Sandhya Seshadri is an apartment syndicator at Engineered Capital, which acquires and operates value-add multifamily to build legacy wealth for engineers and busy professionals. In this episode, she shares her seven steps to achieving stellar investor returns in a subpar economy. 
Sandhya Seshadri | Real Estate Background
- Apartment syndicator at Engineered Capital, which acquires and operates value-add multifamily to build legacy wealth for engineers and busy professionals.
- Portfolio:
- 1,400 doors in DFW
- Based in: Dallas, TX
- Say hi to her at:
- Greatest Lesson: Don't invest passively with an operator without vetting their track record.
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TRANSCRIPT
Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and I'm here with Sandhya Seshadri. Sandhya is based in Dallas, Texas. She is an apartment syndicator at EngineeredCapital.com, which acquires and operates value-add multifamily in the Dallas Fort Worth area, where they currently operate 1,400 doors. Sandhya, can you tell us a little bit more about your background and what you're currently focused on?
Sandhya Seshadri: Sure. Thank you for having me on the show, Slocomb. I really appreciate it. I have an engineering background, like most Asian geeks. I've got my degree, got my job, and realized very quickly all the business folks were making decision, so I got myself a part-time MBA, got into the stock market. And while that was lucrative, it did not give me any kind of tax advantages, so I've found my way into real estate. I realized very quickly in assessing single family rentals that I was not a handy person, and I didn't really want to be tied to the tenants, toilets, trash and termites, the four T's of a landlord... So when I heard about multifamily being a way to acquire properties, large properties of over 100 doors, and having a property management company do all of that for you while you are a high-level asset manager, it made complete sense, and Dallas where I live was an excellent market for it, so I dove right in, started out passively, and then now I'm doing more of a general partnership role.
Slocomb Reed: Gotcha. So when did you first get into apartment syndication?
Sandhya Seshadri: About four years ago, and at the end of 2018 I made my first passive investment. And then in 2019 I got my first syndication as a general partner, tagging along with two other experienced partners as part of a larger mentoring program.
Slocomb Reed: Nice. Which mentoring program is that? Are you still involved in it?
Sandhya Seshadri: Yes, I'm very much still active in it. It's by Brad Sumrok. He's my mentor, and he does a lot of deals in the Dallas area, and that's where I found a lot of potential partners with whom I've done several sets of partners. I've done seven different deals so far.
Slocomb Reed: Nice, seven deals. In your general partnerships, Sandhya, what do you typically focus on?
Sandhya Seshadri: Initially, I started out as boots on the ground asset management, and I partnered with two guys who were out of state. So when COVID struck and they couldn't travel as much, I learned a lot of the business by going in person to all these properties and doing that. And since then, I've also gotten better at raising capital, underwriting and asset management. So I fulfill all of the roles now, depending on what's needed with each deal.
Slocomb Reed: Gotcha. How much involvement do you have with acquisitions?
Sandhya Seshadri: Definitely, I live in a neighborhood with four brokers in my same area, so I'm very much involved in acquisitions. Most of the major brokers in Dallas who do Class B and C know my name, so I'm definitely involved in that stage. Also, I do the tours, the comp analysis, underwriting, all of that. And if one of my partners does it, I double-check that as well. So in both ways.
But I have several different steps that I've figured out now, based on my asset management experience, as to how you can still make good returns for investors in this kind of an economy. So if you like, we can dive a little bit into that as we think about underwriting and asset management.
Slocomb Reed: We can head in that direction. First, let me ask - when you say "this kind of economy", we are recording at the very beginning of January 2023. We have a fairly sophisticated listener base, Sandhya, so I believe everyone hearing this right now has an idea of what you mean... But can you elaborate?
Sandhya Seshadri: Sure. I'm talking about how we've had the rising interest rates come to us at a very steep rise in a very short amount of time. We're also in a time of inflation, and the economy definitely seems to be slowing down in a lot of ways. So the stock market has crashed quite a bit in value over the past 12 months, so that means investors are feeling the pinch of their net worth etc. reducing from it. So there's a lot of different things at play right now in terms of raising capital, as well as your interest rates being favorable for acquisitions... And there's a gap between the price at which a buyer wants to buy the property versus what the seller is willing to sell it at. So that gap is closing a little bit, and it's becoming more of a buyers' market than a seller's market, like it used to be in the glory days of 2021, as an example.
Slocomb Reed: Sandhya, I have an interesting perspective here... I'm an apartment owner-operator in Cincinnati, Ohio. I do not at present syndicate. However, earlier today I was interviewing another value-add apartment investor who invests in Dallas Fort Worth, and has a similar-size portfolio, and targets a similar-size property as you. So I was just having a version of this conversation earlier today. I'd like to hear - you said the brokers know your name, you are involved in acquisitions... You said it's becoming a buyers market. I want to get into your steps for returns here soon, but tell me what it is that you're seeing from the offerings made available by brokers right now, beginning of 2023.
Sandhya Seshadri: I don't have to put hard money down on day one, like it used to be. I could ask for a little bit of early access, even a few days of due diligence before I have to do that; that's a big piece of it in terms of acquisitions. Loan assumptions are getting more attractive, because the interest rates are so high. Bridges completely priced out of market, and when it's a Fannie or Freddie loan, the interest rate is still pretty high, so you want to have that convenience of a nice exit. That's becoming difficult. But in making offers, people are still wanting to go back to their three and four-cap kind of days, and I'm seeing more of a five, five and a half cap, or higher, depending on the class of property, the vintage and the location in Dallas.
Slocomb Reed: In the last quarter how many deals would you say that you and your team have reviewed in Dallas Fort Worth?
Sandhya Seshadri: I would say that in depth underwriting maybe about six or seven deals. But as far as reviewing them at a high level, which is more of a back of a napkin calculation. "Okay, if this is located in Plano versus Irving versus South Dallas", right? So some zip codes are just a no-no... Probably 50 deals that come across our desk, as far as maybe this is a little bit distressed, this operator's on a bridge loan, they're looking to sell it... But the price doesn't come down significantly enough to where we can still make a play. And a big part of that is your rent bump assumptions. So it depends on how much below the market rent the subject properties' rents are across the different unit types, and the popularity of certain unit types, too.
Slocomb Reed: Sandhya, let me ask the question to direct where I think you're already headed... As one does, you've put 50 deals on the back of a napkin, put six or seven in your spreadsheet... Thinking about the last 90 days or so and the deals you have analyzed, how has the number of offers you've written, the number of times you've been countered, and the number of contracts that you've gotten, compared to earlier in 2022? And assuming there is a change, what do you feel like accounts for that change?
Sandhya Seshadri: The biggest change I'm seeing is that gap between what a buyer wants to pay for it and can afford to pay for it based on the financing available today, versus the sellers' expectation of still trying to get closer to their beginning of 2022 kind of pricing. In terms of number of deals and just deal flow, you would get at least 20-25 deals on a regular basis back in the day. And now it's more like "Here and there a seller's thinking of selling this deal. Do you want to take a look?" kind of mentality, rather than "Here's our marketing, and we've got seven deals this week" from every brokerage back and forth. So in terms of that, the deal flow, I would say, is maybe a quarter to a third of what I used to see in the past. Maybe even less than that.
Slocomb Reed: A quarter to a third as many deals on offer. And based on your experience in the last few years, has the frequency with which you offer on those deals, or the frequency with which you get accepted changed?
Sandhya Seshadri: The frequency with which I make offers has definitely changed. I don't do a huge number of offers. I only offer on one deal at a time. But as far as acceptance goes, once you know the whisper from the broker and the expectations, you kind of know already if you have a shot at it. So that's something I've know right off the bat. If I don't come close to whisper, it's not even worth it, and I kind of tell the broker "This is what I'm willing to pay. Maybe in a month's time, the seller might be more willing to come back to that price, so let's go there." So not as many. A much smaller percentage, I would say.
Slocomb Reed: Would you say that anything else about the sales process has been markedly different in the last few months?
Sandhya Seshadri: Yes.
Slocomb Reed: And what else?
Sandhya Seshadri: It's a lot more off market based, rather than directly on market. There's not as many listings and emails and etc and tours and call for offers. A lot of it is more of softly off-marketed to a select group of buyers, which I think is more like a hundred buyers, not like ten buyers... But it's more in an off-market sort of way. It's like if we get an offer that the seller is willing to accept and that's it, rather than "Okay, January 15th is your call for offers date. We will take all offers up until that date and go back" kind of way of doing it. But the other big one is the hard money day one; that's not happening anymore.
Slocomb Reed: Gotcha. Being able to do some due diligence before your earnest deposit goes hard. That's a big deal for lots of buyers.
Sandhya Seshadri: Yeah, yeah.
Break [00:10:46.14]
Slocomb Reed: Sandhya, I know you have some information prepared for us... I believe you were calling it the "Seven steps to achieving stellar investor returns in a subpar economy." We've spent some time talking about that economy and what acquisitions look like right now... What are your steps?
Sandhya Seshadri: So I focus a little bit on the acquisition side, as well as the asset management side. But the first one is that the rents of your subject property have to be far below market. For example, we acquired a property earlier this year direct from the original owner's son; so he had owned it for over three decades. So the rents were $200 to $300 below market rent. So that's an example of a great acquisition where you can raise rents pretty easily and organically, compared to the market rents.
The other one is the market fundamentals itself. As you know, I love Dallas Fort Worth, but you've got to have your job diversity; you've got to have new businesses relocating to the local area. As an example, the Four Seasons in Irving is revamping to become a Ritz Carlton, and it's like a $65 million project. And we have got a couple of deals within a two mile radius of that location. So again, you want to pick a place where there's so much economic growth happening.
And then every number in your spreadsheet has to be justified by somebody else. Because you're going to have your own bias as an operator who wants to make the deal work. So every number there has to be verified by a property management company who agrees that "Yeah, you can get a $100 rent bump by doing this kind of upgrade." Or "Yes, this is your insurance cost, and it's a reasonable assumption." You have to have an actual quote. Your taxes, especially in Texas, make a huge difference, so your tax [unintelligible 00:13:20.28] company has to tell you "In that county, this is what's reasonable." So every number that you put into a spreadsheet has to be justified by a neutral third party person, so you don't make those kinds of mistakes.
Lending and financing - you know this environment has changed so drastically in the recent months, so make sure you go with something that your investors are comfortable with. My investors that have a floating rate bridge loan, they're not going to invest in my deal. So the last two deals I did were Freddie fixed rate loans, but would step-down prepay, so that I know what my exit fee is going to be. But you want to make sure you have an official term sheet from a [unintelligible 00:13:55.19] lender if it's agency, for example. So that's going to justify your financing terms, which could change. So something like a Freddie allows you to lock that in pretty early in life, so that's a really good way to mitigate that risk if you have a rising interest rate environment.
But then the asset management is a huge [unintelligible 00:14:13.01] There's so much excitement around acquisitions that people forget the asset management side of things. So the older the vintage of your property, you want to be very cash-rich and capital-rich. You want to have a lot of reserves in your account, and you want to definitely make sure that every little thing that you implement in the property - you don't want to be going to do a $10,000 unit upgrade if it's only going to give you a $50 to $75 rent bump. Maybe you could just do some basic make-ready for $2,000 to $3,000 and get a $25 rent bump, because in this environment I think putting a large amount of CapEx into a unit upgrade may not necessarily give you the return. So really look closely at every CapEx, every spending you do, to see if it's going to give you a reasonable ROI.
You definitely want to track your marketing dollars, make sure they're spent in the right places if your occupancy is a challenge. So for example, if you have a really low occupancy issue, and your last three leads - you want to see where that came from. And you also want to make sure the median household income there can support that market rents that you are charging. For example, if your visitors all of them don't qualify, if all the new leads are not qualifying, where do you go find the qualified leads of tenants? If your highest rent is $1,500, for example, times 12 is $18,000. So 18,000 times at least a 3x; you want to get close to that 55k plus or 60k plus... So getting qualified tenants to visit your property, and then become your future tenants, so you don't run into a delinquency problem. And you want to have a plan in place to address delinquency.
So I would say those are my biggest suggestions to make sure you make money in your properties. Of course, you should always have a pulse on your competition. So at least on a quarterly basis between you and your property management company, you should be shopping the comps. So similar comparative properties, of the same vintage, similar amenities, on the same side of the highway, the same street, within a one mile radius, what do they offer? So if you were at a resident shopping to see where you want to live, why would you pick the subject property over one of the competitors?
So I think if you do all of these steps in a careful manner, and you do all this wishful thinking of your numbers, but actually plugging numbers from neutral third parties, you're setting yourself up to succeed and provide investors with a great return.
Slocomb Reed: Sandhya, that's a great list. I'd like to pick out a couple of the things that you mentioned to ask more about them. Again, sophisticated listener base, a lot of our people are already involved in apartment syndication, more so passively than actively... I know a lot of these things you're saying already resonate with our Best Ever listeners.
So there are a couple of things I wanted to ask about here more particularly, that are operational. Well, part of it is due diligence. The first one - I have to present this the way that I took the notes while you were speaking... What I wrote down, Sandhya, is that every number in the business plan must be verified by a third party, ideally your property management company. Of course, that makes sense. For you, what has that looked like in practice? Can you give us some examples?
Sandhya Seshadri: Before I make an offer, I ask the property management company for a budget. And I take those budget numbers for expenses, other income sources etc. to put it into my analyzer spreadsheet. And if there's a huge difference in some of those numbers, we have to go back and have that conversation. Because if we forget to discuss that - like, if I think, "Oh, other income - I'm gonna get $50 for a parking spot", and the company is like, "Nah. We operate a property down the street; your property has plenty of parking. No one's going to pay 50 bucks for that reserved parking." Well, you can't assume that.
So you've got to have somebody with a neutral perspective giving you feedback on those numbers, because ultimately, they're going to take over and run this property for you. So if they can't meet your business plan numbers, or they don't think, "Oh, just because you did an exterior paint, you can't just go in and charge $200 more." Your interiors also have to be nice, you have to do a better job with service... And these one-bedrooms are already close to market rent... So no, that rent bump cannot be justified just because you're gonna spend 200k on exterior paint. Just things like that. So you want to make sure your business plan is accepted by the company that's actually going to implement it and run it for you when they take over.
Slocomb Reed: A couple of follow-ups here... The first is ,with the portfolio that you already have and the property manager and relationships that you already have, I imagine it's much easier to have those conversations with a property manager about a property you are considering writing an offer on, but don't have under contract yet, because you have a track record with those property managers. Do you have any recommendations as to how a newer syndicator, or a syndicator who is new to the area, and needs a new property management relationship - do you have any advice on how those investors can engage with a property management company to get that level of in-depth analysis before they get a property under contract?
Sandhya Seshadri: Yes, the easiest way is if you're a passive investor in a deal in that market; then you just look at those financials and you get that operator to do the intro for you. That's the easiest way. If not, find another operator. Like, if you needed help in Dallas, I'm available, but similarly find somebody who's already doing that in that market, because they're probably the ones you go to to recommend the company anyway. So who do you want to use as a property management company in Irving, or Carrollton? If you asked me, I would give you the name of my company and an intro. And then you would have a pretty good idea, from that intro and the other information I can give you, to say "This is what is reasonable for taxes, or insurance, or contract services etc", based on the vintage of the property and your business plan.
Slocomb Reed: So if you don't have the contacts, or connections, or the working relationships already, reach into your network to find those people, so that you know your numrbers are realistic.
Sandhya Seshadri: Exaclty.
Slocomb Reed: One more thing here... I'm imagining the relationship dynamic that the vast majority of active real estate investors have experienced, where they reach out to a contractor to get a bid on a property they don't own, that they don't even have under contract yet, and the contractor says, in nicer words, "You're not worth my time until you have it under contract or own it. Call me back later." How often are you or your property managers dealing with that? And I'm thinking more about the in-depth stuff, like mechanical work, or more significant apartment turns, things where there's some nitty-gritty to get into before you figure out exactly what the cost is going to be. How is it that you advise our listeners have those conversations with contractors or property managers?
Sandhya Seshadri: When you do your due diligence walkthrough, bring every trade with you. In my case in Dallas, I use Omni Assessments, who's a company that offers this due diligence service, and they just bring in every possible [unintelligible 00:21:20.07] They bring somebody; they bring somebody for HVACs, plumbing, parking lots, everything else.
Because in your drive-by, as well as the tour with the broker, you already have a pretty good idea of what CapEx you'll probably have to do... So you want to make sure you pull a contractor for every one of those trades to come with you on your due diligence day, and give you an estimate... And you tell them exactly what you want it to look like. So for example, for interiors, this is what I'm looking to do. Parking lots - probably the lender of the city is going to make me fix that, so give me an estimate for that. You already figure all those things out, so that on that due diligence day, you're there with an army literally, to figure that out.
Slocomb Reed: Tell me about the company that you use to set this up for you.
Sandhya Seshadri: Omni Assessments by Brian Amos. He does due diligence services in the Dallas area, and he brings every trade, and we get estimates on everything. So we know upfront what our CapEx really is going to cost us, and he brings, perhaps, shall we say, some of the best of the best. So if I have to do foundation repair, or anything else, I have a really good estimate. And most of the times, the estimates later that I get are going to be within that amount. So it's more of a higher end of numbers.
Slocomb Reed: What you're describing sounds comprehensive, and expensive. How much are you paying for the services of this company when you get a property under contract?
Sandhya Seshadri: So I pay anywhere from $5,000 to $8,000, depending on the size of your property, and it's a very small price to pay to have this kind of accuracy. I already have a list of vendors, and they give me written estimates for everything from electrical work, to foundation, to everything else. So when I go into my webinar to present this to investors, I have a pretty accurate number for those costs, and I rarely exceed my CapEx projections. But this is, again, for like a 200-unit property, to give you perspective.
When you think about how much you pay the lender upfront, and every other cost you're paying in your closing costs, a few thousand dollasr -- I get literally a matrix that tells me that unit C22 has old floors, and it has black on black appliances that I might want to go do stainless steel. So I already know my interior upgrade plan based on my renewals coming up. So I can have everything pre ordered, so I reduce my turn time. That's a pittance to pay for the convenience of having that data by, again, professionals in the business.
And as someone who doesn't have a strong handy person kind of background, I would rather have a list of contractors by a reputable company. And Brian Amos is also within the Sumrok Group, so of course there's a trust factor and also an accountability factor. That's why a large number of us use him in the Dallas area.
Slocomb Reed: Yeah. And for a 200-unit property, the cost you're talking about is $40 per door or less, which makes a lot of sense, all things considered. One more thing I wanted to ask about... You talked about making sure that you finetune your marketing, meaning the marketing of your properties and your apartments for lease. Can you give us some best practices ideas there, what you all do that's been working, especially what's been working recently?
Sandhya Seshadri: Residential referrals are the best for us, because if residents bring more people in, they all stay within the community and our retention is also better. So we offer 50 bucks for that, instead of paying tens of thousands of dollars for various websites and marketing. So word of mouth has helped us a lot.
The other one is just being able to post flyers, etc. at local businesses from whom we want the employers, whichever ones which will let us do that. And then incentivizing our property management staff itself, is that if they are a qualified tenant and we don't end up in a delinquency later, then they get an added bonus later, six months into that lease, rather than right at the beginning, for signing that lease... Because then that makes them sure that they truly do a good job of screening the tenant, and don't just bring somebody in for the sake of making that small bonus.
Slocomb Reed: Yeah, the world would be a different place if we didn't pay lease-up fees until you were six months into a lease, for sure. Do you have any advice on how best to test the market to figure out where market rent is?
Sandhya Seshadri: Nothing beats secret shopping. So you first want to at least get a set of calls out to all of the local properties within that one mile radius, that are the same vintage etc. that are a true comp. But then I do drive-by's and I also visit myself, and I say "My daughter wants to move here" or I say "I'm looking at properties nearby to acquire." So I do a personal visit if I'm going to make an offer. But everything else - your CoStar data and your secret shopping and phone calls, to find their specials etc. will give you a feel for the market rents.
Slocomb Reed: This has been very insightful, Sandhya. Thank you. Are you ready for the Best Ever lightning round?
Sandhya Seshadri: Sure.
Slocomb Reed: What is the best ever book you recently read?
Sandhya Seshadri: Atomic habits, James Clear.
Slocomb Reed: What is your best ever way to give back?
Sandhya Seshadri: Resident activities, and we raise funds for residents who have, for example, lost a loved one etc. and some tragedy happened. Then we wrangle and we try to give them free rent and we do a fundraiser to support them with things like whatever they need; like, a guy lost his wife to a delivery so he still had a baby, and we did baby stuff for him.
Slocomb Reed: Thus far, Sandhya, in your commercial real estate investing career, what is the biggest mistake you've made, and the best ever lesson that resulted from it?
Sandhya Seshadri: When I was a newbie, I didn't thoroughly vet operators, and I just went with the glam that I saw on social media. And now I've learned better to ask for their track record by getting references from existing passive investors. So basically, the same thing you would do before hiring a contractor. You want referrals from people who have used that contractor recently for the same job, same concept. References from existing passive investors before I invest with somebody passively.
Slocomb Reed: On that note, what is your best ever advice?
Sandhya Seshadri: The best ever advice in life is about persistence. Never give up. No matter what one path may have worked for somebody else, you may have to blaze your own trail to get to your destination. So don't get disappointed if a certain strategy doesn't work. Stay focused on your path, and success leaves clues. Learn from people who have accomplished the same thing before, and copy from them.
Slocomb Reed: Where can people get in touch with you?
Sandhya Seshadri: My website, or LinkedIn. My website is engineered-capital.com and they can find me on social media platforms such as LinkedIn and Facebook.
Slocomb Reed: Those links are available in the show notes. Sandhya, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show. Leave us a five star review and share this episode with a friend you know we can add value to through our conversation today. Thank you, and have a best ever day.
Sandhya Seshadri: Thank you so much, Slocomb.
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