Brian Burke is President / CEO of Praxis Capital Inc, a vertically integrated real estate private equity investment firm. Praxis operates on multiple platforms, currently managing active syndications for the acquisition of multifamily, single family, and opportunistic residential assets in US growth markets.
Brian has acquired over $400 million in real estate over a 30-year real estate investment career including over 2,500 multifamily units and more than 700 single-family homes, with the assistance of proprietary software that he wrote himself. Brian has subdivided land, built homes and constructed self-storage, but really prefers to reposition existing properties.
The Achieve Wealth Podcast
Guest: Brian Burke
Title : Market selection, Rent Comps and turning around apartments
James: Hey listeners, thanks for coming into this podcast show, it’s called The Achieve Wealth Podcast. So we focus on value at real estate investing aspects and today we have a great show. Somebody that I’ve been following since when I started in Bigger Pockets, the host’s name is Brian Burke. He’s the president and CEO of Praxis Capital, a vertically integrated real estate private Equity Firm. Basically, they are currently managing active syndication of multifamily, single-family and residential assets across the US growth market. Brian has acquired over 400 million in real estate over 30-year real estate investment carrier, including 2500 multifamily units and more than 700 single-family homes and he built his own software that he wrote himself.
He has done a lot of different aspects of real estate such as subdividing land, build homes, constructing self-storage, but he really prefers the re-positioning of existing property.
Hey, Brian, welcome to the show.
Brian: Thanks for having me on.
James: So why don’t you tell about your location, whatever background that I’ve missed out and what’s your focus area and what’s your reason for focusing on real estate?
Brian: Yeah, you pretty much hit it. Our office is located in Santa Rosa, California, which is north of San Francisco.
But having said that that’s not really where we’re investing in real estate. All of the real estate we’re buying is outside of California, mostly in the southern half of the US, Arizona, Texas, Georgia, and Florida. We’re acquiring multifamily properties that are somewhere between preferably 150 units and right now we have 539 in a contract. So somewhere between 150 and 500 units. Typically, we’ve done a couple of deals that are smaller like 136 units recently and we’ve also made offers on some larger properties like one that was almost 1000 units.
But we’re really focused on the value-add multifamily space in the southern half of the US.
James: Good. So why are these markets? I mean, can you describe a bit more on why did you choose this few markets?
Brian: Yeah, we select our markets based on areas where we see a really good economic growth story. So really what we’re looking for is, we’re looking for a lot of income growth, job growth, and population growth. Those are the three big drivers of multifamily and so we’re looking for markets that have all three of those. In addition, we like to see areas, where there’s not a ton of new development or the new development doesn’t exceed the population growth and absorption.
So, we analyze markets all over the US every year, we come up with a list of Target markets where we want to be and each year it’s typically the usual suspects but some markets will drop off and some markets will pop on.
James: So in your looking for deals, do you start with the market first, do you start with the sub-market or do you start with the deal first? What do you start with?
Brian: We definitely start with the market first; the deal is so much less important than the market itself because the market is going to provide you either with a headwind or a tailwind. You can work really, really hard trying to push a great deal in a bad market and get absolutely nowhere but on the other hand, you can buy a good deal in a great market and achieve an incredible result. So it’s really got market first, sub-market second, the deal is third.
James: So what are the parameters? Let’s say, you look at like, you chose a few like Arizona, Georgia, and Texas, right? So, what are the actual indicators that you look for? How many percent job growth do you look for, how many percent supply coming in, just tell me what are the exact criteria that you look for when it’s like a market.
Brian: Yeah; the yardsticks are less about percentages than they are about how—number one, do they exceed the US average?
James: What average are we talking about here? Is it household income or is it house vacancy or what are we talking about?
Brian: No, we’re looking at income growth, job growth, and population growth. Those are the three main metrics and we want to see that all three of those exceed the national average; that’s kind of the first test. But really the way that we test them is, we look for the top markets in the country You can look at the Milken Institute’s best-performing cities index, you can look at PWC and ULIs markets to watch rankings and you can get a sense of how some of the expert demographers and economists are ranking various markets by their performance in those categories. And so to begin with, we look at the top ranking market. So, there might be, call it, 200 different markets that are ranked, we definitely want to be in the top 100, preferably the top 50 and generally, we’re focusing on kind of those top 25 markets, that’s a starting point.
The next thing we do is, we go in and we look at the actual data; we can compare those markets so which ones do we think are going to be the most promising for us? And also you have to couple that up with what markets have a deal flow right? I mean you could find a great market where all of the demographical indicators are telling you that there’s a great reason to buy multifamily property there, but they only have 20,000 units of multifamily housing stock so you might see one deal every two years.
James: Yeah, exactly.
Brian: It also has to be areas where there’s an actual product to buy.
James: Okay. So let’s take an example; so after you look at all these different reports you look for the top, in terms of, job growth, income growth, and population growth. And you also look at the deal-flow because you need to get deals right? I mean, sometimes it’s just too crowded with people trying to buy in the same market, just because everybody knows it’s a good market. So, what do you do next? I mean do you go into, let’s say, for example, Atlanta? Atlanta is a very strong Market, is that a place that you buy?
Brian: Yes. We own over 1000 units in Atlanta; it’s definitely one of our primary markets. And again, it has all of those things; it has income growth, job growth, and population growth.
James: Okay. So, for example, Atlanta, it’s a big city, right? So, how do you go to the next level?
Brian: The next level really is starting to look for the product. And we’ve been in that market for a while so we have really good relationships with brokers in that market and we see a lot of opportunity coming out of that market.
If it was a new market to us that we hadn’t been in before, what we would need to do is we need to establish relationships with brokers. And generally the best way for us to do that, is through brokers that we’ve actually closed with before and other markets and say, hey, you guys have an office in Orlando, can you get in touch with one of the guys over at the Orlando office and tell him about your experience in working with us in your market.
So they’ll take us seriously when we call or our lender, maybe we’ve used their debt group before and they can call and vouch for us because this is a relationship business and cold-calling Brokers out of nowhere and saying you’re this big-time buyer isn’t really gonna win you a lot of points.
James: Yeah. So let’s say you get a deal from the broker and you know, I mean, I know somebody in Atlanta which I would not buy right I mean, so I’m sure you have that as well. So what do you look for in terms of sequence? I mean, let’s say you get a deal today, what do you do, do you look at numbers, do you look at sub-market, do you look at the crime rate, what do you look for?
Brian: The first thing we’re going to look at is, does the property fit within our box? So, our box would be if it’s like built before 1980, it’s probably not going to fly. It might if we do some 70s deal on a case-by-case basis but if it’s built before 1970, it’s probably an automatic cross off.
The next thing is, is it too small? If it’s 100 units or 99 units or 75 units, yeah, it’s just too small, we’re gonna cross it off. So, it has to meet kind of the age and size restrictions, we’re looking for properties preferably with pitched roofs, no chillers, a good unit mix so we’re basically kind of looking at the physical plan itself. And if that’s a pass, then the next step after that would be to underwrite the financial performance. And that involves building the model, inputting the historical financials and rent rule data into our model, conducting a market survey to study what the market will support for rents, post-renovation, talk to the broker and learn about the story behind the deal and then model it up and see how it will perform.
James: So when at which point do you look at the sub-market?
Brian: That’s part of this process of looking at the physical asset. So, when we are underwriting and modeling it up, one of the things we’re going to look at is, we’re going to look at the median income in that census tract, we’re going to look at the crime rate in that area. Those things are a little bit lesser important but when we get close where we think we’re going to make an offer on the property or we think that there’s a chance we’re actually going to get awarded the property, now we’re going to take a really deep dive into the actual sub market data and statistics.
What’s the historical rent growth in that sub-market? What’s the future forecasted rent growth in that market? What are the occupancies? What’s the occupancy history and occupancy forecasts? We’re looking at that. We’re looking at the trough occupancy, how bad did occupancy get during the last great recession? We’re looking at all of those different kinds of granular level statistics right about the time where we’re circling in on making a decision either to write an offer or to accept an award of a deal.
James: Okay. So basically you have a very high level, you have age and size that might be just like [12:28unintelligible] if it doesn’t work, then it doesn’t work; no Chiller, pitch roof and you will go ahead and do the underwriting on the financials and just before writing an offer you think you’re going to get the offer then you go into deeper into the sub-market [12:45crosstalk] and occupancy okay, interesting.
Brian: Yeah. Yeah.
James: So, when do you do the market rent comp?
Brian: That’s one of the first things we’re doing. So as we’re building the model and putting in the historical rent data, we’ll go out and do a tour of the property where we show up and look at some units, take a good look at the exterior of the property. And then after we’ve seen the property and then we go to drive the comps and we visit those comps and figure out what they’re charging in rents, what their level of renovation is like, is that a property that’s supporting where rents for the subject property should be today or is it more of an aspirational comp where this is what this property could be when it grows up.
We need to figure out which category the comps fit into and then make sure that we’re adjusting our rent expectations based on comps that are really comps.
James: Okay, so when you do your rent comp, how do you do it? Do you go by bedroom, or do you go that high-level price per square footage? Can you describe in a bit more detail about how do you go into doing the rent comp analysis?
Brian: Yeah, the comp analysis is basically it’s a grid system where we lay out the unit mix of the subject property so that we can see, you got to 500 square foot studio and a 650 square foot one bedroom and an 800 square foot two bedroom and 1000 square foot three bedroom, and we’re going to lay all those out on a grid then as we go visit the comps, we’re going to put the most applicable units in that grid.
So like if we’re looking at a 750 square foot two bedroom unit at the subject, we want to find somewhere around 750 square foot two-bedroom units of the comps and they might be 700; they might be 775, they might not be 750 but they’ll be somewhat close. We’re going to put that next to the rent that we have for the subject property and we’re also going to note, what condition are those in; are they renovated or non-renovated and if their renovated to what level have they’ve been renovated or they have granite countertops and stainless steel appliances or is it resurface counters and white appliances? You want to know what you’re comparing to and then what you plan to renovate the subject to and how it’s going to fit in with those comps.
James: Okay, got it. How far do you go in terms of looking at properties that kind of meet those comps or that you’re going to select for comps? I mean, is it like one mile, 0.75?
Brian: We go as far as we have to; the best comps are within three miles, but sometimes we’re finding comps five or six miles away. This can happen, especially if you’re looking to renovate a property in a sub-market where there’s only been a couple of properties that have been renovated. Sometimes you have to broaden your search out to find other properties that have been renovated to give you a frame of comparison to a post renovated rent status.
So, we’re looking for a minimum of four, preferably 6 comps for the property and we’d like for those comps to be representative of what we expect our property to look like after we finish doing what we’re going to do to it.
James: Okay. Got it. And how do you identify because real estate is hyper-local right? It’s very, very localized. So how do you identify whether the comp qualifies a comp or not? Because if you do a circular comp so you can go across certain artificial barriers, such as a highway and I mean, street by street right? Sometimes by doing this, you have a completely different comp, people are willing to pay more but how did you identify those kinds of issues?
Brian: One of the things we look at, sometimes you can just tell; you can just drive in and you can say this is just not a comp, it’s a completely different physical plan. The subject property is a pitched roof – 1980s and this is a flat roof – 1970s with no amenities and it hasn’t been fixed up; you can sometimes just tell but going beyond that, you’re right. Sometimes you can cross over a major arterial and you can go from a place where people want to live to one where they don’t want to. So one of the ways that you can check for, just as for the subject property, we looked at the median income in that census tract and the crime rate in the area of that comp. We can do the same thing for the comps and look at the census tract where the comp is located and sometimes it’s different. You might cross arterial and cross into a different census tract and you can see like a massive change in income.
So one of the things that can trip people up sometimes is let’s say, your subject property is in areas that have $30,000 median income, you’ve got a great renovated comp about six blocks away and they’re getting like $400 more so you might say, geez, we could get $400 more for this property, that’s great. But then, you look at the income maps by census tract you see like, okay, this is in the 30,000 neighborhood, but the comp is in a 90,000 income neighborhood, it may look like a comp but it’s not really a comp and it could be that it crossed the School District boundary and you went from subpar schools to your really desirable School District or whatever the case may be and sometimes those comps aren’t really comps.
James: So you are mentioning a lot about census tract. So in your opinion do you think census tract represent, could be the artery on where the difference in household income would be able to be represented well?
Brian: Well, it’s just when they’re doing a statistical data set, that’s the way that the data is calculated. It’s by census tract and so some people do it by ZIP code but zip codes can be so large that they might cover half of a City versus census tract that it’s more like a few blocks; it just gives you a little bit more granular level detail.
James: So do you do like a cost report to do initial rent comp before you guys drive down?
Brian: No, not generally. With rent comps, they’re fairly easy to kind of circle in on to some extent. Usually, the offering memorandum, the broker will give you, will show you some comps and have some comp data in there that you can use as a starting point. And then there are other things you can do; like visit the comps property website, it’s supposed to have a link you can click to see the available units and you can click on that and you can see what they’re asking for various different floor plans on their website, they have pictures and you can get a sense of the property by looking at the comps picture. You know those kinds of things are relatively good start.
Nothing beats good old fashion shoe leather of showing up in the office and asking for a brochure and saying, Hey, I want to rent an apartment here, what are you going to charge me for a two-bedroom unit and can I see one?
That’s really the way you get the best comp data. We do have the ability to get comp data from Co-star, Axiometrics, and Reese, which is certainly very helpful. And we do use that to a certain extent but we like to get a little bit more granular than that.
James: Okay, okay, but do you use this Co-star, Axiometrics in the beginning before you visit the property or that is just not being used at all.
Brian: We usually use that when we’re getting closer to deciding on a price or putting in an offer; until we go see the property, that’s just raw data. We really want to get our hands on what we’re dealing with and what the comps look like in person. We can usually tell if a deal is work before we go down there, but we’re still going to end up touring a lot of properties that maybe we could have ruled out but we just group them together and our chief investment officer will take a trip to Atlanta and look at 10 assets that are for sale and do it all in one trip.
And so there might be a couple in there that slip through that we could maybe have decided against by looking at data. But the time it takes to look at that data, it’s probably more time than it would have taken it to drive a few more blocks and go look at the property.
James: Okay, I mean, it looks like what you’re saying is you prefer to just see the property on the market just go and drive for on comp rather than doing all this, Co-star, Axiometrics and all that.
Brian: Yeah, that information is helpful; it’s certainly not something to be completely disregarded but you can only do so much desktop underwriting. Real estate is a tangible business and it’s a hands-on process and so you gotta get hands-on.
James: Yeah. Yeah, that’s interesting because I know a lot of sponsors who like to do a lot of things on the desktop before going even and walking the units and they may walk the unit’s eventually but the rent comp is so tricky because if you get the wrong rent comp, your whole business plan may not be able to work right?
Brian: That’s exactly right. Yeah, it’s true and you know what I find is that the data in those third-party reports often contain inaccurate or dated information and there’s no current information better than showing up in the office and asking for a brochure. We just do ours a little bit more hands-on; nothing wrong with using data and we will use data to kind of screen initially but we really want to go see those comps.
James: So what about on the financials, like the P&L and rent roll so let’s take P&L; I know we take the numbers from them and underwrite it but at a high-level glance when you look at P&L, what do you really look for?
James: Not much; there’s not a lot of information on there that’s particularly helpful. I would say there’s really only two things on a P&L that we use and that’s the utilities expense and the contract Services expense. Because whatever they’re paying for utilities; water, sewer, electric, that’s probably not going to change when we buy the property so that that information is useful.
The other thing is Contract Services, what they’re paying the landscape company and the cable TV contract and the alarm bill, Alarm Monitoring those kinds of things, those recurring contracts, assuming that we can’t negotiate a better deal those costs are going to end up being our costs and so we want to look at what those costs are; the rest of it is not particularly helpful. We will look at things, like, we look for clues right?
So often times, you might find the general and administrative expense category is abnormally high. Well, why is that and then you find out, well, there’s a homeowner’s association that charges homeowners association dues; we’re going to be stuck with those so we want to make sure we build that into our expense model so we look for clues like that to tell us that there are certain charges or expenses that we’re going to be responsible for. But outside of that, the balance of their expense sheet doesn’t really apply to us because our insurance company is going to charge us a different price than there getting. We’re going to have different software than they’re using so we might switch phone companies or change internet providers or whatever.
So our general administrative costs are going to be different. We’ll advertise differently so our advertising and marketing costs are going to be different.
We’re going to staff differently so our payroll costs will be different. We’ll probably have a different pay scale than they have, we’ll probably pay a different management fee. Our property taxes will get reassessed based on however the local taxing jurisdiction handles property taxes upon a transfer so that’s going to be different. So all that historical financial data is relatively meaningless other than to give us a comparison to see kind of what the starting point is.
James: Okay. Except for these two, basically what you’re saying is that’s basically coming to entry cap rate, right? So do you really care for the entry cap rate?
Brian: No, entry cap rate doesn’t mean anything; entry cap rate has no use in acquisition underwriting.
James: Yeah, especially on a value-add deal because now you are going to be running it much differently from the current guy that has been doing it.
Brian: That’s right and cap rate is nothing more than a measurement of the sentiment of the market and how it’s valuing an income stream. There’s no particular use for entry cap rate in underwriting your acquisition.
James: Yeah, absolutely. Like what about the rent roll, what do you do with a rent roll that’s given to you? What is one of the first analysis that you do?
Brian: Yeah, what we do is we sort the rent roll based on floor plan and then we sort it based on move-in date so that we can see each floor plan, what the average rent is that they’re getting for each floor plan and we can also see what is the average that they’ve been renting those units out for in the last 90 days.
And those two things kind of give us a sense of what units are renting for and what direction they’re headed.
James: Okay, and why last 90 days?
Brian: We just want to see what the most recent rents are going out. So, let’s say, for example, you have a two-bedroom unit that on average is rented for $800 but you notice that in the last 90 days, they’ve been getting 875; that tells you that something’s going on. One of two things is going on; either they’re doing some renovations and they’re getting a $75 bump for the renovations or the market has gone up $75 and they’re not doing any renovations at all.
So as we’re analyzing what our starting point rents are, the starting point rent is $800 because that’s what the average is or are the starting point rent is 875 because that’s what they’re getting today.
James: Okay. Well, they could be just faking the rent rule at the last minute just because they want to sell.
Brian: That’s also possible.
James: I’ve seen many cases like that.
Brian: I have to yeah, they could be stealing the rent rule. That’s entirely possible, absolutely.
James: Yeah. I’ve seen cases where sellers, they were only like five years and the last year they started bumping up and it’s like the last three months, they started bumping up. I always wonder, what? I mean, you owned it for the past five years and why suddenly the last three months you’re bumping up?
Brian: Because they want to sell.
James: They want to sell it?
Brian: Yeah, absolutely. The trick is when you go and due diligence you’re doing a lease file audit and you’re looking at those most recent leases, did they do an income verification? Did they do a criminal background check if that’s what their practice was? So if you look all the sudden, their lease file audit is pretty clean but in the last 90 days you’re noticing that there’s a bunch of felons that have no jobs, but they’re still paying a higher rent, it tells you that they just got anybody to sign a lease [28:50inaudible]
James: Absolutely. Yeah, it’s a lot of tricks that the sellers play too. So I mean commercial that’s the challenge right? It’s not based on surrounding comps like single family homes, right? I mean, in commercials it’s all about the income stream that’s coming in and you have to be very careful on how the sellers are positioning their product just before selling and buyers can get tricked into it. So I mean, you focus a lot on value-add deals, right? I mean, that’s the fundamental on why people do commercial real estate because of [29:22inaudible] appreciation. So what do you think is your secret sauce and is there any secret sauce that you have in your value-add investing that you think, I’m very good at doing this or I’m good at identifying this and fixing this, other than increasing income and reducing expense?
Brian: Well, I think a couple of things; one is, I think we underwrite very well and very accurately. We’ve got really powerful modeling tools that we use that gives us a competitive edge, I think that’s part of it. The other is we take a very deep dive and we have a very good understanding of the market and the comps.
We have an advantage in most of our markets because we already own there so we have our historical experience to be able to dip into and really, a lot of people fail to realize is that doing a value-add deal isn’t just about an acquisition, it’s about execution. My senior team here has 105,000 units of multifamily experience and they’ve been doing this for as long as 40 years. So that gives us a tremendous advantage because we just got all this operational experience and things are not going according to plan.
We’ve got a lot of experience here to dip into, to figure out how to right the ship and make things start going according to plan. I think that gives us a tremendous
James: So I think you have your own proprietary Excel spreadsheet, I guess to underwrite the deals, right? So what do you think is the unique advantage of that spreadsheet that you think it gives you really good accurate underwriting numbers?
Brian: Yeah. It’s just incredibly granular and the level of detail that it goes into and it’s been built for doing value-add multifamily deals and gives us a very, very detailed look at what we expect a property to do. And it’s also enormously flexible that we can arrange all different kinds of financing, vehicles, debt, equity, just an enormous number of combinations and model; any scenario and estimate the outcome and it just gives us a huge advantage to be able to underwrite like that.
James: Yeah, so have you tried to match whatever you’ve underwritten and are you able to execute it correctly? I mean, have you seen it come out all the time correctly?
I mean, there could be some times where whatever you underwrite on paper didn’t come out on execution; what are the cases like that?
Brian: Well that happens 100 percent of the time, the only thing I can tell you about underwriting multifamily with absolute certainty is that the actual performance will not exactly match the expected.
James: It always ends up, something is wrong. It’s always something wrong.
Brian: Yeah, it’s 100 percent wrong. I mean, it’s the best estimate you can make going in but you’re gonna perform in one direction or the other and that direction is going to change. So, it’s not at all uncommon where you find that your first year performance was way under the mark because you got in there and you end up finding out that a third of the tenants didn’t qualify and they stopped paying, you got to get them out and bring occupancy down to 75 percent and then bring it all the way back up with a new tenant base and we call that repositioning the tenant base or resident profile change is another term for it.
James: Demographic shift.
Brian: Demographic shift; sometimes you have to do that and that causes your first-year performance to slack but then you get to the second year and now you’ve got a better tenant based on what you started with and your second year outperforms. And then, by the time you get to year 3 everybody’s forgotten how bad year one was and you’ve got a higher income than you projected and you sell and you actually beat your projections.
You have other times where right straight out of the gate, you’re beating your projection. We had this one property where the day we took over, the new managers went into the office like literally an hour after closing. And every time a new prospect walked in the door, we increase the asking rent $25. And we did that all day long until somebody said no.
I think, by the time we were finished, it was like a $125 increase from where it was five hours earlier. And that property really outperformed in the first year because we had so much more robust renewal and lease rates than what we had forecasted. So you’re never going to get it exact, you’re always going to be wrong. But the point is, can you underwrite it accurately enough to make a good decision on whether or not you want to be involved in that asset, to begin with? And then, how well can you execute and can you outperform that projection? And we’ve kind of
intentionally design our pro formas so that we can outperform them. It’s just a much easier way to operate and we don’t always do that, especially in the first year, it can be tough on some assets but generally speaking we tend to outperform. And by the time the property is stabilized, we’re usually stabilized at a higher income than we projected. All the deals that we’ve exited, we’ve exited and delivered a higher rate of return and a higher multiple than what we had projected to achieve so all in all, we have a really good track record. But you just can’t track a track record month by month or quarter by quarter, you don’t really get your report card until you’re about two or three or four years in.
James: Correct, especially in value-add deals. I mean, you’re absolutely right. You just do not know what you’re getting into until after a couple of years. So, what are the tools that you use to do asset management? Because I mean, you are you are an operator right so there should be a lot of tools that you use to monitor the rent growth or the rent increase, the expense reduction; what are the things that you track and what are the tools that you use to track them?
Brian: Well a couple; we use a software platform called Real Page which is a property management software platform, an enterprise-grade management platform that is used for generally, people think of Real Page, they also know it as one site.
James: Yeah, it’s a property management software, right?
Brian: Yeah. It’s a property management software usually think of it as a way to track your tenants and book your rents and that sort of stuff but it’s an enormously powerful tool. And one of the things that they have as part of that package is a package called, oh, shoot, now, I forget what it’s called; let me let me look and see how I saved it here, it’s called like asset something or other. Business Intelligence, see how intelligent I am, I forgot that it’s even called, Business Intelligence. And so the Business Intelligence model what it does is, it gives me a dashboard or I just login; I can see on a dashboard, occupancy, the leasing velocity, the number of visits to every property in our portfolio on one dashboard at a class, including with graphs and everything. So I can just pop that up and I can see what’s the occupancy property, how many people walked in and asked for a tour? How many of those closed and signed a lease? What’s the least rate that we’ve been leasing out lately?
What was the lease rate we had a year ago? I can make comparisons then and then every week it automatically emails me a detailed report showing me a number of different yardsticks that I can measure performance. In addition to that tool, we also take our quarterly performance and model in a comparison spreadsheet next to our expected performance. So we’ll take each and every quarter out of the acquisition model we have, what did we think we were going to get in gross potential rent and how much are we going to lose the vacancy loss and what we’re going to spend in utility bills? And we input our actual performance next to that and we can compare how we did with how we thought we were going to do and we can report that to our investors.
So we kind of take both of those two platforms and also that gives us a little bit inside, where do we need to improve? You know, jeez, we really missed the mark on vacancy loss so we need to get on a drive to push occupancy and oh, by the way, we didn’t spend the entire budget on marketing so maybe if we spent more money on marketing we’d have less vacancy. So those kinds of things, you can see that stuff kind of in real time as it happens.
James: Wow! But this is assuming the real pitches, you’re assuming that all your property management companies are using Yardi systems as the property Management tool because that’s basically integrated with that.
Brian: Yardi is a different system than Real Page so that’s a competitor. It’s similar, but it’s a competitor product but we own our own management company. So, we are the management company, we have that in place at all of our properties.
James: But do you use a specific property management software to use Real Page?
Brian: That is it.
James: Yeah, so basically, you’re using one site.
Brian: One site is real Pages product; it’s all kind of part of the same enterprise software platform.
James: Okay. So what do you do when you see certain properties not recovering from its bad performance?
Brian: You get to work. So we had one like this in Houston, Texas, it was kind of interesting. It was performing great and all sudden hurricane Harvey came in and it created a lot of chaos in the city. And at first, we thought it was actually going to be beneficial to us. So a lot of units, not on our property, but outside of our property were destroyed by the hurricane and we thought, all these units are going to come offline, those people are going to need to find someplace to live, that’s going to drive occupancy, it’s going to drive rent growth.
Historically when you looked at past hurricane events, you saw that happen like in Katrina; rents went up 30% so we expected it was actually going to help our performance. But instead, what happened is we found that a lot of the apartments that were destroyed were in really, kind of subpar neighborhoods or bad neighborhoods or just lower-income neighborhoods or however you want to characterize it and those residents were coming to our sub-market to rent. And a lot of them weren’t paying, they were skipping out; it just turned into a complete disaster and we noticed delinquencies sky-rocketing, we noticed vacancies increasing. To combat vacancies, we would offer concessions and that brought concessions up and then marketing expense went up and it caused the whole thing to perform below expectations.
So, what we had to do was, we had to try every experiment in the book and you try this concession. Like maybe you give half off on the second month and then maybe you try a month free or maybe a try waiving the security deposit or then you try waiving the admin fee. I mean, just a variety of different things trying to throw things against the wall to see if any of them stick and none of them did. We literally tried everything there was and nothing got us over the hump. Finally, I said we have to do something that nobody ever wants to do and it’s probably maybe even never heard of.
James: What is that?
Brian: We’re going to lower the rent. And it’s funny, I used to go to some of these like Guru seminars and stuff and they’re like, “The great thing about owning apartments is that the rents always go up. When was the last time you ever saw someone lower rent?” And I’m here to testify that sometimes rents do go down and we tried that and we lowered the rent.
We found that there were two floor-plans that were really contributing to the majority of our vacancy and we lowered the rent on those two floor-plans by $50. And lo and behold, within six weeks, we had the property back up to our projected occupancy; delinquencies plummeted, literally plummeted by about 75% and the property was tracking back on track within six weeks. And now that we did that, we can start walking the rent back up and over time, we’ll get it back to where it was and it only affected a limited number of leases that we signed but the strategy works. So sometimes you have to get creative, you have to think outside the box, you have to do things you don’t want to do but part of being an operator is improvising and trying to make the best decision to right the ship. Yeah, that decision sometime maybe difficult.
James: Yeah, I mean, I’ve done it as well. I look at demand based on square footage and floor plans as well and sometimes, you may have been wrong. So now when you look at the data demand-supply analysis, they are sometimes you realize okay that particular floor plan is too highly priced so you need to reduce that.
So I’ve done it quite a number of times and it’s a balance. Some floor plans might be over-performing and compared to what you thought and some could be lower in performance and the data will tell you.
James: So, for example, we talked about what are the markets that you look for to acquire deals, right? So what are the criteria for market do you look for when you think that I should start selling in this market? You’ve maybe done that before.
Brian: Yeah. We haven’t really done a coordinated Exit Plan for many markets, generally, so far, knock on wood, we’ve been lucky enough to just maybe get out of markets before that happened. We have a business plan for each asset, we try to accomplish that business plan and sell when we had planned to sell it.
If we decide, this market isn’t performing quite the way we want, we’re not necessarily going to go into a fire sale, but we’ll stop buying in that market and then over time, we’ll just have a [44:48inaudible] we sell off properties and we’re not buying additional properties, we’re net sellers in the market; eventually, we’re out of that market completely. We’ve definitely seen some sellers will do a portfolio sale and go like, you know what, we want out of Kalamazoo; take all the properties and put them all in the market in a big portfolio and we’re done and you could certainly do that.
At this point, with the size of our portfolio, the lower 2000 units, we’re not in a position where we would say we want to do a wholesale exit of a market and do a portfolio sale so we haven’t done that type of analysis yet.
James: That’s good. And why did you choose to have a vertically integrated structure?
Brian: As opposed to third-party management; so we started out with third-party management, I think most owners do. We had property management companies in each of the local markets where we invested managing those assets in those markets and that works fine, nothing wrong with it. But as we grow, having vertical integration allowed us to bring more of the control in-house, it allowed us to combine systems, we had better access to Asset Management tools, like the Business Intelligence I was telling you about, where I can log into my dashboard and see how all of our assets are performing, that’s difficult to do if you’ve got a hodgepodge of different third-party managers in charge of properties in different areas. So this allowed us to to get that internal control over our data, our accounting, centralize everything and also really one of the big drivers was we were looking for institutional Capital Partners who could bring significant amounts of capital into our Acquisitions.
And, generally speaking, those institutional capital groups have discovered that vertically integrated companies perform better and so many of them have a preference to funding joint ventures with groups that are operators that are vertically integrated. And so in order for us to have the best chances of attracting those kinds of Partners, we needed to have that vertical integration and we did it.
James: I didn’t know that institutional guys likes vertically integrate. I mean I presume is one neck choke, right? That’s what I always say.
Brian: Yeah. That’s a great way to put it.
James: So have you started working with the institutional partners?
Brian: We have yeah, we’ve done a few deals with some institutional partners and it’s certainly helped us fuel our growth.
James: Okay. That’s good. And in terms of value-add, what do you think is the most valuable value-add?
Brian: The most valuable value-add. Wow, that’s [47:44 crosstalk]
James: If you do these few things…
Brian: Yeah, sometimes 20% a year effort will get you 80% of the result.
Brian: Yeah, that’s true, that’s a great question. I don’t think I’ve ever been asked that one before. The challenge of it is that it really varies depending on the property. You can have some properties where you can just literally walk in the front door and create an enormous amount of value just by walking in the front door. A good example is that one I told you about a while ago, where literally the day we took over we raise rents $25 every time a prospect walked in.
Just managing correctly and understanding your market. I mean, we got 50% of our rent lift without spending a dime on that property the very first day and so that is a tremendous amount of added value is just proper management. But generally speaking, where we find most of our value is in doing interior renovations and taking an older run- I wouldn’t say rundown- let’s call them dated interior finishers and transformed into a more modern appearance; it goes a long way to getting additional value out of that property and actually the residents feel better about it.
They don’t feel so good when they found out that you just rented $25 more of the rent than the last guy just because they were the next one to walk in the door; that doesn’t necessarily make them feel like they got some value right? But in exchange, if you can show hey, look what we’ve done to the interior of this unit; it’s got new flooring and new countertops and new fixtures and appliances and they see that there’s actually value of that extra dollar that they’re spending, then it’s kind of a two-way street of adding value. Where you’ve added additional income which is added value to the real estate but you’ve also added value for the resident and they feel as though they’ve gotten something out of the transaction as well.
James: So what are the top three things inside the interior units that you think is the biggest bang for the buck?
Brian: The biggest bang for the buck is probably kitchens and bathrooms so appliances, countertops, and fixtures are the biggest ones.
James: Okay, that’s very good. I mean, there could be a lot of people, I mean, I know right now the market is so hot, there so many gurus going around telling multifamily is one of the hottest real estate asset class to do even though they don’t tell how difficult is it to manage multifamily, right?
Brian: No, that would drive people away. They wouldn’t buy the course if they say [50:17 inaudible]
James: Yeah, you can do all kind of selling when the market is hot, but when things turns around, it’s a whole new landscape right out there.
Brian: That is true.
James: Yeah, one of the top five advice that you would give to people who want to start a multifamily?
Brian: The top advice; I would say first is to start with a size that you can execute on. So a lot of times I hear people go, hey, I just ripped my first house, I want to go buy a 200 unit apartment complex. It’s probably a little too soon; set your goal a little bit lower, get some experience doing some smaller assets, prove yourself, survived that and then move to the next level. I heard it said that success is an escalator, not an elevator and you got to do it one step at a time, you don’t just go straight to the top. So I think that’s probably the biggest piece of advice thing. Most people, they try to go too big, too soon and give up.
James: So you think they should be starting slowly, learning how the whole real estate process works. Where you buy under the market and you start to renovate it and you start to increase the value, I guess, the whole transaction process, right?
Brian: So I think you gotta start wherever you can execute. If you’ve got 20 million dollars in your bank account, you can start at a different point than somebody that has 20 dollars in their bank account. So I think you can start wherever you can execute and just make sure you just don’t put yourself into getting yourself in over your head.
James: Yeah. Yeah, that’s crazy. I know it’s a lot of people thinks that they can buy 100 units. I mean just because syndication has become popular nowadays, and there’s a lot of capital, able to pull money and there’s a lot of clubs, pulling the money is become so much easy; so much Facebook group so many Gurus out there telling that you can start with 100 plus units, right? And everybody’s jumping into trying to be an asset manager and they don’t realize how complex the business is and that’s a bit scary.
Brian: Yes, I agree.
James: Yeah and then advice for newbies that you think that they should know?
Brian: Just be ready for it to take a while. I didn’t buy my first large multifamily property until I’ve been in this business for like 15 years. So, you gotta just pace yourself and not get too wound up in whether or not it’s moving fast enough for you, it will happen in time; just be patient.
James: And just another question before I forget; so in terms of buying and selling real estate, I mean, do you believe in buying whole forever or do you buy and hold until the gas is out from that property or do you like to flip properties within a couple of years?
Brian: Well, I think I believe in all of that, it really just depends on what your strategy is. I have some properties in my personal portfolio that I’ve owned for a decade or longer and I might own the rest of my life and they’re not particularly great properties, there’s nothing special about them but what I do know, is that in about 10 more years, they’ll be completely paid for and that rent can provide me with a retirement income even if I did absolutely nothing else, I know that that’s there. And so it serves a specific purpose so that’s the ‘buy and hold forever’ approach and it’s serving a very specific purpose.
Now, I wouldn’t go and raise money from a bunch of investors with the thesis that we’re going to go buy some property and hold it forever, that just doesn’t work. When you’re investing money for others, you have to be sensitive to the fact that they want to know that they’re getting the highest returns. They want to know when they’re going to get their money back and they want to know what the business plan is going to be an ‘buy and hold forever’ really isn’t the plan. It’s you’re buying it and setting it and forgetting it; there’s no active component to buy and hold forever.
So if you’re going to raise money from other people to invest in real estate, I think that you make the most improvements that you can to the asset, you increase the income as much as you can and then at that point, the hold cycle reaches this inflection point. Where it’s no longer about you and what you can do, it’s now up to the market. And when we reach that inflection point, to me, that’s a great time to sell and we can get out, recapitalize our investors and we can do it all over again and we never have to rely on the market, we can always rely on our execution.
James: Okay, that’s a good point. So do you have any funny stories that you have? I mean, as an operator you would have seen a lot of funny stories by tenants, right? You want to share a couple or one or two?
Brian: Oh geez, I’m terrible at remembering stories. It’s like, they’re always funny when they happen and then you laugh about it and then afterward, you move on so gosh! I’ll tell you another thing is once you think you’ve seen it all, you haven’t seen it all; there’s always something that comes up and says, hey, this is new. We certainly had plenty; we’ve had all kinds of interesting things happen in the 750 something properties that I’ve acquired over the years, every one of them has a unique story. It’s just that after having done so many of them, I don’t even remember them anymore.
James: Okay, that’s fine. So, hey, Brian, thanks for coming onto the show. And can you tell our listeners, where and how can our listeners reach you?
Brian: Yeah, sure. Thanks for having me on the show, by the way, James. I appreciate being here and the best place to find me, it’s really two places where you’re going to find me. One is going to be on biggerpockets.com.
I’m on that website, we’re answering people’s questions, contributing to the forums and that sort of stuff. So I’ve written for their blog so I get around on there so that’s one place where people can find me.
Another is through our website, the Praxis Capital website, which is, praxcap.com.
James: Okay, I’ll try to put that into the show notes as well. And yeah, I mean thanks for coming online and talking to me and our audience. I presume you have gone into a lot of details and my main motivation in doing this podcast is so that we can listen to some podcasts and learn a lot of things.
I mean, a lot of podcasts has been too much into a marketing material and I think as you go deeper into the multifamily asset class that’s so much of details that an operator can give and that’s what are the most important thing that I want to bring into this podcast. And, hopefully, everybody learned something today and thanks for being here.
Brian: And thanks for having me, James.