FCP 105: Multifamily Real Estate Investing – Lessons Learned

Jack: Hello and welcome to another episode of the “Forever Cash Life Real Estate” podcast. In this episode, I’m going to talk about lessons learned from several years off multi-family investing. All right. So, get ready. We’re going to talk about the good, the bad, and the ugly of investing in apartment complexes, how it compares to other things because as you guys know, we’re doing land flipping. We have a portfolio of rental houses and we also have 300 something door’s off apartment complexes adding probably another 250 doors to this just this year. All right. Let’s get started in just a second.

Announcer: Welcome to the “Forever Cash Life Real Estate Investing” podcast with your host, Jack and Michelle Bosch. Together, let’s uncover the secrets to building true wealth through real estate and living a purpose-driven life.

Jack: All right. So here we are. You know me as the land flipper and Michelle as the land flipping couple, right? So Jack and Michelle Bosch with landprofitgenerator.com. Our bread and butter has been for the last 17 years to flip land. We flip land just like other people flip houses. So just without the houses. So it’s a simpler strategy because it removes some of the tentacles that are in real estate. You don’t have to know anything about repairs and toilets and termites and trash and contractors and mold and all this kind of stuff. What you do is you find piece of land for 5 to 25 cents on the dollar as there’s a lot of them out there. We have done over 4,000 deals and you flip them to an end buyer for half price on a wholesale deal or a full price with a down payment and monthly payments in form of seller financing and therefore you create cash flow from land.

Having said that, we have built this up to over $70,000 a month in cashflow at the peak. And then we also instilled very high, and then we also started the 2009, we started buying single-family properties because America was for sale. And then as these prices went up, we started realizing that while we love single-family homes, from the point of view that you own the asset, it spits off cash flow for the rest of your year. If you have 10 problems and all this kind of stuff. That’s why I love land. But what comes with it is that the inability to force appreciation as it’s called in the commercial and multi-family industry. What I mean by that is that you cannot just go and rehab a house and because of rehabbing it becomes worth twice as much. You cannot just, I mean, that is possible, but you can’t make it worth really more than the houses on either side of it or on that street if they’re all similar square footage and similar kind of look and feel.

So, you can also not, I don’t know, paint it in gold and all of a sudden double the price for it, right? Even if you paint it gold it’s still worth what the neighboring houses are worth. You can also…so you can double the rent potentially, but you cannot because of that sell it for twice as much. So because of that, we started looking as another of what we call asset allocation strategy. So we make our money with land flipping, we roll it into single-family homes, we get cash flow now from both locations and we roll this over into multi-family properties. Now, multi-family properties, we also do what’s called a syndicated deal. So, we syndicate with investors, usually accredited investors only sometimes with also non-accredited investors, so called sophisticated investors, but only with those of course that we already have a pre-existing relationship because that’s the law and we always want to follow the law.

So, therefore, when we do these syndicated deals,the investors put money in, we put money in and then we get a loan for about 75% to 80% of the property purchase price. We raise the money from the investors and from us for the rest of it. We raise some additional money for what’s called CAPEX for repairs and improvements to the properties so that we afterwards the property is in a better condition than it was before. Now, typically, here comes the thing, in a multi-family property when the property is in better condition, it’s a more attractive property, you attract better kind of tenant profile. That means tenants that are looking for better properties and also willing to pay more money for that property to live on that property for money in rent.

And if you attract people that’s willing to pay a higher rent, overall you have more of those people in the property. The property produces a higher rent because you spend probably some repairs on it, you know, or some CAPEX do improvements on it, there’s less to repair. It means your maintenance costs has a tendency to go down after you put the improvements in place at least for a little bit and, because there’s nothing to break anymore, right? And the rents are going up, that means now you have a higher profit in the deal. And as your cashflow gets higher, your net operating income is higher on the property. Now, the property value goes up because contrary to single-family houses in multi-family, we’re in the multi-family world house, an apartment complex, let’s say, or a commercial property of any kind is worth a multiple of the net operating income it produces.

So, if you have a property that’s, let’s say there’s a concept called the cap rate, which is really, you can look at it as a number that represents how much cashflow the property, or the free cashflow the property spits out based on its purchase or sale price. So if you’re taking a property that spits out $100,000 a year and you want to sell this property at $1 million a year, you’re selling it at a 10% cap rate. If you want to sell that property at $2 million, then the $100,000 cash flow that stable, right? That represents only 5% of the purchase price. So in other words, then you’re selling this property at a five cap. So when you’re selling a property, you want to sell it at a low cap rate because it represents a high premium and price. And when you want to buy a property, you want to buy it at the high cap rate because it represents a low premium in price, a low multiple. So that’s kind of the one thing to remember.

So, now, with that aveing been said, if you produce…if you take this property from $100,000 to $200,000 in income, even when you sell it at a 10 cap, you can now sell that property that perhaps you bought at $1 million by increasing the net operating income from $100,000 to $200,000 even at the same cap rate of 10 cap, you will sell it for $2 million. Now, the reality is in this market right now, cap rates are not 10, cap rates are much lower. It means the premium and selling is much higher. So in other words, for every thousand dollars that you add in a net operating income to a property, the value goes up by something like $15,000 to $17,000. So let’s pick 15 as a number. So in other words, you add $100,000 in income to that property.

The value just went up by $1.5 million. So not only do you get more cashflow every single month, you also, when you sell it, get a million and a half more dollars for the property than what you paid for the property. So it’s a double-dipping that in the single-family home world is just not possible, right? Yes. You get the appreciation with it if there’s general appreciation. Yes, you get the cashflow from it. But in this case, you can literally what’s called forced the appreciation by making the property nicer, by getting better tenants in, by raising the rents, by keeping the income and the expenses stable, therefore raising the net operating income, the income of the property, and therefore raising the value of the property. Even if the neighboring property is not doing this, and neighboring property might be selling for $4 million for let’s say a hundred units, your property can sell for $6 million because you have, because it’s a calculation based on at least, or logic reads a calculation based on the net operating income.

So with havingsaid that the laid a foundation of knowledge. What I want to talk about is what lessons we have learned from the time. So, the first lesson to learn is that things in a multi-family work take time. This is not a fix and flip kind of situation where you bring in a bun, massive amount of people rehab a hundred units in, like, I don’t know, six months and then go flip the property again. While you can do that, typically you have to what’s called, you have to build up, what’s a trailing proof of operational efficiency off the property. So you have to basically show potential buyers that this property is indeed producing on a consistent basis the income you said it’s producing. So in other words, once you put them, let’s say if even if you put $1 million in in capital improvements of the property, you rehab all the units, you put a playground on there, you do all kinds of different things and then this property is beautiful and then you fill it back up.

Once it’s filled up, you want to maintain a track record. You want to own it for at least another four or five months before you go sell the property because then you can establish and show the market that you have taken a property from where it was to where it is now that consistently it’s producing those kinds of numbers and therefore the buyers are going to take those numbers seriously. They’re going to underwrite the property and its financial abilities based on those last four or five months of really good performance. And they’re going to make you an offer based on that number instead of based on the entire year worth of numbers, which of course part of the year was probably miserable, right? Because you were remodeling properties, you had vacancies, you had higher expenses, you had all kinds of stuff and the income was much, much lower.

So another thing that you want to do, I want to look at this. So this therefore it takes time. So buying in a market apartment complex, even if your goal is to rehab it, fill it up, and then sell it, it’s usually at least a two-year process. So you’ve got to be aware that you can’t just go flip them very quick. At the same time though, if it is a two-year process, what you can do is after two years, instead of selling it, you could go to a bank and have them look at the recent four or five months of trailing income, have them re-evaluate, which now evaluate is because you forced the appreciation, values the property much higher. And now because of that, you can now go and actually have instead of selling the property, refinance the property and potentially get all the money that you put in, pay off the old loan and put in all the money that you guys and your investors put in.

And now you have a property of course with a higher loan, but everyone, all the investors got their money back and now the property spits off less cashflow because you have a higher loan. But less cashflow, but that cashflow is basically infinite return because neither you nor your investors have any more money in that deal. So that’s another way to looking at this model. Another lesson learned is, what is the lesson learned? The lesson learned from from being in this business now for several years, is that that the key to everything in multi-family is a good property management company. Of course, you’ve got to have a vision for the property. That’s the other key. The vision and the ability to implement the vision are our key things. But if you have a crappy property management company, then no vision matters because they’re not going to be able to implement it.

And that was a lesson we learned the hard way, because we bought a property that had 90% occupancy when we bought it. Our goal was to get it to 97% occupancy. Our goal was to increase the income. Our goal was to remodel some of the units. Our goal was to do all these different things, but what the property management company that we chose with all kinds of vetting did was first of all evict everyone. Not everyone, but evicted a third of the people when they’re even like one day late. We had a hurricane go through that property or hit their property and some people lose power and everything and lose their jobs and lose their income possibilities. Instead ofl being understanding, they just evicted everyone. And now we ended up going through the winter on this property with literally only a 66% occupancy on the property, losing money left and right.

Right? So in that case, what we immediately the moment we realized that we fired the property management company. You got to take leadership then. We fired a property management company. We got in a new property management company and that property management company then immediately went to work and within a matter of like another four months or five months, they had the property at 98.9% occupancy again, with better tenants, better paying tenants at higher rents and so on. So the property now is spitting out a nice amount of cashflow, but in between it was actually losing money. And we, Michelle and I had to put from our own cash into the property to make sure that the property would survive, which brings us to the next point. You only want to invest with somebody who actually has deep pockets. You don’t want to invest with somebody who last year or still even has a job in parallel or last year still had a job or is this their first deal or something like that.

You got to ask the tough questions. Ask them the questions of, “What happens if this property ends up being only at 70% occupancy because something happens and the property has just barely enough money to pay the mortgage payment but not to pay anyone else or even not enough money for that and you have to put money out of your own pocket? What happens in such a situation? Will they go because they don’t have any money themselves? Will they go and ask for a capital…do a capital raise again to own the property? Will they go and basically do what’s called a capital call and ask all the investors that already invested money, give them more money and not pay them any dividends, right? Not pay them any returns. And on top of it ask for money. That’s about the worst thing you can do in this property because it’s going to disgruntle all your investors and they’re never going to invest with you again.

Instead, if you want to invest with somebody that you won’t like that to happen, so invest with somebody who has deep enough pockets that they can bridge that with a loan to the property that then once the property stabilize will be paid back to them over the course of whatever, another year or so, or even at the sell off their property will be paid back to them. This is what we ended up doing. We ended up giving the property a loan. We ended up not asking for investors for any money. We actually kept paying our investors their quarterly returns that we had promised them and now that the property is stabilized and throws off substantially more than it’s needed to pay both the investors and the bank, we’re going to not even take this back by the way.

We are going to use some of it more for capital expenditure for more like improvements on a property, but then at some point of time we’re going to start taking some of that money back, not to pay ourselves as profit, just to pay our loan back. Right? So that we’d be made whole again over the course of that thing. So that’s the kind of investor you want to work with because if they…so that you know that the deal never ever, ever, ever is in jeopardy. You invest with somebody who is just like barely knows what to do this and just puts in some money and all of a sudden they can’t pay anything, they do capital calls and those kind of stuff. It’s just, in my opinion, not the way to go because it’s your hard earned income that is on the line. Your hard earned money that you’re investing in somebody. So make sure you don’t just get blinded by returns.
The other thing, lesson learned is that in this market, in order to make deals work at least on paper, a lot people are having crazy assumptions, crazy assumptions. So I’ve seen, for example, I’ve had this happen with one of our investors. One of our investors that we already had a pre-existing relationship with that attended one of our led profit generator seminars and so on. We had talked to him before in the phone and they came to us and said like, “Hey Jack, I want to invest $150,000 with you.” We’re like, “Okay. Great.” But then just before they invested, they got somebody else pitching them on a different deal. And on that deal, they were promised a higher return on their investment.

So it’s like, “Okay, this is cool.” So I just asked him a few questions and one of the questions I asked him was, like, “Have you looked at their underwriting assumptions?” Right? Have you looked at their underwriting assumptions? So they’re like, “I don’t know if this idea on those, I don’t remember.” But I told him that like, “If you haven’t, make sure you ask him for the assumptions and send them over to me. And what I will do is I will go and underwrite my own deal exactly the same way that they underwrite theirs. Basically, I’m going to put the exact same assumptions in there so we can truly compare apples to apples.” They were a similar kind of markets with similar kind of brand and goals and similar kind of population growth and so on. So they did that, they sent me the numbers and here’s the deal.

When we told them about the deal, we had told them that our deal is expected to return about the 15% annual return, which is a pretty good deal, right? Comprised of two components. The quarterly cashflow that they’re getting and a bonus of profits split at the end when we sell the property. So they looked at that and these guys had given them something like a 17% or 18% return, I promise if I remember it right. I might be off by a few percent. And the reps he close even 20% or 22%, it doesn’t really matter. Because once I underwrote our deal with those same assumptions that they use, I came out to a 33% or 35% return on their investment. So what I told them is like, “Just do your research on the markets that you’re about to invest and ask if it’s reasonable to get…continue to get a 3% or 4% or 5% annual rent increases, which certain markets are currently seeing.

I personally don’t think it is reasonable to expect to see those markets because the people, particularly if you invest in class C, the people who invest in these kinds of properties are not people. They’re participating massively at the economic boom right now. If you’re investing in class B and class A, that might be the case because there’s a lot of, but even there, there’s so much new product, so much new units coming on the market that they’re starting to become a glutton in certain markets. In certain markets those prices, those rents are not going up anymore. They actually going down. So in other words, what do you do in a situation like that? Well, I do, I estimate that it’s reasonable to say that a tenant after we increase the property, the rent to market that it’s reasonable to say that upon renewal the tenants will pay $10 or $20 more every single year.

But it’s unreasonable to ask somebody who makes $30,000 a year, has to have a car, has to have food on the table, has to pay for insurance and gas and things like that, to ask them to pay 50 bucks more and basically take your rent from $700 to $750 just upon renewing. That is not reasonable. Or from $800 to $850, right? That if from $800 to $850 is only a 7% increase, but it’s unreasonable for you to be able to do that year after year, after year after year. You can do it at the beginning when we take over properties. We take over properties, usually they’re below market rent. They have $100 to go. Within one year we take the people that renew and we up their rent by $40. Only about half will do it. The other half will move out. Right? And then when it’s new tenants come in after we remodeled the units or improve the units or made the entire property prettier, they don’t have a problem paying $50 or even $100 more because they’re new tenants because we’re now attracting a better tenant profile, right? That are making more money. They’re not making $30 they’re making $40,000 a year. They can afford an extra $100 more to live in a prettier property than they lived before. Right? So, but the other ones you can’t. But then if then they renew and the market, let’s say is at $800 for those units, I can’t expect them to next year paid $850, the next year pay $900. But that’s how these guys underwrite. That’s how they underwrite these deals. A lot of people underwrite them that rent continue to go up by 3% or 4% per year. It’s just not reality. But the reality is in those class C markets is that people, when they make $30,000 a year, they might get a 2% job increase.

I mean, a raise the next year. They go from $30,000 to what? What is 2% of $30,000? Thirty thousand three hundred. They get a $600 a year increase. If you get a $600 a year increase, which Uncle Sam takes like $200, you have $400 a year in increase. You can’t afford to pay 50 bucks more in rent, but you can afford to probably pay 10 bucks more. All right. So we go and estimate our rent increases. Once the property stabilize, after like the first or second year, we estimate that our rent is only going to increase a percent. And if we can beat it, it’s bonus for everyone involved. But we’re not going to make pie in the sky kind of estimations and forecast and so on. Because I just think in a class of properties that we’re operating in, it’s not reasonable. Having said that, there’s a few things that you actually can do to increase rents above and beyond what everyone else is doing.

And that is something that I think is one of the least utilized components of property management. And that is that of community building. You know, it is my deep core believe [SIC] that people don’t just want to have a roof over their head. They want to live… It’s a human desire to live in a community, in a true community that cares for each other. Yet so many slumlords, especially in a class C and class D and so on world, they do the bare minimum to the property to sucker every dollar they can. They just provide the bare minimum though like a non-leaking roof and an air conditioning and heating and a key to the room and that’s about it. And a place to park the car. And other than that, they don’t care at all. Yet it is so easy and it doesn’t even cost anything to create or it doesn’t cost much.

It costs a few hundred dollars or a couple of thousand, a few thousand dollars worth of barbecues, but perhaps a couple of [inaudible 00:22:25], perhaps a fence for the dog park in there, perhaps a monthly community event that can’t even have sponsored by outside companies to really try to start creating a community. And now we’re going to do a separate podcast about that on what we do on these properties. But the community aspect plays a big role because the community aspect tells people that you as the owner of the property and the property management company cares, right, cares about them and as tenants. And what does that do? It means that the people who don’t care about that stuff will move out because they just feel almost like, “What are they doing? This this nice.” But more than anything, it allows you to raise rents even though it is kind of more minor improvements didn’t cost you a lot. Because it allows you to attract a better tenant. It attracts a tenant who actually wants to be in a community, attracts a tenant who wants to be in an environment that is happy, healthy and where their kids actually get taken care of, where there’s somebody looking over them and so on.

So for example, the very first thing that we do when we buy our properties is we don’t fix anything. I mean, we fix stuff right away. But the very first thing is we do is we get a popcorn machine for the office. Now, why in the world do we get apopcorn machine for the office? We get a popcorn machine for the office because most of these classy properties that the parents are not home when the kids get home. So in this case, the kids need a snack. And we’re obviously not going to create like avocado toast for them or rubella, rubella salads or anything fancy, something like that. We are going to have popcorn for them available. That they can go into the office, grab a pump popcorn. It carries them over. They’re happy about it. And you know what the parents think about about that? They’re happy that somebody takes care at least a little bit for their kids.

And another thing we start doing is we start looking into having a tutor come to the property and offer free tutoring for the kids in different kinds of grades because it’s another core belief. Just because somebody doesn’t make as much money, their kids shouldn’t be suffering dramatically under that. I know we live in the United States where the property taxes only go to the part of town that the people with the villas live in, and there’s reasons for that and there’s, but there’s still something as the bare minimum. I think the ability to rise generationally to the socioeconomic circles has to do with what kind of support you get when you’re little. So if we can be helpful of that, it’s actually also good business, because if it’s a helpful, because it’s good business because basically we provide tutoring, we provide a little snack, we provide a prepared playgrounds, we provide some barbecues, we provide that people can be [inaudible 00:25:11] community events. It makes the property more attractive. Parents that care about education are going to have, if they have two properties to choose from, one that is nice and costs 50 bucks and both costs 50 bucks more than competition. One that provides just a nice place to live in and one that provides a nice place to live in and offers something for the kids and tutoring and so on. They going to pick the one with tutoring. So we offer tutoring and then once the kids have the tutoring, the parents…they do better in school because now are the parents going to move? No. Are they going to be sensitive to a $20 per hour rent increase at the end of the year at renewal? No. Because the alternative to them is to spend several hundred dollars for their kids to get tutoring somewhere else, which most people don’t have.

So it’s good business and by doing good, we making money. So I hope this makes sense. Other lessons learned. Lessons learned is be wary of partners. Like, there’s a lot of really weird partners in as well. As a result, we don’t partner with anyone anymore. We have investors, but we don’t have co-sponsors. We don’t engage in this entire thing. Like, you raise part of the money, I raise part of the money. We get into deals together. No, we have a clear vision of what we want to do with our properties. We have a clear vision of how property’s going to become the gems of the neighborhood and its asset class. We have a clear vision of how this translates into financials and proof is in the pudding. Right? After we kicked out this property management company, the properties now at 98.9% occupied. The numbers have literally blown up and financially their net operating income is high.

On another property where we offering the tutoring, about to offer the tutoring, we have increased the net operating income. We are on track to crease it between $75,000 and $100,000 in the first year of ownership. While it’s still a lot of tenants are in the grandfather dinner and the old rents and they haven’t come up for renewal yet. So, it works. It works, right? So this is what we do. This is what we learned from it. What we learned is that have a clear vision for the product you want to offer in the market. Implement that vision and push it through with your property management companies. Because your property management companies are used to doing business a certain way. Pick a great property management company, but then spend time educating them on your vision and make sure that they help you with that.

You have to often break through some hurdles with them because they might be class C property management companies, but they might be looking at it from a point of view is like, “Yeah, this stuff doesn’t work anywhere. People just want us to have stuff for free.” And it’s not true. The process is, if you offer free things to your tenant, the process is also to enforce the property. The rules are stricter, because if you get the freebies in there, they’re going to fall behind the rent. Don’t allow, you don’t allow them in. It’s a dual process. You give, but you also expect. Right? You give and you expect, you expect the rent is being paid on time. You expect that they have good credit. You expect that these things are there and you give at the same time top property management. You give fast responses to repairs and you give those non-monetary pieces that make a difference for the people.

And you’ll see the people who just coming for the freebie, they won’t be able to hold up their end of the bargain. They’ll fall behind on their rent. They’ll get evicted. So what you want to do is you want to enforce it. You want to get advertise those things and you’ll end up getting the people who truly deserve to be in your property, which is the best of the best [inaudible 00:28:43]

All right. So those were my little…my presentation right now about multi-family investing. Obviously, there’s a lot of work included. Lessons learned is you got to become good at accounting if you want to run some of these deals because you’ve got to dive into these accounting pieces every single month. You’ve got to talk to your property management company. You got to make sure they have accounting stuff in the right ways and then you go and…so that when you report to the investors the numbers are actually correct. And then make sure that you, that you follow up through your word, that you say what you do and do what you say and you’ll be gold.

All right. With that, thank you very much. That was my podcast episode about lessons learned from multiple years in an apartment complex investing. Steals are out there. You got to just have a crystal clear vision of what you want and string that up from the rooftops and people will bring you deals and the bright tenants will show up at your properties as long as you manage it correctly with the right property management company. All right. With that, thank you very much. This concludes my episode. Again, if always, give us a five-star review on iTunes, post below. If you’re watching this on YouTube, give us a five star and that give us a thumbs up. Share this with your friends, share it around. The more it’s being shared, the more we get the word out about it. Right. Thank you very much and any links about how to know more about all of this are below this video in the show notes. All right. Thank you. Bye-bye.

Announcer: Enjoyed this episode? Then make sure you like, subscribe and post your comments and questions below the video. We’re looking forward to hearing from you.