Dec 24, 2019
James: Hey, audience and listeners, this is James Kandasamy from Achieve Wealth True Value-add Real Estate Investing. I'm here today with Mark Kenny, who's the founder and I'm not sure, the president or what's the title?
Mark: Yeah, well my wife and I together so we might have different
opinions but...
James: Okay. Both of you run the King multifamily. But
before that, before we go into the hot topics that we're going to
discuss with Mark, make sure that you guys look at last week's
episode where we had KK Singh being interviewed. KK has moved from
a business owner. He used to own gas stations and laundry mat and
now he's become a multifamily investor, which is a very, very
interesting concept. Because I think any business owner, anybody
who wants to know how that business is run and why he's using
multifamily, why did he go into multifamily? And he didn't even pay
tax last year just because of the multifamily investment. So you
guys want to check out the last episode.
But let's come back to this episode. Hey Mark, welcome to the show.
Mark: Thanks for having James. Great to see you again.
James: Awesome. Also, I'm happy to have you on the show. So, Mark,
he's a GP, almost like 5,200 units, out of that 2000 units where
he's basically the primary active asset manager and he's also GP on
another 3,200 on top of the 2000 units. And he goes across multiple
markets, which is very interesting for me. I want to go a bit deep
dive into that. You know, he's in Texas, he's in Alabama, he's in
Tennessee, he's in Florida and I believe that's what I covered.
Right. Mark?
Mark: Georgia, as well.
James: Georgia. Okay, got it. Got it. Atlanta. Right. So yeah. So
Mark, did I miss out on something about yourself? Do you want to
tell the audience about yourself?
Mark: No, I mean, yeah, real quick. So I grew up in Michigan. I'm
in Dallas now, so not too far away from you, James. But I was a CPA
for a while, did IT consulting, which you and I traded some stories
about that before about the IT side and I started buying small
multi-family when I was 22, I was a senior in college. About two to
four units and then my brother and I...I didn't know what
syndication was. Syndication is the fancy word for raising money
from other people for the most part and pooling it together to buy
properties. I didn't know what that was. So I started buying two to
four units. And then my IT business was doing pretty well. That
was, I really had no time. I always, I'd say 80, 85 hours a week
and start really doing the math.
I was probably 90 to a hundred hours a week and a lot of weeks. And
you know, frankly didn't have any time for my wife, caused some
issues and so she basically said, you need to do something
different than what you're doing. And I said, well, yeah, I will.
But you know you have to deal with me and we both love real estate.
So we started buying larger properties through syndication. I
invested passively first in a syndication with a friend of mine,
said it makes a lot of sense and you know, why don't I look at
doing it myself and that's what we started doing back in 2013.
James: Got it. Got it. It's very interesting about your story when
you're working on a W2 job, especially in the IT tech industry. I
mean, it's a lot of work, we put in long hours, right? It's a
constantly changing sector, right? The industry is consistently
changing. We are always driven by schedule and I was just talking
to, Shanti, who's my wife and all and how our life has changed when
we used to be in W2 every day, like Fridays when we can really open
up our time, open up because from Monday to Friday we are like so
busy working like [03:55unclear] focused and where
I used to work, we used to work remote as well. So after five, six
o'clock we used to work like, you know, we have lunch, we have
dinner, and we continued working with the offsite team. So life
never ends. And now with real estate, it's so much of a difference.
Now you own your own time and you're out on what to do and we can,
you know, my traveling time in Austin is like 11 to 2. That's it
because it's a bit of traffic.
Mark: Yeah. It's interesting, right? I mean, I actually started my
own IT business 2008 so I didn't even have a W2 job since 2008. But
I got in a situation where, you know, any project that came up and
any unrealistic timeframe that was out there, I would do it. I
would make the dates. So that's what allowed me to get more and
more projects. I had a number of Fortune 100 companies as
customers, but so even though I have my own business back then, I
still didn't have the luxury of time. You know, I was always going
somewhere, always doing projects and yeah, I'd be up, I sleep three
hours a night, like consistently, that's all I would sleep.
James: I mean, you don't have to go by numbers, but did you
make like almost a similar amount of money compared to what you
made in real estate? I mean, it's a time versus money investment,
right?
Mark: It's a great question because when I first started looking at
syndication, I said I'm not going to be able to replace my IT
income. And I truly, it was a mindset. It really was. I really did
not think I'd replaced my IT income. It was pretty, pretty high at
the time. And after three projects that I did in multifamily I
stopped doing IT. I had not replaced my IT income at that point in
time, but it was enough to live and live, you know, decent. And
then we've done, you know, we've done 37 projects, whatever now.
But I didn't think I was gonna replace IT. But yeah, we've far
surpassed it. I mean a lot frankly, and the time we have, and I
don't have to ask anyone to go anywhere or you know, things like
that, you can turn it on and off if you want to. Where in IT, if
you're not working, not making any money, you don't have that
passive income.
James: So you have a very interesting life cycle because you were
working in
IT, a W2 job and then you went to do your own business but still in IT. And now you are completely a full-time real estate investor. So, so in terms of time wise, I mean from what we're discussing, I mean, real estate investment gives you the best return of time, right? I mean, you get really good pay and at the
same time, your time is like, really low.
Mark: There is no comparison. You know, you mentioned about talking
to your wife a higher life is different. I mean, my life has, you
know, 180 degrees different for the better than when it was before.
I was on the verge of, you know, I'm not sure, you know, Tammy, my
wife wasn't only happy because of my work schedule and now we got
to work full time together. Just like you get to work with your
wife, which is great. And the time, you know, if I want to go
somewhere and you can get to the point with multifamily or any real
estate investment, you get enough of it. If you choose to go sit on
the beach, which I don't want to do, frankly I don't but if you
choose to go and do that, you get in a position to do that for
sure. With IT, I wouldn't be able to, I had to keep working
projects in order to make money.
James: Yeah. But can we go back to your mindset when you are
working, not as a business owner, when you are working in IT?
Because I sometimes analyze my own mindset when I was working,
because when I was working in IT, I did look at Robert Kiyosaki's
book and I could not read like a few pages because it just doesn't
make sense to me, we are so busy working. What is this guy talking
about business. And after a few pages I put it down and I forgot
about it until recently I started reading it and I was just
surprised that that book changed a lot of people, real estate
investors' life. But I don't know, I think when you are working
you're really, really working, you really don't care about the
business side of it and I mean, I think it's up to your circle,
right? Who are you mixing with?
Mark: That's a great point. I know when I worked originally at KPMG
Consulting and I worked for SAP you know, did some Salesforce
consulting and things like that. And you're looking at other people
that are older than you at the time I started out, it was, you
know, early twenties when I started out. And look at other people
that are partners, for example, and you have this image, you're
like, that's my lifestyle. I'm going to be traveling all the time
and I'm going to be working seven days a week, which is what I did.
And you know, and then, you know, some point in time, not everyone
gets to the point where I was, where my point was. And my wife was
pretty much ready to leave me if I didn't do anything. And that was
a big eye-opener for me. But you're right, you get trapped in that
circle of influence, right? And everyone's doing the same thing.
And at that time, I aspire to be a partner and I would've made
partner, I mean, made a manager in two years and things like that.
But I would have been miserable, frankly. I would have
been.
James: So compared to the job security, I mean, I don't know
whether there's job security in any job or not because there is no
job security, right? I mean, when I was a manager, I used to hire
and fire people very quickly just because of non-performance,
right? So there is no job security, right? I mean, I use to work on
a semiconductor industry for like almost 20 years and we thought we
were going to retire there but we realize you know, during
different economic cycles, the company doesn't really, you know,
honor your loyalty. I mean, there's no such thing. They have
to make a business decision, they'll let you go if they need to let
you go. There's no such thing as a company is going to be keeping
you forever.
Mark: Right, right. That's true.
James: Right. So yeah, coming back to real estate venture. So 2008
was when you got into IT and when did you start your real estate
venture?
Mark: Syndication; 2013 is when I first started investing
passively and invested in a few deals. And about that time I
started looking at syndication, but it took me almost a year to get
my first deal. And it was partly, I was looking at other things
too; self-storage and building custom development, you know, homes
and things like that, franchises. I looked at everything. I was
looking for something to get me out of the bad situation I was in.
But it still took us about a year to get our first deal.
James: So did you stop work and start into real estate? Was it a
step function or was it like a...
Mark: It is gradual; for me, it took me three deals. So I'm
thinking, let me see, 2014 is when I think I got my first deal, I
don't remember exactly. But by '16 I had stopped doing IT.
James: Got it. Was that a painful transition from a business owner
to a real estate investor?
Mark: No, it really wasn't for me anyway. You know, I've always had
a big fear of money and you know, I wish I did, but I always did
cause growing up and things like that. But we had enough money set
aside to where, you know, I looked at it, if I had to go back and
do IT, I had so many connections at a time, I could get a job
pretty much, you know, right away. I didn't want to, but I was
like, okay, well, I have a transition I'm making here, but if I
fail, that was my mind, if I failed at doing this and after taking
a year to find my first deal, I was pretty skeptical. And then we
started getting the traction. So I was like, Hey if I need to go
back, I can do that. I don't want to do it. But if I do, I can
support the family. The transition wasn't hard for me. We were
buying at that time only in Dallas, so I really wasn't having to
travel outside Dallas. Yeah. So it was a pretty easy
transition.
James: Got it, got it. So as I was talking about that, you
had like three different lifecycles, right? You're a W2 employee,
you're a business owner and then you become a real estate investor
and you are a CPA. So I'm going to ask you, similar to CPA
question, how was your tax advantages comparing these three life
cycles?
Mark: Okay. So you know, even though I'm a CPA, I haven't
practiced for 20...
James: But at a high level, was there any tax benefit
between...
Mark: Oh yeah. Without a doubt. When I had the IT business,
you know, I was actually paying taxes quarterly. I was getting hit
hard. I mean, I was making decent money. Now, in the last two
years, we haven't paid any federal income tax like zero. And
in fact, it's negative. So people were like, Oh, you didn't
make any money. No, we make money. But from the tax benefit we
received through depreciation and cost segregation and bonus
appreciation, we pay zero federal income tax. So, I mean, think
about people listening to this, if you didn't have to pay taxes,
how much more money you'd have in your pocket and what you could do
with that?
James: Absolutely. Yeah. Yeah. I have a chart that shows how
a $2 double for the next 20 years. And you know, at a 25% rate,
that $2 becomes 72,000 after 20 years because you're taxed 25%
every time you double, right? But if you don't have tax, that $2
becomes almost like $11 million, you know.
Mark: Oh, boy, Oh my goodness.
James: So the tax does impact your compounding savings. And if you
don't look at it, you may not know. I mean, when I was working, I
never really looked at tax because as I say, we are busy working.
We just look at net pay coming to the thing. I mean taxes, like
it's not nice for me. But when I look at that kind of chart, you
know, it does make a lot of difference in terms of, Hey, you know,
it does impact your overall savings. You know, if you compounded
for not [13:53unclear] you see a big difference,
millions of dollars of difference.
Mark: Oh yeah. And like you mentioned, when you have a W2 job, it
just comes out, you notice it, you don't like it. But when you have
your own business, my own IT business, you have to write check
every quarter you really notice it. And then you're like, I made
that much money this quarter and where did it all go? And now I
have to write a check for, you know, X number of dollars. And you
know, you're just scratching your head and you're frustrated and
stressed out. But with real estate, it's literally zero.
James: So did you have employees under you when you have a
business?
Mark: All 1099.
James: Okay. So if you have an employee, then you're to pay tax for them too, I guess. So that's double taxation
Mark: That's exactly right.
James: Okay. So W2, I mean, I don't know. I have a chart that shows
W2 people are paying almost 70% of the tax in this country. So this
country is supported by people who are in W2. They are the ones
who's paying taxes. They're the ones building the roads, the
bridges, and all the infrastructure. Right? The 30% is from the
other people who are earning less than 30,000 or people who are
earning more than 500,000 and above.
Mark: Yeah.
James: Right? I mean, people who are earning more than 20,000 to
pay a lot of taxes. But in general, if you look at it, the big bulk
of it is paid by our W2 employees.
Mark: Right. Makes sense.
James: Just because you can't run away.
Mark: You can't. There are no savings, no tax shelters.
James: Absolutely. I'd say real estate investors, all kinds of you
know incentive in the tax code to not paying taxes. So coming back
to your real estate venture in multifamily, and you skipped over
buying single-family and you went direct to multifamily.
Mark: We did. I mean, multifamily, two to four units when I was 22.
Yeah. So it was smaller for sure. It made more sense to me,
frankly. I don't remember, I actually didn't look at any homes. I
don't know why I'd go back and think about that. Why I didn't start
looking at any single-family homes. To me, we looked at two to four
units at a time.
James: Well, I mean if you look at cashflow, two to 14 definitely
make a lot more sense in terms of cash flow. Right? Maybe that's
what it is. And how many two to four units did you own before you
come to multifamily?
Mark: We had like 17 units total.
James: Okay. 17 in two to four units, I guess. Smaller multifamily.
And do you think that helped you when you scale up?
Mark: It did. Because I know you manage, right? You and your wife
manage. When we did the smaller properties, we self-managed and we
took care of things and evicted people. So it definitely helped
from that perspective. I didn't like the process, it's not
something I want to do now, but it also, even though it's
drastically different how you evaluate four units and below and in
five units and below is drastically different, people can argue all
day long steps are almost identical, right? You identify your
criteria, you go drive by a property, contract, blah, blah,
everything's the same. So it helped for sure. Plus just kind of,
you know, getting comfortable with buying your first deal is the
hardest. So once you start, you know, I bought like whatever it
was, you know, five deals, six deals, I don't remember the number,
exactly. It gets you more comfortable. So when you go buy a
larger property, it's bigger numbers. So it is concerning whatever
I had already done, you know, like six transactions before that
time, even though they're small, it helped.
James: Got it. Got it. I mean, in a way, it helps because I mean,
you know at least how to read the lease and you probably know how
real estate section happens, right?
Mark: Your first time signing for your first deal, usually you're
most likely going to be pretty freaked out, right? You've done six
smaller deals. It's still, then when you start doing bigger deal,
then it's the money. Right? The only thing that concerned me, you
know, I have to say only it really was the, you know, brain capital
to the deals. I had no concerns about how to underwrite the deals
that I knew how to do that or how to find deals or talk to brokers
or loan. It was always about, you know, the capital. That was my
biggest concern.
James: Okay. Okay. But do you think that's still an issue in this
market cycle?
Mark: Yeah. I'm always concerned about capital. You know, we
have like eight deals under contract right now. You know, so
we've never not closed a deal, but you know, that's the one thing
that's still stressing me out sometimes, frankly.
James: Yeah. Because you need to figure out whether you have big
enough investor base too in all those eight deals.
Mark: That's right.
Mark: Okay. Got it. So coming back to this, no multiple markets
that you have, I mean, do you want to explain on how did you get
into this so many markets? I mean, I think some of it is you've
partnered with some of your students, right?
Mark: Well, originally I was just buying pretty much with one other
person off in Dallas. Dallas, and at least, in my opinion, was
definitely getting more expensive and it's even more expensive now.
I have a twin brother that moved to Atlanta so I used to visit him
and Atlanta has a lot of similarities to Dallas. Dallas is yet, and
it may never be, but it definitely has a lot of similarities. So I
started traveling there. I looked at properties for about a year
and a half before we got our first deal. And I just really like the
market. That kind of was if my brother wasn't there, I don't know
if I would be in Atlanta, frankly. I don't know if I would have
thought about going there. When I'm going there, I see a lot of
activity, new buildings, new development cranes, things like
that. So it was an attractive market.
And then, so that's Texas and you know, kind of the Atlanta area.
And then we started looking in the Southeast. This is a general
statement. Some of the brokers cross different estates sometimes
too. They might, if they have a license, they can actually sell in
multiple States and they might say, Hey, now, we're in Tennessee,
we have a project here, we have a project up in Arkansas now, which
we don't own anything there yet. So these brokers started giving us
deals and I started checking out different markets. And really, the
way I got into the other markets as far as initially was I would
have brokers in Dallas typically reached out to other brokers in
other markets and make an introduction for me. And that kind of
gives you instant credibility and they're going to typically give
you the best of the best of brokers to work with in another market.
And that's how we got involved in other markets.
James: Got it. So how did you choose this market? I mean, except
for Atlanta where you said your brother was there, you initially
went there because of Atlanta, but now you are like in five
different markets. Tennessee, Alabama, Florida. I mean, now, how
did you choose these markets and why these markets?
Mark: Yeah. A friend of mine who I've done a lot of deals
with, he had bought a smaller deal in Memphis and I never would
have considered Memphis. And some people don't like Memphis. We own
a lot there. We've done really well there. But Memphis also has,
you know, even though [21:05 unclear] job growth
population growth, things like that, it's okay, but not like
Dallas, of course. But the rent growth has been going up. They're
putting, you know, several billion dollars in investments of
downtown. But that particular city also has something called a
pilot program, which we've done multiple times. Where you can go
in, you buy a multifamily property, you have to put a certain
amount of capital into it. It's a lot. And then you'll get your
property taxes cut in half and then they're frozen for 20 years. So
I mean, as you know, property taxes is typically one of the
largest, right? [21:44unclear] I can freeze them
for 20 years. Cash flow is going to typically be pretty nice on
it.
James: Hmm. So you're basically taking advantage of that
particular program. What about the other States that..."
Mark: Yeah, Florida, I always looked, I like Florida just because
of probably the weather initially and when we were in Atlanta we
started looking in Florida as well. And Florida has, I mean, some
areas like Miami that as you probably know are extremely expensive,
just not going to buy there. But I also have a cousin, multiple
cousins actually live in Florida and so I heard different things
from talking to them. And then some of the brokers we were talking
to like in Georgia and stuff like that, had some properties in
Florida and a property came up and the first time we're looking at
properties there. I liked the properties in Jacksonville and we
have a few properties there now. And it was one of those markets,
again, similar to Atlanta, job growth, population growth, rent
growth. It doesn't have to be off the
charts, frankly.
Some of the markets where it's so off the charts, it's just too
expensive to buy in, the yields. You can't get the returns. And
then with Alabama, it was a guy that had a deal and was looking to
partner and I partnered with him on a few deals. He had deals there
in Alabama. And then we have another one right now, a guy in our
coaching group that has a deal in Alabama as well. He's closer over
by there as far as that's where he'd been looking. So usually it's
through some sort of relationship. Somebody either already lives
there or someone is looking there and then it kind of gives me an
opportunity to check the markets out.
James: Got it, got it. So basically if you have boots on the ground
as part of your program, that's an advantage definitely.
Right?
Mark: It is for sure.
James: But don't you find, you know, establishing broker
relationship in that kind of market it's harder because you, I mean
they did not know you, right?
Mark: It is, there's no question. I mean, you know, I think that's
why it took us so long to get into Atlanta. We had a really hard
time breaking in there. And then once we got in there, you know, it
was just one brokerage firm in Atlanta that we closed 11 deals in
like 18 months with. We've definitely had their attention. With
that first deal., I went to Florida. I mean, I was banging my head
against the wall because we couldn't get any traction with brokers
there. I would say, you know, you just keep sticking with it, but
there's no question, you know, if you're an outsider, don't live
there and you've never bought a deal there, you're at a
disadvantage. You can use things like, Hey, your track record and
you can have brokers that I know.
So when we got a deal in Florida, our first deal, it was with
a brokerage firm that I had bought a deal in Dallas with and the
broker in Dallas had called me about it. So he, you know, if you
want to say put a good word in for us. So a lot of these brokers
talk as, you know, it's very small world. Yeah. And I don't think
we would've gotten that deal in Florida if I had not bought a deal
without a broker, you know, brokerage firm if you want to stay in
Dallas, I think we would have probably not been selected for that
deal.
James: Got it. So let's go a bit more detail into that step by
step. So let's say today somebody, you know, in your circle or one
of your students come, Hey, you know, I found a deal in Florida,
right? Somewhere in Florida, right? So what are the things that you
would do to underwrite the deal?
Mark: Yeah. You know, the underwriting different aspects of it,
forget the reports and stuff for a second. But you know, even
financing terms can be drastically different across the country.
Some of the pre-review cities and stuff like that start at 65%. So
you want to first understand, don't assume we're getting 80%
leverage in three or five years IO in every single location because
it's different. So understanding first, the insurance can be
drastically different. You know, if you're on a coastal area, it
can be a lot higher than all the other areas and understand kind of
the fundamentals there.
Taxes, you know, do they get reassessed? And that can be through,
we have a tax consultant we use, but also you can typically just
call the County and the County will tell you kinda how the taxes
will be reassessed and when. You know, in Memphis, that's every
four years so that's important to know. They only reassess every
four years. And then we'll get like a report, whether it's Yardi or
CoStar. Those are paid reports. We'll also use things like some
free...we have a number of links on our analyzer that take you to
things like crime and the school districts things like that. Those
are all links we have on that. But overall, nothing beats having
someone on the ground, you know. So if you can talk to other people
there and talking to lenders, you know, lenders have the biggest
investment in a deal than anybody as a general statement where they
have more money involved. So try to understand from lenders to kind
of how some of the properties are performing there, it is
important. In the report, as I said, it's only as good as the
report. It is good data. A lot of it's based on, you know, actual
transactions that have happened, but I'm trying to get someone like
a broker or property management company. So if we have a property
management company you know, David Shore is multi South in Memphis
and he's in seven other, he's actually in seven other States.
Once we built that relationship, then we start asking him
questions. He'll tell us, don't even look at that deal, it's not a
good deal. This deal maybe you can look at, you know, 95% of deals
he tells us not to look at there. So having some boots on the
ground can't be replaced. It might take you a while to do that.
It's typically going to be like a management company or maybe, you
know, a broker, but you know, brokers in to sell, you know, they
wouldn't, don't get paid unless they sell a property. So kind of
all the different aspects. Reports talking to people, visiting the
area, trying to understand what happened before in the past. Those
areas are all good ways to kind of get more Intel on the
property.
James: So you basically look at location, crimes, making sure how
are you underwriting your tax records.
Mark: The tax is huge.
James: Every state is different.
Mark: Yeah. Every state, county; city even sometimes. So we have
like I say a tax consultant, but we have found really if you call
the County and tell them the property what you're doing, they'll
tell you how they reassess and they'll give you a good number. And
we've only had like a couple of occasions where it hasn't really
given us the information we want. Generally speaking, we always get
the information we need from the County.
James: Got it. Got it. So who have told you the most knows? I mean
like who say don't touch that deal most of the time? Is it a
property management company or is it the tax consultant or
insurance company?
Mark: Property management company. Without a doubt. It may be they
don't want to manage it.
James: Well how do you know they just don't like that property.
Maybe it's just because...
Mark: I know you self-manage. We have found in almost every
submarket we ran with a management company, even if they don't
manage a property today, they're like, we manage that property five
years ago and you know like in that, you might have some Intel. We
got a property here where a number of properties in Dallas I've
looked at and our management company managed it. So I called the
guy and said, Hey, what's up with that? And he'll say, you know, it
had like $200,000 of plumbing issues or whatever it might be. But
usually someone that's large in a submarket, they know the property
or they at least know you know the area well enough to give you
some really good Intel and it seems to amazed me where people are
like, well, THE manageMENT company says we can push rents like $75,
I think we can do it like by 125. it's like there's no basis for
that. Like why do you think you can do that?
You can push your management company and ask them questions and
things like that. You know, if I go try and do a comp for a
property myself, I don't fit the demographics, I'm probably not
going to get a good comp. Have a management company do it for you.
They'll actually send people out there that fit the demographics.
They'll actually get you comps and pictures and things like that.
Go into some of these reports...I get called all the time from, I
won't name them, but these providers of data call me all the time.
I don't talk to them. And half time the information you get, you
don't even know if it's right. It's coming through there. So,
yeah.
James: So how do you know the management company that is calling is
not the current management company?
Mark: Yeah, it's happened before. You know, you can ask the broker
who managed it today. They'll tell you because it could be for sale
and the property management company doesn't even know it. And if
you call them and tell them, Hey, I'm looking at this property for
sale, then they're going to be pretty upset.
James: Yeah. I've looked at out-of-state as well at one point. And
I realized management company gives me the best quick data. They
can tell me a lot of things about a state compared to anybody else,
right. Because they know the pain of managing it. So yeah, I would
say they are one of the best resources to call if you're looking at
out of state investment. So after that, what do you do? I mean, you
already looked at taxes, you already looked at the property, so
it's all good. So what do you do next?
Mark: So then we'll underwrite it. Usually using, you know, we have
a quick analyzer. We have a much more detailed analyzer. In the
detailed analyzer, we're going to go through every expense
category, like line by line, compare them to the, you know, T12.
We'll try to get two independent property management budgets so we
get that. And then our analyzer also has industry standards based
on property, class, and size. We'll tell you what the standards are
for every single category. Which is very helpful to see if
something's out of whack. You know, I just had an example. Somebody
not in a group, if someone's sent me something, it was two
properties. It was over 300 doors together and they had payroll at
$750 a door. I'm like, no, it's not going to happen. Or we're going
to share the property manager on-site across the two properties and
might not for 300 plus units, we're not going to, not very
easily.
So I said, okay, so does the management company say they're okay with that? No. And if they did, what happened was that if you have to get rid of them and now you're going to bring in another management company, they're going to be at $1,200 a door. It just happened, another one today actually on something where they're getting charged two and a half percent on 80 doors. I said that's pretty low, two and a half percent. I'm not saying it's impossible, but you need to probably bump that up because just because one management company said they'll do it for that, if they're not your management company anymore, then you're going to be paying more.
James: Yeah. Yeah. You can't underwrite just because one person said it. I mean two and a half is really low compared to any industries. Whenever I see sponsors or syndicators showing me a deal, I mean, not many people should me their deals, but I do get to see some people still. I mean, when they say they want to share management, that is an indication that you know that deal doesn't have that much upside. They have to do really, really creative weird stuff. They will share this, share that, we have to do. [33:15 unclear] covered parking. We have to do washer dryer and that's all that really small amount of upside. And that is not a good deal.
Mark: That's just the gravy. You're exactly right. I mean, you know
it, right? You manage your properties and people are like, I'm
going to share. I was like, you're not going to. I mean, if you
think it was that easy, don't you think all the management
companies would do it?
James: You're going to compromise a lot of things when you share
management. And as I said, when you're going to that extent to
really justify your upside in the deal, that means the deal is
really not a good deal.
Mark: Well, James, I have people who'd be like, we're going to put
in like wifi and charge this and they're trying to put that in an
underwriting and I'm like, yeah. First of all, you might not be
able to because of the cable contract. Right. You might not be
allowed to, and second of all, let's just assume you're able to do
that, is that needed in your analysis to make the deal work? I sure
hope it doesn't. You know, it doesn't mean that.
James: Those who are learning this business, the biggest bulk of
the deals that work is when you can bump up rent and you can reduce
expenses if you can do these things is a big thing. So if you see
any deals that you can, majority of your upside comes from here.
You know, I don't look at adding more one or two washer and dryer,
adding parking, adding wifi. That's what you said or sharing
management. That's all right. Really the deal doesn't work at all.
I think the sponsor's just trying to squeeze all kinds of juice and
tell you that it's going to work, but in reality, it is really,
really hard to make all that work. I mean that all that is just a
bonus. If it works, it's good.
Mark: Yeah, that's exactly right. And your total expenses, you
could go up because the property taxes, but you know some of your
points of your own, you reduce the expenses. I mean there are huge
savings in water lots of times for operators. You can go in there
and do repair and maintenance. We see lots of times you do as well,
I'm sure were people are putting capital items in repair
maintenance and they're like $1,400 a door per year. I mean that's
a really high, right? So they're just putting stuff up there. If
you go in and get a loan you're able to put capital in there and
maybe do roofings and a/c and things like that, you can most likely
bring your repair maintenance down more to industry standard. So
for looking for those things, but if you don't know what those
standards are, you know, you don't have any gauge.
James: Sure, sure, sure. So we don't have to talk about your detail
and analysis that you do, but on the sniff test that you have a
quick analysis. So one of the few things that you would look at to,
you know, kick out a project
Mark: Return wise, I'll look at, you know, we still shoot for like
a 10% cash on cash return, which is getting harder
James: 10% with the IO on year one, I guess.
Mark: Yeah. Overall or if the product is a five-year project, 10%
cash in cash, 15% plus IRR and 100%; 100% is getting harder on five
years, frankly for a lot of properties, closer to six. In
some markets, it's more than that, but usually we try to stay in
six and below to double the money. And then I'm looking at other
things like, you know, what cap rate are they using? You know, on
their exit, how they get the current cap rate, the broker. I mean,
I had someone, no joke, in Florida called me and said- it
wasn't Miami, by the way- they said, Oh, the broker told me the cap
rate is 3 and a half. You know what I mean? So those types of
things, right. So you can make any deal work. It's on a piece of
paper,
James: Just change the exit cap rate.
Mark: Exactly right. I have an example, I do in our workshop where
I'm like, you know this, and then you do the cap rate down to two,
what does it do? And then, you know, other things are going to be
more round, you know, total income growth over the first couple of
years. What does it look like? You know, I'll see sometimes people
think we're going to grow income 30%. I'm not saying it's
impossible to do that, but I see a property as, you know, 92%
occupied and you go up 30%, your total income in a year is pretty
high so you need to have justification for that. So basically we
look at a lot of different gauges, break-even occupancy, break-even
reds and then the financing. You know, people don't understand
financing well enough. Lots of times as far as what the hell
they're going to do that.
James: It can make or break a deal. Right? So let's look at like
the rent growth and the exit cap rate, right? So how do you
differentiate these rent growth and exit cap rate on this like five
different markets there?
Mark: Well the market cap rates, so we always start with the
submarket cap rate, doesn't matter which property it is. And we
have different ways to get that through reports and things like
that. And then we put an escalator on it, an annual escalator, and
it'll be different between ABC assets. And we have some ranges
there. Some markets actually, you know, Dallas has gotten
compressed so much on class C, you know, it was like eight and a
half percent in '13. Now, it's like five cap for a lot of
properties and you don't know if it's ever gonna go back. So we'll
usually use you know, minimum 0.1 up and then up to a 0.2 for a
year. So it could be, you know, full a hundred basis points on a
five-year exit and a lot of it's depending on the property and
location.
I mean some of them, some of the markets that the cap rates
the banks compressed there but they haven't compressed as much as
like Dallas. I mean they might've been..I'll just make an example,
say Dallas eight and a half. Now it's five and the market there
might have been seven and a half and now it's six. So it went down,
you know, one and a half percent total. But we'll actually, we'll
look at the property, the type of property that, you know, the age
of it as a class and then the demographics and we'll add an
escalator on an annual basis for it. So each year it escalates
up.
James: But how do you decide that? So for example, I think in Texas
a lot of people uses 3% rent growth, right? Even though some cities
are different.
Mark: Well, no, for rent growth we usually use 2%. This is across
the board, across all markets after year two. Your first two years
as you know, you might have come in and you're increasing rents,
rephase revenue in and things like that. After year two, the
general statement is going to be 2%.
James: What about expenses?
Mark: Two.
James: Okay, so 2% income growth. 2% on year two onwards I guess. Which makes a lot of sense. I mean, you're not really counting for the first year for value add.
Mark: Right and it might be higher. I mean some people were like in Dallas, you know, seven and a half percent rent increase growth for a while. And people were like, I'm like, but that's like today, one point in time it's proved where, you know, Dallas rent increases have gone down considerably. It's still a great market, I like the market. I don't really buy here right now, but you can't count on today. Or someone will say, Hey, the economic vacancy is 6% and I'm like, yeah, but I mean, good for them. But you can't count on that.
James: You can't count on that. Yeah. Yeah. So yeah, I mean, yesterday there was a national multifamily trend report which shows I mean Dallas is below national average in terms of rent growth, right? So San Antonio and Austin, Austin has been always higher than national rent growth but San Antonio is higher than national rent growth. I never seen that San Antonio being higher than Dallas. I mean it's just cities change. You have to be really conservative in your underwriting.
Mark: I think people are like, enough is enough, right? When rents go up, you know, seven plus percent for a few years in a row, people are like, you know. And it doesn't mean it's a bad, bad market. I mean, there are 150,000 people a year here that moved to, [41:07unclear] you know, net. So there's great jobs and population growth. I've been arguing that for a while. It doesn't matter all those things happen. At some point in time, people will say enough is enough.
James: Yeah. People can't pay anymore.
Mark: In a 2% increase in their wage or whatever they get in 7% in rent, you know, four years in a row, it has a big impact on them.
James: Absolutely. Absolutely. But how do you like for example, in your experience, because you're working on multiple markets, right? I mean apart from Texas, which has seen a good rent growth, I mean, I think even Florida is seeing a good rent growth. I do not know what other markets house in Tennessee, Alabama and I think...
Mark: Georgia is good as a whole. I mean some markets and we bought in a place called Gainesville, Georgia, not Florida. The property has done phenomenal. But that's a secondary market for sure. It's about 45 minutes from Atlanta, but it's like, you know, a 7% rent growth right now. Same with Dalton, Northeast, you know, almost close to Chattanooga rent growths. Florida, like you said, is high; parts of Georgia is definitely high. Alabama and Tennessee, I would say are mediocre, frankly, they're just going to be average. Now, Memphis in general, the random amounts are lower, but the rent growth there is quite high right now from a percentage standpoint. But you know, the starting with rents, half of Dallas, wherever it is, right. So it's proportional, but the percent of rent growth in Memphis is actually quite high right now. The last I saw, it was in the top 10 in the country.
James: Oh really? Okay. Okay. And what about the exit cap rate? Right. So usually, I mean the usual underwriters, people use like one, to 0.2 more than what the market is. Do you use the same exit cap rates in the other markets?
Mark: We take the current and we'll add...so let's say the current was a six cap, we'll add 0.1 per year, 0.20 per year. And in some cases like to your point, and so like that's to the end of five years, you would've gone from a six to a seven. And in some markets, yeah, we'll be, you know, if we're going to be doing a 0.15 in a certain market and we're like, well, maybe this market isn't quite as attractive or in the past it hasn't performed quite as well, we might do the 0.20. At the end of the day, I mean, as you know, nobody knows what the cap rates going to do. We can all guess. And the important thing to consider is that you know, the cap rate has no impact on your cash flow per se. It's really more of a capital event like a refi or a sale, things like that. So if you can still cash flow and you know, get good returns, then you know, you wait to sell when it makes more sense to sell.
James: Correct. What about a loan wise? Have you guys been doing a longterm agency debt or you've been doing some short term loans as well?
Mark: We do about a third of the deals we do prior bridge, but not necessarily short term is still up to five years. So it's not short term really. And the rates are attractive and there's, you know, a lot of advantages too. Bridge and some disadvantages, but there are a lot of advantages. I like them, especially in the big value add deals from what you have to get them. And then we do Fannie, Freddie, and then a number of bridge frankly.
James: Got it. Got it, got it. So I mean, you work with a lot of you know, students who are trying to come up in this industry, right? So can you describe one characteristic of a student who made them really successful you know, sponsor on their own?
Mark: Okay. Characteristic is, I mean, you know, if you want to say grit, not giving up, but as far as a whole, it's getting really good at something that really, you know, one skill set. You don't have to know everything about multifamily necessarily to get started. You have other people there to help you. But getting really good at something that's a value to somebody else. And it sounds like, okay, that's kind of obvious. Well, we've seen it work time and time again where someone, all they do is pretty much come in and just find deals. That's where the specialty is. They don't want to raise money or sign the loan or know things like that. But I think it's being patient, you know, when you have to wait a year, potentially. I waited a year to get my first deal. That's a long time, you know, to wait. And then you look back on it, it's like, that's not a long time to wait when you started buying more deals or you're like trying to do something new and you're spreading, you know, 12 months before you get a deal that can be frustrating. So just being patient.
James: Yeah. Especially when people are already committed, I'm going to do this.
Mark: Yeah, some people give something up to do it.
James: Yeah. I mean, I really just remember there's not much deals out there. So, you know, finding that one deal that makes sense takes time. Right. It's not easy, If it was easy, everybody would do it.
Mark: That's right. That's right. Okay.
James: So coming back to your personal side of it. I mean, is there any proud moment in your life that you think I would remember that moment? That one particular moment in your experience in your real estate venture?
Mark: Yeah. That's a great question actually. I would say when I got that third deal and it closed because I had already decided if I close that deal, I was going to stop doing IT. So when I got that third deal and said, Hey...my son kept asking me cause I kept looking for deals when he's like, if you get that deal, can you stop doing IT? Cause he was seeing me work so much. And so when I got that that was huge for me, for my family.
James: Got it. That was a transition point of view, getting away from IT to real estate, I guess.
Mark: Right, right. And making the decision, like you said, to do it full time.
James: Yeah. It's a hard decision, especially if you're already
used to a certain industry. And what has been, you know,
paying your bills, right.
Mark: Paying your bills, which is great. And you know, the other thing, unfortunately, when I was doing IT, that was kind of my self-worth. That's where I got my value. I wasn't really good at a lot of things, but for some reason, my mind just worked that way. And so I got my self-worth out of my job. So to give that up, you know, it is a big thing. And you don't know how successful you're going to be or not in your new adventure. So, but I mean, the best decision I ever made.
James: Yeah. I mean, you brought up a good point. Sometimes that whole industry, what you study for, define you 20, 30 years in your life and suddenly, you are changing your complete identity. I mean, it's a big thing, right? I mean, a lot of people do not want to do that. If they're known as engineer or a CPA or the IT guy, they don't want to know, what! Suddenly this guy's doing real estate.
Mark: Oh yeah. I mean, my CPA said, what are you doing? He did. Now he doesn't say it anymore. He did. He said, what are you doing? You're making a lot of money doing IT, why are you not doing it anymore? I mean, you know, he couldn't even comprehend it.
James: Yeah. And I have to mention this; when I was in IT, when I was an engineer, you know, I always think that people in IT, people who are engineers are really smart guys. So these are the smartest guys because that's what your circle is, right? Your circle of friends is there. You think this guy's smart solving problems. And I mean, I did my MBA, it was really eye-opening because I realized there are a lot smarter guys than me with a lot more money in the financial industry. So that was a big aha moment. And that's where I realized that you know, you have to go into business to make a lot more money. And there are a lot of other smarter guys in other smarter professions out there that make a lot more money. And so, I mean, before I forget what is the most valuable value add that you've seen in all your deals? What would you do in case your rehab budget got cut into half in a deal?
Mark: Oh, you mean from a CAPEX?
James: Capex wise, yes.
Mark: You know, one, people need to be...if the property looks like junk outside...I've been in properties that look good on the outside and they're not that great on the inside. But you need something outside to kind of attract you. And it could just be paint, you know, something so it's not dreary and dark, dark colors, you know, but using something a little bit more attractive color-wise for paint. Landscaping, simple stuff to do. It's basically thinking about what does a tenant see? When people say I'm going to do, you know, electrical work and you know, things like that. It's like the plumbing, stuff like that need to be done, but tenants don't see that. So first start with the outside and see what the tenants, you know, whether they go up to the office and it's kind of decked out.
Sometimes we'll spend a lot of money around the office to kind of
put a lot of landscape in there and make it really nice, exterior
wise. Interior, I mean, paint, it's pretty easy to do. Flooring is
huge just from a maintenance standpoint. So if you can do it, but
as you know, it's not that cheap to do floor and then we'll like
resurface countertops. I wouldn't do cabinets and stuff like that
if you don't have the budget for it. I wouldn't do appliances
unless they need them. You're not going to get the bang for the
buck for that. Again, people will see paint, they'll see flooring
and they'll see like maybe surface countertops, paint the cabinets,
things like that. But some people have really high aspirations.
They want to do all these things, but at the end of the day, you're
not living in the property so don't outdo the market. I won't be
the first guy to prove something in a market, I let other people
prove it first. But I would say for sure start with the outside. We
start like with landscaping and paint, stuff like that. People can
see that.
James: Got it, got it. Awesome. Mark. So we're at the end of the podcast. Do you want to tell our audience and listeners how to get hold of you?
Mark: Yes. An email address is Mark@thinkmultifamily.com and love the chat with anybody and I really, really appreciate you spending time with me today, James.
James: Sure, sure. Absolutely. Thanks for coming over. You had a lot of value. And I really like going across markets here because sometimes it's hard to find someone who has done deals in different markets, right. Because it's important. A lot of people want to do markets everywhere. I mean, there are deals everywhere so you just have to buy it right and you have to analyze it right. And, you know, just make sure the numbers work and the location works. Yeah. Awesome. Thank you, Mark.
Mark: All right, James. Appreciate your time.
James: Absolutely. Thank you. Bye.