Today, I sat down with Michael Becker of SPI Advisory who owns 6,000 Units totaling $750 MM of multifamily assets in Texas.
Michael graciously shared his vast experience in this 1 hour interview. Some highlights.
Michael Becker is a Principal at SPI Advisory LLC and heads SPI’s Dallas, Texas office where he oversees 6,000 units totaling $750 MM of assets in Texas. Michael worked in Commercial Real Estate Banking for 15 years and has originated and managed numerous portfolios of permanent and bridge loans in all major asset classes.Michael is a lifelong resident of North Texas. He is married and has two young children.
To get in touch with Michael, please visit the Old Capital Podcast or www.spiadvisory.com
To get in touch with Ryan, please visit www.lifechangingcapital.com
Welcome to multi family rock stars. If you are new to apartment investing or already experienced, you will enjoy this show. You will hear from the leading experts on multi family real estate so that you can be a better owner operator at investing Really people, real stories, life change and now your host. Ryan Christopher News. Welcome to today's show. Today we have Michael Becker. Michael is a principle of SP I advisory and heads SP IES Dallas, Texas, office where he oversees 6000 units. $750 million of assets, all in Texas. Michael work in commercial real estate banking for 15 years and has originated and managed numerous portfolios, permanent and bridge loans and all major asset classes. Michael is a lifelong resident of North Texas. He is married and has two young Children. Michael. Welcome to the show.
Thanks for having me. I appreciate it
also. Well, let's jump right in. So Michael walked the listeners through your background.
Yeah, he had you referred Teoh. My official background really was in commercial real estate lending. So the longtime banker lent on all the major income producing asset classes. So I have ah background learning on office, industrial retail, and then the last 67 years of my thinking career, all I did was a multi family living. It's gonna how we got into it was making loans, you know, many, many loans. But she kind of coming out of the going into and coming out of the last recession that we just got about 12 years ago. Um, kind of that process is realizes on the wrong side of all those deals, kind of better to be the bar or the lender. So went out there doing something about it. And she's what, 78 years ago Now get started and it out on my own. Start buying are just really died 10 years ago. Struck nearby. And like some single family homes, um, it did 16 Reynolds Reynold houses kind of one that time realized it wasn versus capable in transition to the large scale syndications about 70 years ago. And like you said, we were done about over 10,000 units. We currently on about 6000 should be close to five. But cover 19 stopped a few sales here recently, so it s all about 6000 units predominately and elsewhere. Worth and the Austin Markets
awesome on. You know, there's a lot of listeners that want to be like Mike, uh, kind of watching what you're doing in terms of how you're managing your assets and just how you're communicating to investors and the like. So just walk us through what you're doing during this cove in 19 crisis, both at your past with investors.
You know, I think first and foremost, you know, we we got a kind of focus. The first thing would usually focus on life in safety. Yet the the asset level, you know, some things we did and kind of mid March. All this was starting toe, really kind of hit was you shut down the offices, which is gonna virtual leasing, or you have at least one of my appointments. Um, having having all that many shut down, making sure we did our best to get the people you keep hearing all about on the news, I make sure we got basket gloves and things for our particular mein disguise that have to go in and do two orders of, like, just kind of first and foremost when you know how to do our best to communicate with the residents. Aziz. Well, um, on the on the ownership side, you know, cut out late march. We video distribution, some fictive Must. We had already kind of scheduled firebox distributions, right? As all this was kind of going down. So we paid on march where we notified everyone, starting in April. Forward. We're gonna spend all distributions, you know, really won't. And make sure that we preserve our asset. Observed the future ability to maintain the assets. So keeping as much liquidity and your energy was was critical is we focus on, you know, cash. Good. Um, we also stopped any sort of voluntary upgrades and capital projects. I want you kind of have supported a return. So any units that were in progress, we kind of finish off the upgrades, but stopped all new new victims. See? So any new vacancy that wasn't upgraded would just already would just get that basic kind of make ready turnover clean the carpets, you know, pink clauses needed, but, you know, really spending money to swap out appliances and fixtures and and the like are trying to further contain costs. We had a couple of projects that were just It's about to send to go again for being so just like to sign on Just major carpentry, carpentry and exterior paint Job on two beautiful properties for a few $100,000 each. So those guys kind of put on it on the shelf as well. Um and then you kind of we went into the great abyss of we didn't know what April Collection's gonna look like 30 days ago. Eso We're just really kind of unknown. Communicated all that to the investors that asked me, got enable, you know, pretty much on a daily, if not every other day basis from starting about the tape for it. I've been Jimmy. Daily collection updates are pretty much the rightto allow investors to talk about what a schedule remnants are, what are collected. Rents are outstanding amount of the percentage. And then I've been doing that on on a regular basis. Really, The last three weeks, I feel like a news reporter. All I really feel like I'm purpose is kind of important news of everybody about our have a collecting. And here we are in the 22nd of April. Ezzard for this and I sent that the daily Mail out support Fully wife were about 3.5% delinquent. About 95% of our rents were collected. Scheduled rants event. That's great. So our portfolio wide is about 93. Occupied some assets that we kind of recently bottom middle repositions to those out a little bit lower. I keep in C and some will have more, like CF statistical higher. But you know, so all in all with about 7% physical, about 3% collection loss for someone there. Low nineties attend of the day of economic occupancy about 10% of comic they can see. If you had told me this number 30 days ago out of and I've been jumped for Joyce, this is far exceeding our expectations are were steers from everything first started hitting going forward. And may I? You know, I don't really know exactly what to expect. My my current kind of based cases. We'll have somewhere between a 50 toe hot of spent decline and collections meeting. If I finish say that, I think we finished about 3% collective, so I would expect somewhere to 4.5 or 6% delinquency, 3% delicacy and April's about 4.5 6 10 May and delinquency. And I asked me 30 days, I'll see how smart I am. So it's a guess, but it is kind of relative, relatively educated. Guess kind of seeing this from the programs. With the end of extra unemployment distinguished, Jackson's really kind of supporting. There are tenants, for the most part, to be able to pay their pit rants.
No, that's great. I'm sure people are taking notes on and then in terms of, uh, you know, what advice do you have for investors and operators during this time? People that you know, own assets or people that have been passively invested,
you know? I mean, if you're passively invested, I don't know a whole lot to do because it is Hang on. But, you know, sponsors leads of deals. Really, I think I think kind of following. I'm doing doing this for a reason. I think it's the right thing to do. But, you know, making sure you know you're communicating with all the stakeholders. Yesterday I sent everyone of my lenders a collection update as a close. It is a before so Here's our schedule wrestlers and collected rents. So each one my lenders know as of yesterday where I stood and I'm going to try to communicate to them, you know, probably twice a month. Kind of with a question updates. We'll get another update early May. When can I get final clutch numbers? So making sure they're aware of it is they're They're your largest partner in this deal that in most cases is going to your lender communicating the investors. Did you have the investors money? So when things I always like to say is when people invested here, they give you, you know, to give you the money, you have it if you don't communicate with them, they think you stole their money, right. So communicate, communicate. That kind of puts a lot of everyone's got a lot of anxiety if you've got a lot of emotions right now, so I think their costs and frequent communication that some calm and some sets of facts and an uncertain time. So whether it's good or bad, I think communicating with people you don't blindside um, those that put their head in the sand with their lender or their investors I think they're going to kind of wake up and being a war of a hurt, because one, because when the problems are going to go away, there's, you know, will be there really big problem that you're surprised your investors, your lender, the outcome Probably not gonna be Yes, as ah, good. But you can you to kill on the way. Maybe your lender has some resource for you, thinking they can offer that might be able to help you out. Um, you know, I think those are the things and then, you know, doing the right thing on the site level. Attention, staff, taking the residents. And, you know, we're doing a lot of problems are a lot of, ah, payment plans for the residents were historically in Texas. You wouldn't take partial rent payments. But now there's a vision board story, um, through the end of this month of in April, and then practically speaking with all the municipalities not to be able, get some up now for another month or two at the best case scenario. So we're working on payment plans. Where were so few would take part of payments. Now we're happy. Take you on a bus this week in full, so long, sexy or whatever. Whatever it is, I'm just kind of trying to be compassionate with everybody along the way, because these residents have no real life things they're going through. They just simply lost their job through no fault of their own. So you know the best we can work with them. We will make sure that, well, the resource is the government are throwing at it, that they're aware of it and have the, um, have the tools have nowhere to go to go, apply for unemployment or get to stimulus check and things along those lines.
And that's great. Appreciate that. And so how does this change your outlook for multi family?
I mean, I think I think you got near term, medium term, long term, you know, near term. You know, obviously we're all of one's come in in a fossil right now, hunkered down, trying to figure all this out. I just think, really everyone's kind of hit the pause button on everything has a kind of mentioned in the intro we had. We had the 22 deals fall apart. Really. Three deals fall apart. We had two deals that were in escrow. Ah, that that one was two days away from closing, and the buyers lender froze up and they couldn't get their financing. The deal you blew up. So I suppose the 19th of March 17 and Passions David Lender froze up. So that was a bad thing. Patrick's day. Um and so that was That was a challenge. We had another do. We just got in escrow. That was smaller. Do we own around? That one fell out was like a week or two with NASCAR together. Ask early March and we had a deal on the market that was going really well on interest on tours. And all of a sudden you just like Dr Apart. We got us a couple offers and that were well below the prior expected range. And since we're not in any sort of distress, we don't have a low maturity will pretty well capitalize. You know, the deal was the 95% occupied, so we were not in any reason to go sell the deal. And that's when I kind of think most people are going to now see your other people talk that think a little bit less informed, saying Now's the best time to buy will now. Probably no kid. Two pots combat to buy, but one There's no deals are gonna get done because anyone that's not in distress would want to sell in a farm like this to the people that are under stress. They can't careful closed on for a long period of time. So we're gonna not. Yeah, Linda can't go sell the deal. They got a kind of heaven stand. So it's gonna really at minimum, probably the start of the third quarter before he's to the first dealer to kind of come out of this and it's gonna be a real small number. And I think maybe the Floats court ever see a little bit more. And then probably in 2021 1st half whom I start seeing some more of these kind of time for deals just takes a while to kind of work through this system, you know? Ah, and then, obviously I think multi family is gonna be much better positioned along with Industrial, whether this relative, obviously hospitality is complete. But bloodbath going from united, Sinak conceded, like two or 3% occupancy on retails kind of behind that. So, you know, obviously more opportunity. Those asked classes a little less and a multi family And I dont Do you think you know there will be some some opportunity? I really think you know the media. It's a long term intermediate to long term. I don't think it's gonna be terrible and we'll keep in with space. I think where there will be stressed. I kind of think of it like I've ever used. Or Bill analogy. Yeah, kind of. Both ends of it got the very top of It's a brand new deal. Just delivered 10 2030% occupying kind of middle initial lease up. That deal is gonna have a really hard time getting demand in the front door, going really slow. They're gonna be in a bridge loan with their left with their construction loan, with their shorter maturity, generally speaking, so they're gonna have some stress. There's, I think they're probably be some opportunity that segment. But on the opposite, then know what the glass deep properties that we've all been calling classy for a while, but they're really always been glass t that are in a high crime area that you know, have less experience sponsor on, um that may be what a high leverage bridge loan on it that maybe was on middle of a reposition where they were in the 80% occupancy range or something like that have been tryingto running. The units push France. They keep the bunch of people out. So now you're 80% and the new collections go No, I'm at 96 plus percent and then the work for 1000 years is lower than that. If you're in a high crime area, seem a lower, so fueling collecting 80% of 80% rent roll, then you start having debt service issue especially higher leverage. I think those areas will have some issues on the brand. The market will have some issues but the middle of the middle swath. If you don't have a high lovers alone and you're well capitalized, you have to give me an answer in place. That's got all the basics that I've been talking about for metaphors five years on our podcast that if you live in one of those things, I think generally speaking, most people survive this, okay, And it was amount of money, everyone sprinting the long term Because I think if you survive the first year of this, you know, through March of next year, you'll make the next 10 years and 10 years. Now the amount of money printing I can't see anywhere. There's not massive asset price inflation, you know? So people that don't really things like apartment complexes. But even the stock market, you shot the stuff Marker star lower, and it's simply being directly correlated with money. The Federal Reserve is injecting system. They're going to create a lot of inflation. So I think you're gonna sold on gases for 10 years. You're gonna be fabulously wealthy, you know? But you got to survive the next 12 months to get the river, and you're
sure? Sure. So, you know, in terms of your acquisition strategy, you know, are you are you underwriting deals now are just things on hold And you know what things would you look at?
Yeah. I mean, we're trying to see whatever little inventory is on the market are being talked about. We're trying to see everything. You know, We're trying to stay in motion, you know? But I fooled you don't expect anything to actually transact in our in our world. Really? The best case scenario. Third quarter, there's there's just nothing that's gonna turns Act in the second The capital markets are frozen Almost the limiters on a wait and see stance No one that one of the small deal that we were in escrow for about a week for grew up that that lady buyer started a alone that you were on a bridge loan. So unknown every course on was that little deal just be on 100% of its where we're taking over there. Freddie Mac loan refinancing. Get a minutes only. Only way that were ableto get the deal done. Um, So where are you going to do it? But they're gonna put 12 months of P i t. I principal interest taxes, insurance s curves. So it's really gonna take a lot of money out of pocket. So if you're trying to do a new deal, have really tight loan standards, have all these additional escrow, we're gonna make a lot of these things look bad. And Fannie and Freddie early on liquidity in the market. The family of Freddie don't moan under stress assets. Do they wanna have stabilized values? So until the bridge lenders and local them start loan and loan out money again, it's gonna be pretty tough to do anything that requires new debt. So, um, it's gonna take a little while offered kind of work out. So I think I'm hopeful we get another deal to done in 2020. It will be at the end of 2020. Certainly won't be in the middle port. Um, you know, but we'll see where it goes. But I think if you sit on the sidelines, you've never you always waiting for the ah better time is never a perfect time. No, and revived under 2020 were sent in the rescue of the possibility of something only lower. Um, then what? It wa So we're just gonna try to make the registers at the time and see if it makes some economic stance because I'm squarely in the camp that in 10 years now, as their values gonna be appreciably higher to three times higher and if you could buy something with you know, 30% down you your your multiple in the Asheville Equity invested should be through the roof if you're buying the right right locations and the right types of deals and, uh, just were, you know, kind of. I think the migration that's been happening of economic leverage has been happening for the better part of two decades. Two decades where people are leaving California in the Northeast and businesses air coming to more friendly waters like Arizona, Florida, Texas gonna jump out the page. I think that this is gonna further accelerate the pace of that migration, especially if we have to start on boring, ensuring jobs that were in fashion, jobs in China and other places. Cause, you know, we've had a really efficient supply chain for the last year. 2030 years just were funny. Got today. It's not very resilient, right? So, like these things that we actually need, we can't get because they're manufacturing China, we can get them over here. So as we start on war on showing jobs, a job, certainly we're gonna go to New York State or California with all these crazy regulations are gonna go that places that have a more business friendly environment and people follow jobs and that will continue the support the housing in places like Texas Water in Arizona. So I think long term, everything is good and I'm bullish Long term, you know, we'll see how smart we are on how smart we borrowed When we settle these deals up over the past 56 years and we'll see if we can weather this economic shock, I I thought if we could weather the wall from 10 12 years ago, we were in pretty good shape. This one's gonna be worse, especially. And whether this I think, where I think we're gonna you know, I think we're gonna be proven that our business model was was pretty sound a few years ago.
That's great. And yet you had alluded to your podcast. For those listeners out there, definitely check out the old capital podcast, particularly the Ask Mike Mondays. It's just a fantastic I listen to it every time I'm driving up the Dallas. So you know, you had talked a little bit about your acquisition strategy. You know, get schematically through your podcast, but maybe walk the listeners through. You know how you think about the deals that you acquire and how that's evolved over time from when you started buying assets. A multifamily
we first started by. And you know what? Let tone was a banker for sideline was a lot of work for 1000. So, uh, you know, 2012 2013 by you know that they captured environment in Dallas, which, where we most grasses where I live was, um you know, 88 or so years ago, you could buy a brand new class A deal in Dallas for about a five gap. A B deal was about 66. Quarter 6.5 cap on the CDO is like 1/2 kabam best forward toe, you know, too much does like her beginning of this year. The calf race, where for a branded class I do was probably like, you know, 4.5. Uh, media be deal was probably, you know, for 75 5 in the sea deal was maybe five and 1/4 5.5. And if he feels had a big value at component, always look for value. Add even lower the cap raise further. So, you know, basically what used to be a 3.5% spread from the top of the market model market. Everything got they see compress upon itself where they're branded class Ada work 4000 Classy deal was basically saying Cooperator within, ah, 1% or 100 basis points of each other. So as we started out, we bought a lot of, well, first housing that we went from C's to B's and from bees Gandhi minus in Simaeys because it didn't make sense to me for the last 345 years. Like why especially to two years in particular. I had a same or similar Capri for something built in 1974 that I can build something built in 2000 for 2014. It just didn't make any sense to me. So we took the opportunity sold. Take that money, trade up by by something a little bit viewers. That's kind of what we've been doing. And then the debt terms got better and better and better as we as we bought new or nice stir better stuff as well. Um, and so that's kind of what we own. And if you look at our current collections for the last 30 days, that was a really wise move because the delinquency and what little will 4000 we have left is is materially higher. And that's kind of the highest delinquencies in the one CDO a couple vehicles have s Where's the link wind and our class A and B minus stuff. Is this collected really well, So going forward, I think we probably got to go back in time. To be honest with you, I'm probably gonna start looking back at the bottom into the range of the very top of the range. So I think the barbells really wonder where this explosive case is gonna be so helpful. We could buy some brand new stuff from a developer that couldn't lease all the way up in two years, as bank is banging on him when you buy something from from that guy. Or we might go buy some some over workforce housing stuff when cap rates, you know, expand because the marketplace finally prices and the risk that's always been there just hasn't been priced in show the last several years. A lot of the unfortunately, a lot of the newer syndicators is my kid, you know, a little bit more of it dislodged, especially that of Rick Sloan on it um, you know, the one of things I got kind of been saying here lately to is, you know, a lot of these people been doing some pretty tough deals to I don't think we'll go. Expectation. He knows really high crime stuff that I've been preaching about for years
to dump on. People
don't buy the hood,
hadn't mattered. It's time matter for last 45 years. Everything went up and they were just buy it. It's years later and double their equity equity in the deal. And they do that over and over again. Now that's gonna matter, you know. So I think there's been a lot of, unfortunately, newer people that got really tough areas that, you know, when things I've been saying is You can't You know, you can't be successful doing a hard shell soft people. So if you don't have experience, you don't kind of have that that tough mentality. You haven't been through the war and you're buying a deal really high crime area. And you've been doing this for six months and you have a bridge loan. I mean, I just don't think in the story is going to be very well here pretty soon. So I fear for a lot of those people that are in those deals, you know?
And then what about, Ah, you know, Section eight in terms of mitigating some of that risk, if people did buy in the hood, but they have a large portion that section it Does that change your opinion, or is it still? I
mean, I would think that would certainly help, Uh, your collections, if you have some. Section eight. There's a lot of stuff that goes along with in we never really have I got into that space is also like that deals well, income tax, housing credits you can get, which are generally newer, nicer stuff that just in a tougher lower system economic area that have, you know, tax abatements and things like that would just be tired. Probably kept up income restricted. That's kind of a different subset that we definitely played in. And you think what they income restricted space for that was the market rate. But that might help a little bit. But then the day when he's deal start trading again. You know, um, you're gonna buy the first deals. They're gonna trade. If everything's just counted, I'd rather buying a nice, good area. There's deals, have a lot of the court of each. And then once it was, deals get bought and you go down to the secondary types locations and third and fourth deals. In the last 23 years, I traded for big numbers of really high crime areas where people just kind of loosening the meeting has certain returned requirements on their projections. So what they've been given on his location and called body of the deal and those last couple, you know, trades and that section, I think, where the most pain is gonna be. Unfortunately,
you know, that's Ah, that's insightful andare There's certain things that you look for when you're buying an asset. I mean, what are the things that you get excited about? You know, whether asset specific things, whether, you know, um, location of it, our proximity to other things. We just walk us through the things that excite you and the things that are kind of deal killers for you.
Yeah, You know what? Really, Uh, don't be a nice well located deals, you know, low crime areas, which it was suburban multi family guys, so, you know, and the better the better suburban markets at better school districts. You know, near employment near retail near a major thoroughfare is kind of the one, Owen, every will say we've always thinking pretty seriously about it. Um, you know, And then we were always, you know, looking for deals that credible value. But I find doing some renovations are made below market rents weaken through our efforts, increase evaluation. You know, uh, but if into the day, really what? I was what I was looking forward, something that's a relative value to today's more kids because there's always a deal right? Whether whether it's two months ago or whether it's, you know, four months now, there's gonna be a deal relative to the rest of the marketplace is something that we think is a relative value. So what other things are trading at around us? So, you know, we bought a brand new 2017 minutes, steel wrapped construction. We sold a deal 10. 31 about a brandy 2017 minutes. Deal. We paid 100 60,000 units at the end of in 2019 and the deal right behind it was on the market was about herself, 215,000. And we saw that that disparity in price and he thought that was a relative value. Now that one of the nicer video. But and all things were just kind of look for someone who is a relative value to current market. And then we put, you know, really good debt. And so we get anyone, crew, put a long term fixed rate debt. All of this stuff. The last seven years, we've been doing a lot of adjustable rate mortgages, So we have a lot of pretty low spreads on some 38 live or adjustable rate mortgages and now are gonna be pay rates on the twos, you know, interest only. And I think, honestly, we'll probably see some of these pay rates with one starting on it. So if I could pay 2% less or an interest on io basis, I mean, I'm not saying we can't get hurt. This environment is gonna be Those deals will be a lot more resilience to something. Unfortunately, that I maybe have a 4.9% fixed rate. The standardizing on a loner put on four years ago. I still own that. I said that I still have a little bit more stress or something that has, you know, maybe 1/3 the death service up for loan dollar. So those Ah, that, you know, we kind of learned that lesson real good. And hopefully we have that applied. And now, to buy interest rate caps so cheap today is basically free. Essentially, get interest rate kept African hedge. A lot of rest is what it appears of. Market police were in a low interest rate environment for the foreseeable future.
And then how has your financing strategy changed? You know, from over, as you've acquired assets.
Yeah. Like I said, I think the biggest thing is going from fixed to floating way. We've done a lot less of the years. A lot more floating rate mortgages, which is which is paying off. And that is current environment, you know, not only with lower interest expense, but we got a few deals that we have to suck up some pretty large prepayment penalties through the humaneness of the seasons. I only ultimately sold him or buyer assumed the workers. We got a little purchase price due to that that. So that was a lesson way. Love are pretty, pretty good trying to make sure we have some flexibility in our exit. Um, there's something we're gonna try to take forward. And we've we have that you've been lowered, the forgetting the cycle for us. We have 80% mortgages, pretty much across the board. And then, as we've been going, we've been dropping our leverage. Part of that selectors requiring you to own a part of That's just way. We, fortunately have been attempted and never been off on the poisonous apple. That is the high leverage, um, bridge to Bridge Step fund program. That a lot of my understand. So we didn't deal that we could have got 82 83% leverage on, and we did, along with a regional bank of 63% leverage. So we put down quite a bit more more money. Seems suicidal to go take that kind of leverage on guy was a year ago. So I think I feel helpful in that air today. Have 20% less leverage. Um, that was easy for me to say, because a year ago, right, that transaction was to prop people full of race 25 million inequity. So we kind of built a track record up to be able to raise more equities. When you're starting out, you know these choices of little tougher because you guys, you guys do get deal down. But I think the lesson is is, um, you know, they just trying to be a little bit more conservative, raise a little bit more money this next go around the lenders will, we'll force you here, starting in a few months to deals trade. You won't have a choice because the debt is gonna has resets. And then when it comes back on, terms will not be a favorable. Out of the phones are basically all of them are out of work in place, So they're just going. So, you know, people are gonna have to expect more money down. That's facts of life. Sure, until and then, no, slowly kind of loosen up and we'll have similar time debt products. 567 years down the road.
Sure, sure, but you stayed away from bridge loans and you said just a leverage component. You know, if you're able to raise the equity, then you know, you kind of stay away from
the hard way Did take a handful of bridge loans, but they were always at lower leverage. Um, and they were always with a regional bank versus easy. These kind of debt funds have been to go sell it securitized. Like CMBs tactical. Unsure that. Tend to be a little bit like predatory type lenders. So, I mean, if I had my mind, if we were gonna take some maturity arrests, refinance rest for sales arrest. I wanted to have a lower loan, the loan to value of the cost if we wanted a little bit higher leverage. Do you want to contend your term that you one of those to leverage you? Should he supposed? If you want to amp up with leverage, maybe stand out your maturity. You wanna have a little shorter maturity? He would help. A little bit flexible, pre pay. Maybe they're loaded your levers. That was kind of the, um as I was doing in my head, Last year's
okay. And then, you know, in terms of is there a quick way that you screen deals that kind of put them in one pile of, you know, this is done. We're not gonna spend time on it. Or Hey, let's spend more time on this opportunity. Yeah, you know,
we would We would go through, have come back of the envelope. Uh, analysis really kind of deal. Comes in a lot of home. Just are simply killed just because of location Shanor size or something. You know, this I can can physically change about itself is on the wrong side, attracts I'm just not going to go there. So gorgeous. Terminate the deals that eliminate a lot of the next would be kind of OK, well, you know, what price are you asking? And look at that relative, you know, kind of our history of the market. Now, that's to be a little tougher toe kind of navigate for a little while as we kind of reset the marketplace before last couple years. Just trying to see everything trade and kind of have a little mental World X plus, We've got a pretty good notes trying to track everything. And if it's, you know, the marketplaces know, historically trading solar type deal for 100,000 they're asking honor. And that is a very attractive. They're asking 90 year 95. Okay, that makes him a better sense. So we spend times on things that kind of makes sense on that kind of kept check level. And then from there, we typically do like a back of the envelope. 15 minute analysis kind of scene with the market rental race, our first in place and kind of what our Deb assumptions are kind of what would, uh, a basic return look like without some reasonable range? That's when we probably could tour. The deal's been with more time on it. Um, you do full underwriting and tasteful five hours. It's really kind of gets deeper into it. Um, And then from there, you know, we that still makes sense. Like tour us When you gonna start making offers, make sure you're there, get some debt quotes. So there's kind of exteriors of, like checkpoints along the way where you know it's the biggest found. The biggest expense in my life is the biggest cost of every opportunity costs. I spent a lot of time on one thing that expresses something else. It doesn't feel like that right now, because I haven't done anything for six weeks. But it just kind of report the news. But at some point we started doing deals again. That that's really yet. So I think that would kind of separates arm or, uh, prolific and successful people is, you know, they have ways to say no quickly and that quickly to get to know is a quickly and get yes with something actually, my family. So just tryingto make sure we're judicious. And, you know, this deal is never gonna work for this. One reason Don't spending more time on it, shooting ahead and move on.
And how do you work with your team to kind of siphoned through those that deal funnel? You
know, we have to offices and my companies from apartment runs are Austin office. I run a Dallas office. So awesome is really kind of analytical, transactional side of the business, debt underwriting, things like that. That's kind of really don't ost center. Dallas is more asked. The management. That's relations kind of the two main thing components that will get you out of Dallas and then acquisition's tender overlap between the two. Um, so you know, something comes into me, I kick it the ham or if he gets my partner, Sean, If he gets it, I'm, you know, deal on his own can have her own our guys with more than the other ones. They kind of underwriting make sure makes sense. And then and then you kind of move gonna move forward from there on and then we have very clear delineated roles and responsibilities. So there's some stuff we obviously all get on. Same page for what? He has his role. I have my role. There are various team members. I have their their specific roles. So, you know, we're pretty leaning, lean and efficient. We never really got floated. Saw feel fortunate that we're able to kind of stay intact throughout this process until we start getting back to doing deals. So, you know, it's just about team and leveraging. People have complementary, but different skill sets special to you. You go both have the same strengths and you're not going to be as efficient or effective. Cos if you could partner with someone with the complementary but different schools that to you,
what do you think of rent growth for this year and next
this year? Flat to negative two bonus with you. I don't think we're probably honestly should be negative. Hopefully negative. 23%. There's probably my my base case at this point. Uh, next year, flat to slightly positive. It is so much uncertainty has a certain toe how quick everything's gonna going to read the sound. And you know what? Extent I don't I don't really quite know what's gonna happen and to mix in now, alone, You know, uh, a year to do for now. But if if you know, I start real and the ship recovery's gonna be in the car, you keep hearing about the feed to you on the outside. I certainly don't think we're going to see a V so severely over you are. Now, um, you know where? See there gonna be a kill a year and then kind of start going back. Um, you know that every part of the country is gonna be just where surely affected and impacted. So I think like starting cool in Texas and Florida and Arizona and states along those lines I think that have been outpacing within my immigration will consistent. Continue to see that as we as we were in the recovery so I think we're better. Resist tendon the greater Sunbelt region versus kind of that class for the Northeast or certainly the West Coast has their own share of issues because, um, you near you're seeing headlines about, you know, governors are not governors, but Congress, congressman and women and sin people from states like New York and California, Minnesota calling for their residents to go on strike. So if I have capitalised, they don't want to put it in a place that the leaders of that area wanted to talk about. Baby rants. So, you know, I think I think that will flee from locations like that on you, even if it's a small percentage. There's so much money out there could have a pretty outsize impact evaluations in the future.
And then, uh, in terms of sub markets in DFW any that you think will underperform versus outperform. What's here? I
mean, I think you by saying the same thing I've been beaten the drum on is, you know, the high crime areas. So the house for specific South Dallas, you know, like islands Vickery Meadow is going to foot worthies Fort Worth. You know those air those tougher high crime areas. You know, I think that the some markets that are, you know, that are, well, position. Like, you know, they're calling counter somewhere. Plano. Alan McKenney. They have a little supply issue on the top of the market, but I think you know, there were 4000 B a minor settle. That will do better in those markets. I like you too. Being her shoelace. Bedford, like Carrollton are like Irving. You know, mournful worth is a favorite of mine. So I think those those locations historically have done well and they will do well will become the first recovery markets. And then, you know, then long. And the cycle will be when the higher primary as well would recover. So that that's kind of my personal crystal ball. Kind of like I wanna see this coming out in, uh, Del four.
No, that's Ah, that's helpful. And then, you know, just walked the listeners through your typical business plan for an asset. When you acquire an asset, what do you typically do day? One day, 30 day, 96 months before
you know it is so clear with us? These deals have had some level of value back to its. You cannot buy it. I always thought of these like a Nike swoosh. You gotta get her down a little bit for you. Go up like a check, Mark. You know, I'm so you buy it, You go in your force. Proper protocols, procedures. You kind of do some clean up. It's on the tenor and, uh, final. Make sure you for screening, eating the right tennis of their that actually have jobs in the criminal background. And then as you as you think You this it's kind of, uh, vacate. You go an upgrade him on the turn over to the exterior common areas and start charging the high over and over $800. Whatever the wherever the business model is in charge are run a race and over a period, usually send in my experience, this entire cycle is thinking about two summers turn around world, you know, sort of betting on when you buy it and said goodbye in July. You kind of miss that summer. So it would be about two years to be bought in January. You got Teoh the summer of the year. You bought it, plus the next summer. And then once you have done that this last cycle, you were pretty much ready to sell a refi, Did you got to get through the rent roll, you know, 1.5 to 2 times on deaf actuated, the higher rental rate. So you know, we'll see on board I'm envisioning. That's gonna be a slower, longer plug, and then we'll see kind of where you know where cap rates go is Well, I think we're deceivingly some temporary construction cap rates. I'm of the camp. In the long run, Catholics will say, you know, flat to negative just cause of low interest rates, that amount of liquidity there were injecting the system is gonna You know, I think the Federal Reserve is everyone's talking about income inequality and the 1% being affair and all that and all the Federal Reserve policies they're currently enacting or do nothing but further that inequality. So they're not there giving us the same medicine that's cause the same issue over and over again. So those that own asset assets that I love erred with, you know, Lo is a straight dad should you know to do. Okay, I think is over eight till they change the playing rules.
That's great. And then, you know, you obviously, you had a great track record of success and well known and so forth, you know? Have you considered raising a fund? And what do you think about the pros and cons of that?
No, I think we We We've talked about raising phones. We've always done, you know, deal specific equity raises. So you know, you best, um, your best underground. Thus you own, you know, x percent of this one asked out of this one location or maybe is A to property portfolios. So young x percent of these two assets, right? But it's never like a blind pool or the fund model. You know, President cons. Air is easier to attract capital when it's, ah, deal specific raise. Meaning, I can tell you, the president comes about this asset versus seven. Say the deal will look something like this on one of these markets, and but you don't know exactly what it is so that that's that's one of the pros do in jail specific raise. Obviously, they have the ability to have funds in the bank. It's a little bit easier when you have to go now, tribe ideals vs kind of doing it in reverse. The risk is a little bit less from that standpoint, but, you know, you do feel the pressure of the money sitting in checking account, like I go spend it. So maybe that might make you a little bit less disciplined on your acquisition criteria. Uh, you know, somebody at some point I think you think it's OK to, you know, another is a right and wrong with either of these. I don't think several waiting to structure I don't think is a right or wrong. You know, we've always historically done with a a pretty simple structure where an 80 20 split 22 the sponsor a T to the past is that we don't pay a preferred return. A lot of people, um pains 6% or 8% prefer turns with, like, a waterfall structure. Words like, you know, investigates 1st 8% above that 70 30 then carriageway says 60 40 to 50 50. Race on our hurdles. So you know what kind of tends we always sort of. It's like it has a potential maybe dis aligning the sponsor's interest on the past of Citrus from from the standpoint that if you want to do is doing really well, you could turn the deal quicker. You get a better IR are you get more of the split. So maybe you have to sell the do a little bit quicker because you're gonna be in your split a little bit quicker versus maybe the deal would benefit being season a little longer. But the I r without ultimately drops you have more time and or if the deal's office that, like, maybe, like a lot of these tools are best to see, hopefully are not. Mostly, I expect to see a lot of these deals that if you have a neighbor separate for a return on your deal, your sponsor, you clearly are not gonna be able to pay out 80% in 2020 is to say 2020. You pay out zero and then you go into 2021. Maybe what covers? A little bit, we don't pay out 4%. So now you know that that preference recruiting. So you have 8% and then the next year you grew 4%. You have to test within 2022. Now you have 12 plus age, 20%. You gotta deliver before you see a dollar out of it. So at some point you have sponsored digging themselves. Such a hole was approved, crafted, looking up, then I never in jobless deals make me let me just dumping fire cell exam working for free, you know? So I think it has a chance of really dis aligning a lot of using that same ones. Right or one is wrong. But you know, those are some of the things that I think about when we're doing it. What's what's always worked for us. Ryan is just kept really simple. It's always work from the beginning, so we never really I felt the need to tryto deviate too much from that. We always thought it was a fair, fair trade, and we've been able to raise capital pretty, pretty prolifically with discharge.
I appreciate that. That's really helpful on returning to asset management. Obviously, you've done a great job communicating with investors and really on top of your assets. So what? What are your thoughts on self management versus third party property?
You know, I don't think there's dislike right around. I think at the end of the day, no one cares about your money more than you do. So being if you're good at what you dio think, uh, self management's probably better in the end of the day. But with that said, I mean, it's way Third party vantage music. There are some people value residential and energy or stuff with Dallas Austin, and we're somewhere around 1/3 of their Their assets are ours were another largest clients were kind of the next best thing, and my estimation is gonna be in too big, too big for them toe ignore type of. You know, we really view it as a partnership. We're gonna buried in these deals together and was good for us. Is good for them or vice person. Um, you know, So that's kind of what we've chosen, that we have a asset manager, that professional guy, that long track records were very large companies. So he's been with us. He's been doing a really good job. So his day to day responsibilities, looking at peace of these assets on a continuous basis, talking on a continuous basis with the various team members of management company reviewing rants on twice, twice, twice a week basis. You know, kind of setting renewal strategies, things like that, you know, having a lot of oversight and kind of the date of the decisions that we have with all these assets. So I think you know, whether you have something that could do it for you, you do self that is, you know, critical. That kind of take a a good oversight onto onto the mansion company decisions as well as you know, the roles that he who serves a lot with the property tax protests, which in Texas, probably Texas, are very large. Line out. I'm so young, protester, not on the annual basis is critical as well as kind of review service contracts and insurance renewals and things like that. So you when you start out and you do this and you're kind of new in the business, you do. You do everything right. You do the $5 our task, you do the 15 another. Our test doesn't kind of do everything as you grow and scale with its massive intricacies of your ability and then afford higher talent. And you know, way. Certainly feel like we have a pretty good asset range. A lot of experience. I can hate a lot of it, not just kind of oversee. And he reports to us on on a regular basis. Really? The officers and I sort of me so pretty much daily were chatting about something for at least half an hour, not longer.
And so you mentioned property taxes and also throw insurance in there, too. What are your thoughts on where those go this year? Next year.
So we, uh we're seeing early indications on insurance. We're probably gonna be 9 10% which isn't as bad as our thoughts yet higher, which, you know, we're think can it could be. Last year was 20% this year. Indications were 20. I think we might be able to beat this down so that kind of 10% range way were new. And, uh, you know, a little less than a month from now, made 15. Some renewal dates were kind of the middle of middle of that. But, you know, we're looking at higher deductible, so remind to buy an ounce of deductibles to make the premiums go. Mobile war. So were so kind of middle of it. So unfortunately, I think we're going to see certainly double digits increase in Texas and insurance. No way. Have a lot of hail, often vortexes. And we have, ah, hurricanes on South Texas. So going a little bit of low bit of ah, double whammy in Texas taxes. So, you know, we're mostly counties should have had their tax is out. Now, most account is this You're gonna come out next week. So the end of April, basically with their with their 2020 values. And Texas is based on the value as of January 1st. So the pre cove, it, um the, uh, one after assets and awesome that you see, that seemed the values come out and we're two counties in Austin days down and three assets and they came out swinging in and they came out with some pretty big bump. So So we're like, like the many It was not that different from the last seven years. Every year said I fight, so we gotta get out swinging. We're gonna protest, likely follow lawsuit in Texas, which is part of the protest process, and and go. So I'm a little more optimistic that maybe maybe nor Texas won't be quite as aggressive as the counties in Central Texas. But I guess being a week and you know I'm not I wouldn't put a passenger to really come get us. I think National be that that the year that we get a little bit of relief because obviously, collections will be impacted, so valuations would have toe be impacted as well. But, you know, everyone's gonna sue him. So So everyone's gonna fight. It's gonna drag on, you know? But this is obviously with with people being unemployed in the counties and cities, bribing or services in this being there the primary source of income in Texas, they're gonna looks like they're gonna come, come with their hand out asking So money from all of us. From the owners.
Sure. And then on the asset management side, You know what KP eyes do you focus on? You know, you have a lot of assets and trying to like you said, spend your time on the things that you can add value on.
So, yeah, today is total rent dollars collected that that's today. Um, you know, before for this you know, And that's gonna be the next several months. I mean, there nothing else really matters. Total collections earlier that the media term, you know, whether whether I'm 85% occupied or 95% occupy this total dollars clutch right now. Generally speaking before glad it also was told to bring dollar collected. We wanted Teoh, uh, collect more this month than last month, but each asked that might be a little bit different. Worth, You know, we bought something three months ago. We're in the process of repositioning it. I know. I mean, after going to go down before I go up, right. So we would have a foursome vacancy, etcetera. So we might take a short term debt to them. Go right of it to you, Dick. Too young, then and then get higher. I ran. So we kind of look at least trade out. I'm out. So my old friend was at nine under my new prints out 1000. You know, I might have been vacant for 45 days or 60 days on unit, but now I'm higher, and I'm a kind of start that moment. Um, so we look at that quite a bit, obviously trying to make sure we do our best. It, like spent, started contain that. But this entire last cycle, really, it was about driving, you know, we strayed out increasing rental rate rental rates and collections on the No you had to do was go from, you know, they desire conceded 95. Hold that for about a month. Yet the market. Hold that for another two months and you get out and deal making fortune. That was kind of the later part of this last cycle for the last several years, and it will be quite that easy going forward for a while. But that's kind of what we will be, you know, generally generally focus on today is getting dollars in the door.
I appreciate that. And then in terms of incentive plans, you know, for on site leasing staff and maintenance staff, what what works? What doesn't work.
They're usually a lot of it, the least staff, you know, maybe stuff is really kind around book or time, Time outstanding. You know, number of workers have to go back to work for a second time, things like that to the office staff again, it's about Reynolds Reynold collections dollars. Kal ended on a good thing, but delinquency as well right now we got turned off and delinquency part of the bonuses, Obviously, where it's not their fault of these residents, Trickling claimed, you know, supported again, trying to motivate them to collect as much dollars possible. But the monetary bonuses as well as like, you know, we had a going to the last weekend of, um, any unit property at 5% or less Blink once he got Saturday off the dental austerity. So if you have more than 5% had a work on Saturday, so it was kind of a carrot for them Thio
Was that done on a monthly basis? Are
Yeah, that was due through last Friday. So, what have you got? A member data? Was I 19th or 20th?
Okay, that's a great idea.
I lose. And that was that was it? So whenever the bench book is that incentivize them to go knock on those doors and look harder trying to get try to get that extra. No extra rent check.
That's great. Yeah, Awesome. Any other tips? I mean, that was a really good
today. Um, you know. I think I think with the residents, you know, we we are payment plans up soon put in place. You know, we're trying to do something, like more community type stuff where they would have like, uh, chalk contest that even better have best structure on another front patio or whatever. You're just things like that trying to tell me we've been We don't being on the residents. Generally speaking, try to collect the rent or the staff has been has been, you know, tough, tough times. Obviously, they're carrying capacity in about people that just can't pay. And you have life interruptions. You know, we need to collect the rent to pay our They are bills in key paralysis alive. So it's been a tough environment for the residents. Ah, and and for the staff, particularly trying to find some or community outreach stains. The latter part of the money out of the grants, largely in the door. I'm trying to build a little better. I'm rappelled for the residents and staff. Kind of what we're thinking about, actually. So no, they had to be anything. But sometimes I have to have that works next month. You know, we really wanted some of things I have heard of Talk about which I sort of disagree. A lot of people in and marchers saying, Hey, if you PayPal's grants early will give, you will give you say, $75 off $100 off your reader what, 5% off whatever, whatever the number is. So what I think has happened is people that were responsible they're gonna pay you rent probably kept me up on that. And so you probably given that 5% or $50 sesh into someone that was gonna figure in anyways. And the people that were gonna be tougher to collect their room or in a position to pay you that, right? So I don't know if that is the best way of going about it. Um, you know, here, last in the last week as we started to get in the latter part of the month, you know, we we threw out the idea of maybe trying to go to some of the residents still had April Ryan outstanding and saying, Hey, if you papal ring on credit card, the processing fee that you would pay will apply as a credit to May's his rental. Now, we've got very little response to it, so I don't know how effective villas, but I didn't want to go through a bunch of a bunch of promotions of this session. It's for something that someone's gonna pay in the anyways. So we kind of just give him, like, cash. Cash is king right now. He's there, every dollar you get in. So I think just kind of trying to think through 2nd 3rd level, about some of the Yeah, sure. So I'm trying to give out your motivating people that were gonna pay you anyways, Really. Just shoot himself in the foot versus trying to be a little more strategic of a battery. So I don't think necessarily all the surface level, um, ideas. That's what these people have have thrown out there. Maybe were always the best. I guess
you had mentioned compassion early on in our conversation to tenants. You know, what else do you think has been helpful in terms of maintaining high renewal rates for your properties?
You know, I think the renewal race really or just naturally elevated right out that everyone just doesn't want to move, you know, what are leasing traffics? Probably down. I looked at this about a week at least. Traffickers down, probably somewhere around 50 50 to 60%. So the amount of truffle getting is have to r graters, but actually are actual leases only down maybe 10 or 15%. So So what I was telling me is anyone that's coming out looking for an apartment in this environment, serious. You know, there's no lookie loos anymore. So if you're coming, you coming to us, you're you're serious about the single hurting at extremely high percentages on the renewal. You know, asking a lot of people that have given notices that them for Senate of a sustained an area under, you know, because people really don't want to move right now. So you're seeing much greater renewal retentions on. We're going flat to negative, which was the animate see now some 1000 council's recommendation, which, no wonder your renewals for April May and June, kind of B flat to negative tryingto really, really push the envelope in comedy that that certainly helps with the residents. I can't pay, you know, putting payment plans. Like I said, helping them find the resource is where you know, Hey, of you, You you gotta pay for check for your tax refund. Go to this website. Put in your bank account informations to get established, Checked, you know, putting put, um, by association checking account or Hey, here's the text of more force Commission yourself off. Unemployment are here. Is this have a recent course of that resource? We're trying to give them some resource. Is that that we can, you know And the people that are that are Well, when you work with us, we want to work with them, you know? But the people that are just kind of going dark on us and and blocking the door and not communicating with us, you know, obviously we don't want to make that local news. So welcome to the first people. Big people. Once the evictions come back on, you know, we're not gonna way will be less likely to do that to somebody that had truly been impacted by this. That I have been trying to work through this versus something that's got dark just aren't gonna pay you. And it's gonna be really, really hard thinking. Everyone's motivations are a little bit right now, especially, they realize they can actually get evicted from their from their unit. You know, they might take that as they don't care about the credit. I'm still live here for three or four months, is a little, and we're trying to get me out and, you know, screw up, right?
Yeah. Yeah. I appreciate it, Michael, As we as we wrap up here, this has just been a fantastic conversation. So really appreciate your time. What advice do you have for people getting into the business? Both passes and first time syndicators?
No, May I think? I think first, it's not that different from before where you need to get a base level education. So we're saying five cast. It certainly could start, you know, So make sure you understand. Get educated. Um, you know what? That that is on the first, if you don't understand, what you're getting into is just dangerous, right? So specific knowledge produced this risk in any transaction to as you kind of coming out of it. You know, I think kind of call back to the basics of these deals, you know, better located, make sure you have a capital stack set up correctly. That won't be necessarily a problem for the next, your to your lenders will make you play fruit in debt on it. So their lenders gonna regulate a lot of love with the structure kind of coming out of this. I don't think that will be a big issue going forward. I mean, I think obviously anyone that can survive an environment like this eyes gonna come out of this, you know, generally much wiser, Um, and usually less since that people will take for a very, very long time. So, you know, I was in actually owning real estate in the last crash. I kind of bought it as we're coming as we're covering less crash, but was a banker and I was a Grim Reaper 12 years ago doing problem with the cow. So a lot of those less and really, really stuff the as as kind of my early thirties, you know, doing that now that I'm in my forties, those lessons gonna, you know, certainly for less of years, we recep this up. It's a lot of people have been in this business for the last couple of years, is not for any fault on their own, But they just weren't doing this years ago. So there's gonna be a lot of lessons learned. A lot of principles of people ignored that. Now we're gonna realize why you do it. So I think the people that survive this will be much better as better bets have been best capital with and 2021. And they were in 2019 for example. So I think you know those that make it around You probably have a bunch of good options there about people that best with that are s that were vested free, that then been lose dollar assets and in the middle of a recession. Now that would be a good target for someone potentially invest with. And then the market will make sure that these structures are set properly because the lenders are gonna let you get overleveraged. And then if you could do the basis of buying, you know, something that has, you know, some upside in it, or is a relative value toe current market that's well located and look good quality done on it. Now I think we're needing Sebacean, the 14 15 projected i R's of University in last couple of years. You know, I think we'll get back into the twenties of I ours here in the future. Which is kind of where we started. Um, you know, So I think I think all in all people will you know, uh, a year or two from now, you kind of just invest with season people that made it through it on but located deals proper leverage. You know, I still think long term, multi family is it is a great asset to to invest in. And I think we're gonna see a heck of a lot of wind in our sails. But when you wear actually starts to get all this money trickle through into the S evaluations, you know, you gotta put about 3rd 3rd down or 30% down on a $10 million deal. You but three million equity in the deal or so and then the next two years that the asset prices triple go from 10 million to 30 million. You know, that's a hell of a returned on $3 million U s. I think that it's probably something along those lines which going to see in the in the the market said that we invest in and many other similar markets toe council with Boston. So I think the future is bright. So, like a second you hang off for the next 12 months to make the next 10 years profits. You know that. That's
really that's great. Now that's awesome. So, Michael, really again appreciate your time. How can listeners get in touch with you?
Really? I think there's just two ways. So find out more information about us first. Is you mentioned Ghost, the old capital Real suggested podcast with all people. So the easiest way Simply go Teoh iTunes, stitcher or anywhere you probably you listen to me talking right now you can find the yolk Apple podcast, Best original capital. We've been doing that for five or five or better years now spending hundreds of episodes archive so you can hear me to go back in time sale. This stuff I just told you today I said it. I said, I really time a couple of years ago. So sure absolutely smart at some point A and or if you want to give more information about text investing with us whenever we ask that you start doing deals again, which is not currently but at some point, the future. Our company's FBI advisory certain strata. Www dot sp I adviser Um, there's contact us form. Fill that out. Always happy toe set off us time to give you more information about what we do.
Awesome. Well, Michael, thanks again for your time. Really appreciate it. Thank you for listening to multi family rock stars Way. Hope this episode was helpful for your personal and professional growth form or episodes. And to learn Maura about investing in multi family apartments, check out life changing capital dot com.