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James: Hi listeners, welcome to Achieve Wealth Podcast. Achieve Wealth Podcast True Value in Real Estate Investing focuses on key players in valuable estate investing specifically on Commercial Real Estate asset class. Today we have Michael Becker who has done more than 7,200 units, primarily, I believe in the Dallas area, I know Michael can help me fix that. But you know, he has done a lot of deals in the past few years that he has been investing. Hey, Michael, welcome to the show.
Michael: Thanks for having me. Appreciate it.
James: Good, good. Can you tell the listeners about things that I missed out about your credentials?
Michael: Yeah. So, Michael Becker, I’m based in Dallas, Texas and I’m a banker by profession. That’s kind of how I got into the business was loaning money to other people and went out on my own about six years ago now, so about six years of experience. And as we talk right now, we’re just closing up our 34th and 35th acquisition. So puts us about 70 to 100 units that we’ve done in our career.
So far we going full cycle on 16 deals. So we refinanced three out, return some Capital still own and we sold 13 of them. So as we talk, we currently own about 5,000 apartment units, the vast majority of those are up here in Dallas Fort Worth, which is where I’m based. We have 400 units in Tyler and then we have 900 units in the Austin markets. So we’re Texas-based focused, predominately on Dallas Fort Worth and Austin for where we look to buy.
James: Awesome. Awesome. So rarely, I get to interview someone who has come from, you know, brokerage business and also the landing site, right? But I always wonder why Brokers and lenders who lend money and trade deals never really become the buyer or the owner of the assets, right? So what was your triggering Aha moment that you said, hey, I should better just, you know, go on the other side of the table here and start buying deals rather than lend money?
Michael: Yeah to be a banker, you have to have a certain like mindset and generally pretty conservative and if you start becoming successful like I was as a banker making a lot of loans, they try to tie you in the bank by giving you stock options and have more investing period so it’s kind of the longer you wait, the harder it is to leave. But for me, I was 35 when I left the bank, I’m 40 now, and we’re just like this little fork in the road, I felt that if I stuck around it was going to be that much harder to go. And really what I did was this all day every day was making loans to other people like yourself that would be a buyer, distress deal, renovate and sell it for big profits and I kind of realized I was on the wrong side of all those deals. It’s better to be the borrower than a lender.
And you know a lot of great clients, a lot of them are friends, my friends still to this day, and I was looking at a lot of them and I was like thinking myself like if that guy can do it, I definitely could do it. You know, not that they’re not smart. But what I like about the business it’s a really, really simple business at its core; it’s not always easy to execute but it’s pretty simple to understand. So I had a lot of connections, had a lot of experience, you know, I underwrote deal after deal after deal, I knew everyone in Dallas Fort Worth, I was in the industry. I just wasn’t doing anything about it.
So I met my business partner, Shawn, back when I was at the bank and he was helping people out of California buy properties in Texas. I made a loan to them. And so, he was kind of sick of working for his boss the broker and I was sick of working for my boss at the bank and so we kind of went out on our own. And like I said, we’re probably the second or third most active B classifier in Dallas Fort Worth and the current market cycle. So we’ve been pretty active here in Dallas Forth Worth.
James: Got it. Got it. That’s interesting. I always wonder, I mean, what do the Brokers and lenders see in themselves that they want to continue doing that rather than owning an asset?
Michael: You know, when you think about it though, like as a banker, you don’t have any money at risk, you got other people’s money at risk, you got your clients’ money, you got the bank’s money and you know for you to go tie up a deal, especially today, I mean, you posted up six figures in earnest money or God forbid, you know, well north of that hard earnest money day one and get all this like Risk and then you got to go out and raise, syndicate the capital. So to take that to do what we do for a living, you got to have a certain amount of guts to go out and do that because you know, you’re taking a calculated risk along the way and you don’t have a paycheck.
So if you don’t do business you don’t get paid. So that’s a certain minority of people in the world I can go on and take that type of risk on and thrive and if you go out setting cases up like I do, you just have to be comfortable taking that kind of risk. And on top of that, you know, most of the stuff is on recourse, where you still sign and carve out. Some bankers get pretty, pretty nervous about signing, you know, I have 4- 500 million in debt right now so I mean that’s a lot of money, you know, and to try to take that mentality, it’s just a different type of mindset for sure.
James: Yeah, I guess the entrepreneurship mindset and whether you want to do it, I mean, especially if you have gone through the last crash in 2008, you can be very scared.
Michael: That’s right, for sure.
James: So let’s come back to how did you scale up to this large portfolio, right? Because I used to listen to your podcast when I started in this multifamily investing in 2015. When I was listening,
I know you had like, first year in[05:47unintelligible] you had like 1000 units and now you have like 7,000 units, right? I mean maybe now you own like 5,000 units, but what was the system’s process if you put back yourself back into that time and I know you made mistakes from then until now but you know, what are the teams or what are the processes and who would you hire first to grow to this scale? Because now it seems like clockwork for you because you guys have been…
Michael: Yeah, so we started out, it was pretty lean. So when we first started out, I did the first four deals, first 800 units. I still worked at the bank and then I kind of had enough scale that I felt like I could you know, keep going. I had enough credibility in the market place; you buy one deal, you get a lot of credibility. You buy four like quickly everyone in town knows you’re out there buying it because like I mentioned, I had a lot of resources like from the standpoint like all I did, all day, was underwrite apartment loans.
I had a lot of connections to a lot of people. What was holding me back was that everyone thought of Michael Becker as a banker, they didn’t think of me as a principal so I had to kind of change the perception in the marketplace what I was from a banker to a principal. So once I did that, that changed it pretty quick and then from there, we sort of started to scale. And so it was my partner Sean and I and we had one employee when we started. We kind of did a little bit everything and we all do a little bit everything when you’re that kind of small.
And so, you know, we were just kind of guys who were doing deals and then all of a sudden we woke up. I think we had seven or eight deals and we had all this work on us and there was still just three guys out there doing deals. So we had to figure out how to systematize so we started out with someone that’s got an IT project management background experience actually, so she came in and kind of did operation; we were disorganized with stuff everywhere.
So like our Dropbox wasn’t orderly, you know, just wasn’t everything wasn’t save down. We didn’t have any documentation of processes and procedures. So she came in the systematically, you know by meeting with me for two hours at a time., she’ll talk about whatever, interview me and systematically built out all our policies and procedures and organize everything. You know, our chaos for life got real organized over a six to a 12-month period from there. Then we added an analyst to kind of help on top of it. And then we started layering in an administrative help on top of that and then you know, we start getting Asset Management help, hired a professional asset manager and then you know, we hired transaction people to kind of help run process the escrow and things like that. So those are the types of teams, you know, we have a third-party management company. I think you’re vertically integrated when you do management in-house.
So we’re able to manage 5,000 units with nine people; basically my partner and I and seven employees. We’ve got ahead and taken the approach. So I want to hire really high-quality people, pay them a little bit more money, but just be a little bit leaner. So that’s kind of the approach we’ve taken because I really don’t like managing people. So the lesser quality people will take a lot more of my resources so I rather pay someone that’s a killer really high salaries and trust they can go out and do the job. But you know, admin help is the first thing I think you need. Someone to make sure you get organized. You have a process, make sure you get an investor database. Be really helpful, if you do syndication dropboxes, so we use dropbox all the time.
You’ll have internal chat systems. Those are things that kind of we can do quick little messaging, you know, all sorts of stuff like I talk about, about raising money more efficiently if you want to go down that path or if you want to talk about operation, we talked about that too. But just trying to use technology and work smarter not harder. And every time we do a deal, at the end of the deal, we always have a Post-mortem meeting where we go over the good and the bad and we take away lessons that were bad and then we take those and try to improve the process for the next deal.
And when we first started out, they were a lot of bigger issues and now, fortunately, the issues are really small and minor because we got the list of stuff you don’t ever want to do again list, got really long pretty quick and try not to make the same mistake willingly twice.
James: Yeah, so can you name like top three things that you have realized from that not to do list, can you share it with the listeners?
Michael: I mean around raising capital in particular, you know, we first started out, we had a database and I needed to raise a million. I remember I had to raise a million four for a deal, I think it was a million five something like that. And it took me about 20 25 people somewhere in that range to get a million five in, a hundred thousand minimum. We first started out I’d get a package. I need be able to an investor. I set up a call and have an hour-long call, 45 minutes to an hour long call and I had to do that 25 times. Now, what will do is we’ll email the list, we hit schedule webinar and it’s at, you know, seven o’clock Central Time on Wednesday. People that can attend Live, great. If not, we’ll send them a recording of the webinar. And then they can watch the webinar when they want to and then I have a five-minute call with them if I need to resolve. So I presented all the materials of the deal so maybe a lot more efficient that way.
Whereas, you start scaling up doing like webinars a lot more efficient way to present your opportunity than one on one calls. Because, for example, we just finish up with 24.6 million dollar equity raised and if I had to do that one call at a time like that is so huge, you can’t do that. It’s going to be 200 people basically invested to get 24.6 million. So, you know, you’d have to have 300 calls to get that and that just isn’t an efficient way of doing it. So, that’d be one thing.
Another thing that’s been official, as I said we got an investor database. So when you invest with us, you go to our database or portal up our website you fill your stuff in electronically and you electronically sign your documents. And that’s a much easier way of going about it and getting the old school, paperwork out, that’s kind of how we started. And then finally what was another good way to be able to work efficiently. You know, I think we got more efficient the way we’ve kind of work it and keep people in line and we clearly communicate what’s expected of people and we’re really consistent with it.
So those are things you grow into, those aren‘t things you necessarily have money to do out the gate because we, you know, spent a couple of thousand bucks a month on our investor database. So if you have zero units to spend $24,000 a year on a database doesn’t make sense. But you know, gotowebinar is certainly something you can do and you can use a Google sheet instead of a set of a database until you ultimately get enough revenue where you can afford some of the more technology tools that are available out there.
James: Yeah, yeah. In fact, I just launched my investor database yesterday, which was a lot of my investors love it. They just say it’s so nice for them to see their dashboard, in terms of investment because a lot of them have multiple investments with me and it’s just nice for them to see. And all the documents are in one place and they can just log in and get the report. They just love it.
Michael: And it’ll help you when it comes to tax time to track all your distribution in there, I’m sure and then you don’t have to go recall your distributions at the end of the year to do your K1s.
James: Got it. So coming to I mean you must have a good number size of passive investors. I mean, how do you select certain passive investors for certain deals? I mean is it first come first serve or how is that?
Yeah, so we have, let’s see, I did 900K1s last year. I think I had about 500 unique investors when we closed the year out. We just raised, I’m not quite sure what the stats are of how many are a repeat, how many are new but I probably have 600 unique investors who’ve literally invest with me at this point in time. And we’re going to do 12-1300K1s next year easily. So yeah, we generally will so we definitely have like a blacklist, right? So if we take your money and you’re a pain, we’ll make sure we don’t take your money again. That’s certainly the thing I think everyone should do that for sure.
On the front end if we think you’re going to be a pain we’ll generally kind of blacklist you as well, life’s too short. Yeah, too many people, we don’t have time to have a little distraction. But basically when we have an offering, we’ll just go in the database and you’ll get together like the MailChimp will send out a little, hey, coming soon email or save the date email, got a future opportunity coming up and then you just email the database and just generally first come, first serve.
Sometimes we have a couple of guys that we know that we have a special situation with that. They’re like, hey, I have this money. I want to place it with you. Maybe we’ll give them a little bit of a head start to deal from time to time. But generally, send it out first for people to pay attention, fill the paperwork out, get it all done, wire the money in, those are the ones that get into the deal.
James: Yeah. I mean, I agree with some investors being a pain. I mean, it’s just so hard to win. Especially sponsors like us. I mean, there’s so much of moving parts and so much hard money in and on day one, I mean, so much money stuck on escrow and this has so many things going on in closing a deal. And there will be some people we just had to deal with it, right?
Michael: Yeah, so, you know, it wasn’t the vast majority, people are great and but you know, one of the things that I was talking with one of my buddies, he’s syndicating his first or second deal, yesterday, and he was getting a little frustrated, it wasn’t going quicker and I’m like well just because you have a deal in escrow and you have a deadline and it’s important to you, doesn’t mean that it’s not as important to investors, but they have other stuff going on their lives. So you got to be able to make sure you meet your deadlines. So you got to consistently communicate deadlines and be proactively reaching out to people and you know, you gotta push sometimes to get these people. Because if you don’t stay in front of them, they’re going to get distracted and something else in life is going to come up and they’ll just simply forget that, you know read about your deal. They don’t mean to and it’s kind of like happens.
James: Yeah. Yeah, I always communicate as well to make sure that everybody knows the timeline and when do we expect things and keep on communicating to them because everybody’s working on getting things done, the passive investor, the sponsors and all that. So that’s important. And so the type of deal nowadays that you’re doing because usually I mean, I’m not sure whether you know, I wrote a book called Passive Investing in Commercial Real Estate where I categorize three different types of deal, which one is core, the other ones are light value add the other ones a deep value add. So the type of deal that you’re doing, can you describe those characteristics?
Michael: Yeah. So when we first started out, we bought a whole lot of[16:37unintelligible] that’s kind of generally where we started out that’s where most people start out. So the first probably ten deals may be more raw 1960s 1970s vintage stuff and then about two years into the business,
we started to transition more in the B-class. So Texas, things like the 1980s vintage. And then really the last two to three years the vast majority of what we have done had been kind of more B plus, A-minus. So things kind of like late 90s all the way to about 2008; that’s kind of my most favorite part of the market, as we sit right now.
We have done a couple of brand new deals. We had some exchanged money, we sold a BDO and we just bought a brand-new 17:16unintelligible] and then we bought a few deals a little bit older than the 90s. But generally speaking, if you ask me, A-minus is my favorite space and a couple of reasons for that. Now one, if you go back when I first I bought my first apartment 2013, I bought a brand new class A Deal in Dallas for about a 5 cap, a BDO was like six and a quarter six and a half cap and a CDO was like eight, eight and a half cap. Fast forward to today an ADO is like a 475, a BDO is like a 5 and the CDO like five and a quarter by five and a half, something like that, right? So what used to be a big gap is now really, really narrow.
So we have the ability to track larger amounts of capital. So it make as much sense to me to be on a risk-adjusted return basis to buy a 1970s piece of crap building if I can buy a 2004 vintage building for a similar cap rate. So that’s kind of what we’re focusing on. And the stuff that was built that’s 15 years old, stuff kind of on the 2000s. Still, most of those have like white appliances and cheap light fixtures and you know, no backsplash and you know cheap cabinet fronts. You still do similar value add things like flooring, appliances, fixtures, backsplash, cabinet fronts and still push the rent lift up a hundred dollars or maybe more per unit by doing the work.
So that’s kind of my favorite part on the market and then just kind of we’ve been fortunate enough to have a couple of deals go full cycle and return a bunch of capital. So we have a lot of money in our database and so I can’t simply go raise two or three million dollars, that’s just too small, you know, we need to be raising, you know, nine ten million time minimum; it’s just too small. So we’re just trying to do a little bit of a larger deal. And that’s kind of what we’ve been focused on and say light value add, A-minus that’s the vast majority of what we do with a couple like more newer stabilized kind of deals then thrown them in if we do an exchange or we just think we’re getting a good basis on a deal.
James: Got it. Got it. And also the other thing that I mentioned the book is the passive investors will be, they would like to invest based on their preference or based on their investment cycle. So when you look at your passive investor demographic, do you see some differentiation in terms of these are the group of people that like to invest in my deal?
Michael: Yeah, I mean, listen with 700 different people that invested with us you get a little bit of everything, right? You know, but that’s one of the things that we always try to make sure we stress is you know, hey, here’s what to expect. You know, we’re really explicit about what the projections are, the timing and amount and the timing of the cash flow and when you do a syndication, ultimately most of those things need to sell at some point. It’s hard to keep a whole bunch of unrelated people to together for perpetuity; forever is not a good hold in a syndication environment. That’s cool if it’s like you or you and a partner or a really small group of people, but when you have, you know, a hundred unrelated people that’s hard. So we want to make sure when we’re communicating with them that–and they understand like, you know what to expect and I also let them know if we’re going to sell it and it doesn’t fit what your objectives are, then this isn’t a good thing for you to invest in.
So we try to be really explicit. So we match expectations properly because what I don’t want is a year down the road, for you to be upset because you thought you were investing in, you know, one thing and there’s really something different so, you know trying to be explicitly and very clear to our investors is what we’re trying to do.
James: Yeah, that’s good. That’s the best way to just make sure that everybody knows what they’re getting into right? So with the market at the current cycle right now, I mean in DFW Austin, you know, the whole taxes or places where you’re investing it’s very hot right now so, where do you think we are right now and how your strategy has changed in terms of acquisition?
Michael: Yeah, I mean. You know, this has been a hell of a run where we’re nine years into this thing or something like that. I mean, it’s been one hell of a run. You know, with that said, the more we focus on a predominately Austin which is where you live in Dallas which is where I live and if you look at the population projections about three weeks ago, I’ve done this with staff about three weeks ago. The Census Bureau came out and kind of have stats for the growth 2018. So Dallas, Fort Worth from 2010 through 2018 over an 8 year period, there are a million more people in here in 2018 that was in 2010. So, we went from that 6 and a half million people to about 7 and a half million people and their projections in Dallas Fort Worth are to grow from about 7 and a half million people to almost 10 somewhere between the next 12 to 15 years.
So to put that in perspective that’s about two and a half million more people coming to Dallas, Fort Worth if the projections are right. So that’s the equivalent of like the entire metropolitan area of Charlotte or Orlando and then putting it on top of Dallas, Fort Worth today. And everything I just quoted to you about Dallas, if you take the percentages, it’s even higher in Austin. So Austin is growing even faster on a percentage basis. If you feel like just driving around, there are just more cars, more people all that. So I don’t know a whole lot, James, but I know if the equivalent of the entire metropolitan area, Charlotte is put on top of Dallas Fort Worth[22:50unintelligible] have to go higher right? They just have to go higher. So what we want to do is, you know, make sure that we’re focusing on the right locations within the metropolitan area. You know, we’re trying to buy away from these Supply the best we can. We’re buying like Suburban multifamily deals in better school districts. We’re trying to focus on basis. So we’re trying not to pay Crazy Prices. One of the strategies we’ve done here recently is focused on properties that you can come buy and assume someone else’s mortgage and you get this avoids having a large yield maintenance or the [23:24unintelligible] prepayment penalty. So you get a pass along a lower cost to you as a buyer. So that’s a way to kind of counteract that a little bit.
What you give up as a buyer; you give up five years of interest only on the front end as you’re assuming a mortgage that’s most likely already amortizing so kind of hurt you up from yield. But if you save a million dollars or two million dollars in basis, you know, one day, that’s going to burn down if you need to sell it or refinance it free and clear. So that’s one strategy we’ve been doing. And then here’s another thing. I mean you own a bunch of stuff to San Antonio like those we were talking about before we started recording.
You know, this is one of the things I would say, it’s completely unfair business, you know, a lot of it who you know, what you know, what chips you can trade. And you know, I own a lot of stuff in Dallas but I walk in the San Antonio, you know, you have more clout in San Antonio than I do, just because I don’t own. So the Brokers are more apt to sell you something than someone that doesn’t know that market. So we’re at this point in the cycle doing 35 deals or some like that at this point, we know everybody, everyone knows us that our Brokers are players in town. So we get our unfair share deals. So, you know, we’re looking at a lot of stuff and we’re trying to be selective with it. It’s also as far as strategy goes, you know, the lone assumption route has been something that’s been successful for us. And then two, we put up a lot of hard money. That is the other thing that helps.
So you can put up a lot of hard money, get aggressive with your terms, you know, act quickly, you know, we got a deal in escrow that we officially never got to tour, you know, so we had to go shop it and then we never got to tour it and so we just basically got it in escrow went hard [25:10unintelligible] without ever having an official tour and I can do that because I’ve done 30 something deals. You don’t do that on your first deal. So I know what’s up, I know what’s going on and we did our due diligence and we didn’t find anything that we didn’t already expect. So we knew what to expect and that’s what experience and repetition gives you a psyche.
I got my 10,000 hours and I kind of know what’s going on. I kept having to make better decisions, quicker with that level of experience.
James: Yeah and brokers love it too because for them is like you’re a very easy buyer because you already know the submarket. You’re not going to give a surprise and they have done deals with you.
They just love it things to go much smoother. They make money as well. So they love the repeat buyers and the local players, as well.
Michael: Yeah, that’s right. And then we’re all friends like we go and have drinks together we go to the baseball game together. We all become friends and you know people do business with people they know like and Trust so being local in the markets that we own and operate in. I was at lunch before this podcast and ran from the[26:17unintelligible] Brokers because of their office across the street from me. Walking down the street and you ended up having lunch in these just randomly. And as I was walking out, one of my competitors who own like 12,000 units whose office is around the corner for me walked across me in the hallway, you know, and on the sidewalk, I mean so this like being proximity and doing a lot of deals that stuff helps.
James: Got it. Got it. So let’s say nowadays, what’s the process of your firm looking at a deal? So let’s say today there’s a deal coming. I mean, it’s not on the market, the broker tells you, who looks at it first, how does it come to your eyesight before?
Michael: Yeah. The way we are set up, a deal comes in, say I get it, you know comes across my desk. You know, I basically kind of where’s it located? You know, what’s the basic price? Right? So I’ll just kind of go to Google Map. Make sure you kind of know the location I’m in and I know whatever location that they are sending us. Like we know like the markets because we’re in the market.
So, you know, usually, most of the deals are like, no, it’s the wrong location or no, you’re prices are extremely insane. I’m not paying that price per unit for this type of product. And so usually a lot of people kind of get kicked out, but if it passes kind of that basic high-level test, then at that point usually we’ll do like a real get the financial statements in from the seller. And then what we’ll do like a real back of the envelope analysis.
We’ll spend 20 to 30 minutes doing a real high-level underwriting just to make sure that it kind of passes the high-level test and usually a lot of those deals die right then. So, you know, the deal was just like, you know the match it doesn’t work. It’s just way too expensive or we don’t think there’s not much upside in the rinse. Just whatever it is. We kick a lot of deals out that way. Then if it passes that deal usually at that point, we’ll do a full underwriting and that will take this like four hours. You know, we have a CFA that’s our analysts. Our analyst will go underwrite the deal for four hours. Since it’s my partner and I, then my partner will go through and kind of review the model.
And once you review the model, it passes that, then, you know usually, most of the deals kind of die right there then they don’t really work. But the deals that kind of pass that screening that’s when you know, we’ll kind of get down and get serious about it. And I think that point that’s usually when I go tour. So that point, they pass all the tests so we set up a tour maybe put [28:34unintelligible] in early kind of depends on the situation.
And so, you know, we’re looking at you know, 60 70 deals to get one that actually makes something like that. That’s probably somewhere in that kind of General ratio is what we look at. And we just have like little series of check marks along the way that we gotta like, you know, but doesn’t pass this one little test and let’s just kill a deal and move on. I found on the biggest cost to have in my life anymore, stop tuning cost. So if I spent a lot of time on one thing it’s at the expense of something else. So my time is precious. So just trying to make sure I get, you know, use that the most widely and don’t chase these deals for you know weeks and weeks. I never had the opportunity of actually making it in a day. So that’s hard to do when you’re first starting out and that’s a lot easier to do when you have some experience.
So when you start out, you got to learn these lessons sometimes the hard way. You got to underwrite this deal that if you would have just at the end of it just kind of be self-reflective like, you know, what could I have seen earlier on this deal that would have stopped me from wasting a week of my life on it? You know, you need to start that. I think that’s what separates a better apartment owner, ownership syndication type groups from the less successful ones.
James: Yeah, I agree. I mean, I don’t look at more than five parameters in any P&L to decide whether I want to dig deeper. So what’s the ratio of deals that you look at verses you looking at and passing it to your analyst for the four hours underwriting?
Michael: I mean, it’s probably pretty limited. So if it’s called 60 deals to get one, I mean it’s probably, at least half just get killed or your pricing is way too high or it’s the wrong location or the deal too small or something physically about the deal I don’t like. So that’s probably half of them and the ones I’ve been going to like get a back-of-the-envelope, we probably kill, you know, the 30 that make it through on the 60 we’re probably killing, you know, so that’s 20 right there. Then we’ll probably underwrite, you know, ten to get the one type of thing.
James: What do you look for in a location?
Michael: You know, yeah, so we’re Suburban multi Family Guy. So good Suburban location that is in the better school districts, you know near major thoroughfares preferably to have access to Lifestyle and Retail amenities like, you know, like they are near a Starbucks, near a good grocery store, you know, retail restaurant, stuff that people want to live in. First and foremost, low-crime area too, I don’t want to buy in the hood. So, you know, no low-crime area. Those are the things I look for and we’re targeting, you know, preferably 200 plus unit, A-minus family deals, but that’s kind of my perfect deals. An A-minus deal with more than 10% or an upside, you know it’s well located, low crime, better School District, near employers, near retail and restaurant. That’s kind of what I look for.
James: So, can we go a bit more deeper into the back of napkin underwriting? So, let’s say there’s a $10 million deal you know, 50 unit, maybe a 100-unit deal, how did you underwrite that? Back of the Napkin.
Michael: I mean, so what is the first major metric is a, you know, one other [inaudible31:51} ransom what’s our basic market survey say . So, pull a [inaudible] and look at the market rent. So then how much upside do we have in rent? So, I say, so, if there’s only 5% upside in rents then it’s probably not ideal for us, you know, we typically 10 plus percent in upside of rent to make the mass work. So, if I only have 5%, I know when I layer in my sponsorship compensation it’s just not going to make sense. All right, so you know, like it’s just not going to have no margin for us to be able to go attract capital. So, that’s the first thing and then we’ll then obviously go down and like other income or other income opportunities, then obviously look at the expenses as well.
Michael: So, you know, one of the deals were we just got awarded, the payroll is by 1600 ,1650 a unit and it should be 1200, you know, so we can on day one, boom, take 450 out of payroll that certainly helps quite a bit. So, we’re looking for things like that, that’s kind of what it is. And you know, basically for maybe if you think about it at its simplest form, James, like, I need to do a deal I need to be able to deliver somewhere between 13 to 15% IRR today that’s what takes me to attract capital. So if I can’t get a deal layer in my compensation layer in whatever capital you need to do, um, you know, talk to the purchase price and I don’t have enough upside of rents because at the end of the day, if I can’t produce a 14% or 15% IRR over a five year hold period, my investors don’t want to invest. So, I can’t spend time on deals on can produce those types of returns. So, we’re just trying to find, stuff that has enough upsides would be able to produce that. So, whatever that is, reducing expenses, increasing income, the two most common things, or is there some sort of way we can get a different type of debt quotes that may be kind of juices, some of these returns or whatever the specific situation is to that property. That’s kind of what we’re trying to get to the heart because, if I can’t produce a 14 or 15% return, I need to shoot the deal and move on.
James: Got It, got It. So, coming to 13,14% IRR is it to investors, or is it overall returns on …
Michael: Investors right. So, if it’s like 15 investors 17 and a half, 18 to the deal and you put a sponsor comp in there? So, it’s got to be, I gross 8 total 18 they get up 15 and our structure or something, something like that.
James: Got It, got It. Yeah. It’s interesting on the debt code side, no, sorry, before I go there, how do you know that the seller is not taking some of your upside? Because nowadays that’s what sellers do, right? They price it slightly higher; they give you upside, but they price it higher, which erases your upside. So how do you determine that?
Michael: That’s the whole thing why we don’t buy c class anymore because of the same catch, so yeah you know, that’s the thing so I mean, all these deals that have a lot of upside have a lot more interest and so they can again, bit up and the cap rates are compressing. So, the trick is you got to overpay a little bit, but you can’t overpay too much. Right.
Michael: And that’s kind of like what you’re doing. So, at the end of the day I got to, I, it’s as simple as I deliver a 15 IRR and if I can’t deliver, I can pay up to a certain price and then you start doing past out price and I can produce the returns I need. And that’s kind of when we back off.
Michael: So that’s kind of how I think about it, so, every, most of the deals we’ll work out at a price. So, we just kind of get to where this is the Max price what we can do to push to push out a 15 IRR for investors. And so that works up to 20 million and 20 million, 100,000 it doesn’t work. So, you got to kind of draw the line in the sand and have a lot of arms in the fire. You get a whole bunch of deals working all at the same time. Usually, they start popping.
James: Yes, yes, yes. The basis of my question is because they could be $150 or hundred dollars a rent bump potential, but the seller has priced it so much or we could have outbid–
James: –so much that it’s not worth it, right. So, to do that because you might be just getting–
Michael: Yes, there’s that. And then you get a little nervous for some of the less– the newer people in the business, with little less experience like you’re going to pay a five cap for 19 C class, 1917 deal. Okay, location and suburban St. Tonio or Dallas or whatever and then you’re going to perform like a five and a half or five 75 extra cap. Five years down the road for a c class deal, maybe that, maybe that’s the right cap rate, maybe it’s not, it needs– as you go and improve the property, you’re able to increase rents and by extension, you value you’re in a why. But at the same time, the more upside you take out of these deals because your turnover, 50% units upgrade them, shrinks your buyer pool cause everyone wants value add. So, the more value you take out on the deal, your cap rate actually goes up. So, it’s like a weird little dynamic you’re in that you got to like, you got to factor in. It’s like a 3-D puzzle you’re doing because what’s great because you’re increasing, you’re why. Because you’re raising your rent, but at the same time you’re also expanding your cap rate, as we sit in the same marketplace. So, it’s interesting, complex puzzle, the marketplaces are right now.
James: Yes, I was talking to a broker and you say hottest deal to sell nowadays it’s like deals where everything is done right, 90% is done.
James: Nobody really wants it because everybody wants value add right?
Michael: That’s probably the opportunity to go buy a bunch of that stuff. Cause that’s what today is. And then if you can get higher leverage loan, you get a 75% loan and get a good low-interest rate and get a bunch of I Own and go buy a deal that’s turnkey. Maybe that’s a better way of going, to be honest with you. And just kind of get a little bit more your return from current yield versus a big pop on the backend. That’s thought about strategy, to be honest with you, it’s a lot more safer than going and doing a bunch of work on a property–
Michael: –and paying a 475 cap for 1970 deal. I’d rather pay a six and a quarter cap for six and a half cap for a deal that’s already done.
James: Yes, because the backend is not certain. Right. Nobody knows what’s going to happen–
James: –at the [inaudible37:58] cap rate, so.
Michael: That’s right.
James: So that brings to my next–
Michael: And then you do all the work, you might expand your cap rate anyways. And then you’re doing all this work to only get half the payment. So, I think if I could go back in time, I would’ve bought every deal on a bridge loan. I would not have spent a single dollar in renovations and just operate it, wait five years and you sell it in today’s environment for like a freaking 475 cap, that would have been a better decision with the benefit of hindsight.
James: Yes, correct. Correct. So how would you– sorry, in terms of cash flow vs. IRR vs. Equity multiply, right? So, what do you see, what is the most important number that– for you, right, I know you’re passive investors need to look at?
Michael: Yes. You know, I think everyone, that everyone’s different too. Like, all my investors have different things that are most important to them. I think, honestly at the end of the day, a pair of this investment, that investment, IRR is really kind of the driven. I’m not the biggest IRR in our store. We, I think the cash on cash certainly matters because I can’t pay my bills on IRR, but I can with a check every month. So, I, that certainly protects it. But at the end of the day, really, we’re focused kind of when we’re– comparing this, it’s up to you in the next one, really kind of IRR. Because you know, if I’m able to come in this deal, I assume a mortgage and refinance in the third year or something like that and have a partial return of capital that pops my IRR pretty, pretty good. And I keep take some of this capital and return to my investors quickly. Two-year period, you know, 30% of their money back through a refi or something like that. That certainly is attractive. So, we’ll, I think I kind of focused on IRR when I’m making the decisions on which deal, I want to buy, which deal I don’t. And we’ve been, we like [inaudible39:54], we’ve been focused many deals about loan assumptions recently trying to get a lower basis. So, the first and foremost I’m focused on basis, making sure I buy a deal that’s a relative value to everything else is trading right now. And I, cause I was only two things. You can’t change on a property; you can’t change your purchase price and you can’t change location of it. Everything else you can kind of modify can always refinance it. I can always improve the property, but I can’t change what price I paid or where it’s located. So, we’ll locate a deal with good prices, and I think everything else will kind of generally work itself out.
James: Got It. And got it. How do you make decent between buy and hold for long term vs. buy and buy and refi? How do you decide?
Michael: Yes, so if it’s a syndicated deal, we’ve done a couple deals, especially when it first started out doing dentures where it’s like what equity partner in us. Those deals we tend to hold longer. We bought a bunch of workforces, we sold them, we exchange, like A-minus or a product. So, we did a bunch of that. And then when it’s a syndication people for like forever is not a good whole period if you’re in syndication. Because people want, return on their money as well as return of their money and kind of the intermediate term. So, we’re typically performing a five-year hold period. I think you’d be going much past seven. Most people kind of like, you know, shoot, I don’t want to tie my money up for 10 years or 20 years. Now I kind of want to get my, I kind of want to see a return of my money as well as the return on my money. So, it kind of depends on the thing, but that’s a heck of a lot of work buying and selling these things. So, it was just a lot easier just to kind of hold and it’s kind of operate, especially the way we’re set up with a third-party management company that does all day today. I, managing a bunch of thousands of apartment units. It’s kind of like adult daycare.
James: Yes, it’s adult daycare, it’s a good one to see.
Michael: It’s property management as a business of problems. I mean, there’s always a problem, like every day, always, problems everywhere. So, if you have third-party management to kind of oversee that and we’re set up and I have an asset manager that layered in between me and them. As a principal, the way we’re set up, it’s really not that bad on the day today. So, what we’ve been kind of focusing on is we’re just selling the older stuff and buying newer, nicer stuff. Cause there’s old stuff, I mean, not only, it was great, and we made a bunch of money, but you have asphalt parking lots and casts on sewers and t one 11 siding, Hardie. You go renovate a deal and two or three years later you’ve got to renovate the deal because the parking lot needs to be redone and you painted over wood.
So, then you’ve got to have more wood of what, right? You got to go paint over again. And you can’t cast, our sewers are collapsed in every time you turn around and get, dig it up and replaced sexting sewer pipe. So, you have all these like nonrecurring items that recurrent all the time. So, doesn’t impact in a live per se, but it impacts your actual cash and the bottom line? So, I’m so I think the actual net cash you can pay out, it’s not that different on a higher cap rate, older deal versus, or maybe a little bit lower cap rate, better quality deal if you’re going to be in these deals for a long period of time. So, we’ve been just trying to get younger in our portfolio, so stuff I owned a day, I’d be much more likely to want to hold than the stuff I owned in 2014, 2013 cause those were just tougher, older, older deals. And I think that’s what I’ve seen been kind of like the natural progression of most people that do what I do for a living. Just over time. One of the things, one of my mentors told me once when I first got in the business was, you own apartments in dog years, and every year of ownership feels like seven. So, like over time, you know that statement is very, very true. The older the property and the smaller the property, the more true that statement is. The bigger, nicer. It’s just easy, just easier. So, I don’t know if I answered your question,-–
Michael: –but those are the– between owning or selling a deal.
James: Absolutely. Absolutely. And– so let’s go back to a bit more personal stuff, right? So, can you name like three things that you think is your secret sauce in, scaling up to this level?
Michael: Yes, so, first and foremost, I mean I’m pretty tenacious and I had a lot of ambition, so, that was, that was a lot of it, right? I was like, I was willing to do what it takes to get to where I got. So, we had a lot of experience, background, and training and that certainly, so first and foremost, I just really, really, really wanted it. And like last weekend I flew to Jacksonville, not check, yes, Jacksonville, Florida, I’m sorry. Losing track of where I was. So, I was in Jacksonville for 21 hours. I spoke in front of 300 potential investors. I flew back home. I did that Saturday morning, came back Sunday morning and three weeks earlier I was in Newark, New Jersey, went to some hotel conference room on a Saturday, came back on Sunday. So, I’m willing to sacrifice a good chunk of my weekend to go out and get in front of investors so I can then do these larger deals. So, if you’re not willing to put in the work and do what it takes and you’re only, you’re going to get a moderate your success for sure. Second thing was, I had a great background being a banker for over a decade and I just did deal after deal after deal. So, I’ve got a great education on my, on the bank Stein. So, most people don’t have that. Cause then they’re not bankers. Right. But, go get educated. That’s the other thing I would, I would say get educated, higher from a reputable mentor. There’s a lot of people out there put the time in. Become a student of your craft, go listen to this podcast, or listen to our podcasts, read books, do stuff like that. That’s a great way of learning. These podcasts are great. Like we host the Dole Capitol podcasts or your podcast. You’re going to sit here and talk to me. So, it looks like about at least 45 minutes here-
Michael: –at this point. And you get to your conversation from two guys that own almost 10,000 units collectively for 45 minutes for free. And there’s a lot of wisdom and nuggets, but I think hopefully you can take out of that. Um, so, my background, my education was certainly it. And then really just a lot of its just relationships. You know what I mean? A lot of this is as simple as just don’t be a jerk. That’s, that’s a lot of it, right? So, the brokers want to do business with people they know, like, and trust. They want you to be honest with them. They want you to be, do what you say you’re going to do. And if you could just do that and be in a good guy and be friendly with them, man that goes a long way. It really does. So those are, those are three things I’ve done pretty well in this business.
James: Got it, got it. And why do you do, what you do, I mean, where are you?
Michael: I understood back, couple of things, right? To have a better life to be able to, the monetary if you’d have done well, the very rewarding monetarily. I sit back, so I got a couple of things happen, reflecting back on this, cause you know, we’ve done a lot in a short period of time. When I was 2010, so my mother passed away in 2010. So, I was like 32, I’m 32, 31, something like that at the time. And, so she was like 57 when at the time she passed away and then she– her and my father sacrificed to save all their life to then be able to retire one day and then go have all those great traveling adventures in the sunlight and do stuff that was great in life and she didn’t get to do that. She works to sacrificed and saved and I never got to– the fruits of it. So, I kind of, that was a thing that kind of burned into my mind that I need to be able to do something young, unable to take a risk young. So, then I can then enjoy a lot of stuff in life. So shortly after, that’s when I really first started was in 2011. I bought a bunch of rent houses in 2011. I [inaudible 47:28] my mom passed away and that’s kind of really when I started like taking risks and doing stuff because being a banker, you’re just naturally conservative. You’re not really wanting to go take risks. But I started small and kind of got some confidence and then a transition in the multifamily.
So that was one thing. And then, and then when I was about 34, 35, I was sitting at the bank and I worked for a large, large national bank and then, I was really successful, and they’re kept trying to promote me. And, when I was looking at the bank and I looked at my boss and my boss’s boss and his boss and thinking about what they do all day, it was kind of depressing, to be honest with you. Like I didn’t want to do that. And I felt like a, it is a metaphorical thing, but it felt like a little fork in the road. Like I’m 34, 35 and if I don’t go out and take a chance like right now, and I wait one more year, every year is, we made a little bit harder to go out and take this risk. But if I like go out right now, I saw the market, the market was right. Capital was blowing and the deals are so good. And I knew that because I was in the industry. So, I was like, if I go out and I fail I can always come back and be a banker because I was a really good banker and I can, y’all are going to need to be a banker.
But if I go out and I succeed, then I can have a great life and get to go to Hawaii for three weeks. Like I’m going to this summer, I’m just going to pick up the family in Hawaii for three weeks. I’m just going to work from Hawaii for three weeks to sort of be in a hundred degrees in Dallas. Right. So that’s what you, that’s what I get to do today. And I get to pay for my sister and her family to go to Hawaii because we’ve taken the risk and been successful and those are– that’s kind of, I guess some of my whys right there.
James: Yes. It’s, it’s interesting on how you’re tenacious. I mean, whether its real estate or anything. And you can do this in anything, right to, you just have to be–
James: –persistent in doing it and know your why and just push it. And I can change your life. Right? So.
Michael: In every transaction, there’s always a problem, right.
Michael: So that’s the thing too. And that’s what I always fall back on. Like there’s always a problem. There’s always stress, there’s always, whatever. And you just got to like push through who’s going to put your head down. You just got to push through. Just kind of will it, so do what you needed to do, you know? And not that every time I feel frustrated and you were not getting a deal, right? Like I’ve gone months and months on a deal, I just do more. Like, you know, I make more calls, I go do this, I’m proactive. I’m just like more always answer. So, we don’t get what you want to do. More effort, not, that’s usually, usually tends to work out pretty good for me.
James: Good. Good. We’re coming to the end. One more question. Do you have any like a daily habit or daily ritual that you do that contributes to your success or effectiveness in life?
Michael: I’m not the most, I don’t really read a lot of books. I don’t really meditate on do any of that. So, what– I, I do find myself from time to time, I’ll go down the rabbit hole of doing something and like burn off 30 minutes by all my life around the internet or something like that in the middle of the day. And I always try to catch myself and say, okay, like I just need to prioritize. So, I have a hundred things to do every single day and I need to ensure I know what the most impactful thing is. And I focus my time on that. Cause, sometimes you let the tyranny of the urgent get in the way of the important. So just cause I have 40 emails on red, I need to go clear. It doesn’t mean that’s the most important thing for me to do right then. Even though that’s like dinging on my screen in front of me. Sometimes I’ll try to shut that out, focus on what are, what is the most important thing. And then I know when I, I’ll schedule time to come back and clear my emails out an hour later down the road when I kind of get done the most important thing. Because, if you’re in a Sproul, I’ll leave you with, it’s kind of, there’s this whole thing that I’ve, I’ve definitely learned in this business, as a syndicator, as someone that does, find that puts together an apartment operators, apartment investment opportunities or any sort of opportunity like that. The best way you make, the way you make money in this business, you’ve got to find deals and find money. Going to find deals and find money and everything else is sort of noise. It’s all really important. You got to operate; you’ve got to do all their things right. But, that doesn’t really, that’s not driving revenue. So, if you want to focus on revenue, you’ve got to find deals or find money. So, I’m not talking to brokers, I’m not talking to my investors, you know, everything else is, not driving revenue. So, at the end of the day, I always try to remember that when I’m deciding, what do I spend my time on. Do I spend my time on this or that, that’s always in the back of my mind?
James: Got it. Got it. Is there anything else that you want to share in this podcast that you have not shared in hundreds of other podcasts that you have been? I should have [inaudible51:57].
Michael: I, I think, we do a pretty good job. So, I would, if you want to know more about me, I think really there’s a couple of ways you can, the easiest way to find me, just get my company’s website, which is a company spiadvisory, just go to our website www.spiadvisory.com. It’s spi like spy advisory dot com. There’s a contact us form, fill that out. I always happen to have in 10 or 15 minutes. A telephone call, listeners of the podcast. You guys are interested in maybe working with us or really the best way if you want to know more about me or if you listen to this podcast or [inaudible] or. So, you can listen to a dual capital podcast. So that’s on iTunes or Stitcher or YouTube or anywhere you’re probably listening to me right now. You can find the old capital real estate investing podcast. So, we have probably 300 episodes in the archive or more at this point. So, we do interviews with other people kind of similar to this format. As well as we do a little short one where my partner Paul interviews me and asked me one question a week and I answered about one specific topic. So, if you want to know anything about and just all-around apartment investing in your or some form or fashion. So you want to learn more about me, that’s a good way to kind of– I talk, I have a lot of stuff recorded that’s out there that, but if you like this, you may, you may like that and hopefully can provide some, a little nub. It nuggets on different little talk topics, to listen to those.
James: Yes. Yes. I learned a lot from you. I mean, listening to you from different, different podcasts throughout my apartment investing journey. So, I’m thankful for that. And I think that’s it. Hopefully, all the audience and listeners got the value that they want to get or getting from Michael and myself. I think that’s it. Thank you.
Michael: All right. Thank you.