Multi-Family Deal Lab Episode 006

Speaker 1: Welcome to the multifamily deal lab podcast, where we dissect a deal before your eyes and ears. So you can discover the strategies and tactics that got each deal to the finish line strategies and tactics that you can put in your own toolbox to get you to the closing table from sourcing the deal, raising due diligence to the property takeover, multifamily deal lab shows how you too can get the deal done. And now here’s your host. David Lindahl, everybody welcome to multifamily deal lab. I’m your host, Dave Lindahl. Hope

Speaker 2: You’re doing well in these difficult times. She’s starting to feel a little stressed out. You’re starting to feel a little alone. You’re starting to feel a little isolated, join the crowd. So good news is, is well. Yeah, maybe this is good news from New York that they may have peaked and are maybe headed down the other side. There’s certainly, if you listen to the may, the governor’s conference today, he was talking about, they’re starting to look at a plan to reopen their economy. Certainly not right now, but at least they’re starting to think that way, which is a good thing for us. And then Freddie Mac and Fannie Mae both have tightened right now when you’re buying deals, they’ve made it a little bit tighter. we talked about a couple of calls to go, how they’re asking you for a PNI for 12 months and additional 12 months they’ve increased their, in order for any type of waivers, they’re increasing the debt coverage ratio to two class and a loan to value of 50%.

Speaker 2: So it also will see these restrictions for the next few months until we get it on the backside of the pandemic. And we start to see some relief insight. There was just something that came over on my Harvard feed, that we share between classmates, that they are, they are testing for different drugs right now. let me see if I can find it mass testing throughout the world. So the world health organization is testy C yeah, global mega mega trial for the most promising, coronavirus treatments. Some of it, one of them had to do with the SARS. One of them had to do with the, malaria. One of them had to do with AIDS. So these are drugs that are already out there working for other types of virus pandemics. And they’re seeing what type of an effect they will have on the coronavirus patients.

Speaker 2: So that’s being done right now as this pandemic works its way through our world. Hopefully something will something good will come of it in a short period of time. So that’s, what’s happening over here in the meantime business still goes on remotely. There are still deals being done. There are people sharpening their knives as they should be. during this time, you know, pick up a skill that you deficient at work on a skill that you could be better at. you can still build your team. If you’ve to the ultimate partnering event, you can go through your old cards. You know, you can start reaching out to people that, you had forgotten about because you haven’t been through those cards in a while and strengthen your team. Somehow again, you can be reaching out to brokers to on a regular basis. There’s certainly the smart ones are reaching out to us investors and they giving information as well.

Speaker 2: So when the game starts getting played again, they will actually, shouldn’t say the game starts getting played because it’s still being played. I mean, people still closing on deals that they had in the pipeline. and people are still putting deals together. Although, as we know, the buyers are wary, the lenders are wary, and the sellers want to get those deals sold as soon as possible because they’re not quite sure what’s going to happen. And on the back end in terms of, the rent collections, when they start doing the trailings, the trailing numbers. So that’s where we’re at. So as we start this call, I thought I would bring on Scott, Stafford, Scott. Many of you know, he’s been a student for many, many years now been part of just about all of our groups, coaching, elevate El society. and he created a product called REI indicator that actually goes through the demographics of all the major city, secondary markets and tertiary cities throughout the U S and the amazing thing about if you’re not using it, those of you that are using it now, it’s amazing.

Speaker 2: But for those of you that aren’t using it, the amazing thing about the software is you can literally, it goes neighborhood by neighborhood, in classifieds areas as a B C’s or D’s. so you, you know, Jeff takes him on his bus tours when he does immersion and before the tour, he Skypes in now, but before the tour, he’ll talk about the different areas, ABCs and DS. And they’ll tell you, if you go to this street and you stand on this side of the street and you look over the other side of the street, you’ll, you should see this because this is where the dividing line is. And that’s what happens. It’s pretty, pretty amazing. But anyways, I thought I’d bring Scott on because we were chatting the other day and he was talking about, you know, one of the opportunities that’s going to be on the backside of this pandemic. so, I wanted him to share that with everybody as well. And then talk about some of the markets that are where things are happening right now. So Scott, you with me,

Speaker 3: I am here. What’s up Scott. Wow. Well, but just watching the very quiet street outside my window.

Speaker 2: Yeah. I bet. Have you been outside lately

Speaker 3: I have. I’m very fortunate to live in a place where it’s fairly easy to be distant from people and still get exercise. So I’ve been on my bike, in places we’re allowed to go, but, it’s not a normal world. No, not at all through this.

Speaker 2: Absolutely. I happened to be in the office doing this call because I had to come in and grab something. And then a Jermaine was in here cause he’s on this call as well. And he came into him, he’s on paper and asked me to start, opening up my computer. And then I was like, dude, get away from me. There’s too many people in this office. Right.

Speaker 3: I don’t want my kids orphans. Yes, of course. I’m glad you’re healthy. And I hope everybody is doing well and is healthy and, all the best to them and their family. Some of you may recall that I am originally from the New York city metropolitan area. So I’ve been watching New York very closely because I have a lot of family there. And, it does look a little promising. although we do have to see a ripple through the rest of the country from that. So we’re quite out of the woods.

Speaker 2: I got friends in New York. none of them are leaving their places. They’re using Instacart to get food in. but my cousin, you know, my cousin Chris Bowzer. Oh yeah, he got it. Oh no, he’s on the backside of it now. Yeah. So he lives in New York. He got it. He’s got two kids, a wife and a dog and they basically quarantined him in the, in the bedroom and he couldn’t see his kids for two weeks and she had to do everything. but yeah, so scary stuff. So, so let’s talk about, you know, you had mentioned some debt, some interesting demographics that are, that are happening, that are going to be ripe for those that know about them. as soon as we’re, as soon as a, you know, business starts picking up,

Speaker 3: actually a couple of things that are overlapping here, which are very interesting. Some that are new because of the, COVID-19 situation, as well as some of the things that are old. The thing I like to let people know is that, as you’ve heard others sometimes speak from an economic perspective on the news, our economy was fundamentally actually quite strong and this was a blow from the side, as opposed to a blow from inside the financial markets are inside the, the cycle of, of up and down. It, it, it came out from a, from a different angle and therefore, those fundamentals should still be in play, which means that markets that are strong will be strong again. And markets that came on late should, also, you know, be a little like an regular typical market up and down, maybe a little more vulnerable.

Speaker 3: So the markets really that, that we’re looking at here are the markets that have strong fundamentals. You want to watch for the ones that have multiple economic stools leg to the stool to stand on. But what’s really interesting about this timing is that when we look at the big picture of the demographic groups, the boomers, the Xers and millennials, we were poised numerically that in about 2021, which is what right around the corner, right there was going to be a massive influx of wage earning career, advancing a career peaking folks, hitting the marketplace in, in record numbers, bigger than the boomers. We had the biggest surge with the boomers. Xers is a smaller generation and it’s about 10 million, less than the boomers. So that’s a little hard to absorb, in the economy. There’s just less, less activity, but look how well we’ve been doing, even with the 10 million less cohort leading the front lines of the top wage earners peak career.

Speaker 3: So we’re all ready without changing anything without anything to do with COVID-19 poised for another 12 to 15 million people entering massively into the economy. And that should poise us for the biggest upswing in U S history for economic growth. So the timing could actually be very interesting because we are having right now a national reset. A lot of us didn’t think we’d see two in our lifetimes, but here we go. We had one in 2008, we’ve got another one here in 2020, and coinciding with the recovery from COVID-19 where fundamental should allow us to do well. And with this huge new segment of the population coming on board, graduating college, getting into careers, making decisions about where they’re going to live. We have a huge opportunity to support them with multifamily in that transition, because as we know, many people don’t buy a house as soon as they leave high school or college and got depths to pay, they still figuring out where they want to live.

Speaker 3: Apartments are ideal for them, and it gives them that flexibility and cost effectiveness that they need. So we have really, you know, an excitement I I’m really kind of, of course, nervous and anxious about. COVID-19 like everybody else, it isn’t over yet, but I am really, really optimistic about the place we’re going to go. in the next five to 10 years, it really should be a healthy restart. It’s going to be amazing. It’s going to be a very great coincidence of, of boom. a couple of things that are also interesting to think about is that it also coincides with a massive shift in boomers to retirement, which has already started, but will really pick up steam over the next five to 10 years. And that’s going to change demand for housing and demand for, employment and the geography of where people are going to be moving to support that and to experience that. So that’s important to think about, and we may also see a possibility of a doubling or tripling up. I’m hoping, as a nation, from the federal level all the way on into nonprofits and health institutions, et cetera on, health research. So those markets that have exposure already in may have an opportunity to really grow because of COVID-19 beyond the norms that are already in place.

Speaker 4: So there are those markets like certainly Boston, right

Speaker 3: Boston’s a huge one. New York, Pittsburgh, Minneapolis, and the smaller market to the South, which houses the Mayo clinic, Los Angeles. And there were probably at least a dozen, a dozen other markets with some significant health research that goes on. And the one they left out, which people shouldn’t leave out is actually Washington, D C Montgomery County has a huge number of biotech and now tech companies already. And so there’s already a workforce there that can handle it. There’s already an appetite for it. So that could be an interesting place to look at as well. And not just in Montgomery County, but the surrounding counties that would support it.

Speaker 2: What do you think about, I mean, so we’ve got a reset on the economy because of COVID-19 and, but at the same time, we were certainly going towards the edge of this particular cycle. So now do you think the recovery from this pandemic is also going to, create the recovery of the real estate market as a whole, in the sense,

Speaker 3: Do you know, how will we typically

Speaker 2: They come out of recovery from a correction. It’s the major markets that will start to roar out first. And that also includes Minneapolis for some strange reason, Minneapolis, but you probably know why Scott, but I don’t, but Minneapolis is always one of the first markets.

Speaker 3: Yeah.

Speaker 2: It’s going to be a major market like surge when we come out of this, like irregular correction or out of those secondary markets that we’re doing so well because the money had moved towards the center of the country, as the primary markets get overpriced, are those secondary markets are going to come roaring back as well. What’s your opinion.

Speaker 3: My opinion on that is that we should see maybe a little, definitely strengthen the primary because the big money, the institutional money always wants to go where they can hedge their bet the best. And when you have economies with four and five major economic engines, it’s just easier to justify the solidity and the comfort level of putting your money in at risk. They’re willing to take lower returns in exchange for that level of comfort. And yet it does create that boom. And I really think that will happen in the primaries, but I think we have a shot here for the secondaries to do a little better on several fronts. First, they already hadn’t quite finished their recovery if you will, are there the boom times. And, and second, I think that some people may be reevaluating their lifestyle, you know, where do they live Do they want to live in places that are so incredibly dense, but it’s highly vulnerable to be out and about because we have an uncertainty hanging over our heads now that we didn’t before about, you know, where, where should we be

Speaker 2: I hadn’t even thought of that. It’s so ironic that the millennials, they all wanted to live in the cities and then the baby boomers, they were tiring and they wanted to live in the cities too, because it’s close to everything everything’s convenient. And then all of a sudden you got this, you know, this, this mysterious killer out there that could come back a day safer when you’re not in the cities.

Speaker 3: And it’s safer when you’re not closely in any location. I mean, we have a town in Georgia, Albany, Georgia has had a tremendous outbreak and it was made even worse when they had a funeral for somebody who died of COVID. And a lot of people got sick at the funeral. And so we it’s anywhere where there we’re gathering closely, but it’s easier to run a life away from people more, you know, it opened open air markets compared to the densities of the Bostons and the new Yorks and the Washington D C et cetera. So I think that there will be maybe a little more attention as people make these decisions as millennials and then generation behind them that are now just about ready to come out of college in their very early years. They’re not peak earners, but we need to keep our eyes on them because they’re going to be renters.

Speaker 3: They’re going to be a lot more suspicious. So it may, you know, if it’s a crystal ball, you could, you could guess, some things I’m really concerned about and watching, if you will, concern may sound like it’s negative. It’s just what I’m, what I’m focused on is that we have a level of unemployment potentially occurring. That will be unlike anything we’ve ever recorded. How fast can we reabsorb those jobs How, how many businesses are going to be lost permanently And on the flip side of that, what is this pent up demand Lots of people are not buying cars right now. They’re not, they’re not buying things. They’re not moving apartments. They’re not thinking about new furniture. So there’s going to be this huge pent up demand where people are going to be ready to go out and spend. So that’ll kind of counterbalance the unemployment, hopefully, but it’s these frontline workers that are generally what you might think of as more of a C kind of apartment tenants that have been hit the hardest financially and are at risk the most.

Speaker 3: So there definitely should be some, some focus on that. We don’t know if there’s going to be a relapse in the fall, statistically speaking, we should probably have an uptick again, as we go into the colder months. So I think any signs of recovery issue or healthier economic behavior in the country that we might see in June, July and August should be taken with a serious grain of salt. It’s not necessarily going to tell us that we’re in the clear and that we’ve got a robust recovery full speed ahead. We probably need to go through another winter. And we probably also need to have a vaccine in place to give that sense of reassurance. We also don’t know where energy, energy prices are going to go. So I would particularly avoid markets right now that are overexposed on energy, because we just don’t know what’s going to happen. There’s been some positive motion in that direction, the last couple of days to stabilize those prices. But we just, we don’t know where that’s going to be. So I would definitely be thinking about avoiding those markets.

Speaker 2: Yeah. That would be a Houston. Lafayette was laughing. Yeah.

Speaker 3: The Midland Odessa, certainly much of North Dakota. We don’t know whether shale is going to continue to have a price support necessary. We don’t know if there’s still the same level of appetite for the renewables, the wind and solar. I mean longterm. Yes. But with the competitive price being so low for the, the, the carbon based, it’s, it’s less likely to ramp up quite as quickly. So keep your eye on that.

Speaker 2: That’s interesting. What are the, what are the markets do you think, I’m going to be affected negatively in the future

Speaker 3: Negatively. I always have been more cautious on tertiary markets. They’re usually the last on and the first off in terms of a cycle. And up-cycle because they just don’t have as much to hold on to when things are tight.

Speaker 2: Yeah. Just let me explain that phrase to everybody. So you have primary markets, which are the major cities. You have secondary market, which are the smaller cities. And then you have tertiary markets, which are much smaller cities, typically a demographically they have between a hundred thousand and maybe a eight, 500,000 people in them. So when Scott says tertiary markets, he’s talking about the smaller cities, typically farther away from the larger cities,

Speaker 3: By the way, for some of you who are here who have an RA indicator system, you may not have already noticed yet that the release that we did about 10 days ago includes, the ability to see what category each of the markets that are in primary, secondary or tertiary tertiary markets are always,

Speaker 2: Here’s the thing. We tertiary markets. Typically we did really well in tertiary markets and in Texas many years ago. And it was because the Texas always overbuilds in their major cities and the rents had never really raised high enough in order for the new building to begin in the tertiary markets. But actually the rents didn’t raise high enough to, to, to substantiate the new building of new product. But they, but the occupancy was staying at 95%. So you could be, she could actually be raising rents, at certain portions. So it lagged the, the primaries and the apartments always stayed full, which was good. So typically the money will flow from the primary to the secondary, to the tier Sherry’s. And then when the correction happens, it goes back out to the primaries. So this is an opportunity right now, really to be looking at DC, which is usually one of the first out of the Gates as well, LA San Diego, Boston, New York city, as opportunities to cashflow.

Speaker 3: Yes. San Francisco as well. I’ve put in that list.

Speaker 2: Yeah. I’m one of the markets, are, would you be focused on right now

Speaker 3: I still like the Southeast South Carolina, North Carolina, Florida, especially sort of the mid size markets there because they’re, there really aren’t, there are many primaries in the Southeast because of the nature of the growing, through the air conditioning age, as opposed to the industrial age. And I think the fundamentals are strong there. And I think that supportive of, for example, people thinking, gee, maybe not Washington, D C how about something like Greenville, South Carolina, or Charleston, where it’s not quite so dense and the quality of life is quite good and the cost of living is, is reasonable. So I, I really think the Southeast is, is very good. I think Texas will do as we come out of this. that’s where we’ve been for a very long time. The question is how well will, how much adjustment will there be in the cap rates in California and in Seattle

Speaker 3: And, you know, maybe there could be some grabs there because mid and longterm, those markets are still fantastic. And it would be great if in this correction, you could acquire some assets in those much longer term strong markets. If there could be a brief moment, a window of three to six months, maybe I’m just guessing here where there could be just the right combination. And Dave, as you teach us, as you taught me from day one and the first, first time you ever instructed me, was it no matter what the market is, there’s, there’s always some distressed property and or distressed seller. And sometimes it’s a combination of, of the two where this will be the moment that even if the cap rates in that market haven’t fully corrected, the property could perform because of the urgency of this seller. And they’re going to be a fair number of people in the small to medium sized properties, the five minutes to 20 units to 60 units that they’re going to be saying I’m folding up shop.

Speaker 2: Yeah. Right. One other point is this is an opportunity. It will be an opportunity. A short window, like Scott had said to get a properties at B yields, cause typically, you know, we’re looking for a, anywhere for an a percent above cash cash on cash return. And you’ll start seeing a properties at the turn of the market, start performing at that before they start sinking down again. So keep your eye out. So you get a nice a property with a nice yield, and that would be a legacy property. Something that you keep, keep for a long, long time that will cashflow always nicely for you. And it will be easy to asset manage and manage. So,

Speaker 3: And they’re more, they’re more, cycle proof. They tend to have a lot more stability during these times of fluctuation.

Speaker 2: Yeah. It’s the C properties in these times of fluctuations that get hurt the worst because they’re the service provider. So those are the workers that lose their jobs first. And that’s why, you know, for, I don’t know, the last number of years I’ve been preaching, you know, do micro repositionings buy properties that are BB minus. If you want to cut your teeth with some seed properties, make sure you’re going to get in and out of there, you know, in a relatively quick period of time, because you don’t want to get stuck with one, my old mentor, you know, he told me many, many years ago. I remember I brought him my next property. I was at my, probably my seventh property by the time I had met this gentlemen and he agreed to mentor me for a fee and I was like, Mark you’re you’re so rich, why are you charging me to be mentored

Speaker 2: And he said, because he was a hard money lender. That’s how I met him. And he said, because you know, many years ago, Dave, I use it. He was brilliant at taxes. And he said, give me your taxes and I’ll show you where you can save more money and we’ll send it back in. And, and it was something that I really liked to do you people have these like really, I know a guy who loves to just look at flow charts, he’s he’ll him and his wife will sit down with a glass of wine and look at flow charts. That’s what they do. This particular guy loved to look at taxes and find ways that he could save people money on taxes. So we actually put an ad in the paper that said, I will analyze your taxes for free and get you a check for at least 20% of what you sent in.

Speaker 2: And he got no responses, no sponsored, or maybe one or two trickled them, but that was it. And he was really surprised. So then he put another ad in that said for $99, I’ll get you a check for, you know, and you get all kinds of responses. So that’s me. I’m going to charge you X amount of dollars. He says, you don’t, I don’t need the money, but it makes it more valuable to you because if I charge you nothing, that’s the value you’d put on it. So I was like, no, I really, I really value you. Yeah. And then he said he was gonna donate it to some charities though. So that was good. Tony told me many years ago that when I brought him my first property, I said, Mark, look at my next deal is a three unit property. I said, look, take a look at it.

Speaker 2: And he said, he looked at me because why are you buying that property I says, look, I said, if I’m getting it for a low unit price and a cashflow is great. He says, yeah, he says, but that’s a marginal property in a marginal area. I was like, yeah. So most of the properties in Brockton that I was buying Brockton, Massachusetts or marginal properties in marginal areas. That’s what I thought they were the best deals. And he said, Dave, he says, you know, if anything happened to the economy, he said, those marginal properties are number one. They’re the most difficult properties to run. You get marginal tenants and marginal properties. You get marginal and upside in marginal property. And you said, if you ever need to sell a property quickly, especially in a down market, people aren’t buying the marginal properties. He said, you buy properties in the good V properties and B areas.

Speaker 2: He said, you get good tenants. There’ll be less wear and tear on the properties. They’ll pay their rent. You won’t have to chase them as much. In most importantly, on the upswing of the two most important on the upswing in the market, you’ll get a higher return than you get on your C property. And most importantly, you’ll be able to sell that property if you need to in a downmarket. Right. I get that. So that’s why you want to, I mean, you can cut your teeth on, sees a lot of people do because cause they look cheap, but just know, cut your teeth and then move on as fast as you can until the bees.

Speaker 2: All right. Well, I want to thank Scott for coming on and giving you you’re great information and everybody out there stay safe for we’ll be back next week. We’ll keep you advised as to what’s going on in the marketplace. Remember this is a time to be sharpening your tools, to be prepared for the opportunity that is just around the corner at this, at this point, work on those things that you’re a little weak at, work on strengthening your team and work on your property. If you’re an operator right now, you know, daily focus on your property, you know what that I don’t have to tell you. And, don’t touch any doorknobs for the next week and we’ll see you all next

Speaker 5: Week. All right, bye everybody. Thanks guys. See you soon.

Speaker 1: You’ve been listening to the multifamily deal lab podcast, where the deals get done. If you’d like to learn more visit Dave’s free book.com and don’t forget to leave a five star rating and review and hit that subscribe button. So you don’t miss an episode. Thanks.