June 24, 2023

JF3215: Strategies for Going Full-Cycle for the First Time ft. Nathan Walldorf



Nathan Walldorf is a multifamily property investor with Walldorf Capital Ventures, which buys class B and C, value-add apartment buildings of 100-plus units. In this episode, Nathan discusses the underwriting guidelines keeping their deals ahead of projections, the biggest challenges they’ve faced in the Dallas market this year, and how they are dealing with properties under bridge loans.

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Nathan Walldorf | Real Estate Background

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Slocomb Reed: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed, and today I'm here with Nathan Waldorf. Nathan is joining us from Chattanooga, Tennessee. He is with Walldorf Capital Ventures, which buys B and C Class value-add apartment buildings with 100 plus units. He is also a realtor, and his wife Eda is a developer. In their current portfolio, they are general partners on 836 units, with five of their apartment buildings being in Dallas, the rest being within an hour and a half of Chattanooga. They're also limited partners on over 2,000 units. Nathan, can you tell us a little more about your background and what you're currently focused on?

Nathan Walldorf: Yeah. Well, first, thanks for having me. I really appreciate you having me on the show, Slocomb. So my background is I've been in residential real estate since 2005. My family's been in real estate since the '20s in our area, in the Chattanooga, Tennessee area. So I'm still selling residential real estate. My wife and I founded Walldorf Capital Ventures, and I'd say this year we've just been underwriting a lot. We've been looking at properties in Knoxville, Nashville, Chattanooga, and even some on the northern end of Atlanta... But it's kind of wild. There's this space right now between what sellers want to sell for, and what makes sense for a buyer to pay for an apartment right now, and have a healthy business.

Slocomb Reed: When did you all acquire your first 100 plus unit apartment property?

Nathan Walldorf: I think we got our first one in early 2020. We had done a lot of small single family/multifamily up till then; created some awesome partnerships with folks who had been in the business, been doing multifamily longer than we had, and we helped raise equity and purchase a building in Duncanville, Texas, which is kind of right outside of the Dallas-Fort Worth area.

Slocomb Reed: You said you've been doing a lot of underwriting. Is the - not necessarily lack of deal flow, but is the lack of deals that are meeting your underwriting criteria the reason why you're looking at so many markets now in the surrounding areas of Chattanooga?

Nathan Walldorf: Yeah, we've always wanted to buy closer to home, with several of our properties being in Texas. So Texas has an immense amount of apartment inventory, and our area didn't quite have as much inventory. So one of our big criterias in buying an apartment building is that they're just great economic drivers and great population growth. So Chattanooga is growing a lot, which is great, but Nashville has got some insane growth that's going on, and Knoxville has had some great population growth, and their rent growth has really been pretty impressive the last few years. And we're so close to Atlanta that they also have a really good healthy market in every aspect. That's just why we've been looking in those areas.

Slocomb Reed: What are your underwriting guidelines? Are you underwriting to a roughly five-year hold period with a preferred return and a targeted IRR for investors?

Nathan Walldorf: Yeah, it's typically three to five year hold is what we're looking at, and value-add. So we're looking to raise rents over time, raising the NOI. Our hope is to be somewhere around about a 90% return in five years. We'd like to see at least a 5% return per year on folks' money.

Slocomb Reed: Yeah, it's a pretty competitive space that you're in. On the deals that are hitting your inbox, Nathan, are you seeing that they are selling to other investors? Are you seeing the sellers are just not getting the offers that they need in order to sell right now?

Nathan Walldorf: I've seen both. I've seen some where I was surprised what folks were willing to pay for a property; it didn't pencil in for us. I've also seen a lot of them go back to the drawing board, where sellers couldn't get what they want for their property, so they decided to refinance or maybe hold longer.

Slocomb Reed: Have y'all gone full-cycle on any of your deals yet?

Nathan Walldorf: Not yet. We've got several that we're doing the lift is on right now, where we stabilized the assets. That's a big part of why we've joined up with partners who have gone full-cycle on several deals, folks that have been doing it for 10 years or so, and really piggybacked off a lot of their experience. And we've got a ton of our own experience, managing our own properties and managing our own assets.

Slocomb Reed: When you have co-GP-ed the way you did with the five properties in Texas, what is your specialty within the general partnership?

Nathan Walldorf: We help with some of the asset management; my wife's really good at design, so she's helped with a lot of the redesign work... And yeah, I've helped raise equity and bring in investors into those properties.

Slocomb Reed: So investor relations and asset management. Is there anything particular within the asset management?

Nathan Walldorf: We've more just been overseeing the property manager and making sure they're hitting their goals. Sometimes you've gotta make changes if your property manager isn't hitting their goals, and find one that will hit the goals.

Slocomb Reed: Nathan, thus far in your experience, a lot of asset managers experienced difficulty with their property manager, or the first property manager that they hire for a property. In your experience, have you had any property managers right the ship after the ship has gone wrong, when they start hitting the metrics that ideally they helped set for themselves? Have you had any property managers actually come through and be able to accomplish the business plan that's been set out after falling behind?

Nathan Walldorf: Yeah, we've got one right now, and I would say we're in the middle of righting the ship, as you said. So we have really good confidence with them, and I've had them on other properties where they have righted the ship. That's just been on one property where we've had to do that. Our other properties, we've had really good property managers, that have killed it. You always have stuff where you find something that you don't like, and you talk to the manager about it, and most of them will make an adjustment to make the property better, or make the terms better, and make occupancy better.

The one manager that we had that we kind of parted ways with - they didn't seem to like making adjustments... So that's why we've moved on to a company that's very good at turning around properties from the experiences that some of our other co-GP's have had, and even other investor friends have had.

Slocomb Reed: Tell me more about your portfolio outside of Texas.

Nathan Walldorf: Most of what we have right now in Tennessee - we've got about 16 units that we own, where we started in investing, that are mostly triplexes, duplexes, are smaller units... Some of them we built; we built a quadplex, a townhome quadplex from the ground up... But we're hoping to get into something a little bigger, 100 units or more somewhere around there, closer to home in Tennessee.

Slocomb Reed: We're recording in the second quarter of 2023... Nathan, I'm not sure what the right word here is; what are the biggest struggles of the biggest fluctuations that your Texas portfolio has experienced? Let's call it in the last four quarters, in the last year.

Nathan Walldorf: Well luckily, our whole GP team - we had a lot of experience, as well as had done our homework before getting in apartment buildings, and we put a lot of safeguards in place. So obviously for everybody, the changing interest rates with some of our loans had been bridge debt, so it wasn't fixed rate, but we had cap rate insurance on them. So I think our biggest challenges really have been in keeping occupancy up. Most of our properties have achieved really good occupancy. We've had one that's been a little more interesting, the occupancy... And right now, we're mostly buying with fixed rate debt, and several of our properties we did as well. So we really haven't had too many problems with the raising expenses.

Slocomb Reed: When you say fixed rate debt, what does that look like, for your properties?

Nathan Walldorf: Two of them we've got agency debt. I think they're both 10-year loans. And obviously, they're gonna have a prepayment penalty, but we figured we'd rather have something safer, or something we've got more equity in it, so we're not overly-leveraged... Because I know a lot of guys are having a hard time, who need to refinance, but can't, because they've got 80% debt, and then they financed all the rehab on the property, so no lender can really refinance them anymore.

Slocomb Reed: Yeah. Taking on a steep penalty for the sake of fixing and a low interest rate for 10 years in hindsight looks like the right mistake to make now, doesn't it?

Nathan Walldorf: Yeah. [laughs] There's still people who are rolling the dice a little bit, but I'm not really there right now.

Slocomb Reed: What about from an NOI perspective? Kudos to you all for getting the fixed rate debt. I'm a boring Midwesterner, I've always been a fan of fixed rate debt. Getting down to the bottom dollar, the NOI of each of your properties, where have you seen the most fluctuation in the past couple of quarters, thus far in 2023 and late 2022? I guess part of the question is how late were you seeing those solid rent increases that we all experienced? And then which of your expenses have you seen go up with inflation and other factors?

Nathan Walldorf: Really, the worst has been with our two loans, even though we're not fixed rate debt... Obviously, those loans have gone up a bit, even with our rate cap insurance. That's taken a little bite out of the NOI. Luckily, part of why I still love Dallas, and why we've invested there, is while the rest of the country it seems like rents have really plateaued, CoStar is still predicting some rent growth there. Maybe even 5% per year over the next several years.

Slocomb Reed: Do you know why that is?

Nathan Walldorf: That's a slowdown from where it was, but...

Slocomb Reed: Of course, but do you know why that is that they're still projecting 5% rent growth?

Nathan Walldorf: I'm assuming it's because people are moving in and businesses are moving in, and that's why. Do you know something I don't? [laughs]

Slocomb Reed: Yeah, if I did, maybe I'd be investing in Dallas, instead of where I am.

Nathan Walldorf: It's a good spot. Well, I hear Columbus is growing at times, so... You said you do the Midwest.

Slocomb Reed: Yeah, I'm in Cincinnati, Ohio. Columbus has seen some expensive growth, for sure.

Break: [00:12:48.20]

Slocomb Reed: What have the biggest struggles been thus far with your Texas deals?

Nathan Walldorf: Like I said, I think it's just keeping occupancy up. December always gets a little weird... But you know how it is, whenever you buy a property, you've got a bunch of people that you find out you have a lot of people you need move out. And so I think just stabilizing has been interesting, and keeping occupancy where it needs to be, keeping it in the 90% range... We've had some [unintelligible 00:14:11.17] here and there, but most of our properties are staying up about in that range. And honestly, we're kind of ahead of schedule as far as our NOI growth on several of our properties.

Slocomb Reed: Even with inflation fluctuations and interest rate for a couple of your properties, insurance, I imagine, in most of your properties, you're saying you're still outpacing the projected NOI growth?

Nathan Walldorf: Yeah, rent is still going up in a pretty healthy manner.

Slocomb Reed: That makes a lot of sense.

Nathan Walldorf: Yeah.

Slocomb Reed: So let me ask then... You've had some of these properties for almost three years now, with a targeted three to five year hold period. Are you thinking to sell here soon? Are you thinking to hold longer term, and what is playing into that decision right now?

Nathan Walldorf: Well, we actually considered -- with one of ours we are pretty well ahead of where we thought we'd be with our NOI. We've considered selling now. We're not sure what the end of this year is gonna look like; it may be a great buying opportunity, it may not be the best time to sell... So that's really what we've hit, as well as we're interest rates are. It's definitely keeping buyers from being able to pay what we would want to sell for, just like on the buying end, as we've looked, and we've discovered -- I mean, I'm selling in, and that impacts us, too. So I would say we've considered it, but we're probably not selling anything yet. And that's kind of the beauty of it, is we've prepared all our investors for a five-year hold, so that's probably what we're gonna continue to do.

Slocomb Reed: Plus, you're still staring down some prepayment penalties.

Nathan Walldorf: Yeah. The fixed rate debt, some of those are ones that we've acquired recently, so we'll probably be holding on to those for a little bit.

Slocomb Reed: Nice. Well, Nathan, are you ready for the Best Ever Lightning Round?

Nathan Walldorf: Yeah.

Slocomb Reed: Excellent. What is the Best Ever book you've recently read?

Nathan Walldorf: I've just read at the beginning of the year "Beyond positive thinking" by Dr. Robert Anthony. It's a great book. And they're even things that kind of highlight where we go through school, told to just do everything a certain way... And then we get out in the life and realize we maybe have to be more creative, or have to push our limits a little bit and aim for something higher. So that book has been really influential, for both my wife and I.

Slocomb Reed: Nice. What is your Best Ever way to give back?

Nathan Walldorf: The Best Ever way to give back... We started before we got into real estate, we worked with Young Life in Guatemala City, and started Young Life there... That's like a ministry for high school kids. So we really love to give to Young Life and support that ministry, and other friends that we met while we were doing that ministry in other areas of the world.

Slocomb Reed: That's awesome. Nathan, on the commercial multifamily you have acquired, what is the biggest mistake you've made, and the Best Ever lesson that resulted from it?

Nathan Walldorf: The biggest mistake we made was on a deal that luckily didn't go through. [laughs]

Slocomb Reed: Nathan, I have to say, that's part of the reason... Well, let's hear the story, but I may also wanna hear another mistake.

Nathan Walldorf: Yeah. Well, we went into a potential partnership with knowing one of the partners really well and not knowing the other ones really well. And over time, it became clear that one partner wasn't as above board as we thought. So let's put it that way. So we feel really blessed; like, God was taking care of us... Because that one didn't end up going through, and it taught us a huge lesson. So now when we get on a deal, we are very selective in who we'll partner with, and honestly, all the folks we partner with now we know really well from being part of a community of investors where we've been able to get to know them real well. And it's been our biggest lesson.

Slocomb Reed: What about the biggest mistake you've made on a property you actually did acquire? And the Best Ever lesson that resulted.

Nathan Walldorf: The biggest mistake - I think on one of our properties we should have switched property managers sooner. If you see that your manager is not hitting your goals, then you've got to be willing, even if it's a pain in the butt to have to switch to a new company, you've got to be willing to do it. So I think that was the biggest mistake we probably made so far. On that note, what is your Best Ever advice?

Nathan Walldorf: It's a great question. Best Ever advice... I think investing in scale is really the way that you need to go. It's amazing how real estate provides you such a wonderful opportunity to invest in an asset that's potentially safe, as long as you have the right guardrails and your criteria for choosing it. And that's what I love about investing in multifamily, is it's just given us an opportunity to have a big business, that's sellable, like I realized I didn't have in my residential real estate sales business. And it's so much better than - you've got a duplex, and your sewer line breaks, and there goes your profit for a year or more. With 100 units, if one unit goes down, then you've still got 99 other units that are paying the bills and really bringing you cash flow. So I think scaling up in real estate is probably the best advice I can give to anybody.

Slocomb Reed: Last question, where can people get in touch with you?

Nathan Walldorf: You can go to our website. We actually have a giveaway to your listeners. If you go to thewealthbuildingtrifecta.com, we've got a giveaway about investing in multifamily, that can help folks learn how to make sure they've got those guardrails and protections on their own investing in multifamily.

Slocomb Reed: Nice. And that link is in the show notes. Nathan, 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 episode today. Thank you, and have a Best Ever day.

Nathan Walldorf: Thanks, Slocomb. I appreciate you having us on.

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