Jun 27, 2020
James: Hey, audience and listeners, this is James Kandasamy with Achieve Wealth Through Value at Real Estate Investing Podcast. Today I have Ellie Perlman from California. Allie, did I say your name correctly?
Ellie: Yeah. Yeah, you nailed it.
James: Awesome. Awesome. Ellie is a sponsor who owns like 2000 units as a GP and LP. And as a GP and as an active operator, she owns almost 770 units asset under management, almost 100 million dollars in assets. And she focuses a lot on Texas, Florida,, and Georgia, all the States. That's our opening early. And she's in California right now. Has California opened?
Ellie: Not at all. So I live in Santa Monica. It's part of the LA County and we're one of the last counties to actually reopen. So Orange County, they've reopened the economy a little bit so you can sit at restaurants. Here, it's kind of a ghost town. We can't do anything.
James: Got it. Yeah. That's awesome. That's a complete difference within a business-friendly state and a non-business friendly state, I guess, but that's okay. Yeah. Ellie, welcome to the show. Why don't you tell our audience about things that I would have missed out about you?
Ellie: Sure. James. So I'm really happy to be here. Thank you so much for having me. I've been in real estate for over a decade now. I've experienced 2008. I was not an investor back then, I was a commercial real estate lawyer. And I've learned a lot from my clients, mistakes, especially, being aggressive and not, how conservative and what that can do to you in times of recession. And that turned me into a very, very conservative operator and investor. I'm basically originally from Israel. I was born and raised in Israel and I moved to the States about six years ago. I went to MIT and got my MBA degree and shortly after, started purely capital and decided that, Hey, you know, I was in commercial real estate law, I also did property management backing Israel, and now it's come full circle, and investment in multifamily properties was the thing that I wanted to do, I saw a lot of potentials there.
Especially the resilience of that asset class is what drew me to multifamily mainly, that's the main reason among many good reasons. And yeah, that's what we do. I mean, we buy class B properties in A and B areas. We like value-add deals like many other operators and for a good reason. And we're very hands-on when it comes to operating and managing properties. And, as you mentioned, we invest in Texas, Florida, and Georgia. They reopened the economy probably several months now, I don't know if that was the right decision to do it now but it definitely helps with collections and with leasing activities as what we see today.
James: Yeah. Yeah. You're living in a really two great worlds in California with the nice weather and a good investment world in Texas, Florida, and Georgia so that's awesome. So let's go into details about your deals of this what you have the 700 units where you are the operator. When did you get started? And I mean, what was the aha moment that when you are a commercial lawyer, what is that aha moment to say, okay, I'm in the wrong profession. I better go to the other side.
Ellie: Well, pretty early on, I remember that at some point I was with one of many, many meetings 'cause lawyers love meetings. 'Cause we actually, you know...
James: Make money out of the meetings.
Ellie: Exactly. And one of the many meetings, I was sitting there was a round table, really big conference room and my clients were actually developers and they were building apartment buildings, actually, in East Europe. And I remember thinking, I'm sitting on the wrong side of the table. I need to be them. I need to be the entrepreneur. I need to be the investor. Because as a lawyer, if you work, you bill, every hour is a billable hour and you can make nice money. If you don't work, there's no income, there's no money unless you're a partner and you bring some clients, but that's a whole different story.
And I realized that I wanted something that has more cashflow streams and something that I can grow in. When you're relying only on your own profession, 100% on your 10 fingers in what you do every day, there's a limit to how much you can make. There's a limit to how much, you know, your income is capped. And in addition, I found it more exciting to actually be part, I want to take part in the action. I wanted to search for properties. I wanted to speak with investors and that looked a lot more interesting and exciting than representing them and negotiating with banks, creating contracts, negotiating with vendors and contractors, and subcontractors. I learned a lot, but I felt that I have some potential that it was not being fulfilled by doing what I was doing at that time. And that was my kind of aha moment.
James: Got it. Got it. Sometimes while we're doing our full-time job: lawyer, doctor engineers, or in any W2 jobs, I mean, sometimes you have that feeling like what you said. Oh, I really want to enjoy something else, which is more interesting. Is it as part of your youth growing up, but you have certain things that you enjoyed more when you grow up that you think resonates well with real estate searching and operating real estates?
Ellie: Growing up. No, not really. I grew up pretty poor actually and so, I didn't see a lot of investors around me in buying a house. You know, your main residence was the biggest thing that I could think of at that point. It only came through education after I went to law school and through kind of learning about real estate during my career from observing what's happening around me. But as a kid, there was nothing that could really tie me to real estate at that point. It was way too early.
James: Got it, got it, got it. So that's very interesting. And what about these deals that you bought? Can you talk about the first deal that you bought and what are the challenges that you had on that first deal and how many units was it?
Ellie: Yeah. Yeah. So I think for every first deal, there's always kind of chicken and the egg. You don't have experience as a multifamily operator so you need to kind of convince the broker to give you a deal, even without experience and how do you speak with investors and bring capital if you don't have that experience? But if you can't convince them to work with you and how are you going to get your first deal? So for me, the way to kind of bypass this hurdle was to partner with someone that had more experience than me. And through that, basically, my lack of experience specifically in operating properties was not the main focus because then I was working with someone who was more experienced so that was one way. And then a lot of new young syndicators and aspiring syndicators and that's the path that they're taking.
I also see syndicators are just, you know, they just find a deal and they manage to basically work with a small group of investors that, you know, usually, it's not a huge deal, it's not a large deal, but they're able to do it. I have a mentoring program today. I teach people how to do what I do and it works. And I believe in that method because I also had a mentor and I paid someone to teach me everything. So, basically, I'm not going to work with investors' money and learn and make mistakes throughout the way and mistakes are inevitable. I think we are all gonna make them at some point, but you can definitely reduce the magnitude of the impact of your mistakes if you're working with someone that has more experience.
James: Got it. Got it. Yeah. I mean, sometimes, people don't see how much money we spend or how much time we spend to learn from others to shortcut your growth. There's no such thing as we came up on our own. I mean, there's always a mentor or something that has driven us to get somewhere faster, especially in multifamily investment, which is a multi-multimillion dollar investment. And it's not easy for anybody out there to just go and do multifamily. So, let's talk about some of your properties right now during COVID-19. So how's the property performing? Can you give us some numbers and performance and how did you guys do it etc.?
Ellie: Yeah. So, you know, back in March, there was a lot of uncertainty and we didn't know what to expect. Part of it was kind of the media frenzy that was basically shouting 'tenants are not going to pay. There's going to be a huge default' and we weren't scared, but we're definitely concerned because we just didn't know how hard our properties are going to get hit. And we decided to be proactive pretty early on. So during mid-March, we came up with a plan that basically created a kind of a payment plan and with tenants that lost their jobs and so basically allowing them to pay in installments throughout the month and we created an early bird discount. So basically during March, if you're going to pay for April, before April 1st, then you get $50 off of your rent for instance.
And we had basically a lot of tenants that took advantage of it. And what happened is that some of them actually lost their jobs by April 1st, but they already paid us in advance. So that was a way to secure at least some of the collections. And that was part of making sure that collections are going to be solid. We were trying to think creatively, how can we increase income across the board with the properties? And I know that many sponsors right now, they stopped renovating units because usually, you renovate a unit, you invest three, five, $7,000, and then you put it back in the market, hoping you can rent it. And we didn't really stop. We basically switched to renovation on demand.
So we have the model unit that is already renovated and then we show tenants the virtual tour of the renovated units and classic unit. And we say, you have a choice; either you can go with the classic unrenovated units or for $100-200 premium, you can get the renovated unit. And just last week, we had three new leases and they all wanted renovated units. So it takes us about 10 days to renovate it. So we were still making those renovations. We're still making more money. We're just not renovating without having someone that is willing to pay for that specific unit because we still don't want the unit to sit out there and again, being rented and just be vacant. So that was another aspect of trying to boost income as much as possible and really aggressively cut costs. So only required maintenance work carried.
We kind of negotiated open all the contracts with all the vendors, landscaping, even insurance, and started renegotiating. And we were looking for ways to save every dollar we can save was good for us. And we were looking at the numbers by the end of April, April was the first month of COVID when it comes to multifamily because March everyone already paid before we knew that COVID kind of is an issue. And surprisingly, we actually made more money during April, compared to March. Our collections were around 99.5% and our cashflow actually increased compared to March because we saved on costs so much and we actually collect, we were fine. And then May came and I think the trend is pretty much the same or tracking right now. We're speaking, it's May 27th and we're at around 94, 95% collections.
So it's a little bit lower than the month of April, but we still have three or four more days until the end of the month. So every day we're collecting more and more money from tenants and our property managers are knocking on doors, sending text messages, and calling tenants. And really, we're very, very proactive in order to make sure that we collect everything. And in addition to all of that, there's always going to be those who cannot pay. And of course, on each property, we have those who've lost their jobs. And we basically decided that those are struggling and were good tenants before COVID, we're actually going to try and help them out. So we gave away basically gift cards to help them pay for their groceries, Walmart gift cards, to those who were good tenants before COVID, and now they're just struggling. They can't pay, or they made us partial payments because we made good money when times were good and they were a big part of our success or our paying tenants.
And the second thing is I think there's something a bit humane about trying to help those who are struggling right now. We also hope that that would help them give a higher priority on paying their debt once they're back to work and they're making money. But definitely the stimulus checks were helpful. The moment that we knew that they got stimulus checks, we make phone calls and some of them came and paid. And if we weren't following up and just hoping that they will come and pay, some of them would probably use the money for something else. Now we have unemployment that is helpful and Texas, Florida and Georgia are all of those economies are back, they're reopening and many have rehired basically. And that also helps with collections. [17:17-17:21 inaudible] Oh, James, I can't hear you. You're muted.
James: Sorry. Let me start again. So we are just checking all our residents on how many people are going back to work because that's important. So once July ends, the $600 and additional from the federal government that is sent out per week, it's going to be ending soon. So we are starting to check how many people got jobs and how many haven't so that at least we know how bad it's going to be after July. So you're absolutely right. I mean, people are paying, I mean, I'm sure your concession or your gift card that you gave has helped them to make a decision to pay the rent. I'm so surprised and delighted that people are paying the rent with all the loss that they have to follow.
We don't have to threaten them with evictions. We do not tell them three-day notice and people are still paying, which is good. And this is absolutely good for us. It just really is multifamily asset class, food shelter and safety are very important and they can go and spend anywhere else. They can go for a vacation. They can go for a movie either to pay for shelter and food. And maybe they buy a massage chair, like what one of my resident did. So a massage chair and some people bought new cars. That's why people are buying new cars because there are so many deals going on in the car, but the good thing is they're still paying the rent. So do you own your own property management company?
Ellie: No. We actually hire a third party company and they're pretty big in the industry. They manage over 40,000 units and that's why, kind of, early on, we realized that we're good at finding investors, finding deals, and managing the asset. Our core focus is not property management, especially since I'm here in California. And this is the great match between a company that sits in Atlanta, for instance, they know the market inside out. They have people there that are sitting in the office and helping to collect rent, signing new leases. And almost on a daily basis, we're in touch with them since COVID started. Before that, it was probably two, maybe two and a half times a week, on average and now it's almost everyday, multiple times a day. So we're very hands-on and I couldn't be happier. They're actually doing a great job.
James: That's awesome. That's awesome. Did you find any resident that ghosts to the property management company completely? Like they don't want to talk, they don't want to, have you ever seen that?
Ellie: Yeah, we always have those.
James: Yeah, I do have that.
Ellie: Yeah. Inevitable, but thankfully it's a very marginal phenomenon, you don't have five or 10% of your tenants whose ghosting on you and disappearing,
James: Correct. Yeah. There's always a small percentage of people. Does anyone want to take free money given by the cities? Like, in Texas, I mean, Dallas, San Antonio, Austin, I'm not sure about Houston, probably they have done it. They did give a lot of assistance to the residents who can't pay. I'm not sure in Florida and Georgia, did you see that? I mean, did the government or city give out any assistance?
Ellie: Nothing out of the ordinary besides stimulus checks and unemployment.
James: There's a lot of programs in Texas that give assistance to residents who can't pay, who lost their job and all that. So, yeah, we did take advantage of some of the programs because yeah whatever money we can get from the government to help out our residents who are struggling, I mean, the more flesh we make them right now, it's going to be better later on, for the next few months. So we are going ahead and do that. So what about the value-add strategy that you do on your deals? So what worked the most, what's the most valuable value-add that have you seen?
Ellie: Usually, it's a unit interior and you don't have to go all the way and make a beautiful brand new apartment. There are few things that are an eyesore for tenants, usually. I mean, a freshly painted unit that's a must. But in many cases replacing the carpet with vinyl flooring is what we do. In the bedrooms, we keep actually the carpet because tenants don't really care about that. And it saves us, you know, cut the costs at least by half some times. You know, usually, it's just the normal things; black or stainless steel appliances, painting the cabinet doors in the kitchen, maybe backsplash, new lighting. So, and sometimes we pick and choose, we don't do all of them.
So there is a really good market research that goes into it before we start doing anything. It's very tempting to say, I'm going to spend five or six or $7,000. We're going to make a beautiful apartment. But sometimes you're in an area where people cannot pay for you to have a decent ROI, or they're totally fine if the apartment looks good, but it doesn't have stainless appliances, it has black appliances. So we do market research. We actually call all the other comps and we look at the pictures of their renovated units and we understand what's the scope of the renovation around us and how much they're charging as a premium and based on that, we know what tenants like. It's also a conversation we're having with the PM, the property manager. And they tell us, yeah, in this market, they're not going to pay you $30 more if you're going to give them a unit with stainless steel finances and not black appliances, but they really care about the carpet. And so that we're kind of adapting to the market and we're adjusting the scope of the renovation based on the demand and the ability to pay for all those upgrades.
James: Got it. Yeah. I mean, that's absolutely right. You want to look at what the market can support and not do random renovations. And a lot of people have failed when they move from one city to one city. I've seen people move from this city. You know, they are so used to spending 5,000 a door in one city and they go to the next city and they try to spend the same amount of 5,000 a door and it doesn't work. So it's interesting how the demographic is able to support it or not. So that's interesting. What about deals? How do you underwrite deals? What kind of sniff test do you do when a deal is given to you? Like today, let's say somebody's sending you a deal, but before I go there, are you expecting prices to go down in multifamily post-COVID?
Ellie: Yes, but not in the immediate future and not as much as most people expect. I don't think there's going to be 23% discounts for several reasons. One, as you you've mentioned collections, we're doing pretty well with collections. I know some properties are collecting around 70, maybe 80%. So not everyone is doing great, but we're not talking about a 50% drop in collections that can basically justify, you know, fire sales. In addition, you have forbearance. So for 90 days, owners were in trouble now, don't have to pay the lenders. So they're not motivated to actually sell the properties at a discount. Most of the discounts that I've seen today of deals that were closed during April and May and early May were around, I would say four to 5% discount. The problem is that there's a huge gap between the seller's expectations and buyers' expectations.
You know, many buyers want to buy a property at a 15, 20% decrease in price, price cut, and sellers are saying, we're doing well. Why would we sell you at a discount? Now, what they're failing to understand many times is that collection is only one part of the equation. So even if you've collected more than March, there are two other main things that have changed and this is also answering the second part of your question about how we underwrite deals. First and foremost, debts have changed significantly since March. So if in March, it was easy to get 70, 75, maybe 80% LTV. Right now, we're talking about 55 to 65, maybe 68%. So you take a property with the same income, let's say, NOI is the same pre and post COVID, but now you have a deal that you only get 55 or 60% LTV versus 75% pre-COVID, guess what? Your returns are completely different.
In that one part, I think was part sellers don't fully understand. And then in addition, when it comes to our projections, pre-COVID, you know, we were using software that had predictive models about vacancies, concessions, rent increases. And we use those numbers along with, you know, it's a combination of those projections, conversation with our property management company and how the property was basically performing up to that point and came out with a number that makes sense. Now, regardless of what those models are showing us, I'm comfortable buying if the deal makes sense with very little 0% rent increases in the first 12 months. And that also affects the price that we can pay, because obviously you have, you know, the first 12 months you can't really raise rents. Even though I have to say that in some of our properties, we are able to lease only with zero rent increases, but on other properties, we just raised rents about 18% higher during April because we were offering renovated units.
I've talked about before renovation on demand and people are willing to pay a little bit extra. So during April, we're actually increasing the rent from some of our properties by almost 20%. So even though that is happening, I think we trust that that would happen with the next property. And so in order to be conservative, this is what we do. We increase also the bad debt or delinquencies and increased concessions more than what we usually do pre-COVID. So all those factors alongside the debt, basically, you know that affects the returns that we're looking at. And that's why the prices that we're willing to pay for a property, they're not the same like they were before COVID.
James: Yeah. There are other factors. Like the debt and I don't know whether they talked about the reserves that the lenders are asking right now. The Fannie and Freddie, that's gonna, you know, additional [29:30unclear] which reduces your return, even though you're supposed to get back that money in the 12 months or 18 months that, you know, after their deal has been meeting a certain threshold. So that's very interesting. So let's go to a bit more on the personal side. So, after you start doing your real estate business, is there any proud moment that you had you know, that you're really, really proud of that takes you until the end to forget it? I mean, you can't really forget about that particular moment that you're really proud of yourself.
Ellie: Well, we had one property that when we got it on a contract, it was 98% occupied. And after 90 days or I think 80 days, we're close to the closing date and we were asking for the latest rent rolls and T12 because we're always, you know, looking at the new financial information. And I'm looking at the rent roll that the seller is sending me and I'm staring at the numbers and I'm not sure I'm seeing it right but apparently the property is about 80% occupied and he didn't tell us anything. He was hoping we're not going to notice. And it happened over a few weeks and we are about less than a week before closing. And we just find out that the property that was 98% occupied is 81, 82% occupied.
James: So it dropped within a couple of months?
Ellie: Within a couple of weeks. Yeah. So, we were starting to kind of scratch our heads and say, what happened here? And we kind of discover an interesting story where basically the seller was self-managing the property. He thought he was saving money by doing it by himself. He left a lot of money on the table because all of his rents were under-market. But when we took over, we just increased rents by $85. You know, almost 10% increase without touching the units because we had to push the occupancy back up because we knew it was under-market. But he was self-managing and he wasn't really treating his employees and his tenants the way they should have. And at some point, when they heard about the sale, the entire team just got up and left and they all just quit.
And he had to bring a third party company last minute. The third party company comes in, they're looking at the property. And they say, okay, those who are a little bit late paying their rents, they just started evicting people. There was a woman, one of the stories that I've heard, a woman that came from the hospital, after she gave birth and they evicted her because she wasn't paying on time because she just got back from the hospital. So they basically said we have very strict rules and so if somebody, if we don't think they should be here, they're not going to be here. And that's how they ended up at 82% and the owner didn't, I don't know if the owner, even knew, I think he was hands-off at that point.
He felt that, you know, he's almost selling the property and we didn't know if we can close because, you know, I had investors rhat knew they were buying a property at 98%, not 82. The first thing we did was obviously, you know, communicating that with everyone and saying, this is the situation. And we also have a plan of what we're going to do. And I wanted to give, you know, investors the opportunity to say, Hey, you know what, it's not the type of investment I want to be part of, but nobody did. We renegotiated with the seller and said, now the property is not worth as much as it was three months ago. And we also had to negotiate with Fannie Mae because now the property is not stabilized. So Fannie May only gives you a loan if the property is stabilized, meaning 90% occupied for 90 days, and this is not a stabilized property.
And we worked with NorthMarq, they were a great team and they went to work for us and basically said, we can vouch for those sponsors are great operators and convince Fannie Mae to keep the loan even for an unstabilized property. So that was one of I think more interesting dealings that I was part of but it turned out to be fine. Our property management company were able to bring the occupancy back up to 90% within 45, 48 days. And the property is doing a lot better and the collections are good. And it's interesting when you're in that moment, you're not sure how the property is going to perform, but when you have a really strong team, it makes all the difference. And I was blessed to be working with a really, really good team.
James: Got it, got it. That's very interesting because it's, yeah, Fannie and Freddie, they expect the property to be stabilized until they close. They'll keep on asking you for rent roll until you're closed so it's very important. That's a big drop to 82%. It's crazy. So, yeah. Thanks for coming for the show. Why don't you tell our audience how to get hold of you?
Ellie: Absolutely. So you can find more about me if you go to elliperlman.com and I also have a free guide for you. If you want to look at a deal, there's basically a free guide. You can download on my website that will basically teach you all the things that you need to look at when you're evaluating a deal, all the crucial deal components. And that's basically how you can reach out to me. If you want to email me. My email is Ellie@ellieperlman.com.
James: Awesome. Awesome. Thank you very much for coming to the show. I'm sure we had tons and tons of value from your knowledge and our discussion. Thank you.
Ellie: Thank you, James. It was fun. Thank you so much for having me.