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James: Hi Audience. Welcome to Achieve Wealth podcasts where we talk about value-add and real estate investing. Today, I have two great guests. The company’s called Raven multifamily, we have Ramana Korada and Venkat Avasarala, both of them own almost 2000 units right now, class B and C in the Dallas market and they’re under contract on another 300 units and they had been looking at other markets as well. But let me get them to introduce themselves to you. Hey guys, welcome to the podcast.
Venkat: Hello James. Thanks for having us.
Ramana: Thank you, James. Thank you for having us.
James: Yeah. Did I miss out any of the introduction a section for you guys? Do you guys want to add anything about yourself?
Venkat: No, I think that that sums it up.
James: Okay. Okay. So you guys had right now all your deals in Dallas, right? And you are looking at or you did have some deals in the other markets as well. Can you explain what were the other markets and why did you guys focusing on Dallas or exploring other markets?
Venkat: Sure. So myself, hi, I’m Venkat Avasarala and along with Ramana, we partnered back in 2016 to get started with apartments and we both live in Dallas. But Dallas, as you all know, it’s a pretty tight market, a very competent to market and you need to have a resume in order to land a property, right? I mean most often than not. So as we did not own any properties back in 2016, it was even so hard to even buy a 60 unit property awarded to us just because we didn’t have any resume. So Ramana came up with this thought, you know what? We can keep doing that eventually, probably will get something. But if you want to expedite this, let’s get out of the DFW market. Prove ourselves outside the market where the market is not very competent.
So that’s why we went to Oklahoma, we bought a hundred unit property there, it’s a C class property, but in the town of Norman, Oklahoma College town, and we showed that expedience and bag the 120 units deal in Phoenix. And Phoenix, back in 2016, was a really mellow market; right now, it’s very hot. But back in 2016, not so much. So we showed this 100 unit experience from Oklahoma and we got the 120 unit deal in Phoenix. Then we showed both of these and bought our way back into Dallas where we live and ever since we were buying in Dallas and we didn’t go back outside of Dallas ever since. But it had to be that way back then.
James: So you guys went out of Dallas because you thought Dallas was overpriced and came back to Dallas once you have some track record, right?
Venkat: No, not really. Not all of time because it’s just that we were not being awarded the deals.
James: Oh, okay. Got It. Got It. That makes sense. Ramana, you want to say something?
Ramana: Yeah, same thing. We were not able to get hold of any brokers or sellers attention because we didn’t sell any properties in our portfolio. These two properties from the other markets helped us to get in the Dallas market.
James: So that’s very interesting because starting 2015, you guys went to Oklahoma or is it 2016?
Venkat: June 2016.
James: So 2016 to 2019 now, which is still early 2019, you guys have accumulated 2000 units. That means you have found some secret sauce in Dallas market on how to win the deals. Can you explain what is that secret sauce?
Venkat: Yeah, Ramana, you can weigh in man, how about you want to take this?
Ramana: No, I think you’d do better.
Venkat: And we strongly believe that real estate is a people’s market, right? I mean it’s a relationship based business, so it’s what you can influence other people, right? So, I don’t know what exactly it is, I cannot articulate, but basically, I think we heard it from brokers and other investors and our peers also. Basically, we come out very thoroughly prepared. We are both from IT background and you can relate to this yourself because you had enough background as well. We don’t walk into any meeting without prep, right? So we prep and we prep and we prep and when we have the meeting we run it in an organized fashion. We come out very prepared and organized. And after the meeting we take meeting minute notes, right? And basically, we work towards every single day of getting things done on a timely basis.
And this is something that we brought along with us from our IT background and I would like to think that, you know, we kind of impressed upon our brokers or whoever we were working with and also we have a track record, right? So we try our level best and then some to always do exactly what we say. And when you keep doing that, you kind of develop a track record and people like to work with you. And I would say that other than that, it’s not rocket science at all.
James: So let’s go a bit more detail into that, right? Because it’s important because a lot of people cannot find deals or could not win the final interview. We know whenever they go in the best and final round so I think that’s what you mean when you go into a meeting with the broker or the seller, you guys are really prepared. So let’s dig down deeper into that. So let’s say when a deal comes, I know you guys underwrite it and you submit your deals and I think it’s as usual, you want to make sure you go to the best and final, right? So and after that, let’s say you go to the best and final where you get interview into the seller. So what exactly do you guys do to the confidence of the seller?
Venkat: Sure. I mean, so let’s take an example off the 306 unit property, our very first property in DFW, right? So we didn’t have, yes, we own about 220 units outside Dallas, but nothing in Dallas. But our very first property in Dallas had been 306 units, it’s called Tradewind Apartments. Marcus [06:21unintelligible] sold that us so we were underdogs there. We won this particular property in an interview, a literal interview. Like where the seller was actually interviewing us and one other party and then they chose to award it to us. So again, the idea is the best and final, these interviews are just the closing part, but the whole process actually starts well in the beginning, right? The day when you go to actually tour the property, you better show up with all the relevant information, thoroughly analyzed and reviewed on your side and just don’t go ask some basic questions.
Show the broker that this person actually wants this deal. They invested a lot of time and effort into this thing and come up with some relevant questions that you cannot get out of an OEM or a T12 or a rent roll, right? And then discuss with a broker, basically, get some help with underwriting on, just enroll a broker into the underwriting process. I’m not saying that you should just underwrite based on exactly what the broker says, but involve them and make them a part of the process so they will get also invested into this process of your acquisition process. So you build up from that and then you put yourself in broker shoes and seller’s shoes and say that if I’m a broker, what would I want to see in buyer if I’m the seller, what I would want to see in the buyer?
So in that particular case, we came to know that the seller was thinking to refi it and they were working with one particular lender at that time. And guess who we tried to get the courts from? And guess who we put on the interview call? We brought a broker from the same exact company.
James: These are the lender’s broker, mortgage broker, right?
Venkat: This is a mortgage broker. And actually a DUS lender, in this particular case actually we put a DUS lender on the call and the mortgage broker, but from the same exact DUS lender that the seller was trying to use and they had the loan, they already had the loan with that particular DUS lender and they’re trying to refi the loan with them. So again, remember, this is our very first deal. We don’t have a lot of track record and we have zero track record in Dallas. See when you are well established and you probably don’t have to try this hard, but you always have to assess your current situation and try to put yourself in other people’s shoes and see what they are looking at, you know, when they’re looking at you, what are the seeing and try to see what I can do to gain advantage. And in that case, that made a hell of a difference because we brought the same DUS lender and they felt instantly comfortable because the DUS lender batted for us and say that, yeah, I mean, these people have checked out, this is what we are looking at on the loan proceeds and all that. So instantly they became comfortable and they awarded us the deal.
Ramana: I know we close two more deals with the same Marcus broker, that’s how best to get the DUS lender on the call. If it was a fast deal, they wouldn’t care to join. But that kind of helped us, [09:38unintelligible] helped big time.
James: Okay. Yeah, that was one of my question. How did you know the right DUS lender, right? So how did you guys find out that this was the exact DUS lender that the seller was using?
Venkat: This is Yardi and all that. This is common knowledge, right? I mean if you actually go into Yardi and put the property name, we know who did the loan, what is the loan amount, the terms and all that. Luckily, we happen to use the same exact DUS lender for our property in Oklahoma and Arizona so luck kind of favored us there. But even if that wasn’t the case, we would have gone and got that particular DUS lender onto the call one way or the other. We already figured out all the details, but always how to work towards what’s the end goal.
James: Okay. Got It. Got It. So just to clarify for the audience, DUS lenders are usually, DUS stands for delegated underwriting services. Basically, Fannie Mae gave like, I can’t remember how many, 30 or 60 DUS lenders, how many?
James: 40 DUS lenders across the nation, which is the delegated underwriting portion of it to these lenders to help them underwrite because it’s just as a part of their scheme for them to do the business. So basically, you can get access, I mean, you can Google DUS lenders and get access to them or you can go to your mortgage broker to get access to a DUS lender. That’s right. So coming back to the preparation to meet broker when you’re doing your tour because I think that’s important. A lot of people, including me, I just go and say hi and bye to the broker, but usually I underwrite my deals if I go and see them.
But how to be really, really prepared when you go and meet a broker because I think that’s important as you mentioned, it gives a lot of perception to the broker to say that this guy is really serious. They are the liaison to the seller and if they can give a good word out to the seller, that takes a long way. What are the things that a person need to be prepared before they meet the broker for a tour?
Venkat: Sure. So what I would say is that number one is there are three components in my mind that I have to check, right? So one is the business plan itself or am I buying into this business plan or not? Because every broker has a pitch, right? Sometimes, right? And the more repeated the broker is, the more accurate at whatever they put in the OEM that you can subscribe to that, right? I mean the more repeated the brokerage is. But still, you have to wet that. Like for example, one of these brokers always puts, you know, you do the small patio extension and you’re going to get $50 rent bump. It might be true in some cases, right? I’m not saying that doesn’t work at all, but may not work in every submarket, in every neighborhood, right? So you have to go look for the comps and all that and you can drop those names of those.
Like for suppose, let’s say if I go to see this particular property and I tell the broker, hey, I read what you wrote in the OEM. So basically you’re saying that if I spend about $800 extending this patio, then I’m going to get a $50 rent bump and I cross-checked with that, that that property and those two properties are already getting it. So I kind of agree with you. So this is how you make a connection and involve the broker onto the team. And I’m not saying that you have to agree on everything, but find the common points. And also even when you try and go into the negotiations into tough negotiations or anything at all, start with the yes. Find something which we both can agree upon and start hitting those points.
And once you build up a yes, momentum, yes, yes, yes, yes. And then you come to a point where we don’t disagree, but since you have established the Yes momentum, right? So you both parties would be more willing for a compromise. That’s a small detour from your question, but that is what I tried to establish. So basically I go through all the business plan and then discuss the same with the broker and kind of establish a rapport. Seeing that, yes, you wrote that, I verified it, checked out, it checked out. So I’m trying to build a rapport here. Then comes to this question, say water savings. I see that you think we can make that kind of water savings but in my experience, that didn’t quite happen that way or all the time; what do you think? Where do you think you got that?
So what I’m trying to do here is I’m trying to build a rapport with the broker on every aspect that shows that, you know, this guy really spent time, effort, made calls, did everything he has to do. So in the broker’s mind, you’re trying to get ahead of everybody else because and not many people may not do all the ground the legwork before showing up and touring the property. The second thing is debt right? Obviously, you have to pull debt, you know, debt quotes and also you have to share that information, right? You may not have to share exact terms and all that, but some general idea on who you’re working with debt and try to give that comfort feeling and everybody knows everybody these days, right? But if the broker knows that, yeah, you know, okay, you’re working with that broker, I know him really well. That’s kind of, again, the second leg of coordination over there.
And the third thing is equity, right? The broker will not ask you all these things. He will not, most people don’t feel comfortable quizzing you like this, you are kind of [15:06unintelligible] there. So they’re trying to show you the property, trying to sell you something, but they’re not going to interview their, right? So they’re not going to ask you how prepared you are, they’re not gonna ask you where you’re bringing debt or equity from. But if I think, I take the initiative of sharing the way I’m approaching on these three friends, the business plan, how I’m underwriting, how I’m bringing my debt, how am bringing my equity. I share that with the broker and I personally think that will help you go several rungs up the ladder and the ice with the broker.
Ramana: Just to add there, you have to make sure that you go through all the financials that the broker provides. I mean obviously accurate, but you test if it fits into your business plan. You know, make sure that, for example, water conservation, if you want to do this conservation, we have to make sure the water bill is high enough so that it will help you reduce your expenses. I mean you have to read through rental like left to right, right to left, top to bottom, bottom to top. Make sure to find anomalies, you know, just to make sure you’re not getting into something you really don’t want to. You can tune up the property but not be unbearable neighborhood, right? So make sure you understand what you’re getting into. Like when concerned, if you plan out on the equity and debt and as long as you’re well-prepared, you have a pretty good chance chunk, but you can get into it.
James: So you guys would have done underwriting and ready to go. You wouldn’t be for meeting the brokers, is that right?
Venkat: That is correct. We only will show up at that property only if the numbers work, otherwise, we won’t.
James: Yeah. Yeah. Same thing with me. I learn everything first before going and see the broker. I know a lot of people who whenever a deal comes they say, well let’s set up a tour first. And then later go and underwrite it. But I think the bad part about doing the second option is basically you missed the opportunity to show how serious you are with the broker. Especially on a hot market like Dallas. Because you know, they want to make sure that people come prepared and spend their time wisely, I guess.
Venkat: No, I would say that no reputation is better than a bad reputation. Again, if you start hitting up all these brokers without prep and if they get a gist that you know what? This guy is just showing up, you know, it won’t work well. But I concur with you there. The prep is the key.
James: So do you guys look at every deal that you get through the mail, through the broker email blasts or is it more through personal relationship or what?
Ramana: We do take a look at each and every bill that comes into our mailbox, but doesn’t mean that we underwrite each and every deal. We want to make sure the location, location is critical, right? We want to make sure we are buying the properties in the right area. The median income, demographics, traffic, the property has to be located on the road if it’s not near the main road, yeah, you have to spend extra dollars to market the property. So we have a few pointers that we look for in each property. If it doesn’t qualify, we just delete the email.
James: So can you list down the top three things that you look for? It’s basically a sniff test, right? What you’re doing is the sniff test?
Ramana: Absolutely. So location is critical, median income; the look and feel of the property. I mean, we can improve the property, but you cannot make a class C property into a class A property. But location, demographics and median income, those are the things that we start with.
Venkat: To add to that, if you want to dig deeper on that let’s say, we see a small culvert or a stream or something like that, we immediately check the flood zone. I’m not saying that you should not buy flood zones, but you know what the insurance will go through the roof. So as long as the underwriting works with a bigger number of insurance, then it’s fine. And another thing is let’s say if you’re trying to buy 150 units and right next to it there is a brand new 2008 built low-income property with 450 units, I wouldn’t go there in there because it’s hard to compete. It’s a much nicer asset, a newer asset, larger asset, and low income. There is no way I can turn a profit there any easy way possible. So these are the kind of things. Again, the first thing is this, you actually need to read the OEM and reading OEM literally takes about 20 minutes.
You can skim the data. You don’t have to read every word. There are a few sections, like a section where the broker actually talks about the strength of the location and talks about the strength of the property, right? The asset itself, like it has new rules, things like that. So as you read them, what happens is you will have a farther need to look into few things and obviously, you look at the property and the Google maps kind of thing. And also read the reviews. Google reviews, apartment.com reviews, oh my God! I mean it tells you a whole lot about the property.
James: So you look for good reviews or bad reviews?
Ramana: I only looked for bad reviews.
James: Absolutely. It’s value add, right?
Ramana: Yes, yes. For example, recently somebody sent us a large property on MacArthur. Now, this is Mac Arthur Irving and what’s there not to like, right? You know, decent. But then again, we started looking at it and we see that 95% of them are one bedrooms. Nothing wrong with that. It’s not something that we are very thrilled about. It’s hard to keep tight on the families there with one bedroom. We want larger units to at least two bedrooms where people pile up all the stuff and you know, there should be a barrier to move away from your property. All they have is a [21:18unintelligible] and a bicycle.
James: Yeah, the turnover is really high. What about the median household income, what’s your criteria? Because that’s part of your sniff test.
Venkat: Yeah, so I would say that we wouldn’t look at anything less than 35; 35 is like really, really bottom so everything else should be strong. Like there should be a strong value add component. If you are buying at $35,000 one mile, only one mile matters. We don’t even consider, we don’t even look at the three miles and five miles and all that. Only one-mile matters in our book. And if we are trying to buy a property with $35,000 household median income, everything else better check out very well, right? Meaning the quality of the assets should be okay. The demographic mix should be okay, we don’t want any concentrations. And then there should be at least like 50, $7,500 rent bump. Then we would venture into 35. Anything less than 35, it’s just not worth it.
I’m not saying you cannot make money on this. I know a lot of people who really do well buying roughest properties. It’s just that we are syndicating these deals so we are taking money for investment, we are taking money from working people who actually had to work a year or two to amass that 75 or $100,000 that they’re giving to you. It’s just not a proper way for us to take that money and going to riskier assets. Maybe the reward will be good, but it’s just the risk is also high. So we just don’t look at that lower end of the market. We try to sit between 35 to about 60,000 median income. Obviously the higher the better.
Ramana: [23:00unintelligible] Definitely. That is something we don’t need to spend a lot of time— of course, with the property we will come up with some value add strategy but we don’t want to buy a C class property 23:18 when you can buy class A for 5 cap. That’s another item that we look at before we delete the email
Venkat: Obviously, in order to get the whisper prize and it’s all the stakes, again, once you keep doing that, you’ll just do it subconsciously, right? I mean, you don’t sit there and make a spreadsheet to track all these things, but you know what the key items that you need to know, the deal breakers basically. So for us, right now, if you see a large flood zone, it’s a deal breaker. If we see a concentration of a particular demographic, it’s a deal breaker like that. So basically once we weed out all these deal breakers and spend about 10 minutes, 15 minutes, and Yardi is a great tool to do this, right? So once you run Yardi, it just becomes so much easier to check these properties out.
James: Absolutely. Do you guys look at the rent range? I mean, you can buy a big property as well, right? Like a big townhome, right? Do you guys look at that and I know you don’t look at the one bedroom, there are too many one bedrooms. I mean you’re not thrilled about it so much. So do you guys look at the rent range?
Ramana: You mean to say like surrounding properties like single-family properties..?
James: No, no, no. Not Single family. So let’s say you can buy townhomes, right? Which is like 1500 1600 a unit rent per month. Do you guys look at the kind of deals or it doesn’t matter?
Venkat: So we don’t own any townhomes yet. We are not opposed to it. But again, what we’re looking for is renters by necessity, right? So as the rent actually goes up and up, let’s say, 1300 1,416 or 1800, you better be in a really nice location, right next to a big financial business district or something like that so that you don’t have to worry about, you know what? Yes, my rent is $1,800 but I don’t care. You know, once this tenant moves out then somebody moves in. Unless that is the case, the higher the rent, I personally perceive it to be risky to play in that area. We don’t want to be at a 500 $600 rentals, so the sweet spot is something like on a one bedroom, maybe 800 to let’s say 1200, 1300 on the higher end. That is our sweet spot.
Again, this is where you get renters by necessity and also the larger the unit, what happens is they accumulate stuff and it’s hard to wow. Because I was a renter once and when I was in school all I had was like my cycle and a couple of suitcases and that’s it. It was so easy. I moved like four different places in two years. But that experience is something that I can never forget. So we want people to come in and also not just because of the luggage, we want people to stay there because it’s a nice place for them to be as well. So again, we look at the rent roll, that’s obviously the next step, right? If like 90% of these leases originated in last one year, obviously that tells us something. So we’re dealing with a high turnaround on the property and it’s really tough to operate those kinds of properties as well.
James: Yeah. Yeah. I would say the volume of renters reduces at the binomial curve. You have the binomial curve in the middle where you have certain brand range where you have a lot more renters. When the market shifts and goes towards the end of the tail end of that curve, you’re going to have a less number of people. And when the market shifts, you know that people may not be there anymore. They’re like class eight people. So it’s a slightly different market.
Venkat: So renters by choice, that choice can change at any time. Maybe a guy go meets a girl, they get married, have kids. Well, they don’t want to live in an apartment anymore, they want a house.
James: They’re not going to go to a high rise building. Right?
Venkat: Yes, there you go. So we want people that they are renters by necessity, so they’ll continue to rent. Now then what happens is, okay, what do I do to just keep them there? Just treat them well, take care of their work orders. If they really want to move out, offer them an upgraded unit for a smaller bump or whatever the retention measures kick in at that time.
James: Okay, got it. I mean in the beginning you had a lot of on market deals, right? Where you see OEMs and all that. I’m sure at this point in time you get a lot of off-market deals, right? So it is that right?
Venkat: We do, but unfortunately this is the nature of the off-market. Off Market is technically not off-market. We bought this property called Surround in Irving and we closed it on February 21st this year. So very close to that, there was another 200 unit deal which came off-market and they were asking 95 a door. It’s not penciling in 95 a door. So it’s like no, the seller is going to list it; let’s move, let’s move, let’s move. And then what happened, the next week a very big brokerage actually listed it and their risk for price is like 88. That’s $7,000. So more often than not, what happens is that owners want to test the markets before. They obviously have some kind of thought on who they want to list the property with, but before they do that, they just flood the property around.
James: They want someone to underwrite it for you.
Venkat: Just to see if anybody will take a bite. It’s worth the shot. I mean, it doesn’t cost anything, so why not? But we do get, I would say about our nine properties, I would say about one, two, three, four; four of our nine properties are off-market, they’re true off-market. Meaning, nobody else is looking at us. It’s just us and nobody else. That is how we define, they’re very far and few between so we’re not going to hold our breath for that but we sift through all the so-called off-market, which come through our table looking for the next off-market. But we are not opposed to buying the listing deals also. And one of the issue with the listing deals is the smaller the deal, the greater the number of bidders.
Right now there’s a lot of euphoria and the market equity and the debt, everything is available and that translates to the bidding wars, right? Up until October of 2016, oh no, actually February of 2018 we were buying around 140, 150 unit, that asset class, right? I mean that size of the properties. Then what we notice is like every time we had to fight with so many people, we compete against so many people. So in order to elevate ourselves from the competition, then we started buying 300 units plus and our last four deals, including the one which we are buying. So we did the HRV, Cielo Surround and this one. So yeah, I mean our latest four deals on average, the average size of this is 350 units and here you get a lot less competition. So you get a much nicer product for a decent price. So that’s what I would say.
Ramana: So on the same topic, the market is so hard. Sellers are trying to get off-market. I mean off off-market. Definitely, they’re just testing the market and giving to the broker who can get the best. But is it really happening? Not in every case. For example, we looked at a property in Jacksonville, this broker was displaying at 87 a door but ended up being sold at 78 a door; $9,000 per unit difference. Sometimes we get scared, not scared, but to tie that off-market prices not making sense at all. No property is getting right there. The market is so hard, so nobody is going to, I mean I wouldn’t say nobody, but it’s tough to make these off-market deals work out.
James: Yeah. It’s called off-market premium. For me, off-market means unless the broker knows you, that you are the best buyer for some reason. And they come to you and say, Hey, you know, we only are giving up to three people and that we think you would be one of the better ones because you have properties nearby or you like this kind of deal that’s an off-market, right? Or the deal falls out of contract and they want someone to close it quickly, that could be an off-market. Or, you’re buying it directly from the seller, that is a real off-market. All other things is actually on-market but the term off-market to make it sound sexier thing, right?
Venkat: In our case, all these four properties, we got to buy them weeks. All four of them [32:24unintelligible] getting listed. So actually they had a listing agreement and they’re working on the OEM and it takes them two to three weeks at least to launch them. Because they had to send them somewhere to take pictures. They have to right up, underwrite and all that. So while that is happening, probably some brokers feel comfortable showing it to some of their clients. And all these four properties had we not buy these four properties, they would have hit the market with the same listing agent.
James: I think even for brokers is much easier for them to find a buyer and just close it off-market. Otherwise, they have to do [32:59unintelligible] they have to do your best and final. There are so many processes, there’s that’s property management stuff, getting visits and all that. So much pressure, right? So you’d rather do it the off-market, but I think they want to find the right buyers and the right buyer needs to move very quickly in the off-market situation if the numbers work out.
Venkat: And I think the seller psychology from what I have seen in the transactions. Our transactions and the other transactions, what I saw James, is there are two types of sellers, right? Hey, I got in at 40 a door. As long as I get 75 a door, I’m more than happy, right? I’m way past my projections. My investors are happy. I’m happy, I want to get it done quick because now time’s money, right? Because I’m planning what to do with this money. The interest rate might go up, then maybe I will not get 75. The smart sellers, sometimes what they do is they work pretty quick, right? They are very agile so they work with one broker. Sometimes you won’t believe, you get the same single deal from half a dozen, it happened to me. Over the period of two to three days, six different big brokerages call me with an off-market property and this seller didn’t know what he was doing. He just blasted it out to all the brokers and that’s how not to do it, right?
But all these properties that we bought are something like, you know what? They understood that a lot can change between now and four months, which it takes to actually market the property and sell it that way. So if somebody wants to move quickly and if they have a number in mind, as long as somebody is gonna pay that number, they’ll transact off-market so that hasn’t been the case. The other kind is, hey, I’m not in any hurry. I don’t care what I bought at that. I want to see every last dollar, maybe 75 is not going to, maybe somebody will pay 78 a door, let’s see what happens; a little bit more adventurous kind of people. And especially if people do that if they have nothing to worry about, right? I mean, they don’t have a big prepayment penalty and interest rates are pretty stable or whatever the case, they will go that route. So we try to work with our brokers so once in a while, they get to transact with this type of seller, which we just talked about in the first case. Whereas, as long as you pay them this price, they’re happy, right? So that is the kind of properties that we want, those are the true off-market properties if you ask me.
James: So Dallas is a super hot market, right? What are the things that you guys are doing differently in the contract terms to get these deals?
Venkat: Ramana, you want to hit it?
Ramana: You mean to say PSA?
James: Yeah, what are the tips? Like day one, had money, feasibility period, the water. What are the things that you guys think is essential to win a deal there?
Ramana: So we are being [35:53unintelligible] there, we want to work with sellers and brokers in order to make everything smooth for them. The market is like, I think 30 plus 30 or 30 plus 45, but based on our experience, we can close even much shorter time period. But just to keep or build some wiggle room, we are doing 21 days DD and got 39 days for closing. Usually, we have a question for a couple of extensions with additional hard money. I’ve seen some cases like a couple of 30 days extension. [36:36unintelligible] everybody’s case is different, but it’s working that way as well. We are doing, before getting into any property, making sure that this is the property that we want to buy so we are comfortable giving the day one hard money. Not a whole lot like on 1% on every deal but what is reasonable for the deal, we are just coming up with the hard money, day one.
Venkat: And James to add to that. So our comps are not vastly different but here’s the differentiator on us, right? We work really hard to close the property ASAP. And the worst case scenario, one day before the 60-day mark, right? Just like Ramana said, obviously, we’re not trying to be a cowboy here. We have signed a 60-day contract with couple more 15-day extension. So technically we have 90 days to close but we won’t use it. We work as if we only have 55 days to close. We do it for a couple of reasons. When we close this property well before the 60-day mark, it really makes the broker look like a hero in front of the seller. The seller will be like ecstatic, oh my God, I mean you got me the best buyer, right?
So we work towards making our brokers look like superstars, that’s the mindset that we have. Like, suppose we purchased a 400 unit property and we went into contract on a Friday; Monday, Tuesday, Wednesday, all the duties are done. We do ask for 21 days due diligence, but Monday, Tuesday, Wednesday, all the duties are done; on a 430 2-unit property, with two different lenders, walking all the units, checking everything which needs to be checked. And the reports will be spit out by, by Friday, the following Friday, right? So it’s just that we work so fast, so agile if you will, and in a very organized way with a lot of communication, a broker doesn’t call me.
Right now, we are under contract to buy this property 330 2-unit property in Fort Worth. It’s been a while since I spoke to the broker ever since we went into contract about two weeks back. That broker doesn’t even call us because he knows that things get done. So that is the reputation that we carry forward, every deal, we close it that way. And even in this case, we have a 5/27, on May 27 to close the property; right now, we brought it forward by 5 days so we working to close by 5 days before. And we are even working harder to see if we can even close on May 15th. The idea is to treat your seller as your customer, right? And treat your broker as your customer and give them the best possible experience. Smoked, right? I’m not saying that you agree to everything that seller says or the broker says, that’s not what I’m saying at all. If the the more you prepare, the more organized you are, the smoother the transaction would be. I don’t wait until a lender asks me. Ramana and I, keep everything ready, anticipating that broker will ask that, a seller will ask that, a title company will ask that. So just run a tight ship and more importantly, equity. Equity is nine out of 10 times that is the one that gets delayed. So as soon as the LOI is signed, we start working on a flyer, we send a flyer out in the same email, we schedule the webinar. And then we do the webinar asap so that we can quickly get the money in the bank to do the transaction.
James: Yeah. Yeah. Brokers love buyers who are very, very organized and get them to look like a rockstar. Ramana, you were saying something.
Ramana: Yeah. So just to add one more thing on the PSA. Like you know, nowadays with the day one hard money, also in the agreement, get enough time to check on few high-cost items would be a good idea. Some sellers would allow and some do not. But you have to make sure you have like an applied GC who can do an inspection if they can come up with some numbers, some check-boxes that would help buyers as well.
James: Got It. Got It. Got It. Yeah. The smoother we make our broker’s life, which is what a buyer’s responsibility should be. I mean, you have to be really, really prepared in terms of aligning every equity, lining up your debt, lining up your insurance guy, you know, so that the broker doesn’t feel the pain and that’s where they’re going to get more deals coming to you. Because for them it’s like, oh, this is so easy to make money with these guys. I mean, I have to convince the seller to a certain price. Now I have the right buyer, let’s do more deals. I mean, ultimately everybody wants to close deals and get their commissions. So that’s important.
Venkat: So just to add to that; in a market like Dallas or Phoenix, the hot markets. A seller might ask, why should I hire a broker when I’m getting unsolicited offers, people with good resumes and all that? So why should I need a broker? So the brokers kind have to justify, and it’s just not meeting expectations, but they have to exceed the expectation if they want to be the top player in the market. Because 20%, in our case, I think maybe 10% of the brokers in the Dallas market does 90% of the deals. If a broker wants to be in the top 10%, they have to consistently exceed the sellers’ expectations so they’re already working under a lot of pressure. So if you can make their job easier, their life easier, oh, they’ll love you for that
Ramana: Oh, absolutely. Yeah. It’s not one-time business. It’s for your life. That’s repeat business that comes in the picture.
James: Absolutely. Absolutely. So let’s go into a little more detail into the value add stuff. So you guys do a lot of value add. I mean, how deep of a value add do you guys do? I mean right now on the recent few deals that you guys have been doing,
Ramana: So last October, it appeared that interest rates are going to take off, they’re not gonna come back. What? We hit 325, I think, on the 10-year treasury and people started doing loans at 5.4% 5.2%. I mean it was crazy. So then we had a big mind shift, right? So if you want to go buy something with a bridge loan and try to settle it into a permanent loan, God knows. I mean, it seems bad once it starts raising traditionally until they go all the way to there. We kind of started take and also we are so late in the cycle, right? I mean usually, a cycle between recession is about nine to 10 years and it’s been nine years. The last time the recession ended was back in 2009 and we are in 2019. So we are actually at the end of one of the greatest periods of economic expansion in this country. So right now, we are off taking some different sub posture. What that means is again, we don’t want to do a straight yield place. Yield is good because you go there [44:01unintelligible] 10%. If they don’t have the value add, next year, maybe your expenses will grow faster, you earn your income and maybe that’ll become 8% and then 6% and then 5%. So we definitely are not looking for very deep value add distressed assets, nothing like that. But as long as if there is at least a 30 to 50% left meat on the bone, then we are going into these deals with an expectation that we are going to do that value add and it’s a good yield place. The good yield place usually gives you a good leverage. On our latest deal, we got what, 83% LTV, 70 in FIO and 154 spread. So right now, we just locked the rate a few days back and our locked interest rate is 4.19%. So good cash-flowing deals, make sure that you get a good deal on the debt side as well. Then there’s some value add left.
So that is the portion that we are taking. We have to see how this 29 goes because we’re keeping our ears close to the ground. The reason is if there is anything coming our way, but we don’t want to be caught in a very deep distressed asset doing the major value add where interest rates take off on us. Or even worse if that decision was to come here. So that is our current state. But even when we are most aggressive, we always go for 90% occupied property; we don’t believe in buying 40 50% properties.
Again, the kind of equity that we are using right now, we don’t want to assume that kind of risk. Obviously, it’s a high-risk value-add game, but we are accepting equity from individual investors. Most of these people are not super rich or anything like that. Most of our investors are wealthy but they’re not like super rich or anything like that. They really need their money back, what they gave and the profit that we projected. So we are only buying 90% occupied properties with a verifiable value add. When I say verifiable, either the seller prove it to us or within the same property, he has to prove it to us or we have to be able to verify with the— it should be 46:08 of debt. You shouldn’t have to dig deeper to see the value add. If we have to dig deeper, that means more often than not…
James: There’s no real value-add.
Ramana: That’s only a good value for the next buyer.
James: So in your experience doing all this value add, light value add, I know slightly heavier value add, what is the most valuable value add that you guys think makes the most bang for the buck?
Venkat: I would say floors, definitely– before we go into the floors and all that. Right? This is what, when we start the business, we couldn’t care less about how the exterior look. We were always about interior. Our thought process was, hey, where does the tenant wants to 99% of the time when he’s on the property, where does he live, inside the property, not staring at the buildings, right? It makes perfect sense to spend, let’s say if you only have $1100 only spend it on the interior and make it look nice and that gives you a bump. Well, we kind of dial back from that kind of mindset. Right now exterior is more important to us as we saw a lot of deals being done, even up from our deals and all that. What we realized is first you should be able to attract a quality tenant, right?
A quality tenant has several options, you know, because we are a capitalistic society, there’s a lot of competition in every single thing and apartments are not different. So everybody has some kind of upgrade or some kind of special, hey, my property has a water view or whatever. So constantly they are competing for our tenants here. So in order to first attract a tenant, as soon as a good tenant sees your property, that person has to take a U-turn and come see us, right? In order to make that happen, obviously, your exterior should look good. Otherwise, if it looks like crap and they’re not going to stop.
James: They are just going to pass right by.
Venkat: They’re not going to come at all. So that I would say, I mean, let’s say if you have a very limited budget, you can just do the exterior. Obviously, what that includes is the paint and what I would tell people is, again, just change your mindset on how you see a value add at a C class property. I mean, 10 years back, Dallas is a second tier, it’s still a second-tier city, but nothing to speak of, right? But a lot has changed in Dallas in the last 10 years or several Metros like San Antonio, Houston, a lot has changed. So treat these C class properties with some respect. And what I meant by that is higher a designer. Please don’t pick your own colors. Hire a designer, see some renderings and make sure that you incorporate the elements. They’re not really expensive, right? Corrugated metal, horizontal cedar planks, things like that, right? Throw some design elements into it and basically, the whole idea is this; there’s only so much you can do to a 1960 property to make it look modern but a little bit of design with almost the same money. You don’t have to spend a vast amount of money.
We spend about five to $10,000 in design and it’s really well worth it because we get renderings, very good recommendations and all that and make the property really pop. So that would be my first step value add. And then we dial into these things. Like if you go into the interior side, obviously, your floor, number one, then appliances. Number two is appliances. And we love appliances. Let me tell you about appliances. The beauty of appliances is as soon as you go into the property, if you see new appliances because everybody’s directly going to the kitchen, everybody’s curious to see how the kitchen looks like, right? They would forgive you everything else except for appliances because that’s something that they use almost everyday. The touch, the feel, even if they host somebody they don’t want to cook on bad appliances and all that. The beauty of appliances is it does not cost you a single dollar in labor. You call somebody, they drop it off on the day when people move in; zero labor and you can mostly sometimes you can buy gently used appliances. You don’t even have to shell out 1500 2000 anymore for a BNC class finish out. And you can sometimes see 50, $75 in [50:30unintelligible] so appliances in my mind is number one for me, but we kind of put it in the number two because the floor is obviously important because you cannot miss it. If it looks bad, you gotta deal with it. So those are my top two.
James: Ramana, you agree with that?
Ramana: Absolutely. So we’ve been doing the same thing in pretty much all the 2000 units. Right? And to that, definitely, the cabinets and the backsplash has to pop up in the kitchen so that, you know, they’ll spend that extra time while you’re cooking or whatnot. So all that is good is like electric and the plumbing fixtures, accent wall. Every little thing adds up. On the exterior side, to attract the right tenant like Venkat said, you have to make sure it’d be [51:24unintelligible] Landscaping is good enough, you have to focus on that. The signage. Signage has to be good. [51:35unintelligible] with bad landscaping and not good signage.[51:44unintelligible] you have to make sure it presents to the current market standard. So if you do that, you can attract the right tenant. A quality tenant is crucial in this business. The guy has to come in and he has to like the property and he has to pay the rent on time. If you don’t find the right tenant, then the entire business plan falls off.
James: Correct. Absolutely. Absolutely. So, let’s go to asset management. I mean, what are the tools that you guys use to asset manage your property? Because I know you guys don’t have your own property management company, you guys are using third-party property management, right? But what are the tools that you guys use to do asset management?
Venkat: I mean there’s not a lot of tools. We definitely have processes and procedures, obviously. We have our weekly meetings with them, but myself and Ramana, we run the meetings. We don’t let our property management run the meetings because here’s the thing. Usually more often than not a regional [52:53unintelligible] on the other side. And we have a deal with our management company where they allow the manager to be on the call as well because who’s on the property five days a week? The manager; not the regional, not the owner, not the asset manager, not nobody else. The manager. Now oftentimes than not, most property management companies, they don’t put the managers on the call for whatever reason that is. So a regional is responsible for so many other properties. So we kind of take any [53:21unintelligible] on them, Ramana and myself and we come prepared to the meeting. Obviously, the regional will bring the numbers and few updates, but then we have different sections, right? So obviously we go through the collections, vacancies, evictions and we will bring up discussion points. Every call is not just simply giving updates, our calls run as a brainstorm sessions. Obviously, there is nothing concerning. Obviously, we skip, skip, skip, as soon as we hit a point which is concerning, we brainstorm. And we treat our property management as experts and we constantly tell them, please don’t look at us owners, just forget that we are owners. We’re not here to make decisions. You make the decision, you are the experts. Our job is to just bring things up for discussion so that we have a good brainstorming session and just like how we do it in IT.
I mean, we could not use the policies and procedures that we used in IT. So we bring that here and also it gives a very good feeling for a manager because nobody’s telling them what to do. Rather, people are respecting their views. One other thing is like you give responsibilities to some people and expect results. Hey, this is your responsibility, you got to do that. But then again, you have to give some power as well. Again, that’s what I was exposed to in when I was IT. When my manager was managing me, they definitely have expectations for me, they said Venkat, this is all your call, not going to tell you how to do it, but this is the end result that we are looking for. So we try to give the same to our property management as well.
James: Okay. Okay. Awesome. All right, you guys, so we’re at the end of the podcast. Why not you guys tell the audience how to reach you guys? What’s the best way to get hold of both of you?
Venkat: You can reach me at my phone number is (281) 727-9238 or email me at firstname.lastname@example.org Raven as the bird, multifamily, all one word.com.
Ramana: Yep. My phone number is (214) 799-9127 and email is email@example.com.
James: Awesome. Thanks for joining us today. And I think that’s it. For the audience, join us on our Facebook group, Multifamily Investors Group, where we are having a serious discussion about multifamily. So thank you, guys.
Ramana: James, one last thing. You bring lots of value to your investors and multifamily, a whole multifamily group. Thank you so much. I mean, it’s really educational and you provide a lot of insight to what you do.
Venkat: I’m in so many groups, but I never feel like asking things and bringing things for discussions and all that, but I feel very comfortable doing that in your group. I don’t know why, it’s just the way I feel. It’s really a great group that you have created on Facebook.
James: Awesome. Awesome. All right guys. Thank you for the comments and nice chatting with you.
Ramana: Thank you.