Inspection day at the 44 unit - creative finance live.

Hello and welcome to another episode of Multifamily Strategy Live, going to you guys live from the phone right now. My studio is getting a little bit of work done for tonight's webinar, so if you'd like to attend that, by the way, uh, the link is in the comments or the, uh, uh, what is it, the description below. So you're more than welcome to join that. We're talking creative finance, we're talking about how to buy deals, find deals with or without money. I'm also sharing for the second time ever my exact Section 8 strategy, how we use low-income housing to provide excellent housing for excellent people. We actually own really nice buildings. I'll be sharing a bunch of those buildings, the walkthroughs, how we're putting this together. We're going to put it all on Multifamily Strategy and on Instagram. Follow there @ChristianOsgood. Now, if you have any questions, go ahead and ask them in the chat. I'll be monitoring the comments here. Today's topic— sorry, I'm getting attacked by this fly here. Today's comments are going to eat you alive. Uh, today's, uh, mission— I'm gonna talk a little bit about a deal that we're doing right now. 44-unit Stephenville, Texas. One of my favorite markets. I love buying in Stephenville. I got a comment from a friend who's actually a fantastic investor, absolutely fantastic, uh, but he had a different idea about Stephenville as a market. And the reason is, if you look at worldpopulationreview.com, it only has 20 people— 20,000. If you're looking at a population of 20,000, it is likely that you will see very little appreciation. Some of those small markets stay small for a really long time. So on first glance, low population, is it somewhere where we want to invest? Why is Stephenville my favorite market? Well, we pulled a worldpopulationreview.com. You can actually look at the graph. It goes up in population every single year. If you look a little deeper It's a college town. It's actually the fastest growing college in the state of Texas. Enrollment is a little over 15,000 students. Population of that town during the school year, which is most of the year, is closer to 40,000. They're scaling from, again, a little over 15,000. They're going to be scaling to 30,000 students. They just went D1. Their basketball team did amazing. They have a good baseball team. Uh, their football team is good. They're, they're, uh, 2-1, but they just got slaughtered by Baylor. But they're actually playing like the big teams. They're gonna play Texas A&M, they play Baylor. Uh, they're taking off as a school, fastest growing college. So if you missed this and you're, you're just kind of skipping over Stephenville as a market, you might look at and say population's too low. Really what you're looking at is a 40,000-person market that's trending towards 50. You drive the market, development going up everywhere, new stadium, more parking. Not enough housing. We have a housing shortage already for the students. We're looking at just about doubling student population. When I'm looking at markets, I love these little markets. They can make a ton of money. Now, if you just invest in small town America, you might have a hard time appreciating. Easier time with cash flow, harder time appreciating. We play the game for appreciation based on the cash flow. So we're only doing deals that cash flow day one, that will cash flow continually through the entire deal without injecting more capital. And we're doing this in markets that are stacked to grow. And that's what we're looking at there. So looking at some of the comments here, I'll share a little bit more on some of the creative finance on the 44-unit deal here as well. Well, so, um, Victor's asking how we found the deal. This was a deal, uh, we actually know the owner, but it was listed. So we reached out to the broker and asked them about the details, what it would take to get the deal done. We're in the middle of due diligence right now. This is a Section 42 deal. If you're not familiar, Section 42, that is also called LIHTC. This is different than Section 8 in that there's rent restrictions based on the development of these buildings. It's attached to the land. So there's actual restrictions called a LURA, a Land Use Restriction Act, I believe is what it is. It follows the actual property, encumbers the property, and it sets restrictions on where we can set rent. What this does, it drives the price of the building down. Now, interesting on this one, We actually have a path to end the LURAs early on both this and the 72-unit that we're looking at. But for the time being, they cash flow on that number. I made a lot of money in Stephenville, Texas, on a 25-unit that I bought for $2 million. We're buying 44 units and these are ridiculously nice units. We're buying them for $1.85 million. We just did the walkthrough. When I'm doing walkthroughs, this is what I'm looking for, especially in Texas. I look at the ACs. How old are they? That's going to tell me how often they do maintenance. How are the windows? How are the ACs? How's the roof? Immaculate. New ACs. Look at the roof. Perfect. All of these things are looking great. We go inside the unit. High ceilings, new paint. Look up, look down. No watermarks, no scuffs. Look at the water heaters. No leaking. And they're all new. This is a fantastic building for less than $2 million. We have $40,000 a door. We're going to buy a really nice— and this is like solid Class B paved parking. We go to the community center, you're talking 25-foot ceilings, giant stone fireplace, all sorts of amenities at this place. That's the type of deal that you can do. And when we're saying low-income housing, because we're doing a blend of Section 8 and Section 42 here, when you're using these government programs, you can actually go quite far and you can get— honestly, you pick up a lot of real estate at a fantastic price. Again, these restrictions are dropping off. One of the deals that's eligible to be taken out of the program now, we're going to leave it for an extra 5 years. No reason to come in and just end, end the program, but we're going to slowly taper it down over 5 years. One of these deals, it ends in 4 years. We're going to do the same strategy, 5-year hold at the current type of operations. We are going to do increases with fair market rate. We are going to do some efficiencies in how we're managing these. But on these deals, these are deals that are on market. Anyone could have found them. Excellent price, excellent market. All of the metrics are exactly what we would want to see. And so we're going to go and buy it, going to close those out. 90-day closes, which makes the capital raise really, really relaxing. Not too much, not too much stress there. Dylan, look on inspection. Do you think 12% cash-on-cash return for investors' money is reasonable? In Houston. Yeah, I think for most areas, if you're getting a 12% cash-on-cash return, that's, you know, 6-8% what you see in the stock market. So from where someone else could invest, yeah, I think that's fantastic. That's a return that I think a lot of investors would be quite happy with. Namir, would it be mostly student housing for this property? No, the 44-unit is actually senior housing, all 55+ community. All Section 42. So lots of restrictions on how we're going to run it. It's totally occupied and there's a huge need for senior housing. In fact, some of our projects, even when they're low income, a couple of them have already displaced some people, people on fixed income. We have tenants who can't afford $450 rents. They would be able to afford this property with government subsidies. We would be able to get them into this property. They qualify, they need the help. And so, we're, as we're buying up a lot of what would be student housing, as we transition that student, it displaces some of the elderly. That was actually a huge reason why I picked up this project. So, we want to make sure that we're maintaining housing for anyone that we displace. And this is actually a way to do it without actually having anyone have to face homelessness or leave the county, which I think is really important. So, no student housing at this particular property. However, our other 2, the 25 and the 26 in that town, Uh, yes, we are getting a lot of students. We will continue to get a lot of students. Would it change from a small market to core? Stephenville, Texas will never be a core market. It is a small town. It is the epitome of small-town America. You drive down the street today for 9/11, the whole town gathered to celebrate their firefighters there and to memorialize 9/11. Beautiful stuff, but you don't usually see that as much in big cities. American flags everywhere. Barbecue joints everywhere, uh, big— it's the cowboy capital of the country, so it's Cowboy Walk of Fame, all sorts of cool stuff there in Stephenville. But it is a small town. It will always be a small town, about an hour and a half out of Fort Worth. So it's far enough from the Metroplex where, uh, easy drive from, you know, like an 8 million person population in DFW, uh, really easy drive. However, far enough away where they'll never really touch at least not in my lifetime. Would you get pro photos for Facebook marketing? Um, it depends on if you have a marketing problem. If you can take a pretty good photo and you're in a place where your rentals are in high demand, you really don't need professional photos. You can just go ahead and lease the space up. Uh, as you get a bigger building, a more expensive building, or you have problems leasing up, yeah, they do help a lot. Cody does that a lot of his listings. Um, I happen to have an extremely good camera setup as I am a little bit of a social media guy, so with all of my cameras and setup, we can usually get a really good set of pictures, which really helps. I do the same pictures and video for all my listings. But again, that's not necessarily the norm. I don't think you need that, especially if you're buying, you know, in the, in the smaller, you know, 8-plexes, 25s, 12s, all that sort of thing. Not typically something that's super needed unless you're having any trouble leasing up. Steamville's cap rate is actually a 6 cap, which is surprising for a lot of people. You might think, hey, wait, this is a little bit out in the country, Cowboy Capital. We're probably looking at a higher cap rate, more of a cash flow market than appreciation. Deals are actually pretty tight here because they're pretty competitive here. This is a market where there's a ton of development, there's a ton of upside. People see it. There's not as many investors. It is a smaller town, but there's a lot of money coming in from Florida, coming in from out of country, coming in from out of state, Californians buying up stuff. It's a market where people who are watching, especially who like student housing, people are watching this market really closely. So we do have a compressed cap rate from what you might expect from a 20,000-person population, which is great for value-add as we're going, you know, taking rents from $450 to $985 in some buildings at a 6 cap. That is, you do make quite a bit of money, $20,000 per every $100 raise. Familiar with the USDA rural mortgage programs? I am. And we've looked at a couple of them, but for the most part, the loan products that are currently made available for us, regardless of how rural we are, The loan programs that have been made available to us are fantastic. What we're going to do financing-wise on this— this is a bank finance deal. On a bank finance deal, what we're going to do is we're going to go in, we're going to get probably about 7% interest only, which is pretty good debt product. I'm pretty happy with that. We're going 7% IO. We are going to lock it in. And we're going to start doing our rent bumps to fair market rent. It's not going to be super aggressive, but they are going to make their way up to fair market rent or wherever their restricted amount is. There's room for increase on every single unit though. Uh, mild increases throughout the whole thing. And then we're doing some major cost savings. The way that this project is run is really expensive. I have a much more efficient way to run the program and still stay well within the rules. So we're going to go ahead and lower the expenses. Do a mild raise on the income. And with those two things, we'll do what's called a rate and term, which we're going to go ahead and refinance, not pull cash out. We're just going to refinance as rates trend down. Our property is trending up, so we'll qualify for even better debt products here, probably in about a year. So in about 12 months, hoping to bring that down because of some of the low-income programs, we can actually get a lower rate. We're hoping for anywhere from a 5 to 5.5% interest rate a year later from now. Deal works without it, but that's another way to run it. All right, rolling through our questions here, and they're coming in from Manuel. Do you guys get tenant estoppel letters? Yes, we do. And what are some of the things that you do to mitigate the risk of inheriting tenants? Well, you inherit tenants, there's not too much you can do about it. You can't run new background checks, and often they're not provided to you. So the new tenants, the best thing you can do is be present. Like today, I was present for the inspection. I actually met a lot of the tenants. I walked through the units, which, by the way, they're immaculate. Everything is new, everything is clean. It was, it was absolutely incredible. Uh, we walked through all units, um, and then tenant estoppel letters are going to help back. Basically, they're there for a tenant to say, this is my rent and this is my security deposit, and you're just making sure that matches the rent roll. Really, the estoppel letters are to ensure that the landlord didn't lie more than check your tenants. But that's the best you can do. And we've had some tenants— I've had a tenant kill another tenant who I inherited. So, well, I didn't— not tenant, but it killed a guest. We've had murderer tenants, we've had drug dealer tenants. All these are people that we've inherited. We haven't had to evict people that we've placed, but we've certainly had to evict people that we've inherited. It is a cost with the properties and it's something that a lot of people don't factor for. So when I talk about your options for cash flow, borrowing less money, borrowing cheaper money, and always raising a reserve. It's a big part of what the reserve's for is you're going to have increased turnover, increased inspection, increased exceptions to the rule. You're going to have increased vacancy, you're going to have increased evictions possibly. You have expenses with the personnel in your building that a lot of people don't factor for. And when their deals don't cash flow, that's often the reason why. From James, do you need your LLCs and good operating agreements set up before filing deals and setting up conversions to potential investors? Um, do my best to read that the way it's supposed to be read. I think the question is basically before I start conversations with investors, do I have the LLC set up? No, because they're going to be members of the LLC. So I set up all my deals as Christian Osgood and/or assigns. And often there's a clause in there that says that I will be a member of the LLC. Basically, I'm leaving myself room to change members, to write the operating agreement, and to found a company that's going to own the property. This is fairly common practice. It also allows me, if I so choose, if I put a lot of time into these deals and I do a really great job raising the capital, like the actual debt piece, if you bring a deal, the management and the debt all lined up and packaged for everyone, it is optional that I can take an acquisition fee on some of these deals. If you put in all the work, that's something you can do. So I can take an assignment fee when I assign it from myself to the LLC, which is a nice bonus. I don't always do that, but there are some deals that are very hard to put together that I do need to be compensated for the time. So it opens up that possibility. But in addition, it gives me time to file the LLC, find the members, and get the operating agreement. Rolling. So all those things are done after you are under contract but before you close. Fixed life: I'm offering my, uh, unit Section 8 housing, but they're only offering to cover 30%. Uh, have you seen Section 8 offer so little? Uh, should I have the tenant tell Section 8 that they can't afford that? Well, the Section 8, they get the voucher that they get. The what the tenant can't afford or can't afford has nothing to do with anything. They have a fixed voucher. So the portion that the tenant pays is going to be based on their voucher for a Section 8 program. So if they're only covering 30% for that tenant, they're only ever going to cover 30% for that tenant. Section 8 is based on the voucher amount. Your rent is your rent. I have tenants who qualified where they're going to pay— they pay 0% of their voucher. I have tenants who pay 80%. But the actual voucher is based on their income for Section 8. Now, there's other government programs. So if you're working with the housing authority and there's a rental assistance program that they'll cover 30%, unlikely that they're going to change the rules for a specific tenant. But because it's a government program, they're usually pretty rigid. But yeah, as far as Section 8, that's based on a voucher program, which is based solely on the tenant's income, not based on your rent for how much they'll cover. No one with the wood returns you can offer investors in tertiary markets are— some of these questions are hard to read. Wood returns you can offer in tertiary markets compared to core? I think it's what are returns? Uh, it's always deal dependent. I don't offer different returns for a core market or a— your return is not based on where the deal is located, based on how the deal is going to perform. If you're doing a deal that's based on equity growth or value-add you're probably going to have a buyout. You're probably going to structure it with an equity partner and a future buyout based on the success of the deal. If we have a deal that's more likely to cash flow, whether it's core or in a tertiary market, if it's higher cash flow, you're going to take it out with debt, or you're probably going to have a higher preferred return for your investor. There's going to be more cash flow, so the buyout will be lower. But that's typically how you're going to structure it. The actual— any investor in your deal, it depends on your deal. It has nothing to do with where it's located. A very low interest rate, uh, because of Section 8. Can you expand on this more? So, uh, when you're working with affordable housing, it's usually when a certain percentage of the building is affordable, you can actually get preferred debt terms from Fannie Freddie. They actually have affordable loan programs. So I'm going direct to Fannie Freddie, uh, for the loan that I will be refinancing into. Uh, for the initial one, we're using a local credit union. But low-income housing and government contracts, there's actual incentives for offering this. They're government incentives, which is why you look to Fannie and Freddie for sort of debt products. So when you're working with Section 8, you have a certain percentage filled with Section 8, you may actually qualify for a different set of debt products because of the affordability of it. It is a government incentive to you to provide that sort of housing. No one buying a new property slash inspection— who the tenants think you are? Well, they think that— they think I'm me. Um, I usually walk in, uh, on this particular one the owner specifically asked that we say that we are doing an inspection for insurance purposes. So we were instructed by the current owners to say that we are with the insurance company. That is what we were told to do. I didn't say anything because I don't lie, especially not to my tenants. It's not worth lying to make someone else happy. But I didn't mention anything. Whatever the inspector said is probably what they were instructed to say. But when I walked in the unit, I say, "Hello, it's nice to meet you. I'll be in and out really quickly." They're aware that there's an inspection happening. They've had notices posted. So there's not really any need for them to know who I am. As far as they know, I'm just another person taking pictures for the inspection team. But if they ask, I just say I'm here to take pictures, which is true. I'm here to take a quick look at the unit. A question I do love asking existing tenants, though, is, "Hey, we're going to be in and out of here really quick. As we take a look at everything, is there anything that we should be aware of?" that you would like us to let the owners know about? Oftentimes the tenants will tell me everything that's wrong with the unit, which is fantastic. It's very helpful. And that's a question that I actually learned from my inspector friend, Ben Brenner. From Vicks Life, what tips do you have on reducing operating expenses if you're investing out of state? Finding a good property management company and honestly scaling. If you have more units, you can negotiate better rates. But when you're new, there's only so much you can do. So I would say, uh, find a good property manager or find a great team. Um, find someone who owns real estate. And what I've done where I can cut costs a lot— this is why, this is why I still run a profitable PM company without like ridiculous overhead— the way that I run my programs is I have a decentralized model. So I don't have on-site management, but I do have zones. So If you think of like football, man-to-man and zone defense, I have a team of people. So my contractors, my property managers, my leasing team, my notice posters, all of them cover a certain area for me. They don't necessarily cover specific buildings, which means I can be a little bit less expensive than some property managers on multifamily. So some people like to run an onsite management program, and I've noticed a lot of onsite staff actually has inefficiencies to it. So decentralized property management, finding a good manager, and really building that relationship with them, then the next thing you can do to really work on your pricing. The more you scale, typically the better pricing you get. From Manuel, what are your favorite mix of industries to have in a market? I like to see— personally, I've really liked markets that have a lot of agriculture and a lot of tech, which is interesting because Moses Lake has both. If you're looking in Grant County, you have a lot of R&D because you have the cheapest power in the country. You have R&D, Boeing, you have data centers, you have— then you have the agriculture background, tons of farming out there, tons and tons and tons of farming. You also have some food processing and packaging. So I'm looking at all these. Now you like to see diversity. In Stephenville, which is a smaller town, you have the dairy industry, the ranching, the farming, solid background, tons of history for that big rodeo town as well. Uh, you have tons of small business and I mean like all over the place, uh, lots of thriving small business. And then you have a huge school that's growing and showing a lot of signs of continuing to grow. They're doing really strong leadership, a lot of interest, tons of growth. So when I'm looking at that, I'm like, okay, our engine right now in the short term is the school. The school is going to carry for the next decade. It's, it should be doing really good, barring any major scandals. Behind that is a town that is Regardless of the success of the school, grown in population every single year since it's been founded, it always grows. People like living there. Then I drive there and I also love being around there. So I like seeing diversity more than I care about specific industries. Things I would watch out for. I'm all for investing near military bases. Bases do move and they move people around. They go up and down in population. They also tend. To be rougher areas more often than not. So if you're going to, if your primary employer is a military base, I want to see if there's other companies in the area and other jobs. I would not invest in a military base area solely because the military base is doing well, because those are subject to change and there's nothing you can do to really impact or control that or really predict what's going to happen. Troops get deployed, bases move, bases collapse, bases combine. I, that's one that I would, I'd be careful with. When serving the military community is choose those types of housing projects really carefully. Other than that, diversity is more important, I think, than any specific industry, because years ago you might have said like the auto industry is a fantastic one, and then look what happened to Detroit. So I wouldn't rely on one industry. I think diversity is more important than specifics. When doing the inspection, do you look at every single unit? I like to. On this particular one, we had to— we got to see every unit, but we did a full inspection of, I believe it was 11 of 44 units. So we hit a quarter of them. On a bigger building, traditionally you wouldn't go in and see every single unit. That's too many attempts to coordinate. It's a massive project. But we want to take a random sampling, so I don't have the owner's cherry pick. We decide which 11 we're going to go into. We make sure we can get keys for each of those. We plan out the day. And then I was about a half day this morning, uh, over in Stephenville, Texas, going through the units. And oh my gosh, they looked good. I'll get some pictures up on Instagram at Christian Osgood. Uh, filmed a bunch of videos there for everyone. So you can see what, uh, what real Section 8 looks like. It's not crappy houses in the Midwest. I've seen a whole bunch of people like promoting courses of like buy slums. Don't do that. Uh, these are, these are actually going to be the nicest apartments I own. Uh, very, very nice. And they just happen to be subsidized housing. Great people can live there and they're nice. I cut out a little bit. Uh, what do you ask tenants to learn about? A lot of problems. The question I always ask tenants to learn about problems with the building, I just say, hey, while we're in here, um, is there anything we should let the owners know? Is there anything that we should be reaching out to the owner about? And they always tell me like, oh yeah, the sink's leaking, uh, this needs to be swept. In this case, no one had anything to tell the owners because like, no, there's really nothing to do. It's a nice building, the management's super responsive, we like it here. So it's a simple one. All right. See, I'm meeting with an old landlord in my market Sunday for lunch. We talked about him selling me some homes, but I don't think it will happen this year. Any advice for building the relationship? Well, the first thing with any owner is you treat them like an owner, not a seller. So I don't worry too much about the selling of the homes. If it's going to happen, it's going to happen. I would really focus on what pieces of knowledge they have. So as you're building out your business and as you're finding other deals and as you're investing in that area, I'm going to be asking questions as, as needed. So when I need a lawyer, that's usually the type of person I reach out to. Hey, you've been in this market a long time. Who do you typically use? Property managers, accountants. He has a lot of resources and people appreciate and typically want to help you move forward. So if you're trying to move forward and you're having the conversation with them, I would just say, hey, look, I appreciate the help a lot. Like, it's been fantastic meeting you. The next time you reach out, have good questions and have new questions for them. If they can help you move forward, it's going to help you. And oftentimes people love doing that. All right. Looks like that's about what we have for questions on today's quick live. If you guys want to check out— and I'm so excited for this— if you want to check out the webinar tonight, the link is below. It starts, uh, about an hour and a half from now. We're going over creative finance. We're actually going deeper into my Section 8 strategy. I'm going to show you simple math where one could— and I've done this multiple times— where you can buy a bunch of units, where you can acquire them, fund them with or without money, and you can use Section 8 strategies like I have to make about $2 million a year, every single year, on repeat. Same strategy. And as you stack these, you make obviously more and more because you have more rentals to put this in. But this is a program where it's like super simple math. So I'm excited to share with you guys. You guys want to join that tonight? That is a live webinar. Just register on the link below and I'll see you guys there. Totally free.