BRANDON ABBOTT INTERVIEW – How “Sweating the Small Stuff” Pays Big in Multifamily Real Estate Investing

Welcome to the Next Level income show where it's our goal to take your income, your investments and your life to the next level. I'm Chris Larson. And I'm Caleb Loboy. You can get our free book@nextlevelincome.com today on our show we have Brandon Abbott. He is a passiveinvesting.com team and he specializes in asset acquisitions and management. As a professional in the field of real estate and construction since 2005. He brings specialized knowledge when finding underwriting and and ultimately when managing assets. He spent the recent years as a top professional in the property and casualty side of both residential and commercial insurance. And today he manages over 200 million in multifamily properties in the southeast after starting investing in 2010. Brandon, welcome to the show.

Chris. Caleb, thanks for having me. Good to be here.

Absolutely. So, Brandon, we met through the multifamily community and like for you to tell our audience a little bit how you went from being a contractor during the Great recession time that we know quite well, to now owning over 200 million in multifamily properties.

Yeah. So life's a journey, right? So mine started back in my college days. I'm originally from upstate New York and came down to go to college in South Carolina. The college I was attending wasn't for me. They're pretty strict. They're really tight, tight knit, you know, kind of militant type school. And at that point in my life, I wasn't ready for that. So I just stuck around in South Carolina and got a job working construction. So went through the ranks, you know, doing everything, you know, actually doing it myself, framing, electrical, plumbing, H vac and kind of learning everything. And then started my own company and just around 2003, 2004, somewhere in there. And started as a general contractor building custom homes in the Greenville, South Carolina market, which we have some properties in now, and really just tried to grow that. So went from the general contracting company and then started a framing company that would work and do my projects as well as other builders projects. So I could kind of, you know, spread myself out across the whole industry. Same thing with grading. So I had another grading division. So those three facets and then, you know, growing, you know, the sky's the limit, no end in sight, you know, contracts all over the place. And then what's that?

Times were good.

Oh yeah, you know, hey man, there's you know, no end in sight really, you know, and kept over leveraging really was what I was doing, you know, building, buying equipment, bulldozers, excavators trucks, you know, just trying to scale up, scale up. And that was all fine as long as you had cash flow. That's going to be a key word. So cash flow stopped when Fannie and Freddie stopped lending money at that moment in time. So while I had contracts signed, ready to go, nobody could get the money. And so I'm sitting on all these liabilities, bulldozers and excavators and all this equipment, which is very high cost monthly and zero cash flow, just went to nothing, like literally overnight really. And so that left us kind of in a bind. So we learned a lot of valuable lessons about cash flow, about leverage, good leverage, bad leverage. So that moment in time, I had three girls, I currently have four. But at that moment we had just given. My wife had just given birth to our third. And so we had, you know, we were hurt, you know, financially because of this at the time. So I'm always the type of person, you just do whatever it takes to get the job done. So I went, got a job working UPS morning shift, got a job working night shift at a gas station, and then started actually a hot dog street vending business just to make ends meet, you know, and I did that and got contracts with different sports venues and in the meantime got my adjuster's license, went into the insurance field and worked in the insurance field for eight years and just built my knowledge of estimating and technology in the field and then finally got with the right team and looked into multifamily. And back when the housing crash occurred, you know, I was thinking to myself, you know, we had to move out of our house, you know, times were hard. We moved into an apartment and I was saying to myself, I need to be investing in rentals because that's where the money is. It's constant no matter what happens. If the market goes up or down, people have to live somewhere. And when they can't get a mortgage or their house is being foreclosed on when in a recession they're going to move into an apartment. And so fast forward eight years later, I was exposed to multifamily and really started getting into that. And here we are today.

Wow. Yeah, I appreciate you sharing that because being in real estate since 99, I watched my parents and we talked about this on the show before. My parents were both working for a construction company in the early 90s when the savings and loan crisis happened. And I saw it then, I saw it happen 10 years ago. And I think today a lot of people are kind of having the same Feelings. Brandon, times are good. The stock market's at record highs. My house is worth more than it's ever been before. You know, unemployment, super low. Like, things things can't get. You know, things. Things aren't going to change. And I think it's a good lesson that, like you said, when, you know, when times are good, you have to look and say, okay, are the fundamentals good or are we focusing on the right stuff? Because, you know, when that. When that. When the music stops and there's no chairs sitting around, you don't want to be the one left standing. Right?

Exactly.

Yeah. So I appreciate you sharing that. Excellent.

Yeah.

And you had said you finally got with the right team, and we had Danny Randazzo on a recent episode, and your other partner, Dan Hanford, we're having on an upcoming episode. Would you share how you met with them initially and got started and what makes the three of you such a great team working together?

Yeah, definitely. You know, when you have a business partner, it needs to be organic. It really does. It's not something that you're. It's not a sterile selection of people. It has to be something that, you know, it's a give and take. And Dan and I actually go to church together, and our. Our children go to the same school here about a mile street. And. And we've known each other. Dan's in the medical field, and we've known each other. We talked before, but we took a trip or he took a trip, took my wife and I on a trip with another couple from our church to New York City for the day. And on the plane flight up, we were talking, you know, and he was talking about how he's getting into multifamily and, you know, telling me the numbers, you know, the returns and cash flows and light bulbs were just boom, boom, boom, boom. You know, this is like, yeah, this is exact. I understand it. I get it. Where do I sign up? So got back from that trip and just downloaded, I mean, just podcasts, books, you know, just absorbed as much information as possible, learned the vocabulary, the lingo, came back around, started talking with Dan about teaming up and doing something together. And so we got together with the wives because, like I said, it's organic and, you know, everybody has to be on board because it is a family environment. It has to be that if it's just business, and it is business, but it has to be more than that. So we want to make sure that everybody was aligned and we all got along good and that that went well. My wife and his wife are good friends. And so we started, you know, looking for properties and getting into it. And then I remember hearing Danny Randazzo on one of Dan's podcasts. He did the tough decisions for entrepreneurs. And I remember listening to Danny. And Danny and Dan were in the same mentorship program together. And so they knew each other already. Well, fast forward a little bit. We were looking at a property in Charleston. Dan and I were, and Danny was in Charleston. And we got to talking to him. Hey, he knows the market. Let's ask him what he thinks. And we just got to talking and said, hey, what do you think about teaming up? So we did that, decided to team up. We did the same thing. We got all the wives together. We went and rented a place in Amelia at Amelia island and had all the wives come and made sure everybody, you know, it gelled really well, and everything was good there. So the rest is history. But the reason it makes us such a great team is because we each have our area of expertise, and each of us really doesn't, I'm saying, doesn't enjoy the other one's lane. And that is very crucial because we don't cross lanes very much. I mean, we give feedback, we make decisions. The team as the three of us, every decision we make, we talk, and we make a decision together. But, you know, I am. I said acquisitions and capex implementation and oversight. Danny's numbers. He loves spreadsheets. He's a spreadsheet nerd. And Dan is the marketing guy. He likes to be out there, you know, and he's on the podcast. I'm doing webinars, and he's investor relations, so it works so well together. So it's a great team.

No, it really is. And Brandon, you know, growing up in a household where my stepdad was a contractor, and seeing that and spending, you know, spending days in the field with you, watching you deal with the teams, it really is different than dealing with spreadsheets and numbers. And look, most people know I love a spreadsheet as much as anybody does. I love talking to Danny about that, but I love watching you in action and seeing how you interact with teams. So, you know, one of the things that you mentioned you didn't talk much about was being a commercial insurance adjuster. And you share a little bit about what you learned in that field and how that translates to what you do now and how that has turned into a competitive advantage for you guys.

Yeah. So when in insurance, it goes in ebbs and flows. So when a hurricane comes, you Know, it's. It's all out. You know, you just, you put everything aside, you turn your life off, you just run claims, and you have to look for efficiencies and ways to make things faster and better. And you have to think outside the box. You have to be better than your competitors. And so, you know, some of the things I would do, you know, was first thing I did, one of the big hurricanes that we had a few years ago was go out and buy a drone. So I went out and bought the drone because sometimes the houses were too high, like three story, and then I had to make a second trip back and. Or get a ladder assist is what we call it from a roofer, and it's just a waste of time. So if I had a drone and I could send that thing up there, I could check for wind damage, hail damage, and, you know, I could do it from my car if I wanted to. And the technology, it's amazing. I can actually tie into my software, my estimating software, It'll control the drone, it'll send it up and it'll go around the house and take 3D photos and it'll import it into my estimating system and create a 3D sketch within my estimating system. And then I click a macro that I pre built with all the items necessary for like a roof replacement so I can write an estimate. So I just import, click the macro and I just wrote, you know, a $50,000 roof estimate in five minutes, as opposed to getting a ladder out and doing this and making a second trip and drawing the sketch all by hand and then satellite imagery. We do that a lot, so same thing. I can just pull down satellite imagery on a set house or building and it'll import into there and I can just run macros and then just learning how to estimate where the market's at, the difference between zip codes and pricing. So all that was very valuable and moving forward or the next step or the next layer of my professional life.

Yeah. And I mean, you look at today, I mean, you know, if you bought and bought an apartment building in 2011, 2012, I mean, you could go and color the siding with a magic marker and watch the price go up and really do nothing. It was amazing. Right? Today the market is so competitive. So, you know, one of the things we talk about with Danny is how very small differences in rent can add up to millions of dollars in value. Can you share some of your experiences, Brandon? Kind of what you were just talking about, where you've uncovered some of these Hidden value opportunities that maybe other operators haven't seen.

Yeah. And again, it's about being, you know, thinking outside the box and being as most efficient as you can. So, you know, I'll start off with cap rates. You know, that's, you hear a lot of people talk about, oh, rates are compressed. You know, it's, you know, you can't buy anything at a sub five cap. Well, there's benefits to a compressed.

So before you go on, so, you know, do you mind explaining for the audience like what a cap rate is?

Sure. So that's your pretty much your market gauge. So that's the return on your investment in the market. So it's really just a gauge is all it is. So I can look at properties that were purchased recently and say, oh, well, that sold for a 5 cap. And so if I'm getting ready to buy property in the same market and they're wanting to go in at a four and a half cap, I can say I'm overpaying in that market. Only in that market. Now, you may go to another market and four and a half may be a great cap rate, but it's just a gauge of where the market is.

Got it. So a 5 cap would be equivalent to $100,000. Investment would put out $5,000. That'd be 5% or a 5 cap. Is that right?

Yeah, basically for rough numbers. And so a lot of people get scared with low cap rates. So for example, like some efficiencies, one of our properties, when we got onto the property, it had three sets of dumpsters across the property and they were paying a rental of $130 a month for those, each of those dumpsters. All right, so at three times 130. So $390 a month. And so what we did is we consolidated. So I built a dumpster enclosure, went to two dumpsters because I checked with the county to see if that would be sufficient for, you know, our occupancy. They said yes. We also found out that we were in the county and that they would provide trash service with the dumpsters for $60 a month. Right. So you added a $390 a month cost drop and then drop down to 60. So for a savings of $330 a month. Minor. Right. We're talking million dollar properties. What's $330? Okay, so $330 times 12 months, that's annual cost of 3,960, you know, or a savings of 3,960.

All right.

And then now we'll bring in the cap rate. So if we bought that at a 5 cap, you know, so you divide that number by 0.05, that's a savings of 70 or that's a valuation increase of $79,000.

$79,000 from going from three dumpsters to two.

Right, exactly. So don't minimize the small stuff, you know, and so you run that same scenario. 39, 60. Let's say I bought it at a four and a half cap, okay? Now, now it's a valuation increase of 88,000. So you see, I got more. So compressed cap rate is not a bad thing because you get a higher return on your investment. Now as long as you're buying equal with your market cap, you know, so if you bought, if the market's selling at a five and you bought a four and a half, that you might have trouble exiting at that same. But you know, this another. And then another example would be operation side. Like, you know, one of the properties went in and they were paying an IT company, the management was paying IT company to. And they were putting in Microsoft Office. They're charging like $700 to install Microsoft Office. I was like, I go to Best Buy and buy it for like 65 bucks and I'll install it, you know. And they were paying like a residual monthly fee of $500 a month to this IT company. All they did was like install software when you need it and it's it, you know, just, you know, a lot of times owners don't get deep into the financials. The operation side, that organic value add, it's not just sheetrock and granite countertops or new flooring. It's trimming operations and small little things. Save $330 a month and you just made yourself a bunch of money.

Well, that's what I, you know, like back to your point of staying in your lane, Brandon. When you have a guy like Danny looking at the high level numbers, knowing how to analyze a market and a property on a spreadsheet, and having you be able to walk in behind him and know how to implement it, I think it's a powerful combination. And I mean your examples right there, they remind me of a book I just read. It's called Atomic Habits by James Clear. And Caleb and I are both cyclists in there. He talks about David Brailsford and he is the coach that took the English cycling team from the bottom to the top cycling team in the world at the Olympics, at the Tour de France. They've won multiple Tour de France's Tours de France, I should say, in the past decade. And David Brailsford talked about making little 1% changes, and if you make a 1% change in all these different areas, what it adds up to. And I think it's a perfect example of what you do as well. It's awesome.

Definitely. Definitely.

So at our recent investor meetup, you're telling me and some of the other people there about on how you work with Lowe's buying things in bulk when you're renovating these apartments and all of that to add value, could you go into that a little bit as a way of sort of further explaining how finding these ways for those marginal gains can really help increase the value to make a profitable investment?

Sure. So, you know, in the contracting world, you have to be a strong negotiator, and. And you just have to just set the bar. Extreme anchors, if you've ever listened to never split the difference. Extreme anchors. So I kind of use that in the setting prices for suppliers and contractors.

Great book.

One of the things. Yeah, that is a great book. One of the things that we try to do is go straight to manufacturers and cut out the middleman, because everybody that touches it is getting a piece of that pie. So if you can get all the other hands off of it, you're getting a bigger slice. So. So we want to go direct to the manufacturer. Well, but what we found on some items was that with the buying power of a company like Lowe's, who's, you know, just. They can buy in huge bulk and they can get better contracts than I can even going directly to the manufacturer. So, for instance, we had a light manufacturer that we were using. We were buying them from Lowe's. We're like, hey, let's get Lowe's hand off that pie. And let's go in and try to, you know, buy this directly from this manufacturer. Well, we go to the manufacturer, and we get in with them, and we're talking. Yeah, we'll buy pallets at a time, and we're doing, you know, thousands of units, you know, annually, you know, great. You know, thinking, you know, we'll sell them. It was higher than what we were buying it from Lowe's for, you know, and it's like. We're like, wait a second. So we went back to Lowe's, and just what we will do is we'll go in. When we purchase a property, we'll go in the unit, and we'll get every piece that we need. Then I'll go on to the website or go into the store and get all the SKUs and the quantities for. So I'll just Multiply it times 260 units or whatever I need, and I'll submit that to Lowe's corporate, and then they'll shoot me back a price of what they'll sell it to me for. And a lot of times they'll even price match. So, you know, I know for a fact that I'm getting things less than anybody else is. I can. I can say anybody else, because I've looked at, you know, other bids, and it's very, very competitive. So don't be afraid to, you know, say, don't. Don't accept the first offer, you know, to say, well, this is what I'm doing. Hey, sell yourself on the volume. Really, we're talking about, you know, small gains. That's the beauty of multifamily. The scale. Right. The economy scale is tremendous when you're negotiating prices. I mean, hey, guys, I got a project that's Gonna last you 18 months, you know, for. Forget about what you're doing right now. But if you're gonna do it, I want it for this price. And I'll keep you busy for 18 months.

Awesome. Yeah. In our book, we talk about a lot of the things you mentioned. We talk about cap rates, we talk about adding value. We talk about the scale and why I sold all my single family rentals and moved into multifamily. I mean, the scale is whether it's management or like, you're talking about Brandon. It's fantastic. So here we're a fan of. Of B grade multifamily properties, workforce housing. How did you end up focusing on B grade, and why do you continue to focus on it in this market?

Yeah, so it's interesting kind of the way you shift mindset as you get into the industry. So we originally started out looking at Cs and Bs, but what we found was that Cs are great because there's so much you can do to the property because usually they're older, vintage, you know, mid-70s to mid-80s. The problem is that it's hard to change the reputation of a neighborhood. Okay. So you can go in and you can. I mean, you can just deck that thing out. You know, granite, you know, marble, whatever you want to do. All just stainless, everything. And it could look beautiful. But the people that live in that sub market know that neighborhood for what it's been for years and years. And so it takes a lot of time to change the public opinion of a property. So you have to be careful about buying a property that has a bad reputation and just trying to make it better by putting lipstick on a pig.

Okay.

If I can put it to you that way. So then we said, well, you know, B class assets, they're already nice assets, they're already known to be a good neighborhood, better neighborhood. I would say, you know, not. We're not talking D, you know, but now we're moving up from C. And so now we're talking about people that choose to live in apartments as opposed to people that have to live in apartments. So our stabilization is better, our retention is better, and they appreciate the value add and they can afford the value add. So that's why the B class works well and there's less work involved. So again, our, you know, we're called passiveinvesting.com. so if I can get the same return and do less work, then that is ideal. Okay. And it's less of a risk. It's less of a risk because the neighborhoods already known to be a good neighborhood, we're just gonna make it better. Yeah. So that. And you know, people talk about, oh, in a downturn, Cs do better and Bs do better or A, you know. So I actually looked into that and did some of the research back in the housing crash or the recession, and there was only a 50 basis point spread between BC and A, you know, between each other. 50 basis points in vacancy increase. So it really, that's marginal, you know, so it's not really a factor.

Yeah, and it's really, you make a great point. It's, you know, if you're in this space, if you're in the value add space, people have, like you said at the beginning of the show, Brandon, people have to have a place to live regardless of where you are. And that's why it's important to look at the actual neighborhood, look at the location and dive deep into that. I know the last property we worked together on, I mean, the rent year over year rent increase is near double digits in that specific market. And it's amazing how strong it is. So, yeah, it's a great area. But picking the best market within the areas is very important.

People get confused sometimes with multifamily and they forget that you are buying a business that's selling a product and that product is a home. Okay? That's what it is. So, you know, anytime you buy a business, what is the, you know, what's, what's the thing with real estate? Location, location, location. So you can have the Best product, you know, you could have the best store. Right. But it's in the worst location and it's not going to do as well. So you have the same product and be in a better location and now you're going to do better. And so that's kind of the mindset behind the B class.

Fantastic.

Yeah. Another common question that seems to come up a lot with people trying to learn more about multifamily is how the hold period of the asset is determined. Could you share what your approach is to that and how you guys determine the hold period for the assets?

Right.

So that's driven by IRR internal rate of return and that's your return on investment with the time factor included. So, you know, if you say, oh, I put in $100,000 and I got 200,000 back, that's a great return until I say it took 25 years to get that back. So now it's not. So it's. So we look for certain factors in the IRR for our investors, you know, and the market is adjusted. So we've had to adjust those numbers as the market changes. But you know, we look at that factor though, IRR factor. And so you hit a certain point where you start to drop in irr. So once if you're doing like a bridge debt and you change to permanent debt, your IRR is going to be affected at a certain year after you've been stabilized. So it really just depends on the asset, the purchase price, the return. And we just look at those numbers and say, okay, basically on a. It ends up being usually, and I'm gonna say usually a 5 year hold makes sense from an IRR perspective. Cause then it starts to drop, it starts to go down. And so that's really what we're looking at. But you know, if we, you know, the market goes crazy and we buy an asset and we stabilize it faster than we thought and we're able to sell it in a year. The IRR is through the roof, you know. Cause we return capital and they got returns, the investors got returns, but their equity multiple does, you know, they didn't double their money over because we didn't hold it for five years. But their IRR stood the roof and they just rolled into another property. So, you know, it's really, it's not a dogmatic thing. It's really, you know, asset specific and market specific. So I mean, like I said, we've seen properties that people have purchased, ones that we were looking to buy and they were like, they purchased it years ago and they're selling for double what, what they bought it for in two years. And so why would you not sell it even though you'd underwritten to do five years? I mean, go ahead.

Terrific. Thanks for walking through that. And that's, that's something you guys talk about irr. You talk about equity multiple. If anybody has any questions about that, you can reach out to us. We have some stuff about that in the book and we can answer more questions on that as well. I think I told you before, you made a big impact on me when we spent, you know, spent the day together. And I think a lot of people don't realize what goes in, you know, behind the scenes, kind of the magic sauce that your team has.

Yeah, you have to really know, you know, you have to be around contractors. You know, it's a, it's a different. They're a group of people that have. And if you are, if you can't relate to them, right. If you haven't been there and you don't also, you have to understand what they're doing. So if you come to them and they're just talking numbers, they're like, this guy doesn't know what he's talking about. He's trying to get me to do this. But if I've actually done the work and I understand what kind of time goes into it, I know you're overcharging me because I know I could do it for, at this amount of time, for this rate. Come on, man. And once they understand that, you know, what you're talking about, it changes. They are two chains. So it really makes a difference.

Yeah, no, it's exactly right. I mean, we're building our house now and just, you know, being around it. I got a project manager who's been in it and you come in and he gets it, I get it, and the shit gets done, you know?

Yeah, you have to be, you have to be a hard nose, man. I mean, you have to be able to crack the whip and not be afraid to, you know, make a change. You know, you have to be able to shift on the dime.

So. Yeah. Cool, man. All right, let's wrap it up.

So one question we ask on every show is if you could go back in time and talk with your 25 year old self and give him one piece of advice from everything you've learned, what would that piece of advice be?

So I think it would be never, always have a bigger vision, you know, don't limit yourself to what you know now. Always be looking for more. You know, I've always said my whole life, no, knowledge is bad. Knowledge always be. You never know where you're going to be able to use it. And I believe that people are built in layers. So you have specific experiences that happen at specific times that make you who you are today. And more layers are going to get added tomorrow and the next day through experience. And so never be afraid of change. And the one thing, and this is something I knew back at my 25 year old self, but the biggest enemy to success is an inability to change your mindset. And when I run into people and I try to explain to them about multifamily investing and you know, you could sell it every which way. And the old saying, you can lead a horse to water, but you can't make it drink. And because they cannot change their mindset. Yeah, but I always have been told this, this and this. And they never open their ears, listen to what's being said. And that's the big thing. Listen and be okay with changing and be okay with being wrong. You know, like, hey, yeah, that's what I thought. But you know what, that makes sense. And have a paradigm shift and just go in that direction and be okay. Put yourself in an uncomfortable position and do what it takes to get it done. And so that's what I would tell anybody, no matter how old you are.

That's fantastic advice. That is fantastic advice. And we were talking about our kids before show and that's one thing we, my wife and I tell our boys, Brandon, is don't be afraid to fail. It's okay. We ask them, hey, what was your failure today? You know, it's great. Like, let's hear, let's hear about the successes and the highlights. But you don't learn. You don't learn from that. And it's hard sometimes. You know, it took me a lot of years. Again, going back to racing bikes, you lose a lot more races than you win, like 10 times if you're lucky. That's a loan under. So, you know, getting used to failure, you're learning quickly through it and I know you face some tough challenges. But we want to thank you for being on the show, sharing your wisdom, sharing your experience with our audience. I know I've learned a lot. I know our audience will too, Brandon. So this will be airing after the holidays, but Merry Christmas and happy New Year to you and your family.

Merry Christmas to you both and I hope you have a good time with your families. And thanks for having me on the show.

Absolutely.

Thanks for joining us.