know, 30% IRR or 10% cash-on-cash return or, or whatever it is. But when you really drill down into it, you realize it's still all about the relationship with the sponsor and your trust in their underwriting.

Philosophies.

I've never heard a general partner say we underwrite very aggressively. We all say, you know, we underwrite very conservatively. And I think it's up to the limited partners to digest that and understand that and understand why. And so what's that mean? Well, when somebody says we underwrite very conservatively, I mean, everybody's definition of conservatism changes. Is different, just like fiscal responsibility. There are people that are conservative and people that are liberal in their thinking or in the middle. So big things I look for in underwriting is, first, there's a ton of different templates out there today. Each of the major educational groups, whether it be Lifestyles here in Houston or Brad Sumrock in Dallas or Michael Blanc or Jake and Gino's, all have their own tools and templates. I'd encourage— and none of them are bad. They all have some pluses and minuses of them, but I'd encourage your audience, if they're going to get into the underwriting, to get one model and stick with it. Don't try to go into all the other ones and understand them. They all come back with investor return and et cetera. But when I'm underwriting today, I really try to look at the major assumptions. So what is the buying cap rate? That's key to me. What's the buying cap rate? What's the exit cap rate? So a lot of general partners today may buy something that is— it's not been uncommon for the last several years to see below 4 in many markets and 4 cap rate buying cap rates. And then they'll project 5 years out or 7 years out that same kind of cap rate, which I really believe is unrealistic today. You should have at least 10 basis points for every year, and that's probably fairly middle of the road today, maybe more in today's market. So that means the exit cap rate is going to have— exit or reversion cap rate is the term is going to be 50 to 75 basis points higher than the buying cap rate. So that gives a little freedom for rising interest rates and cap rates in those markets as well. I look at what are the income and expense assumptions, what are the rent projection growth. I've seen some that have, you know, year 1, 25% rent growth.

You've seen that?

I have.

Oh, really? Wow. Okay. Well, wow, that is phenomenal.

And they had logic to back it up. Which was even better. And, and believe it or not, Digester, I invested in that one as a limited partner only because I really challenged the sponsor on that 25%. I said, what are you smoking? I mean, that's, that's nowhere. But it's at a very small niche. It's in the Tucson, Arizona market. It had been extremely underperforming. And fast forward almost a year later, we're getting that kind of increase. But that's an exception.

Wow.

That's a real exception. Normally you would see an underwriting perspective, 3%, maybe 4% growth on rent growth adjusted for the submarket. And you got to have data to back that up, CoStar and comps for the area to back that up. And then what are the expense assumptions as well? Growth assumptions. We used to put 2% in there. Today, I think that's kind of light. You got to probably almost plan on 3% or 4% to be realistic with supply chain issues and people, labor issues that we're facing. Across the country adjusted. Obviously you're, you're looking at all your, the stuff your lender's going to look at, the debt service coverage ratio, the returns to investors, obviously. And so you're going to kiss a lot of frogs when you're underwriting. As we've shared offline, there's very few that pencil today and they're a lot of work. But I think, well, another factors I look at, I live in Texas, as you mentioned, I'm in Houston, Texas market. So real estate taxes is a huge variable. What are the assumptions there for growth? Texas is different than other states in that we reappraise every year. So that can, upon buying an asset, you're going to have a step up, a significant step up in real estate taxes. Because we live in a coastal state as well, insurance rates are just a huge factor to consider. So if somebody's saying, get this, if somebody's saying $500 a door, that's probably really light these days. I remember back when we were getting it for $250 or $200 a door, and today I've seen as high as $650, $700 a door.

Wow. Yeah.

For insurance, because again, a coastal area. So those are some of the big ticket ones. And then what kind of debt structure too? Obviously today as we speak, variable rate debt is out of fashion and fixed rate is preferred. It was just less than a year ago, bridge and variable rate lending was what everybody was doing, and myself included. And so those— the debt structure is key. What kind of debt coverage do you have? Well, loan coverage, I mean, loan cost, 70% of proceeds, 60% of proceeds, et cetera. The lower the number, the better from a risk perspective. But the challenge in that is creating a return for those investors because there's so much capital invested in the project. And then, but most importantly, what doesn't show up on that underwriting is who's going to operate this booger? Who's the property management company? And that to me is, the longer I'm in this, I'm really focused on property management. And if you've got a good one, that's great. And if you don't, you know, I always say you don't know you have a bad one until you've seen a good one. But it is a painful experience when you have a bad one.

Yeah.

And I've lived through that, regrettably.

Enlightened investors, if you haven't done so already, be sure and click that like button and also click that share so others can take advantage of the content. And finally, be sure to subscribe so you don't miss a single one of our upcoming episodes. Well, speaking of good, bad, uh, indifferent property managers, how do you go about rectifying the situation when you discover that you don't have the property manager that you need?

You've hit a tender spot, Alan. I'm, I'm in, I'm in the, we're in the process of doing that right now on one of the properties I'm a general partner in and not a Evaluating it for a change, but we've— so it's a smaller property. It's a 60-unit Class A here in Houston. And we bought it over a little about a year ago before, and it's a beautiful asset, but we're really having challenges with it, keeping it rented up and getting it rented up and getting quality tenants. I mean, everybody, a lot of people across the country, especially in Texas, are experiencing delinquencies and bad debts and evictions that because it's a 60-unit, that property is play— the numbers become much more material.

Mm-hmm.

When you have those delinquencies, et cetera. And so we're in the process of, we've changed out, we first, we're doing the right thing now is we're, we've changed out really the regional manager and the onsite property manager and the maintenance personnel. So the first thing is to really take a serious look at the onsite property manager is the most important one in my role, in my mind, I should say. So we took a real long, hard look at that. And we decided to make a change there. And just about a month before that, we just— the regional manager left who was overseeing the property manager. And we didn't realize at the time until he had left that there were challenges there in his attention to our asset and attention to oversight of the property manager, which probably led to the demise of the onsite property manager because he just wasn't getting the oversight he needed from the regional manager to grow in the profession and learn tools and their way of Doing business, et cetera. So first things is really challenge the personnel, but you gotta look at the process too. So what is driving poor performance in the asset manager's mind? Is it the numbers or is it the personnel? Generally they're related.

Mm-hmm.

Generally they're related. So I think we started out our analysis focusing on key performance indicators, you know, evictions, delinquencies, bad debts, maintenance records, et cetera, et cetera. Tenant lead. marketing leads. So we were focused on all those KPIs, which kind of drove us to the people part of it. So it's, it's an art form. Asset management is an art form, I think, as much to oversee the properties.

What brought you to— I mean, it's a big decision replacing a property manager. And as you were saying, there's, you know, there's not only the personnel issue there, but there's also the systems that are in place. And so what brought you to the conclusion that this was a personnel issue? And that you needed to move forward with making that change?

In our case, it was the first— we got a new regional manager there. And because the numbers are important and, as I said, material on a 60-unit, we gave the onsite— or not the onsite, the regional manager— we expressed our concerns with the property manager as a leadership team or as a general partner team. We expressed our concerns to the new regional manager. And told her that she really needed to have about a 30-day assessment, no more than that. We asked— we were trying to put the pressure on them. We told her what we thought, that he was marginal at best, and we needed a strong performer given the delinquencies we were experiencing and bad debt. Gave her 30 days to really assess her own opinion, and she concluded as well with us that it was time to make a change. And then after the change is made, so we as management have been making weekly visits to the site. property, doing property tours, looking at tenant leasing information to make sure that what they were telling us they were doing in terms of credit checks, background checks, employment verification, etc., that, that almost was a mini audit every week of a couple of different tenants. And so we were doing that and realized that the previous gentleman had left some missing documentation, shall we say, which kind of reaffirmed our opinion of our decision to, to make a change. And Some of the background there, it gets kind of tedious and boring, laborious, laborious, but we're trying to have a lot of oversight and not override their decision-making ability, but we want to be very active in this situation. Yeah.

Well, I can see why. I mean, you would want as rapid a fix to that, particularly it being a 60-unit, you just don't have the volume there. To compensate for poor performances there. And this being an A-class property, I'm guessing it probably wasn't a value-add property, it being an A-class investment. No, it wasn't.

No, it wasn't.

Yeah. And so that even, that is even going to make those figures even more critical and meeting those performance standards there. So the decision was made to move forward with that. You've made that decision. You have the new person in place there and you're keeping your eyes on the product as as well as the personnel involved in that particular situation there. So you're probably going to, uh, to see some turnarounds in conjunction with that. I'm a little surprised that you're having delinquency issues, and maybe it was just the personnel thing, but usually, typically, delinquencies are not a particular problem in A-class properties, uh, not to the degree that they are in other classes there. Other than the personnel issues, are there other issues with this particular site that were causing those delinquencies, or? Yes.

That's a great question. And we have pondered that. It's an A-class because of the location and the newness. It's a 2018 build. So it's A-class because of that. The tenant population, if you look at that, is probably a B tenant population, maybe a C+ tenant population. And what our opinion is, is I guess we'll never really know, is we got in a pickle over the holidays where some of the tenants started paying off their credit cards or doing Christmas shopping and are trying to catch up now and are still trying to catch up from that. At least that's our assumption. And then we've started a very stringent eviction process. We live in a state where we can do that, but really day 2, they get a little reminder that they're late. Day 3, they get a second reminder. Day 4, they, um, we lock 'em out of the, of the unit. So that means they literally get locked outta the unit until they call the office and talk to the office. By the law, we have to let 'em back in within 2 hours of when they're locked out. And we are fortunate enough to have a high-tech, uh, Remote e-entry into the unit, so the property manager can actually unlock the unit from lock or unlock the unit from wherever she is at via her cell phone. And so that's a very nice feature. But the lockout serves one purpose of making the tenant respond to the property, talk to the property manager, and getting an update versus ignoring them. And then on the fifth day, we actually file eviction notice with the court. I think it's on the seventh. You got to give them three days after that notice. You give them a three-day notice you're filing eviction, and on the seventh day, we file. with the court and hopefully try to get them out. And, you know, we'll say, if you're not going to pay, just leave, just go rather than going through the eviction process. Yeah. And so some people have taken us up on that. And then there's other good-paying tenants who, you know, want to catch up and they make every effort. It's like anything else in society. They make every effort to catch up and pay us a little bit at a time or whatever. And so it's a real mixed bag. The key element is the 60 units. It's just like you said, we don't have the economies of scale. So every, every non-performing tenant is killing us, but we'll get through it.

Yeah. Yeah. Well, Randy, tell our viewers and listeners what it is that you have to offer as a company and how it is that they can get in touch with you to take advantage of that.

So Randy Langendorfer, as you said, Houston, Texas. Just a real quick intro. I started out in the single-family flip business. I was a hard money lender, got As you indicated in the intro, into multifamily in 2014. I've been in several different educational arms, started out at Lifestyles here in Houston, was in the Sumrock Group in Dallas for about 3 years. In the last several years, I've been in Rod Khaleef's organization. So what I offer is try to offer investors above-average opportunities to invest in different real estate— multifamily real estate, I should say, across the Sunbelt. So I own with other GPs in Greenville, South Carolina, Houston, Dallas, and Tucson, Arizona. So I look for properties that are where I can partner with somebody if it's not in my local market like Houston, or with somebody that has experience in that local market, operations experience. And I think we're gonna, we're gonna do just fine in those markets because they're across that Sunbelt. Currently doing one right now in Houston here. We have a— we have an opportunity there that we're trying to close up in the next month. And so also on the side, I'm a personal coach. So if anybody really wants to talk about coaching, I'd engage on that as well. But I'm going to be doing this full time after just stepping away, as I said, this coming week. And I'm really looking forward to it.

And so viewers and listeners, Randy is going to have time on his hands. So get in touch with him. For investment opportunities as well as some wonderful coaching opportunities there. Well, Randy, share with us one of the most difficult situations you've had to deal with and how did you deal with that? How'd you come through those times and what lessons did you take from that?

Oh, wow. One of the most difficult times. You didn't preempt me with these in advance, Alan. That's all right. That's good.

Putting you on the spot here.

Put me on the spot. Well, on the business side, one of the most— I'll say there's 2 business ones. One on the W-2 side of, you know, changing, moving to Houston, Texas from Cleveland, Ohio, where I was for many years. I'm a Cleveland, Ohio native. And if you were to see my office, I've got different Ohio memorabilia around the room. But, you know, in my mid-50s, picking up and moving across the country for a job was the realization that I needed to find something passive income-wise because the corporate world just Wasn't meant forever, at least anymore. And so that was a very difficult decision to pick up my family then move. And we had extended family back in Ohio area. Many years out, it's it's been a great decision. We're we're thankful for it. But at time, that was very difficult to pick up and move. The other business one I'll say is on the multi-family side. My mentor Rod Khalif talks about they're not they're not disasters. They're they're learning lessons. And the first multi-family I was a general partner on. I don't know if I shared this with you before, but this is back— we bought the asset in late 2018, and, uh, in the lovely city of Beaumont, Texas. It's about 120 miles due east of Houston, for your listeners, between Houston and St. Charles in Louisiana. Literally second month into the place we own it, I get a call one day in the office, and the, uh, property manager calls me to tell me that, Randy, the building's on fire.

Oh my gosh.

And, uh, so That was, you know, just— I'm a newbie. It's our first asset we ever owned. And people said that would happen sooner or later, but I didn't think it happened in the first 2 months. I was hoping for about the 20th property down the road someplace. But that was a, that was a real challenging experience because it put a lot of financial pressures on it, on the asset. We became very involved, almost micromanaging the property to pull it out of that. Does that Luckily, it wasn't the entire property. It was only 28 units out of 139, if I remember correctly.

Only 28?

Only. And the other really good thing is, fortunately, no one was injured. There was no bodily harm done to anybody, any of the tenants or anybody else. So we were extremely thankful for that. And because, you know, everybody says sooner or later you're going to have a fire or a crime on your property if you do this long enough. And we had it early. But you really don't want the loss of human life because obviously it's somebody's mother, brother, sister, father. But it also becomes extremely difficult then going forward to operationalize that and correct those situations. If somebody dies, there's going to be a lawsuit. And the next property I was in, you know, there was a fire out on there. Forget it. There was a fire. A mother left her 3 children home alone and regrettably, very tragically died. She left 3 children home alone and they died in a fire on the property and she sued us for negligence. Only in America.

Yeah.

Uh, I mean, it was very tragic, but loss of life. But so anyhow, those are 2 big decisions I think of. And then there's, uh, I guess in a personal vein, uh, raising kids and, you know, being married for a long time is not that those aren't devastating. Those are just life challenges. But, uh, for sure. Yeah. Life challenges.

Well, Randy, it has been wonderful having you back with us. Thank you for sharing your wisdom and knowledge with us. It has been a pleasure reconnecting with you. So thank you for being with us again today.

It's my pleasure, Alan, all the time. If somebody wants to get ahold of me, the best way is the, my webpage, which is invest-ark.com. And there's a schedule meeting there on that webpage and would love to talk to any of your listening audience.

And all of that information will be in the show notes as well. So viewers and listeners, thank you so much for being with us today.

Thanks, Alan.

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