James: Hey audience, welcome to Achieve Wealth Podcast where we focus on commercial real estate asset class and we focus on value-add real estate investing. Today, I have Kenny Wolfe who owns more than 2,000 units. Kenny is a well-known sponsor in the Dallas Market and he owns deals Across the Nation. Hey, Kenny, welcome to the show.
Kenny: Hey James, thanks for having me.
James: So why don’t you explain to the audience about more background about yourself? Because I think I may have missed out a lot of things.
James: Yeah, that’s alright. So, we started investing in multifamily real estate over eight years ago. We started out here in Dallas, Fort Worth, Texas, but quickly branched out. So we’ve owned multifamily properties in five different states; so, Texas, Oklahoma, Colorado, Ohio, and Louisiana. So those are the five states. We’ve been in Colorado, the moment we sold that property. And we sold the property in Louisiana and we are back to go about buying a property on Tuesday in Louisiana so we are back there in that state as well.
And then within those States in Ohio and Texas, we’re in multiple markets in those two different states as well.
James: Awesome. So, I mean, you asset manage and operate the entire portfolio, right? Is that how you do it?
Kenny: We do. We have some deals which are passive as well. Then there are deals where we’ve co-sponsored in the past. And so I mean our total unit count that we’ve been involved in is almost 36 hundred units, now. There’s about I think we’re down to about 2,000 that we actually asset manage. We’ve sold some off but we’re buying 400 units on Tuesday so that’ll make a lot of that up.
James: Oh, yeah, that’s a big number.
Kenny: It fluctuates.
James: I mean you are in one of the hottest Market in the country, right, Dallas? Why did you go to other markets?
Kenny: It got too hot for me. I mean, I started out buying deals back in 2010, right? And so I’ve seen the run-up in the cap rate compression firsthand here in Dallas and it’s been very big and very real so, you know, it felt too hot for me. I thought the prices were high four years ago in Dallas-Fort Worth so I called it a little early. But I mean, it forced us that and I think in hindsight because I was wrong, I still think it was a good idea because it made it possible for us to grow quickly in those other markets and have bigger deal flow and get used to different markets too. I think if you’re stuck on just one market, it can be problematic for you because if you sell something in that Market at the peak and you know, what are you going to buy if you just focus on that one market?
So anyway, that was kind of how I felt behind it Diversified and kind of chase some good deals.
James: That’s awesome. So at what year did you call Dallas was too high?
Kenny: I think it was like 2014 or 2015. I was really early.
James: It might be the right call. I mean, I didn’t know after 2015, everything was IO deals, right? A lot of IO loans came into the market. So I don’t know, my thinking is there as continued the multifamily boom, right? Because people get still justify the cash on cash.
Kenny: Right. Yeah, and it depends on what you’re looking for too. I mean some of these investors that we were dealing with coming into Dallas Fort Worth were foreign investors so they’re okay with a lower return and also, we had a lot of 1031 exchange money coming in from California and elsewhere where they just wanted to you know, they were okay with lower returns because they were able to offset all of their tax burden from the property they sold somewhere else.
James: Got it. So what was your underwriting criteria when you say Dallas was too hot? When did that cross and what was that number?
Kenny: Well, so we’ve always stuck with our original underwriting, was to when we would write a deal, we like to double the investor’s money in five years or less. We like double-digit average cash on cash return over five years. We’ve done deals where it’s nine and a half when we rejected that so I mean we’ve, I guess, gone down a nine and a half cash flow but we still double their money in five years or less. So if we can’t do that, then we don’t offer on the deal.
But, I mean, I’ve seen some of these groups, they’ve changed from that from our same underwriting criteria, doubling their money in five years or less; can be 75% or 80% so they’re changing their underwriting criteria, which if you ask anybody who’s been to the last cycle, that’s what they did.
They change their underwriting criteria to make the deals work. So we’ve always stuck with that number and that’s why we were priced out of Dallas Fort Worth is because you just couldn’t find that very easily.
James: Okay, okay. Yeah, so basically you were priced out because you didn’t change your underwriting criteria, right?
Kenny: Yeah. So when we stayed conservative on that too, but that’s what drove us to other markets and you know, now we get on planes a lot but that’s okay.
James: So now let’s say today Dallas doesn’t work, right? How did you choose your next Market? What was the process that you went through?
Kenny: So we went to the other the market that we went into first after Dallas Fort Worth. It was Colorado Springs, Colorado. So that market was interesting. We bought that deal with a seven and a half cap rate. Then a truly seven half cap rate Market rents below as well. There’s a lot of deferred maintenance rehab we could do as well so we like that market. It was close enough to Denver as well which had a lot lower cap rates so we felt like there was going to be some rent growth there. So, that’s where we went next and then Oklahoma City and then Columbus Ohio kind of danced around. But typically, what we look for in a city is if it has typically low unemployment, historically low unemployment Population growth, jobs, obviously. We want these tenants to be able to pay rent so they have to have a job. And then also to make sure it’s landlord friendly, you know. I just read an article I think was yesterday in the Wall Street Journal about how there are 12 States about to introduce in their state legislatures to introduce rent control for these states. And Oregon was the one they were picking on but they’re going to cap rent growth at seven percent as a state and then it sounds like the cities can come in and add more constraints on that as well. So we like to pick landlord friendly States. Oregon would not be one of those.
James: I used to live in Oregon.
Kenny: I’m sure it’s beautiful.
James: It’s beautiful in the summer. So other times it rains a lot but it’s a beautiful place. So let me understand the process. So you basically Dallas doesn’t work. Now, you look at across the nation, you look for landlord friendly and then you start from there, you look for population growth and jobs growth, is that right?
Kenny: Yeah population growth, low unemployment, historical long-term population growth, things like that. And then, also we wanted to have a very diverse economy. Like I’ve always picked on this city, and eventually, they’re going to probably write me a nasty letter but we don’t buy deals in Midland Odessa.[08:10inaudible]
James: I know someone who bought them.
Kenny: You do? To me like if you buy a Midland you’re really [08:17inaudible]
James: It’s an oil and gas play.
Kenny: Yeah, you really in the oil business if you buy real estate in those cities and same with like Colleen; Collen’s all military. There’s no [08:26inaudible] on all other jobs. So to me, I think those markets we stay out of, we like the diverse economy. Like a good one would be–so we’re in Columbus, Ohio. So that’s the state capitol. It’s got a huge university. They’re obviously, the Ohio State University. I’m told that’s how you say it.
James: Oh, really?
Kenny: Yeah the Ohio State. And then, you’ve got Nationwide Insurance is there, Victoria Secret, Edward Tommy’s there so you’ve got a lot of very diverse economy. So that always helps when you’re in a kind of recession, you know, because if you’re not Banking on just one economic driver then it will help you to weather those storms.
James: So apart from Dallas, is Columbus Ohio your second favorite? Can I say that?
Kenny: Oh, man, I don’t know if I got a favorite. Well, it will give me grief about that. I mean it depends on the market. I mean right now we‘re buying a lot in El Paso’s. I like that one personally because there’s really not a lot of third-party management companies there in that town, even though it’s a town of about a million people because 80% of the units are owned by six families.
And so that’s really helped to keep the prices low at the moment. But we’re starting to see them creep up as folks come in. So right now you basically have to be an owner/operator to buy in El Paso. And since we own Allied Property Management Company or a big chunk of it, it’s easier for me to get to El Paso than someone who doesn’t own that. So right now we’ve got an edge. I think eventually the next year or two that’s going to break wide open and we’re going to see folks prices go up and folks have to own their own management company be able to buy in there.
James: Got it. Got it. Yeah, El Paso, I don’t know when I was looking at markets and militia report for 2019, I was just looking at certain trends of supply and demand and construction and I was looking at Capri. And very, very few cities came like to be like one of the best one and somehow for some reason El Paso was that. I was saying, what’s happening in El Paso? Yeah. I mean, I know not many people buy there, you are buying, therefore, for the reason that you said just now, right? But you know, Indicator why it does look very favorable. I believe there’s not much of construction coming in and the cap rate is still healthy, something along that line. I need to go there.
Kenny: There are only like 120 units being built in El Paso for all of 2019. It’s only a million people so that’s always good.
James: It’s one of the largest city in Texas and the nation too, right?
Kenny: Yeah. It’s number 19 on population size so it’s pretty big. Correct. Also, a lot of its economy is driven from the import-export business; it’s the biggest import-export route through for the US and Mexico. That’s highly diverse, obviously, if you’re dealing with import/export and then you got some military too. You’ve got Fort Bliss out there, Texas Tech has a very large medical facility and there’s a whole bunch of drivers there. You’ve got new tech which is a college of about 20,000 kids as well. It’s very diverse in that way. The growth is slow and steady. It’s nothing great, but it’s always growing so that’s good as well.
James: So is there any deal that you comparatively to Performance in Texas, made much better, you know in terms of performance outside of Texas?
Kenny: Yeah, I mean our deals in Columbus, Ohio, those have been home runs. We showed up there about four years ago as the crazy Texan buying in Columbus, Ohio. That was us and so we got up there, bought 120 unit deal. I underwrote that we could do an upgrade package to get about 75 bucks a month. We ended up getting about 150 and that was a B minus deal. And at that time, the reason why I got to turn on to Columbus, Ohio, is Arcadia has this annual report and she goes over the biggest markets in the US. It talks about there. Like you said that it’s one of the prior years and what the current year outlook is. And at that point, It was the only major Market that hadn’t crossed over 2007 per door prices yet. So when I read that I hopped on a plane and I said I’m going to figure it out because that was just unheard of so…
James: Can you repeat that? It didn’t cross over the 2007 price?
Kenny: Yeah. So the peak of the last cycle, just four years ago, they hadn’t quite gotten back to the 2007 peak per door…
James: Is it single-family pricing or is it multifamily as well?
Kenny: I was focused on multifamily13:15crosstalk] So when I read that I was just amazed and because it’s a solid City and it’s grown quite steady about 2% a year, one 1/2 to 2 percent a year since like, I don’t know 1850 something, I did my research on it. So that’s been a good market but we were the first ones to kind of do an upgrade package. No one was ruling the faux wood the backsplash all those kind of things like we’ve done here in Dallas for years. So we were kind of the pioneer and I don’t know about the soul Pioneer, but we were one of the first ones to try it out. And so that’s been really good.
So we ended up buying two assets there and then and everybody heard about Columbus and now I can’t buy anything because that’s too expensive to buy.
James: [13:54unintelligible]
Kenny: I keep talking too much [13:59inaudible]
James: So coming back to Columbus, Ohio, so in terms of underwriting the deal in Columbus Ohio, right? What do you see significantly different from underwriting a deal in Dallas or Texas, in general?
Kenny: Well, so what’s nice about these other markets too is that you don’t have 20 people bidding on the same property and that always drives up your price and also your terms too so like in all the deals we’ve done over eight and a half years, I’ve never had hard money from day one, never.
James: All of it?
Kenny: Never had hard money from day one. And so, you know, I like that model. I don’t like to have money at risk.
James: Yeah. It’s so much of pressure to have day one hard money;[14:40unintelligible] controls you, the lender controls you, everybody controls you because they know you can’t get out from the deal.
Kenny: You’ve got to close it, right? And so, we’ve never had to do that but part of this is because we’ve gone to markets where there isn’t much competition, right? And also now the past 4 units we’ve closed; we’ve closed four multifamily deals the past four months. It’s been crazy at the office but all four were off-market deals. So one was a straight transaction between myself and a buyer, no broker involved. Then the other three were, you know, off-market. So there’s like four or five of us have seen it but they were not taken to the open market. So it’s only a few of us biding on it.
James: So selective off-market, I would say.
Kenny: So we’ve kind of focused on those the past I’d say a year or so trying to find those deals and we’ve been pretty good, successful. The last six we bought have been that way off Market.
James: Yeah, so in terms of buying directly from the seller, is it someone you already know or you did some marketing to reach them, what was that?
Kenny: Yeah. Well, it’s pretty simple. I mean it’s you know, this business we’re in is not rocket science. So I did a little bit of homework. I bought a deal from him in the past. I took him out to lunch knowing that his kids aren’t really into the B&C apartments that he owns a lot of. He’s kind of getting older and so anyway, so his kids aren’t into development. And so, I took him out to lunch after I bought the first deal and said, hey, you know, if you got any other things for sale, let me know, at lunch, he said no, but then two weeks later, he calls me up and says, Hey, you want to by this deal? It was a fair deal. You know, we worked well together on the first one so we kind of understood each other. So buy lunches for folks that have units. I mean, that’s what I talk about.
James: Yeah, but I’m sure you would have created that reputation of a good closer too.
James; And that helps, yeah. We wouldn’t have gotten any of these off Market deals if this was our first deal.
James: Correct. If it was your first deal it would have been kind of hard to work with, then they would not want to sell to you. They’d rather just go to a broker and just get them to deal with all the pain of dealing with the buyer. But if they know you’re a good closer, they would definitely want to sell to you.
Kenny: I mean even then when you go through a broker, I mean, you still want to—and all these deals, it’s a very small world in multifamily so if you are trying to nitpick and give the seller a lot of grief about some small things to try to retrade about, you know, exterior paint which you should have already put in your numbers or things like that, if you try to do that stuff, you quickly get a reputation because it’s a much smaller world in the multi-family and you’re not going to get very many deals if you do that kind of stuff.
James: Got it. So coming back to Columbus, Ohio, I just want to close up on how to underwrite Columbus Ohio, right? So what about property taxes and insurance, is it comparable to Texas?
Kenny: So insurance is cheaper and what’s going to great about having a portfolio that’s kind of not Nationwide but across multiple States is that because we have such a large unit count or large enough, anyway, we’re able to get a master insurance policy. But our Ohio properties actually help our properties in Oklahoma and Texas with lower Insurance.
James: Because of the diversity of the properties, right?
Kenny: Yeah. So the insurance companies love that when we are all across different states so that’s a big plus. Property taxes in Ohio are just about as bad as Texas, not quite as bad. It’s harder to fight up there though. So they know what you paid for and they pretty much stick to that. So there’s really no property tax protest Business in Ohio like there is a Texas.
James: Okay, and you must love the cold weather there, right?
Kenny: Well, I try not to go in January, I avoid January. The first year we bought that deal, I flew up in January and it was 8 degrees when I got off the plane. I swore to myself never again.
James: Never again. I’m going to hire someone to go?
Kenny: Yeah. now in July, I like it. July is great, July is awesome. Get away from the heat in Texas.
James: Okay, cool, so let’s go into a value add strategy. What’s your favorite value add? What do you think is the most valuable value add?
Kenny: I like the deals where I mean we’ve done everything from, we bought a D class deal and brought it up to probably a C plus, B minus. We’ve done those big heavy value-adds but the ones I like, are the ones where the seller, they’ve done a lot of the work for us, but they haven‘t capitalized on the rent. So an example is our first deal in El Paso, the seller put in 128 of the 188 given to put in the vinyl plank, plywood and didn’t charge any money for it, they didn’t charge a thing for it. So that’s a lot of saving. It’s like 800 bucks to maybe 1,000.
James: Flooring’s expensive.
Kenny: Yeah. So I mean he already put that in. In our due diligence, eight out of ten of them were in good shape, good enough to keep, didn’t have to do any repairs so that was awesome. So on that property, we’re calling those classic units. So if we just either clean the carpet if it’s in good shape or put new carpet, we’re getting extra 60 bucks a month on rent and then on the premium units, so we’re going and doing a backsplash, do new cabinet fronts, stainless steel package, those are getting $100 on top of the 60. $360 rent increase over his embedded rents and it’s fairly inexpensive for us to do it because he’s already paid for the flooring for the most part for us.
So those are the deals I love because it’s easier, it’s a bigger return on investment than some of our others, where we’ve done this huge value add, one that you’ve taken from D to a C+ or a B minus. Those are fun and a lot of work.
James: It’s a lot of work.
Kenny: But it also takes a lot of capital too, right?
James: Correct. So, let’s say you’re doing a full value add, on a deep value add on exterior and Interior and you have a very limited budget, where would you spend the most money?
Kenny: Well, so you have to do the exterior first. I mean, where I’ve seen a lot of folks go wrong and where we’ve actually found some good deals is where they put all the money on the interior.
You have the units but didn’t put much money on the exterior. You got to be able to get people to the property. If you don’t do that, how are they going to know that you have good interior units, right? They’re not gonna believe you. No matter what kind of marketing, online marketing you could do, you’ve got to have that fixed up first. And then, I would do, you know slowly turn the units if you had to do that way, we always raise your money up front for all the rehab but for those that don’t, which I don’t recommend but if you do that, then exterior first and then start doing the Interiors upgrades as you can. Otherwise, you’re not going to attract the right residents to your property.
James: Yeah, that’s that’s absolutely right. So how would you bump up the rent? Let’s say today you close on the deal, right? So you have 30 days, 60 days and six months, right? So how would you stage your strategy to turn around that property?
Kenny: It depends on the asset. So the deal we’re buying on Tuesday in Shreveport, it’s 70 percent occupied. So it’s 400 units as well so that if for those who can do the quick math, that’s 120 vacancies. So for that, that deal is different than the deal we bought last Thursday in El Paso, which was 95 percent occupied, 94 percent occupied. They’re different strategies. So on the one in Shreveport, that’s less occupied, we’re going to have three crews that go in and they’re gonna be able to do 30. Each of them should be able to do 30 units in about 30-45 days. So we should be able to knock out all 120 unit upgrades in 3 to 4 months. So that strategy, that’s how do we do that one. We also have already picked out the new name for the one in Shreveport. We’re going to get the new logo going here pretty soon. So we’ll get it going on the exterior as well. But the interior to get the higher rents for upgrades on that one, we can just kind of blitz it and do a whole bunch at once. The one in El Paso, that’s going to be a little slower because it’s more occupied. You can’t upgrade [23:12inaudible]
James: Got it, got it. Hey audience, if you guys want to ask questions on the interior topics, you can definitely ask questions so I can ask Kenny while I talk to him. So do you change name every time you buy a deal?
Kenny: I’d say probably 90% of the time. So we bought a deal, an ‘A’ class deal, it was built in 2018 in Greenville, Texas. We kept that same name because it was brand new and it had a really good reputation. But most of the time, we would do a big rebrand with a new logo, new signage, at least some kind of paint color. The paint is a big tradition. We paint a few walls or trim to change the paint color to give it kind of a new pop but most of the time, we would do rebranding especially if you’ve got bad reviews online. We do the rebrand and then all of a sudden, you know, you’ve got a new asset.
James: Correct, correct. Why do you buy an ‘A’ class deal? I mean, does it make money?
Kenny: It does and I’ll tell you how. So at that deal, we were the only non-institutional person at the table, everybody else was a bigger institutional buyer. We ended up getting the deal but mostly out of persistence. So I think we just annoyed the seller…
James: You buy the broker lunch again?
Kenny: No, it was the seller. I was just kept annoying him I guess.
James: So you had a relationship with the seller.
Kenny: That one didn’t go through a broker. So that one, it was really interesting, it was a value-add play, but we didn’t really know it at the time. We thought it may work, but we didn’t underwrite with that. So our underwriting, we are able to assume the builders TDHCA loan, which we stack that on top of our new Fannie Mae loan. And so our leverage was 84.4% and the blended interest rate is 3.85%
James: What is the loan that you mentioned in the beginning, PDAC?
Kenny: Yeah, I had to learn it too when they first told me about it. So TDHCA. It’s the loan of the Texas Department of Housing offers up.
James: Is it like tax credit loan?
Kenny: Well, part of it is, it’s partial. So 20% of those units are capped on rent.
but they’re capped at the median; 50% of the area median income and so the area median income and that area is about 70,000 a year. So it’s not really cats. I mean our cap one bedroom scope for like 900 bucks. But the cool thing about that loan is that they provide this loan at 0% interest and so it’s just principal payments every month, but it’s 0% interest so your Equity is going up really fast in the property.
And then, we were able to assume that and stack it on top of our new Fannie Mae loan. So that’s how we got the higher leverage and that’s how we’re making money on the deal. It made it to where we’re getting the returns of the B or C Class deal but on a brand new building.
James: Okay. So the value add is on the financing?
Kenny: Partly; so after the fact, the Builder it’s beautiful. It’s got really nice cabinets, granite countertops. Really nice faux wood, vinyl plank, but a little bit higher than what you usually put in our stuff. But he did black appliances and he did no backsplash. And so in 4 of the units so far, just to test it out, we did a stainless steel package appliances and then added a backsplash. We’re getting an extra hundred bucks a month for that. So the cool thing about that is that it only cost us about $1,800 to do that upgrade, maybe less, about 1750 bucks, but we gained a $100 rent bump.
So the ROI off of the amount invested into those units is so much higher than what we could get on a B and C property, our payback is almost a year. Whereas if we had to get that same rent bump on a B or C, we may spend three to four thousand dollars a unit on there.
James: But you said you didn’t realize that it was a value-add when you initially looked at it, right?
Kenny: We kind of go on and we thought about, okay, we’re going to try out four of them and see what happens but we’re not going to put that in our numbers, we’re not gonna model that out. But now that we’ve done four, we’ve approved another 5, so we’ll keep doing them until they [27:43inaudible]
James: So initially, your strategy was to try to use these combinations of loans to get a good return, I would say right?
Kenny: Yeah, right and then also the deal came with 13 acres of raw land. So that’s kind of the kicker down the road. We would be able to double our unit count in probably three to five years whenever the market is ready for that extra 170, 180 units.
James: Awesome. So how do you sniff test your deals? Because you are looking at Nationwide right? That’s going to be like hundreds of deals coming to your desk, so can you describe a process of what do you do when you get a deal and how do you narrow it down?
Kenny: Yeah, so the first thing I do is, I checked the median income and that is a very small radius around the property and half a mile is too big, I’m talking like the quarter mile. And we use a website called City-data.com, we’ve been using it for years. But I look that up because I’m pretty choosy but the deals that we’ve bought where the median income is equal or just about equal to the price per door that we’re paying, those have been home run deals. And it’s not rocket science, the reason why that ratio works is because if I’m able to buy it at that ratio and that means, their operations are not good because they should really be getting a higher NOI, they should either be able to charge a lot more rent than what they’re charging or they’re not running the expenses efficiently or both.
But that’s kind of how I sniff test deals these days because every deal we’ve bought like that has been a home run.
James: So do you do that for all the deals and do you do it personally or you have someone sniff testing for you?
Kenny: So yes and no. So we have interns every once in a while for throughout the year.
And so whenever they come I have them do a lot more of that so where our scope is a little bit bigger. So far, with these four deals that we got, they were brought to us off-market and so that’s kept us busy enough where I didn’t really have to look at stuff on Market and also that’s mostly what we’ve been looking at. So when we get those off-market deals, I underwrite it. That’s one piece of the business I have not been able to let go yet. 30:05inaudible] I mean, that’s something I need to work on eventually if we’re going to keep rolling like we are but right now, it’s something that I do and then like I said, I get interns in here in the office pretty frequently and train them up and they can do some of that easy kind of simple sniff test stuff.
James: Got it, got it and let me see. So are you ever looking at deals at Dallas right now or you’re giving up on Dallas?
Kenny: No, I mean I toured enough again an off-market deal, it was an A-Class, kind of similar situation with the last one we bought but it was off I-35 near Louisville, but it was a deal where you know 20% of the units were capped on rent but the median income is like 120 thousand right there. So again, I don’t know why the state of Texas is giving these loans, but whatever, I will take them, I guess. The numbers didn’t quite work out on that one but it may come back to us, they were having trouble with the other buyer. I’m actually getting the contract, you know solidified on it. So it’s kind of in our back pocket to look at that one again if it comes back. But, for now, we’re kind of holding off on that but we like here but it’s got to have a heck of a story of you know, why is it priced way below Market? Because we’re not going to pay the 90-95k a door for some of those, you know CNB stuff here.
James: Especially if you have seen it at 20 and 30 a door.
Kenny: Yeah. I mean, that’s probably my problem too. I’ve got baggage. I’ve been doing in for years and I know what we paid way back when. The first syndication that I did was a B class. And by the way, we paid 45 a door for it. You know, which now is just laughable knowing everybody would buy that in a heartbeat now, but anyway, so I mean, yeah, I mean, that’s probably my issues. I’ve seen it when it was 45 a door for a B class [32:10inaudible]
James: Yeah, it’s hard, I know because everything else seems to be very expensive because we have seen the lower prices per door. So can you give me like three things that it’s part of your secret sauce success?
Kenny: Yeah, I mean, I was just talking to a guy yesterday. I guy just starting out and trying to figure out how to get started and I was telling him that he lives in Massachusetts so that’s a pretty hot Market too for multifamily. But I was telling him, look in your own backyard. So if you live in Dallas Fort Worth, you know, look at Dallas/Fort Worth but pick two or three other markets that you’re willing to travel to and look there too because you’re going to get better deal flow. So that’s really helped us expand immensely. It got us into a lot of other markets but also it got us into starting to vertically integrate as well because we branched out so much. So I think if you’re able to pick two or three other markets than what you live in and be able to travel there, you know, somewhat frequently then I think that’s a good thing. So I guess number one would be looking at multiple markets for the better deal flow and better quality deal flow.
Next would be, I was very glad we stuck to our guns on our first syndication deal. We wanted 60 units or higher, it was easier for us. It’s so much easier to buy a 60 unit plus or 80 unit or 100 unit plus deal than a 20 or 30 unit deal. So that was something that I think starting out was a big deal is being able to be patient enough to find that 70 80 Unit deal, just because it’s so much easier and our portfolio would not have grown near as fast had we chosen that 32 unit or 15 20 unit deals, to start out on. So that would be a big deal because then you can afford a third-party management company,
they handle the day-to-day operations. So I mean we’ve been in almost 36 hundred units involved and I don’t know how to evict anybody, you know, I don’t know how to change out a toilet and I don’t want to know that that’s somebody else’s job. My job is to grow the portfolio.
So if you focus on those smaller units, you can’t grow your portfolio as much because you’re dragged into the day-to-day operations on that. And then also I think the biggest, the third biggest deal is making sure you have a quality team around you. And so I kind of use that as a broad scope. So yes, we’ve got folks here in the office that helps asset management stuff behind the scenes for people that work with paperwork and all that kind of stuff with our investors. But also it’s a matter of you know, finding the right lenders, finding the right management companies. We’re doing all that legwork to meet the right folks and that’s going to set your business apart from everybody else.
James: Got it. Got it. One of the things that I want to ask you before I forget is like because you have been trying to grow portfolio by buying businesses as well. Can you explain what are the businesses you’re buying and why you’re doing it and what’s your angle?
Kenny: Yeah, sure. So back last March, so a year ago, a little over a year ago, we bought into Allied Property Management. So I own about 49 percent of that company. And so, they were an existing management company; it worked out because I would bring all my units over to them so we could hire better people and so that that’s really taken off. But now what we want to do is buy a few other management companies and bring them under one umbrella, and then we’re also looking at two other ancillary business to buy. So the way I look at it, right now, if you’re just an investor you make money off that one line item on the incomes, the NOI, right? That’s where you make your money. Well, there are 20 other line items on the expense side where folks are making money on your deals, right? So you might as well start bringing that in-house and then, making money on that as well. So we’re looking at landscape companies to buy because we buy existing ones, someone who could run it already. Flooring, import business could buy an existing one because one, you’re buying them for three to four times cash flow so it’s a really good investment. Your returns are pretty solid, but then to be able to bring that in-house and say oh, yeah all of a sudden there’s 8-10,000 units where we can you know plug in some, you know, potential buyers for these services as well. So start plugging in that in those and then the goal is to package them up under one holding company and then either sell it off to the public. There are a few other exit strategies we’re talking about but that way, we could really expand the value of that holding company that has a whole bunch of ancillary things. We also have a construction arm as well.
James: But don’t you think it’s going to distract your focus?
Kenny: I get that question a lot. So because we’re only buying businesses that already have folks that run them. So like an example, there’s a party management company in Ohio that we’re looking at. The owner is ready to sell but he’s also the CEO and president. So he’s in the day-to-day operations. So my question to him was, well, if I buy you out, who’s going to do the job? I’m not doing it. You know, I’m in Dallas, you know, I can’t do that. So I said I’m not interested, you’ve got to hire someone to replace you on the day-to-day who’s going to stick around after the sale and then I’m interested. but until then, I’m not really interested in folks that own businesses, whose first question is who’s going to run it after we buy it and it’s not any answers not me. So it’s got come with someone who already runs the operations.
James: So you look for some self-sustaining business and you just want to buy it as a business and let someone else manage it, I guess?
Kenny: Exactly so I mean, it’s kind of like the Berkshire Hathaway model. So Warren Buffett doesn’t buy businesses where he has to manage it. He buys them already existing where there’s management in place. So we’re taking that same model and applying it to the management business here for multifamily.
James: Got it. And when you say three to four times cash flow, that means basically the cash flow for the year. Let’s say it’s a hundred thousand, you’re basically buying it for 300 400 thousand. So your recovery is very quick, I guess?
Kenny: Exactly. So for those multifamily investors, that’s like a 33 percent cap, right?
James: Yeah, exactly.
Kenny: So it’s not the 25 to 33 percent of cap rate. I mean, it’s a heck of an investment but also too, what’s cool is that because you know, I think it will be about 8 to 10 thousand units under third-party management by the end of the year with our management companies. We’ll buy these existing businesses and then be able to say, Hey, you know here are these 10,000 units, you can also do business for.
James: Got it. Got it. Very interesting. That’s a very interesting model. So let’s go back to the bit more personal side. So throughout your real estate career, is there a time where you were really proud of yourself for doing something in the business?
Kenny: I mean the biggest one, I guess would be, we’ve had a few but I guess the biggest one would be after we close that first deal. So we went from zero units to 76. We syndicated 76 units for our first deal. I was never in single-family either that’s kind [40:09crosstalk] I went from oil and gas to multifamily. And so zero units to 76. So once we close that first deal, that was a very proud moment. That was stressful. The first one’s always stressful, but we got it done. and the rest is history, I guess but you know, that’s a proud moment. Another one happened just a few weeks ago. One of our investors called me up and he was signing up for one of our latest offerings at the time, but he was able to check the accredited box. We asked if you’re sophisticated or accredited and he said this is the first time I can actually check the accredited box and you know, and I wasn’t the only person he invested with but he did invest with quite a few of our deal.
So that was very cool that actually, he thanked us for being able to kind of move that needle, a better for him as a passive. And so that was pretty cool to hear I got goosebumps on me telling you this.
James: Yeah, it’s interesting that you know, a lot of passive investors become accredited or become millionaires, you know, because of a lot of sponsors hard work, right?
So that’s very important as well. So that’s good. That’s good. And when you look at your daily habits and whatever you do on the day-to-day operation, what do you think a few things that make you very successful?
Kenny: So, I mean, I went to Tony Robbins. So I’ll put that disclaimer out there. But I picked this up from him. But you know, I start my mornings, every morning at about 4:30, 5 o’clock, but just do it like a kind of a gratitude mindful exercise. So I just kind of pick three things that I’m grateful for, kind of go do that and then imagine any kind of hurdles that we’ve got at the business or what’s going, you know, if there are some stressors in my life, kind of focus on those and those getting smaller. And then, that really helps kind of clear focus for the day for me. And then you know, it’s the rest of the day is getting to the office and working hard and making sure all the teams are moving the right direction. It’s about it, man. I mean, there’s no secret sauce.
James: I know the secret sauce. I think it’s you know, waking up early and visualizing and being grateful. You know, it’s something that a lot of successful people has been practicing.
Kenny: Yeah, exactly.
James: Keeps your mind very focused. Can you give three to five advice for newbies who want to start in this business?
Kenny: Yeah, I kind of gave a few of them away already. So I would say go big or go home. I mean, so start with a 70 unit or higher. A 30 unit deal or 20-unit deal, I kind of equate it to buying a boat. There are two good days; when you buy it and when you sell it. In between, it seems to be a lot of hard work and you know, it’s going to slow down your growth, your portfolio growth. So that’s, I guess the biggest deal one there and it’s to build that team. You’ve got to find the right management company that’s going to take care of your asset, the right lender to work with. You have to find your investors as well. So I mean, it’s a lot of networking. I guess would be the second one is to network that’s going to cover all three of those investors and then the team that you’re going to need to actually buy the deal from, the lending and the management company as well. So you’re going to need that and then focus on more than just one market, would be my next suggestion. You’re going to be able to grow a lot faster and start a lot faster if you’re willing to go to places that folks aren’t interested in buying yet. So like we just bought a deal in Cleveland, Ohio. So which is you know, a lot of folks, they hear Cleveland then they think the light still catches on fire.
So it hasn’t happened since 1978. So there’s a lot of folks that are turned off by markets like that. But I mean, me, personally, I think they’re missing out on the true facts of what’s going on in Cleveland, but there are other markets like that too that are not being attacked yet by some investors and so it might be good. There are always deals, you just got to be able to find them and be willing to hop on a plane. Kind of one of my big aha moments was I was driving to, we hadn’t bought a deal outside of DFW yet but I drove to Oklahoma City just to check it out. It was the closest next, you know, major market for us north of Dallas. So hop in the car, it’s a three-hour drive and on the way back, I was like if I’m going to drive three hours, one way and then come back that same day, three hours, what does it look like if I hop on a plane? What does that open it up to? So that really opened it up, you know, because that flight to Oklahoma City is like 35 minutes.
We fly there but we do day trips to El Paso. We do day trips to Columbus Ohio, you know, so that really opens up where you can buy. I mean, I highly recommend being able to you know, think bigger than your own backyard. Especially if you’re buying a bigger deal and you have third-party management that’s local or has a couple thousand units there in that market and it makes it a lot easier to buy it from afar when you’re buying a bigger deal.
James: Got it. Got it. Coming back to Asset Management; so what asset management tools do you use because you have a lot of deals scattered across all over Nation.
Kenny: The biggest secret is a weekly phone call with your regional manager.
James: That is something important.
Kenny: That’s pretty important. So we have a really good asset manager now on staff. So he flies to Columbus in January when I can’t or I don’t want to.
James: That’s why you need someone to go.
Kenny: He goes a lot more than than I do, I go when I can. But he definitely does a great job. He definitely goes out on the asset management side. And eventually you have to do that, it’s part of your growth. You can’t grow without an asset management or asset manager to help you out, once you get to a certain unit count or how many properties you have in different states as well. There’s only one of you.
James: Correct, correct. So coming back to the phone calls to the regional right?
I mean, I’m sure the asset manager you making the calls to, what are the questions usually you ask them?
Kenny: I mean it always starts off with, what’s occupancy, what’s the pre-release number? That’s the obvious first question. And from there you can really dig in and then traffic as well, what kind of traffic are they getting in? So a lot of traffic is quality traffic. That’s a big piece. I always ask, when’s the next Community event? You know, when are we doing a bounce house or a pizza day or Taco Tuesday or you know those kinds of things I think that sets us apart from our competition. And then just talk to the Regionals about what’s going on at the property, how the managers are doing, where we need to improve, you know, how our collection is going. Renewals are big, that’s a big question for me. If our properties are less than the 50% renewal rate each month, I kind of question the work orders if they’re really being done. Because if they’re happy, I mean the average in the business is 50 percent turnover. So if we can beat that, then I know we’re giving pretty good service or you know good service at least to folks. So that’s a big deal I look at as well.
James: Got it. Got it. Got it. And on the disposition of assets, right? How do you decide at what point you want to sell or refi or continue to hold it?
Kenny: It really depends on the asset so our deal in Wiley, it’s also our first syndication yet, we still own it. We have through a sentimental loan, we still have a lot in the cash flow. We were able to pull all the investors’ Equity out to them within 30 months. So we don’t have any of our money in the deal. We’ve owned it four years since then past that and it’s just cash flow quarterly. And then about two years ago, we had a huge hailstorm. I mean of biblical proportion, it was huge. So we got 56 brand-new windows on a property of 76 units, we got like 15 or 20 sliding glass doors. The hail was so big, it created holes in the Hardiplank so we got a brand-new Hardiplank. a brand-new paint job, new roof, new insulation. I mean, the insurance company ended up putting about 10,000 a door into our property for us. So that one you know, and it was built in the 80s so that one you know, we’re debating right now whether to refinance or keep it. But if we keep it, there should be very minimal CapEx for us to do for the next five-seven years because it looks like a brand-new property because of the hail storm. So that’s one piece to it. Not all of the deals have big hailstorms like that.
So it really comes down to you know, are the long-term system something that you want to be to deal with. So like one property we sold in Colorado Springs. It was all wood siding, it was flat roofs, it was individual HVAC, but other ones, you know, if they have a chiller that’s something to look out for. You know, that’s an 80-90K price tag if you should replace one of those. The one in Colorado, it was on a hill, that wasn’t the problem that it was on a mountain because the ground up there doesn’t really move but it had a lot of catwalks. So a lot of cement, a lot of steel supports that eventually someone’s gonna have to replace and I didn’t want to be that person. So someone made us an offer, 30k higher a door than what we paid so it’s time to exit that deal. I mean that just makes sense. And then something I just kind of thought about you know. The past two weeks I’m debating about but I think I’ve got my answer. That the properties that are less than 100 units in our portfolio, we’re probably going to start selling those off.
Those units and we have some small ones. I broke my own rule; I bought a 23 unit deal only two-three years ago, but it was the numbers just were amazing on the deal. So we bought it whatever so that one. We’ve got a deal in Arlington that’s 56 units, you know. Those deals are a little bit harder to manage and there’s also a lot of demand for those because there’s a lot of new buyers that want to buy those assets so we may sell that one as well. It just kind of depends on the physical attributes to the property and where we’ve taken it and if we could just get some ridiculous offer from our sellers.
James: Got it. Well, Kenny, you’ve been an awesome guest, thanks for giving so much of value. You want to let the audience know how to reach out to you?
Kenny: Yeah James. So thanks for having me on, I appreciate it. Our website is wolfe-investments.com. So it’s Wolf with an e on the end of it there, social media, Kenny Wolfe. We’re also on LinkedIn. We’ve got a YouTube channel so you can find us all those various ways.
James: Got it. Thank you, audience. If you guys seeing Live in Multifamily Facebook group, you know putting your questions, Kenny’s in the group and I can answer any questions as well. And if you are listening from the podcast format, just come and join us in Multifamily Facebook group on Facebook or subscribe to us on iTunes and give us a good rating. I think that’s it. Thank you very much for joining us.
Kenny: Thank you.
James: Thanks, Kenny.
