Sandhaya Seshadri - Untold Stories of Real Estate Investing Podcast - Diversifying from Stock Market

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 the Untold Stories of Real Estate Investing. I'm your host, Wayne Courageous. For our next episode, we're excited to have Sanya Sasadri. Sonya has bachelor's and master's degrees in electrical engineering and worked at Texas instruments for over 14 years in various technical, marketing and management roles with revenues in excess of $80 million and budgets of $28 million. During her time at SMU, acquiring her MBA 20 years ago, Sonya began investing in the stock market and built a portfolio that allowed her to retire early from her corporate career. She diversified into commercial real estate in 2018 and has passively invested in over 3,500 doors and multifamily and syndicated two deals. Let's welcome Sonya. How are you, Sonya?

Doing great. How are you, Wayne?

I'm doing well. I'm excited for you to be on our show. You and I have built building a friendship and partnership over this last year, and I've really enjoyed getting to know you. So for our listeners, can you go deeper into your background and why you decided to invest more in multifamily when it sounds like you did a really great job in the stock market?

The stock market has really done very well for me in the last 20 years, I think just because of luck to some extent, but also because of certain principles. But the more money I made in the stock market, the more I was writing a nice big check every day April 15, and that's one of the reasons is to reduce my tax burden in some way. Another one is that every rich person I've ever met had something to do with real estate. And even from my roots, which is back in India, my parents always, once they had some money after working for a decade or so, they always had rental properties as an additional source of income. So a passive income stream from some sort of real estate was always on my mind. I just didn't want the hassles of managing my own single family rentals, screening tenants, and being called in the middle of, say, a Thanksgiving dinner, you know, to fix a leak in Their plumbing or a toilet leak kind of thing, that's what made me stay away from that. But when a friend told me that with multifamily you can scale up and afford a third party property management company, I was intrigued. So I started by investing passively. And then I joined a formal mentoring group after attending a weekend seminar and realized, okay, there's a lot of ordinary people with engineering backgrounds, just regular middle class folks like me who do this. I don't have to be having a billion dollars to be able to go buy apartments. There's this concept called syndication. And so that did it for me and I joined and I got immediate access to a huge group of like minded people and there was no stopping after that.

So. So from that tax standpoint you mentioned, you know, the stocks have done well, but every tax season you had to pay taxes. How does multifamily reduce your tax liability? And you know, we hear zero, you know, potentially zero taxes through your passive investments. Have you seen that be the case or is there typically some tax liability? I mean, what, what can listeners really expect with real estate?

So your passive income, passive gains can offset any passive losses and vice versa. So one thing to know in multifamily is we tend to invest in older properties, class B and class C, which means they were built in the 80s or older than that. So a study is performed called cost segregation. And then due to a newer Trump tax law that he brought into effect in 2017, you get to do also what is called bonus depreciation. So a typical property has equipment that you depreciate over a decade or so, typically. Right. In this case, what this Trump tax law allows you to do is take all the depreciation for the next decade or however long is the life of your equipment, all of that in year one. And what that does therefore is give you a substantial number amount in depreciation. So if I invested say $100,000 on a passive deal, the average depreciation paper loss I can take is at least 70%, so about 70k. So what that does is if I made 70k in income through real estate that year, this 70k paper loss will help me sort of offset that and so cancel it out to where it's a zero. In addition to that, there is this thing called qualified real estate professional designation. So if you don't have a W2 job like me, then you only have to work 750 hours on real estate activities that you can prove to the irs and that qualifies you as a real estate Professional. So then the paper losses, if they exceed my passive income from real estate, I can then take that and apply it to my husband's W2 income because we're a married couple filing jointly. So in that sense that's a great way to reduce your tax burden, especially if these are the years that you'll be paying more in taxes because you're in a higher tax bracket and you can offset that.

Yeah, that's so key and it's good to know about that qualified real estate. You said 750 hours.

750 hours is the rule right now. Now if you had a full time job in addition to this, the rules are more stringent, but always check with your accountant. But that's a general rule on that. If you are actively managing real estate, you're dealing with real estate in an active way, not just investing your money passively, closing your eyes and going away and not having anything to do, managing the asset or real estate related activities, then it's not the same. But you want to definitely check with your accountant on that for sure.

So I didn't realize that you've passively invested over 3,500 doors. I mean that's, that's a lot of, a lot of doors, a lot of investment. What has your experience been like and, and what can you share with newer investors and, and what to look for to invest in, especially in today's Covid environment.

So the first and foremost rule I have is always, always cash is king. So make sure you have at least six months of living expenses saved and don't touch that money and don't put that into real estate. Because as you know, real estate is less liquid than stocks and cash. So if you needed money next year and you put your money instead into a real estate deal right now, you're probably not going to get that money back for four to five years. So definitely real estate is not for short term cash, it's for long term. The best way to invest, at least in my opinion passively, is if you used to work for a different employer like I did, and then you're no longer with that company. You have all of that retirement money sitting there. And if you like, I rolled over my retirement money from my previous employer into a EQRP, which is a type of solo 401k. And I manage that asset, I'm the custodian for it. But that money is money that I cannot use to buy my own multifamily deals. You can use retirement money only to invest passively. In other deals. And so it was a perfect opportunity for me to take that money, invest it in a bunch of different deals, while learning the process of multifamily from a variety of sponsors so that I could see what I liked about it and what I didn't like about it. I also chose most of my investments to be in my geographic area, which is the Dallas area where I live. So that was my target market. And this way I could actually knew a lot of different things about the locations, the properties I could drive to these investments. That was a big plus for me. So that's why it made a lot of sense to put that money into passive real estate investing. And again, I still love the stock market. I still have a good portion of my portfolio. There's. But I decided to allocate some of it into real estate just to learn the business. And I treat passive investing as sort of like your internship. You've done your degree, you've done your college degree, you've done all your book knowledge. Now it's time to see how that works in the real world, but without taking all the risks yourself. So passive investing allows you to sort of like look over someone's shoulders and see what, how they run an asset and how this is done without taking the risk yourself. And then you can ask a lot of questions, read those reports, even visit those properties and learn the business. And also another side benefit, if in the end your goal is to become a sponsor yourself, this is a great way to build a relationship with someone. You get to know them, you see if you like how they operate, whether you have the same values and you identify three or four people with whom you want to do a deal in the future though, numerous benefits to passive.

Investing have you seen. So did you started passive investing in 2018?

Yes.

So the last couple of years, have you, you know what have been high level returns and has that changed in 2020? Are they still doing distributions? What tends to be happening with your passive investments right now?

So some actually two of my passive investments have closed and I've got my money back. So that's a positive for multifamily. Definitely. Several of the properties have not done so great through Covid in terms of collections. Their collections have dipped some because they've avoided things like late fees and they've had maybe a 10% drop, 6% drop depending on the property. A lot of properties actually have higher collections also this year compared to last year just because they've stabilized the operations and they're more efficient, they've finished their capex projects, so now they're able to get the higher rent bump. So it's a mixed bag. But one thing consistent is I would say 75% of them have suspended distributions over Covid. But they've all started sending messages now saying we will be making distributions equal to the amount that we missed during COVID so we'll make up for it. I would say an average return would be about 7% this year in terms of sheer cash flow. But if you look at the nois of those properties, a lot of them, and you base that on the, you know, valuing the property, their noi is still more this year than it was a year ago. So the property is worth more today than it was a year ago. So they're going in the right direction. And I think that when they do plan to sell these properties in two to three years, I trust a lot of the sponsors with whom I've invested passively. They're going to time it well. They're seasoned operators. They're going to time it right to where you still come out ahead. So I have confidence. But this is a long term real estate is a little more long term. It's not like, you know, the stock market where you can invest today because stocks fell big time today and you know, make some money in six months because it goes back up. Right? That's a prediction. Yeah.

And what you said earlier about making sure you have liquid cash or the ability to draw from those type of savings instead of real estate because it is more of a long term investment. So, you know, a lot of deal sponsors were doing the right thing and being conservative and holding off on distributions just to see, you know, how bad the market was going to be. And it seemed overall, I mean, high 90s or mid 90s in collection percentages of the last several months. And you know, since the CDC has come out and just banned in essence evictions through the end of the year, we'll really see how the impact goes. I mean, have any of the deal sponsors communicate on how they're going to respond to non paying tenants? Or is there anything that, you know, and this flows over to your active side too, because I know you have two syndication deals. But you know, I'm just curious personally and listeners that are out there, you know, renters not paying. As concerning when it comes obviously to.

Returns on investment, I think it's very important to make sure you pick your investment locations carefully. You work with your property management company to screen your tenants really carefully as you move them in because a lot of times it's tempting to just get tenants in so that you have high percentage in occupancy to satisfy that, you know, Fannie or Freddie Loan kind of requirement. But one of the things we know for sure with this eviction law is that the only reason why you cannot evict a tenant is this non payment of rent. If they violate any other rental agreement, you could still evict them. So people don't seem to realize that. So you can have shorter contracts with them and you can evict them for violating anything, like overstaying their contract, for example. Right from the beginning, one of the most important things you do as a landlord when working with your PM company is you already develop. Look, go through your rent roll in detail and you have a list of tenants you want to retain and who are your so called blacklist of tenants. So right from the beginning you know that. Now we did have one tenant who took all the stimulus money, bought himself a new car, did not pay rent. So that's two months of rent we lost from him. But our repeated notices to him to say that he's still under contractual obligation to pay us the rent. The fact is that yes, we may miss out on collecting his rent, but he is blacklisted, so to speak. So the next time he tries to rent a place, it's going to be on his record and people are going to know that. The other thing to sort of mitigate that risk is to make sure your leasing manager has a strong relationship with the tenants. Kind of have an idea of what kind of employment they have. So in today's eviction law, tenants who say they cannot pay rent, they actually have to show proof that they are affected by COVID 19, they are trying to find another job, et cetera. They can't just say, oh, I can't pay my rent, I'm just going to stay here. That's like me, you know, let me go check into the Ritz Carlton, let me go spend a week there and then come back and say, oh, it's too expensive, I can't afford it. That's not how it works. You know, so actually we, this law is a little bit better in terms of more being more clearly defined as to what we can and cannot do. So we had four tenants who were a problem. Two of those tenants have already left. And we're working very hard to either get these tenants remaining to give us payment plan options and work with us, or show us proof they're looking for a job.

Yeah, I Think you hit it hard on the. They have to show proof. And I think the law really helps with promoting and encouraging that communication between the owner or the property management company and that tenant and having that dialogue. At the end of the day, we're all human. We're all. We have empathy. You know, we're all in this together. And I think if. If that person is trying to, you know, find a job and such, then, you know, we're able to, you know, make the concessions and the adjustments needed to make it work for everybody, but just not paying. And I love the Rich Carlton's example. I remember you posting that on. On Facebook and I think it's a great example of, of, you know, just at the end of the day, they're not. The amount of rent is not being forgiven. It's. It's that, you know, we're just trying to make it so, you know, those that are in need can get. Can get assistance.

It's really affected by the pandemic. We're going to work with you. We have some tenants on payment plans and they've been making payments on time. They still owe us money, but that's fine. They've at least made an attempt. They're paying a partial rent. That. That's all we want to hear. We want that constant communication. And one of the things we do as landlords is we do a lot of tenant appreciation activities. So I think about two weeks ago, we left this package on the door of every tenant, which is like a, what you call a goodie bag. So it had a roll of toilet paper, it had a sanitizer, it had packet snacks and candy and things like that. We also have a stack of school supplies in our office that any tenant can come and help themselves to it if their children needed it for school because a lot of them were still in online school. We're just starting to go back now. So we just want our tenants to know that we appreciate them and we want them to stay. Retention is big for us. We try to retain them because the more good tenants you have, it builds a community. And we reward them for recruiting new tenants into our apartments. So they get a reward if they bring their cousin or friend, etc. That builds a community and that makes it harder for them to leave. And from our landlord, side unit turns are expensive. So if I can have the same tenant in the same apartment and paying my performer rent for a few years, that's better than having to clean the apartment and get it turned and paint and all of that. Every year. So it's a win, win situation both ways. We in fact, tried to do a big kind of outdoor grilling kind of festival because we have a nice courtyard in one of our apartments. We installed new grills and benches and everything. But because of Covid's restrictions, we couldn't do that. So that's why we ended up doing the treat bag style of appreciation. Another thing we did at the beginning of COVID is anyone who paid their rent on time, we gave them gift cards to the local store. We were just doing different incentives so that tenants know we're still thinking of them. And if they have any problem with paying rent, we're here to work with them.

Yeah, it's building that, definitely building that community and that trust. And it makes it definitely makes it harder because they're more emotionally connected to, you know, where they live for sure. So a couple more questions on the passive side, and then I'd like to turn it more into active. But, you know, how are. How are you vetting deal sponsors? Or how did you, when you started out, vet deal sponsors? And then what metrics of the deal did you look at to see if it was worth investing in? And again, I'd like to put it more towards in today's environment, you know, whether it's reserves and rent increases, et cetera, you know, how are you vetting an opportunity from a passive side?

The first and foremost thing is the deal sponsor or sponsorship team. You have to know, like, and trust them. If you just met them and had one conversation with them, to me, that's just not enough. Think about how much time you spend analyzing a car or an appliance for your house. Right. Shouldn't you do at least that much when the investment is probably 5 to 10x that?

Right.

You know, how much time did you spend on your last, I don't know, smaller purchase? Right. You agonize over buying your next whatever car, TV, etc. Or refrigerator. So definitely I use that analogy and say, do your homework. You're gonna give them $50,000, $100,000 of your money. Really know them well, because you're gonna give them a lot of personal information about you. What is their track record? Are they willing to talk about every deal they've ever done by quarter and say, okay, these two quarters we didn't perform because of this, but then we turned it around doing this. Right. Make sure you get references from passive investors who've invested passively with the sponsorship team and they have positive reviews. Have they done at least one full Cycle to where they've turned the property around, made money for their investors. And if they haven't done that, I mean, there should be at least one team member who's done that. The other thing about the sponsorship team is have they done that particular type of deal? What do I mean by type of deal? I mean, like, is it an heavy lifting, value add kind of thing where the property has very low occupancy and they have to take over the property, turn it around and make it a lot better? Or is it more of a yield play where the property is doing just fine, they're going to do some minor enhancements to increase the value. So if they've never done a deep value add deal, why should you be their scapegoat, so to speak? So that's also important. Have they been established in that market, wherever this deal is being offered? Like my experiences in Dallas. So if I come to you with a deal in Phoenix or North Carolina, you should ask me, who is your local guru, who knows that place? Why are you going there? I'm sure it's a great investment market, but if you don't have experience running a property there, then you don't know the nuances of even little things about the weather that could affect it or insurance costs or all the other little factors that come into play. So if you don't have an local expert in that market, that's another red flag for me when it comes to vetting a sponsorship team in terms of deals itself. Today, today being September of 2020, if you are presented an opportunity today, remember that when they did their underwriting of this deal, it's based on a T12. A T12 is the last 12 months of expenses, income, rental, all of that put together to tell you what the balance sheet of that property looks like. So half of it is based on really good times pre Covid, and then another half of it is based on now during COVID So the T12, really, I would rather see something that's more of a T3 and T6 based on how they did during COVID for comparison and see how consistent the property is. Because only now we're rolling off all the stimulus packages, so it remains to be seen how much the renters can pay. So I would almost wait a little bit and see how that plays out for a couple of more months and see all the T12 as of say, end of October or end of November to base the numbers. So if something comes to you today and it's based on T12, which is half Covid and half pre Covid. I would want the underwriting to be super conservative. What do I mean by that? A very conservative rent bump. So the first 12 months, no rent bump, maybe even the first 24 months. Can the property sustain itself if you take it over and you do nothing to, you know, expect the rent bumps, can you still pay the higher property tax? Because now you're buying the property at a much higher price and you'll be paying your property taxes based on the new price at which you bought it. Right. So that's a big one. Does your property management company agree to run the property with those numbers? That's a question to ask the sponsorship team who agreed to run this property. And does that property management company have experience there in that market to run it and give you an accurate budget? Because they're running another property, maybe down the street, a similar looking property. And does your PM company have experience running this type of property? Like a class C clientele is very different from a class A group and so do you have the experience? Is an important question to ask financially. The other thing to look for is I'm not a big fan of acquisition fees. So the mentoring group I belong to, where I found all my passive investors, the acquisition fee tends to be 1% or less. So whenever someone has a 15, $20 million deal and they have a 3% acquisition fee, well then another question I ask is, do the sponsorship team members, right, the sponsorship team, do they have any money left in the deal after closing when they get all their acquisition fees? Right. So they have no money left and there's less of an incentive for them to work hard for the money, so to speak. Right. Because they don't really have skin in the game after closing. A lot of them advertise skin in the game. So be sure to ask, how much skin in the game do you have after closing? Is it at least as much as the minimum investment that I'm going to make with you? Another thing to look for is the reversion cap rate. The reversion cap rate, what is the reversion cap rate? So cap rate is basically the net operating income of the property divided by the selling price, the price that you're paying for the property. So if the reversion cap rate is the prediction of what the cap rate is going to be when you are ready to sell the property in four or five years. So it's a bit of a gamble, it's a bit of an educated guess, but who can really tell where the market's going to be in four to five years. So if they assume a reversion cap rate to be low, that's more aggressive than a higher reversion cap rate because the lower the cap rate, the higher the selling price for your property. So if they're buying a property today, and I can tell you about the Dallas market, a lot of properties are still selling at a 5 cap. So if the reversion cap rate at the time of sale is also 5 cap, I think that's too aggressive. I would prefer 6.5 to 7 cap for the reversion cap rate to sell the property because that's a more conservative underwriting. So no rent bumps for the first two years, acquisition fees to be reasonable so that sponsors still have skin in the game. A reversion cap rate that's very conservative because it's assuming a slightly worse market and therefore a lower selling price for your property in a few years than the best case scenario. When everything goes great, the property taxes should be reasonable. They should be based on the price you pay for the property. Did they do that? And experience of that location is huge. Is that location. The market analysis has so many different things to look for, but the first one is population growth, job growth, median household income and a diversity of jobs so that you're not just dependent on one employer to support those families that are staying in your apartment. And so when you satisfy all the market requirements, then the sponsorship team and then the financial analysis, you're in a good position. But again, put your eggs in multiple baskets, right? So definitely invest a little bit. Like let's say you have a half a million dollars, spread it across 10 deals or at least five, six different deals. Don't put all of it or just into two deals as an example and make sure it's like retirement money or something that you can't use in your own deals. If your end goal is to learn from this and be a sponsor yourself because it's only a limited bucket, you have to invest passively. And when you invest all of it, remember it's going to be a few years before you get it back.

That was a lot of great information on the metrics and you know what you're looking for. So when you do that two year, no rent bumps and you're doing a one and a half, 1% to one half or more cap rate difference going in versus the exit, the returns are dramatically changing. Right. And definitely. And it's definitely more conservative. Worst case scenario, based on how you're, how you're Underwriting. But how have you, how are going into it? You know, 8 to 10% cash on cash and you know, 8, 18% or more on IR. How are you seeing things today when it comes to returns? When you are being conservative like you've.

Mentioned, it's been harder and harder to find deals that fit all of those metrics. I'll give you that first because a lot of people, if you believe just the buyer's pro forma numbers, the brokers pro forma numbers, they show rent bumps right from year one. They show it right away. The fact is that let's say you're acquiring a property, let's say you put an offer today on a property, September, you're not going to close it till the end of November. Well, this is really sort of the beginning of the off peak leasing season, if you will. So they've already done a lot of leases that by through the summer and now. So if you take over the property in November, it's going to be next August before you even get a chance to bump a rent significant number. I mean obviously spring from March onwards. There are some. But a lot of these properties, when the owner knows he's going to list it for sale, he or she's going to list it for sale. They fill it in with tenants and they don't do the rent bumps because it may be harder to fill it then with the tenants. So you're really stuck for about a year before you can truly do the rent bumps. Also, if the units are occupied, you're not going to be able to go into those units to do the upgrades. So then how can you get your rent bumps right? So you have to look at it realistically. I would love all my paper calculations to come true. But when you start putting in that reality, it's sort of like when you go to college, go to school and you have all these marvelous designs and then you go to the real world and you realize, ah, there are these other little factors that come into play. It doesn't work perfectly like the textbooks told me, it's sort of like that. You know, your analyzer spreadsheet can tell you a very nice story depending on how you tweak it. But in the end, when you think about it and walk through the process, look through your rent roll, let's say you have 100 units, which tenants, how many of these tenants realistically can I bump the rents by how much? So if you just add another couple extra columns at the end of your rent row and you start seeing what Days, those renewals are possible, and then, okay, the extra two weeks for me to go upgrade these units, for example, and then you get the rent bump. And so you have two weeks of lost revenue, for example, it all starts adding up. So when you practically put that in, you realize, ah, I'm probably not going to get any rent bumps for a year, could be even longer. And we don't know how much I'm going to lose in collections. So economic vacancy is another thing, a very important parameter to take into consideration. So economic vacancy is not just a physical vacancy. It's actually what are your bad debt and loss and collections from the maximum rent you could possibly get out of this property. So typically, Nobody ever gets zero economic vacancy, right? 10% is pretty typical, but in bad times like Covid, you should assume even more depending on where the property is. If it's only got a 90% occupancy to begin with, right there, it's a minimum 10%, right? You should probably assume 20% economic vacancy in year one. And then as you get more efficient with your operations from taking over the property, you can keep reducing that number. Realistically, based on your confidence with how closely you manage your property management company and asset manage that property in that location, right? So for me in Dallas, I know that my properties are in Dallas. I can just hop on my car and go visit them in an hour from now if I wanted to. So I do surprise visits. I of course, have weekly metrics we watch. Me and my partners, we have weekly calls with a property management company. But we have certain trends we watch, right? So for example, if we don't have at least a 95% occupancy at the end of this peak leasing season, I'd be worried because people don't really move after October. They want to settle in for the holidays. And so I really want my units filled or I should be upgrading them and maybe even look at offering concessions if my Occupancy falls below 90, which is not the case for us. In my properties, they're at 95 and 98, so that's okay. But that's, for example, a trend you want to watch. You want to watch for different trends on your occupancy and the days of rent that you're losing because of whether it's unit turns not being done as efficiently or what other reasons are. You know, at the end of the day, you look at a report from your property management company that says, okay, January through August of 2020, how many days did I lose of not Collecting rent. It's sort of like I had 2, 500 flights take off with this many seats. How many empty seats did they have when they took off? Right. That's revenue that's lost forever that you can never collect. So why did that happen? Go and analyze it. Is it because I couldn't lease fast enough? Is it because I couldn't turn the units fast enough? Right. Go dig deeper into those causes and figure out. So these are all examples of bad debt. Right. For whatever reason, this is all contributing to your economic vacancy. Just because you didn't collect rent for those days lost. So these are all many different ways by which your economic vacancy number keeps going down. And that's what you work hard as a landlord to try to improve. But you have to assume that to be a pretty high number in the beginning when you take over a property until the operations are more stabilized.

Well, and a lot of what you're talking about is on the asset management side, the active investment port has. And closing up on the passive investing side. So there's a lot of metrics to look for from the conservative that you mentioned, the cap rate, economic vacancy, the rent bumps, et cetera. And then, you know what I always tell people that are looking to either invest in our deals or others is hear the story, look at their projections and just see if it makes sense. Is it conservative? Where the story behind it, you know, represents today's, today's environment. Thank you for talking about all the different metrics and such. And so now, since you started going on the active side, which is a perfect transition, let's talk about your first active investment. You've invested passively, you've learned, you built relationships. Can you talk to us about that first active investment? How did you get it to get it to closing? How did you get people to trust in you as a deal sponsor?

And so I had been in this mentoring group for over six months, done several passive deals. It was time to get active. And I had been actively underwriting deals throughout the process. I had coaches to help me check, make sure my underwriting was right. So as I did passive deals and got better and better at underwriting, and I was the Dallas resident, and Dallas is where so many deals were happening. It kind of made sense that, okay, it's time to kick it up a notch, find partners. So I started talking to several different partners, potential partners, saying what I could offer, and underwriting deals in the Dallas area that were through brokerage. You know, I got all the emails from brokers, and I started underwriting properties. I visited this property, I toured it, it had a lot of potential. It actually met all the relatively conservative underwriting criteria. I mean, last year we still, this was all over a year ago, was 15, 16 months ago. So things were great, the market was great and I still had a two point difference in my reversion cap, for example. And I found out that these other two gentlemen were also bidding on the same property. And we were like basically getting into best and final. And I was like, they're both in the same group as I am. Why don't I just join with them, join forces instead of competing to bid higher. And this way they're both out of state and I could be boots on the ground. I'm local here. So while they had the experience to guide me and make the financial decisions because I was still new to the process here I was, I was available with my time. I had kids in school so I could spend the day in the property kind of situation. So my availability and being able to be boots on the ground anytime really helped convince them to take me on. So that's how I was able to add value in terms of raising money. All of us participated in raising money and of course they raised more money than I did, but I was still able to raise some money, which surprised me considering I hadn't done a deal prior to that. So I was very happy about that. There were friends who trusted me from my engineering world and my local neighborhood, etc. So I was able to raise some money which made me really happy. And so I was able to contribute to the project. But since then, once we took over the asset, right when the water conservation folks came, I was there to meet with them. So this was a great opportunity for me to walk every unit with them so I could get into the interiors of every unit. And I make my own notes about, oh, I like this tenant, or I don't really like this tenant and all the little things you notice because you get into the units same way we were doing an LED upgrade. That was one of our big projects. Again, I was able to get into the units, I was able to meet the vendor, et cetera. So that kind of stuff really helped. Feel more confident on the asset management side without any prior experience.

Yeah, the relationships that you built through that mentoring group. And then you mentioned adding value. You found a way to add value to the partnership. You couldn't bring it all of all the things that they needed. But boots on the ground, your experience and being able to raise capital and also it's a great, great way to get in to syndicating. So what are some of the not so much talked about aspects of syndicating multifamily properties?

So one of the things people don't talk about as much is really how hard it is to find a good deal, right? They don't see it's like that iceberg picture you see. You know, no one sees what's beneath the surface and all the work that goes into it to create that. So sometimes you underwrite or at least initial underwriting of maybe over 100 or 150 deals, especially during these Covid times before you say, ah, there's a couple of deals that are showing some promise where it's worth my digging deeper and visiting the property. So no one realizes how hard it is, especially in today's climate, to have the relationship with brokers or with the seller himself or herself to find the right property. So that's a lot of work. They also don't talk about all the things that could go wrong or bad in a property, right? Like we heard in the news recently about a tenant getting so mad because they were going to get evicted, they set the place on fire. While that's a bit dramatic, we do know that both of us have one of our mentors, right? His apartment actually caught fire, one of his apartment buildings. And so luckily the tenants were safe, no one was harmed. And then renters insurance and your own insurance comes into play. And in the end you have to work through all of that pain before you get the nice new units, right? All the pain of the smoke, people's property loss, the adjoining apartments, how they're affected and just the general. Therefore, when new prospective tenants want to come visit your property and they see all this damage, it's not a good thing, right? So people don't see all the pain that goes behind the scenes in syndication. And that's why, if you notice, in my portfolio I'm still largely a passive investor, but I have a couple of active deals for the experience. But also because when other people trust me with their hard earned money, I want to be very, very hands on and I want to know exactly what's happening with my properties. I want to be able to tell you why I have three units vacant, what are we doing to fill those? And if I have collection problems, I can tell you why. So I'm very hands on that way. And that's why I know I can't handle like 15 properties at a time unless I have systems and processes in place. Like Some of the big syndicators. But I like a close watch for now on my properties.

Yeah, so you've done this a couple years and you've done a lot. So what do you know now that you wish you had known starting out, whether it was passive or active?

Passively. I would say that a lot of the criteria I just mentioned recently is all because of little, little mistakes I made in terms of trusting sponsors. And every sponsor is a, you know, you assume they're good people, they're not trying to cheat you out of your money. But at the same time, if they don't have experience for like a deep value add deal in that particular location, you trust them because they are good people. But do they have that experience for you to trust them with your hard earned money? I think in the end the deal is going to do fine. But just the fact that they don't have that experience, I shouldn't have invested with them. So that's one of my lessons learned. Right on the active side, I am shocked at how well the properties are doing. So I don't know, I'm like really blessed. But maybe we just had a really good property management company for each of those properties and it happens to be doing well. But we're still, despite Covid and despite eviction issues and all that, our properties are performing better than, way better than they were a year ago and very close to all the pro forma numbers we want. And both properties, if I had to sell them next month, the nois are up to where we'd make a lot of money even from a year ago. So both properties are up from where they were valued at a year ago. In fact, with this 5 cap rate going on in Dallas, we could actually make a lot of money. So I think the time to decide would be when the IO rolls off. So that's always a good time to see. In terms of syndication, the only other thing I would do differently is I will hold on to more of my cash so that I have more cash to bring in to the syndication in case we need it. Because today if you had to syndicate a deal, one of the lender requirements is about nine months of, you know, escrow for your mortgage payment and interest. And you have to pay insurance also up front and you want to have enough to pay your property taxes. So you have to raise more capital today than for the same deal a year ago. I would say definitely hold on to more capital if you can. And you only need maybe three or four deals to really understand the business from the passive side, you don't need 15 deals like me, unless that's how you want to stay, is predominantly passive.

And it sounds like you've been really fortunate with your property management group. And I've heard a lot of horror stories with third party property management groups. So how did you find them? What are the things that they do that help drive that day to day execution of renting units, retaining tenants and collecting rents?

I think right from the beginning, setting expectations, having weekly calls, knowing what things you care about, making sure they send you those reports. And our biggest thing was like this property is in Cleburne, one of my properties that is about 30 miles from Fort Worth. So it's one of those small towns. People don't know where it is. So I think that's why we didn't get a lot of bids on it. But one of the important things to see was who has managed a property here and finding that local property management company. So this company we hired had another property they were managing less than a mile away. So they already knew the local market, they already knew where your clients come from, what type they are, what the employer base is, all of those kind of things. So having that local experience really mattered because the supervisor who was going to supervise our leasing manager already had experience at this point. So when we brought in a new leasing manager who had a very good resume and then she connected well with the supervisor, they had a really good process in place for it. I would say not everything was perfect. The biggest thing that we have to improve on is our turns, unit turn, cycle time. But this lady we got is like a leasing machine, is what I call her. Like leasing is her thing. So. So the most important thing I would say when you hire a property management company to ask is do they have local experience? And secondly, what is your biggest priority for your apartment? Right. For us it was leasing, making sure we could get a lot of new leases at the new pro forma rent because we had a lot of people staying in that apartment for many years and paying substantially below pro forma rents. And so we wanted to get in, upgrade those units and get a new tenant base or make sure this tenant base was willing to pay that. So we had some tenants, once we had upgraded units, they moved from their older unit to this nicely upgraded unit. And we're willing to pay the extra 150 bucks in rent bumps, which is great. But the biggest thing is to say this is what I need for this property. This is my number one priority if nothing else happens, because each Leasing manager sort of has a specialty. Some of them are really good with customer relations, some are good with working with the maintenance folks to make sure your cycle times are reduced, etc. For us, it was leases. Leasing at pro forma was our number one and we got exactly the candidate we wanted. In that sense, we lucked out.

Yeah. Did y' all interview that individual or did you just tell the management company this is what we're looking for then? Because you don't want to get in that co employment situation. So how did you deal with that.

Our management company, what our priorities were, one of which is we prefer a female just so that a single mom with kids could more easily approach this leasing manager and discuss things with them and they could connect maybe better with the tenants and have more empathy and be more approachable. But at the same time, we wanted someone who had the soft skills to manage these relationships and could still be firm when it comes to rent collections and other things that are needed to be there so that that blend. And we wanted them to be a leasing machine. And that's exactly what we got.

Perfect. Well, a couple more questions until we close, but given the COVID 19 environment, how are you adapting from an operations standpoint at your properties? Have y' all stopped capital projects? Are y' all doing anything differently from an operating expense or revenue standpoint?

So because our properties were acquired last year, both of them, and in both cases, most of our capex was already done. But we were fortunate that our capex didn't quite exceed the budget because a lot of times you budget a certain amount for a project, it actually ends up costing a lot more. And I think we were cash filled in both properties to where all of our capex was not used up. And so we still had capex money left and things like our water conservation and LED programs, all of those came through in terms of the savings we were expecting because we have all bills paid on one property, one side of the property. So capex wise, we did great. So we're not see, we don't have anything left to do other than upgrades to get the rent bumps. And our leasing machine manager in this one property is able to get a lot of the rent bumps without even having to do full upgrades. So rather than just making a sweeping change and saying let's upgrade everything in this apartment, if say the white appliances are working fine, they don't look bad, they don't have any obvious large dings or anything, we've been leaving them instead of always upgrading them from black or Stainless steel, because it's a class C property that we're trying to make it look more like a class B. It's a lot of the exterior looks nice like a class B, but at the same time, it's like, okay, we don't need to update every little thing. So the flooring, the paint, and your fixtures are three of the biggest things that people notice that makes them feel like, oh, this is a nice apartment. But if the refrigerator is white versus black, it's not as big of a difference. So we're doing our upgrades more selectively. Rather than a sweeping, let's spend 5k or 6k on this. Maybe we can do enough with 3k. That gives us the upgraded look to, like, you know, paint the cabinet doors, upgrade the countertops, but not necessarily to granite, because, I mean, this is still a class C property. There's little things like that.

So I like to ask this question at the end, but, you know, what are your proudest moments investing in real estate?

I think definitely the day I was a PTA mom, spending the whole day at PTA meetings, and then I get a call from my lawyer saying, you need to come and sign this so you can close today. And then going straight from PTA meeting in my PTA T shirt to the lawyer's office and signing the deal, and I'm like, oh, my gosh, this is my first deal. I'm officially a landlord. That was a great feeling. And the second moment, I would say, is when I spoke with a friend who only knew me again as a PTA mom, discussing few hundred dollars kind of budgets, and she's like, oh, yeah, we'll invest with you. I totally trust you. You're so smart. I always knew you were really good at math. You're going to invest in this. I'm going to invest with you. Yeah, we're all ready. And they invested with me. I'm like, are you serious? So that was, like, really big surprise to me that even in your little world and the little things you do, you can shine and show how you are, shall we say, thorough and focused, and you can still make an impression from little things that carry on to big things.

Yeah. Well, I love that. Thank you for sharing your proudest moments and anything else you'd like to share on the show or anything about you or your company. And then how can you people find?

You people can reach me on my website. Multifamily4u, where 4 is the number 4 and u is spelled out y o, u. Multifamily number 4 y o u.com they can put in their name and email address and I can send them a passive investors checklist to vet a sponsor. They can also email me. It's the same multifamily number 4 y o u to reach me.

Well, thank you so much for being on the show and so much value was given to our audience. So thank you and we'll talk soon.

Thank you so much. It was such an honor to be here. I really appreciate the opportunity. Wayne, let's talk soon.

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. Check out Wayne's free ebook by going to Creipartners.com ebook Also, follow us on Facebook by searching Crew.