Ellie Perlman -Untold Stories of Real Estate Investing Podcast - Navigating Multi-Family Real Estate

Welcome to the Untold Stories of Real Estate Investing, hosted by Wayne Courageous iii, a place where active and passive investors come to hear the good, bad and ugly of real estate investing. Our guests consist of experienced operators and investors who want others to succeed by sharing their stories. If you're looking to syndicate deals or grow your wealth passively in real estate, you've come to the right show. It's now time to sit back, take mental notes and enjoy next episode of the Untold Stories of Real Estate Investing.

Welcome to Untold Stories of Real Estate Investing. This is your host, Wayne Courageous. I'm really excited to have Ellie Pearlman on our show today. Ellie is a real estate investor who owns multifamily properties across the U.S. she's the founder and CEO of Blue Lake Capital, a real estate investing firm specializing in multifamily acquisition and management. At Blue Lake Capital, Ellie helps investors grow their wealth by investing alongside her and large multifamily deals. She started her career as a commercial real estate lawyer, leading real estate transactions for Israel's largest real estate company. Later, she transitioned to a property manager role and oversaw properties worth over $100 million. Ellie holds master's in law and an MBA from MIT Sloan School of Management. She's a Forbes author and a real estate investing podcast host. For Ready to scale. Without further ado, welcome to our show, Ellie.

Hey, Wayne. Great to be here. Thank you for having me.

Absolutely. I'm just really excited today and get to know you more and, you know, share great tips to our listeners. So one thing I'd like to say is, you know, impressive background. Is there anything that I may have missed that you want to introduce yourself before we get started?

I think you probably did a better job than I could. So, you know, been in real estate probably since, I would say, in the last decade from, you know, moved from real estate legal services to property management and then, you know, finally to investments, which is what I do today.

Nice. So today, as we were talking about before the show, I'd love to get Your outlook on 2021, discuss capital raising, especially with the focus more on family offices, and then dive into your recent acquisition of Element 41 Apartments in Atlanta. But before we do, one thing that I find very inspiring and incredible and looking at your website and just learning more about you is as your is your background and how you, as your website says, grew up poor in Israel and but still have the grit and passion, determination to do all the things that you've accomplished. So I'd love to give the audience a little background on who you are and how far you've come so far in real estate investing.

Yes, As I mentioned before, I started as a real estate lawyer and Today Blue Lake Company that I own owns and oper about 2300 units, which is over 300 million in asset under management. And we keep growing. We don't have a certain number in mind in terms of the number of doors we want to buy every year. And I get this question a lot. What's your, you know, from investors, what's your goal? How many doors are you going to buy this year or next year? How many, how frequently do you do deals? And the answer is there isn't any goal because it really depends on the market if the market is going to present a great opportunity. I'm going to buy two deals in one month. I'm not going to say, oh, this one, I'm going going to buy only one deal. And because I have this fixed schedule, I'm going to buy the next one next quarter. And on the flip side, if I can't find the right deal for six or seven months because the market is not where I want it to be, then the fact that I want to buy every month or every three months or whatever my goal is, it's irrelevant because the market is basically creating those opportunities. But having said that, we do, you know, we do have a growth mindset and we are, you know, we're growing, the teams are growing, our acquisitions, our deal size. You know, if 200 or 150 units was a good size for us years ago, that's not the case anymore. Right now our sweet spot is probably around 4 to 600 units. So we're talking about 50 to 80 million, $90 million deals. From the strategy point of view, I actually prefer those larger deals because normally you fewer buyers that are competing for that deal, there are more people or more companies, more investors in the U.S. and in the world that can buy 15, $20 million deal versus $50 million deal. So this trend has changed a little bit now because you have a lot of dry powder, a lot of institutionals and medium and large private equity firms that are looking to deploy capital. But for the most part, this strategy just proved itself to help us find the right where we don't have a lot of competition.

And what market, so 400 to 600 units. And what markets are you finding attractive right now?

Texas, Florida, Georgia and the Carolinas. They're all markets that have very impressive job growth. And I'm not talking, obviously Covid changed things, but those Markets also have population growth, so especially during COVID I've seen this trend starting before COVID and it's just Covid just, I think put, put everything on steroids. The entire process is much faster. You have more people moving to, you know, Texas, leaving, leaving New York, leaving California, moving to Georgia, moving to Texas, moving to the Carolinas because there are more in terms of the quality of life, that's great, but it's a lot more affordable. And this is where I want to be. I want to be where people are because those people who are moving are usually, they're the ones who are creating the demand for, for the properties that we're buying for, you know, for multifamily. And of course, estates have to be landlord friendly. And that's why I don't buy in New York, I don't buy in, in California. I can, you know, deal with tenants that I cannot evict. And again, I'm not really talking about COVID but generally speaking, if someone decides not to pay rent, then I can get stuck with that tenant for a year while paying all the utilities and the expenses for that door. This doesn't really happen in the markets where we're investing in. So that's basically what's driving decision to invest in certain markets and avoid others.

Well, you talked about landlord friendly states and Covid and such. So how have your properties held up during COVID and not being able to evict like you normally would be able to?

Generally speaking, most of our properties are actually overperforming. So we are bypassing the projections that we've under in the deal based on, you know, prior to Covid. But bad debt is still increasing on some properties and that's for understandable reasons. You know, you have more tenants that cannot pay. Now. The next wave of stimulus checks are going to definitely help. The extension of unemployment is definitely helping. The, the next round of PPP money is definitely going to help. On the flip side, you also have an extension of the eviction moratorium by at least 30 days. So you cannot evict tenants. But you have more money coming to tenants. And I still need to look into it because part of the second package is supposed to allow landlords to apply directly for delinquent rent that is not being paid by tenants. So there are, you know, mostly good changes compared to the previous stimulus check package. That's definitely going to help. But of course, you know, things are changing. They're not. You don't have with real estate like in any other investment, you don't have a set, you know, a fixed number, a fixed amount of dollars that are coming to you every month. That's the nature of investment. You're taking a certain risk, you're being rewarded for that risk. And the good thing about real estate is that you have a lot more data points. So you can try to mitigate your risk as much as possible. You can do it on every deal. You can't predict the exact income every deal, every month. But if you're being conservative, then you should be able to hit your returns just like we have, basically.

And that's conservative during your underwriting process, you know, when you're looking at buying a property. So when you're underwriting future deals, what is your, you know, is it year one, no rent increases, it's a higher vacancy loss, or how are you protecting yourself to mitigate the risk that you talk about?

So no rent increases or very minimal, up to one one and a half percent in the first year renovation schedule that starts at month six or seven or eight. Even though when you buy the property, you're actually pushing rents, you're starting renovating right away, but you're just underwriting those kind of worst case scenarios to compensate for whatever rent increases you cannot get that you thought you could. Not necessarily higher vacancy because people are not leaving. And especially with the eviction moratorium that may, this moratorium makes sure that tenants are going to stay put. The problem with COVID is not higher vacancy. It's high delinquent rent, high delinquency and high bad debt. So we are underwriting to higher bad debt. Basically we're looking at the last 12, nine, six, two and one month. And we're trying to see a trend. If the property has been battling with bad debt, you know, 4, 5, 6% and above before COVID it's going to do much worse. And if the numbers are decreasing during COVID that's a red flag. Either someone changed management and maybe it's a good thing, or they figure something out, or they're just playing with their numbers and they're not presenting the right numbers. So looking at all the trends and we're trying to assess what would be the right bad debt number to underwrite. So if you see a moderate half a percent or three quarters of a percent until Covid and then start in March, you see an increase and then a decrease, then we're trying to take the high point and maybe take that and run this number for the next 1812 months, assuming. Because we are assuming that at some point the bad debt is going to go down and the economy is going to get better. So it's all, it's a matter of how strong the sub market is and how the property has been performing before and during.

COVID Do you do property management in house? Are you working with third party management companies and if so, how much input are they providing when you're putting offers on deals?

So we're working with third party companies. They walk the property before I fly out and walk it. So they walk the property, they come back with some feedback, they come up with initial budget of how they can, with their resources, can run the property or what's the operational budget every year? What would be the capital expenditure budget? For instance? They say, hey, you need to fix the breezeways, you need to resurface the parking lot, do some tea trimming. And so we're taking their numbers. We're also working and tweaking the numbers based on what we see in the market. And if the deal works, then I fly out there to walk it and then we keep tweaking the numbers based on the information that I get when I'm actually walking the property. Because when you have a property management company, they're trained to the property from a certain point of view. When they walk it, they have certain input as the owner and operator, you see things a bit differently. So that's another layer in the underwriting. And of course we have the lender that is providing a debt quote and you have the property tax expert that is running the numbers and giving you the estimate of what would be the property tax bill per year for the next five years. I'm not trying to take an educated guesstimate or run some formula, simple formula, because if I'm off by a hundred K a year, I can feel it in my pocket. By the end of the year, I'm gonna have lower amount of cash flow. So I leave that to the experts. And that's the way that I see it. The sponsor, we're as a sponsor, we're not supposed to know every little thing. That's. You can't do that. You need to find the best professionals, the best companies. That's a bread and butter. You know, you have lenders, you have property tax experts, you have property managers. And with my asset management team, we're actually gathering all those, this piece of information. And with the acquisitions team, we are adjusting every line item in our pro forma based on the feedback that we get from them. And even if we get, you know, information doesn't mean That I blindly take those numbers. I push back many times. I'll give you an example. After property tax, the second highest line item in the expenses, usually payroll. So a good rule of thumb, I would say $1300 per unit per year. And sometimes the property manager is going to walk the property and come back with an estimate of 14,000 or 15, 1400 or 1500 per unit. And we're going to push back and say, show us the, you know, how did you get to that number? Maybe the property needs more care. And we're going to say, okay, you know what, that makes sense. Maybe, you know, obviously they want to have as many people to support, you know, the operations, and we think that they can run it in a much leaner way. So we're going to make those adjustments. But it's always a conversation with those who are providing feedback when we're underwriting the deal to make sure we get to the best number possible.

Great points and great example of the payroll piece. For me, the challenge in Austin and San Antonio in particular is everybody's competing for a limited pool of professional type people who are going to be able to manage the property the way you would want. And so as the number of the units decrease, there's less money to be allocated. Right. So, you know, what could be 1200 to 1300 could be 1500, 1600. And so. But when you push back, are they able to get quality people hired and retained? Do you have any challenges with that when you're pushing back with property management companies?

Not about that, because, you know, we're not trying to lower the number to $1,000 per unit, which would be the case. The challenge that we do see during COVID is some people are not incentivized to actually show up to the interview, to the job interview, because they get an extended unemployment benefit and they get unemployment. So if they're making 48,000 on unemployment and we're offering 50,000 for an extra 2,000 a year, why would they leave the couch? Which is exactly the type of people we don't want managing our properties. But it really diminishes the pool. That's one of the downsides of extending unemployment. On one hand, it helps my tenants pay their rents. On the other hand, when I need to hire, you know, punch dick or property manager, sometimes they're not very motivated to show up to an interview because they get unemployment. But, you know, managing people, finding the right talent, that's the most challenging thing in every business. Not really. Not only in real estate. And that's one of the challenges we're dealing with.

Yeah, it's great points going back to what you were saying earlier about mitigating risks and such. So before COVID you had to choose an asset class, or maybe not. You'd have to choose a particular one, but one that you wanted to really be an expert in. And multifamily seems to be that for you. So why did you choose multifamily over office and retail again before COVID you know, when you were getting going, I.

Think it's something that probably most multifamily syndicators are going to say there's just an increase in demand to multifamily property. It's not the only asset class that has increase in demand. But single family homes, it was just, it didn't scale. Cash flow was not significant for per one per door. All the time it takes to find a deal, to underwrite it to put the financing in place. Even if you're just starting out, just do 50, 50 units. 20 units. You just. It's the same as buying 20 doors and you don't need to do 20. It's the same as buying twenty single family homes and you don't do the work twenty times over. So it really scale, it scales. In addition, when it comes to multifamily, you know, I'm obsessed with trends and data and I'm looking around me, you don't need to be a genius, understand where we're going. You have Gen Z and young millennials. They don't want to get married when they're in their early 20s and settle down and buy a house and a dog and have kids. They want to travel, they want to have one job, one exciting job in New York. And then two years later they want to move to, I don't know, Boise, Idaho in maybe Salt Lake City. Three years later, they don't want the burden of owning a house. So you have a huge amount of segment, huge segment of the population that is actually looking to be flexible and they want to rent. That's why I chose multifamily. You know, I was also a tenant before. I understand multifamily. It's easier for me to see things from tenants perspective because I was one of them. Office, there's a lot of changes, especially with shared office space and right now with remote work, everything in office is changing and it's just something that I felt passionate about. Multifamily, I understand it. Demand is increasing, so I went for it.

Well, how do you see 2021 any differently than you did 2020. Do you think it's going to be continued the same with more stimulus, more unemployment? You know, obviously we've got political change in Washington, D.C. and such. So what do you, what is your crystal ball on 2021? Is it going to be more of the same that we've seen in 2020 when it comes to high stocks prices or again, more unemployment? What do you think it's going to be?

That's a very difficult question to answer. And the truth is that I don't know. My gut is telling me that we're not going to have a third round of stimulus checks or PPP because the vaccine is here. We're starting to vaccinate, you know, people so they can go back to, you know, working, you know, and making money. Probably we'll see a lot more businesses closing. There's so much that, you know, businesses can sustain when it comes to a decrease in business and cash flow. So I honestly don't know. I don't think, you know, anyone, anyone can know. But I believe in the next 18 months or so to 24 months, we're going to be switching again to a different part of the cycle and we're going to see properties generating more cash flow and businesses, you know, there's new businesses that are coming instead of the old businesses. And I think what the pandemic did is it accelerated the processes that were already in place. So people were moving from downtown areas, from core cities to the suburbs already. This trend was already there and Covid just accelerated it. People were also, you know, some businesses that were not very efficient or were old fashioned were slowly, slowly closing. And I think the COVID you know, I haven't looked at the numbers just yet, but I think Covid accelerated that. So it kind of forces lot of players out. But you have to remember that this is also going to create an opportunity and it's going to create an opportunity for newer businesses more relevant or, you know, maybe a bit different than older businesses that died out. And that's going to generate tax money, more jobs. It's going to take a little bit more time. It's not, you know, when you have a vacant store because they went out of business, you're not going to have the new one getting the next month. It's going to take time. But I think in the next 18 months there will be wealth that will be created because there's going to be more opportunities. And we just, we don't need to. There's a lot of fear right now. And you have to understand that those who've made wealth, they took step forward while the rest of us were taking the step backwards. So see the opportunity clear out, you know, the fear. And so I think a lot of opportunities are going to be created. Maybe not 2021, maybe 2022, but it's, it's still coming.

And I think when you talk about that opportunity, you know, I see people already changing their mindset towards repositioning assets, you know, maybe from malls or even long stay hotels, motels, and converting them into multifamily, you know, so those are people that are seeing opportunity and wanting to be part of that change process. While to your point, a lot of people step back and sort of see what's going to be happening. Shifting gears a little bit on more into the capital raising. So you've built a business where it has a strong reputation and investors are coming back. But you know, for those that are starting in their capital raising efforts, how has anything changed for you in 2020 and how will it change in 2021 from a capital raising standpoint for your deals?

I don't know if anything necessarily changed with the exception of the average check amount actually increased since the year before. And I think it's because I think my brand is more attractive to the bigger check writers now. And so, and I say now not because of Bluetooth, but because of the, of COVID So it actually attracts more wealthier investors to invest and the smaller investors are still afraid or still unsure, so they're still sitting on the sidelines. And so this year we actually saw an increase in the check size, in the average check size, because again, you have the, you know, those who are not afraid to invest and are already seeing returns above projections, where those who are usually have more money, who are usually willing to take a little bit more risk. And you know, I always say if you're starting to invest, if you're considering this, look at those who have made it and understand how they think and how they behave. And look at those who haven't made it and see how they think and how they behave. Those who haven't been investing so far or have been investing, you know, before COVID and now stopped altogether, how successful are they? I'm sure there are outliers out there, but looking at family offices, for instance, most of them have increased the amount of capital that they're deploying since COVID These are the wealthiest family in the world. So obviously if it's your last $50,000, you need to be more careful about it. But don't be afraid to take a calculated risk. And I'm not an investment advisor. This is my opinion, but based on, again, on what I've seen in the past and what's happening right now, I'm obsessed with data and with patterns and trends and that's what I see. The less wealthy you are, you're not going to invest. And maybe I didn't say it right. Those who haven't been investing since COVID started, there's just a correlation between the net worth and the willingness to invest and also how much risk you're willing to take. Right now, those who are willing to take much higher risk are those who are far more wealthy than other investors. So I'm always saying if you want to become wealthy or if you want to take your wealth to the next level, look to your right, look to your left and see how people are behaving. If you behave similarly to a certain group, that's basically where you're driving yourself to, to be part of that group.

Yeah, yeah, well said. So I want to dig more on the family offices. You mentioned family offices and how did the structure work? I mean, it's very wealthy individuals that are, you know, have like an investment manager and such who are investing. Can you break it down for us from who they are and where do you find them and what are their structures? If you could.

Yeah, that's definitely not for one interview. But in short, these are wealth management companies. It's firms that were designed to serve one family or handful of ultra high net worth individuals. Usually they have about 100 million in capital to deploy. And where you find them, there's no, there's no one way to find them. I mean, you do need to have experience, some track record. You can't just start your first, you know, deal and partner with them, but you need to hang out where they hang out. So find the conferences where they go to and attend those conferences and start meeting and networking with people once you have more experience. You know, make sure you're invited to platforms and conferences as a speaker where you can find a network with other family office members as panelists or as, as attendees. It's, I mean, it's, it's pretty straightforward, but it's hard work because you need to prove yourself before you get to that level. I think that would be probably through networking. That would be the best. And then once you have one family office that is investing with you, then you know, your proposition is a bit different because now you already have at least one family office. That invests with you. And family offices, they like to invest with one another, they like to co invest. If they know there's another family office involved in the deal, they're more likely to invest with you. And you build that reputation over time. But again, like anything else, you need to hang out where family offices hang out and you need to find those places, those online and after Covid, you know, actual conferences and forums where they meet and find a way to add value to them, find what's their pain point and give them, you know, give them some value before you engage and talk with them, talk to them about investing with you.

Are there structures similar to other LP partnerships?

Depends on the deal. Yeah, yeah, it depends on the deal. You can normally, you know, they normally don't write small checks. So if a family office is willing to write you a 5 or $10 million check, they expect something a bit more than the usual terms that you would give someone who writes a 50 or 100 or $200,000 check. You need to figure out the structure. It could be an increased amount of returns. It can be basically multi tier investments where if you invest up to a certain amount, you get X percent in cash on cash. If you invest above a million, you get Y percent cash on cash. Another way is to give them a piece of the gp so they basically get a portion of the fees and the equity split. And another one is just to partner with two or three of them and not syndicate the deal and split. There's no gplp, it's a jv and you just come up with a certain allocation every dollar that the property makes. How is it being allocated between everyone else who they just want to write a check, they don't want to manage the asset. You're the one who's doing the work, so you can find, you know, a way to make it, to allocate the funds, the cash flow.

And when you're looking for those 400, 600 plus units, family offices, I assume play a big part in that raising the capital. I would assume right, because you're raising quite a bit of money, which is why others aren't competing as what you said earlier, you're in a different arena and competing with higher or institutional type owners at that point. So do family offices for you play a big role in your 20 to 50%? 20 to 50%. So with your recent acquisition in Atlanta, can you tell us more about that property and more so on? So we've talked a little bit about the underwriting portion, but say starting day one six months, 12 months. What is your goal now that you've acquired the property and how do you put in KPIs or goals for yourself and the team and keep everybody aligned?

So I'll start from the beginning. The deal that we've purchased, it's almost 500 units in Marietta, Georgia. And the business plan was very simple. Renovate the 400 units that were not renovated and match the same renovation scope to those who have been renovated we have projected. So when we ran the numbers, we started renovations at month 13 and we basically renovated 0% rent increases in the first year. We're already getting, we started the first month by 6 to 9% rent increases, I believe, and I just looked at the reports today, we're up to 15% rent increases. So as you can imagine, we're already overperforming. I had a very strong conviction that we can raise rents because we own other assets in the Atlanta market. And we've been getting almost 40% for zero. I believe it's the actual numbers 39.4 or 39.6% rent increases. So I thought we can do the same here. But I didn't want to assume. I wanted to assume, but I didn't want to underwrite it to those assumptions. So I very conservatively underwritten to 0%. And then in terms of KPIs, my main goal is to overperform is, you know, at least, at least by 15% by the end of the year. So if I said 8%, I want to match, at least match a number. But the real goal is to over deliver. So my investors know that every number that I show them is the absolute worst case scenario, which is how I failed in not being able to increase rents, not being able to renovate from the first day of ownership. And when you do that, I think you match the expectation to what the market can do. Because right now that's what some of the market, some of the assets, they can't raise rents. Then you give it your little touch and a lot of hard work, a lot of attention to details, a lot of very, very hands on operating process and that's it. So in terms of my KPI, I have several of them. But the most important one is to over perform. If I can over perform during COVID it means that investors are going to want to write me another check and another check and reinvest. And that's how I know that, you know, we are a success. Not just by closing deals. You can close deals all you want. If you say 8% cash on cash and you deliver 6, you're not very successful. And even though you can't win on every deal, over delivering is the number one priority.

Yeah. And with that over delivering, I'm sure there's lots of stress along the way. So my last question for you before we close up is what are some of those major stress points and lessons learned? You know, what are some mistakes that you might have made that you have learned from to help reduce the stress for the future?

I can probably write a book about it. I'm trying to think the best ones. I mean, from every deal you learn something and you implement it. And then, you know, if you've been enough time real estate, then you know that you can never really learn all the things that could go wrong. I'm trying to think of, you know, the main one, I would say vet your partners. Took me a while to find a really good, you know, really good partners. Everyone at first seemed great and then you take them on on date seven, they ain't looking that good. They're not, they're not doing what they said they, they would do. And you need to step up and do more than you were you were supposed to do. I would say also, just when it comes to lenders, the one thing that is a stress point is just making sure you have a backup plan because lenders change their minds. If you have, you know, from the moment you sign the contract with the seller, there's two to three months until you close. During those two to three months, the seller keeps providing you financials and you have to send it to the lender. If the bad debt is increasing, if the vacancy is dropping or actually increasing, if the NOI is decreasing, the lender is going to adjust the loan proceeds. So from 75% LTV, you're going to end up with 70% LTV. So just make sure you have a plan B. Make sure you stress test our returns are looking. If you need to bring 2, 3, 4, $5 million extra because the lender is not willing to give you the full amount that he that the soft quote showed when you signed the contract. So those things are, you know, if you have plan B, C and D, then that's good. I think that will lower the level of stress. And you know, okay, I need to pivot. This is the situation. You work hard to create a story to try and convince the lender to keep the original loan proceeds. Sometimes it works, sometimes it doesn't. And if it doesn't, you need to, you know, pivot quickly. And when you have those plans ready to go, that can really decrease the level of stress.

Well, great advice and great lessons learned as we close. Ellie, is there anything you want to tell our audience about where they can find you? I know you have a mentorship program and a podcast, whatever you'd like to share so our listeners can to get to know you a little bit better and maybe even reach out to you for investment opportunities.

Yeah, you can basically Google Ellie Perelman and there's a place on my website to add your information. As an investor, we're only working with accredited investors, so we basically run a 506C deals and that's about it. I mean, I'm basically, you know, on every other platform, LinkedIn, Twitter, Instagram, Facebook. So if you, if you type my name, Ellie Perlman, you'll be able to reach out to me also using, you know, on those platforms.

Well, Ellie, thank you for being on our show. Happy New Year. I wish you much success in 2021 and look forward to getting to know you more over time.

Thank you, Wayne. Thank you for having me.

That's all for this episode. We hope you subscribe, share and leave a review of the show. For more information about passively investing in multifamily apartments, check out Wayne's free ebook by going to forward slash ebook. Also, follow us on Facebook by searching CREI Partners. This was the untold stories of real estate investing.