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James Eng Real Estate Background:
-Senior Director at Old Capital Partner in over 2,500 multifamily units and arranges financing on over $100MM in multifamily properties every year
-Started career at GE Capital underwriting over $750MM in commercial real estate loans throughout Texas
-Completed GE's Finance Program Current focus is investing and financing multifamily
-Based in Frisco, Texas
-Say hi to him at www.oldcapitalpodcast.com
-Best Ever Book: The Dip
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Joe Fairless: Best Ever listeners, welcome to the best real estate investing advice ever show. I'm Joe Fairless, and this is the world's longest-running daily real estate investing podcast. We only talk about the best advice ever, we don't get into any of that fluff.
With us today, James Eng. How are you doing, my friend?
James Eng: Hey Joe, thanks for having me.
Joe Fairless: My pleasure, nice to have you on the show. A little bit about James - he is a senior director at Old Capital. He's a partner in over 2,500 multifamily units and arranges financing on over 100 million in multifamily properties every single year. He's based in Frisco, Texas, and you can say hi to him at his company's website, which is in the show notes link. With that being said, James, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
James Eng: Sure. When I came out of school I started working with GE Capital. There I did their corporate finance program, and then really jumped into their real estate business. They had a lending business where I was an underwriter and did close to 750 million in underwritten loans for every product type: office, retail, industrial, self-storage, multifamily, and really just sort of learned all the pros and cons of all those. Then when GE Capital sold the real estate business to Blackstone in 2015, I moved over to Old Capital and started in the mortgage broker business.
For the past three years I have been investing in multifamily as a limited partner, so in about ten deals right now.
Joe Fairless: Wow. The past three years you've been investing as a limited partner. You're on the financing side, where you arrange financing... How come you haven't jumped over to the GP side?
James Eng: Right now I spend a good amount of time on the financing side, and I really enjoy that part of the business. Right now there's probably like ten deals in process that I'm working on right now, so right now just has not been the right time for me. I like the aspect of being able to invest with general partners that have the experience and have the time to go out and find deals and really learn everything there is to know about operations and sort of run the properties the way I like to see them run.
As a limited partner, it's almost the 15th of this month, and I get ten checks, and I like that piece of it.
Joe Fairless: Tell me you have ACH setup too, right? [laughter]
James Eng: Yeah, ACH is set up on all of them...
Joe Fairless: Okay, good. Excellent. Well, what do you like about the financing side of the business?
James Eng: The financing side - I think it's pretty interesting in that on single-family you have pretty much two loan options: a 15-year, a 30-year fully amortizing, and you can pre-pay it whenever you want, whereas in multifamily there's a lot of different investment strategies. Some people wanna be in it long-term, some people have a shorter timeframe, like 3-5 years... Every investor is gonna have a different strategy when they look at a property. So understanding the investment strategy and then mirroring that on the financing side I find pretty interesting, and also the ability to understand how to underwrite these deals goes hand in hand, I think, with the financing, because to me, multifamily is a numbers game at the end of the day.
Joe Fairless: You've given us so much stuff to talk about, so thank you for that. You said with multifamily there are different types of investing strategies and you mirror the debt financing to what that investment strategy is for the property and the project. What is a typical investment strategy, and in that same scenario, what is a typical loan that you would do for that investment strategy?
James Eng: Let's say somebody wants to go in, spend a lot of money on a property; let's say they're spending $10,000 a door in rehab on a property, and they wanna sell it in 18-24 months. There would be no reason for that person to be locked into a long-term Fannie Mae loan and get stuck and have a big penalty at the end of 18 months, right? So for somebody like that, they're probably looking for a 3-5 year bridge loan, get a lot of the rehab rolled into the loan, and then when they sell, they might have a 1% pre-payment penalty, something pretty light on the exit...
Compared to, let's say, somebody who is a doctor now, or they have another business and they wanna park some money in real estate, they like the returns, they like the hard asset aspect of it, and they go out and buy a stabilized deal, and they wanna hold it for ten years. For that person, the Fannie Mae or Freddie Mac 10-year fixed loan product would work perfect, because they can fix the rate today, not have to worry about it for ten years, and then either sell the asset or refinance ten years from now.
Joe Fairless: For that second option, for an investor who is looking to do a ten-year fixed and it's their first go around at this, what are some misconceptions that they have that you've had to dispel?
James Eng: I think for first-time investors, the important thing is if you're gonna go and sign a recourse bank note, you're gonna have to understand what they're gonna be looking at in terms of tax returns, in terms of the property, and understand all the things that are gonna go into that loan process. Freddie Mac right now has a small balance program where first-time investors can get non-recourse loans, so not a bank loan where you're not personally guaranteed, but a non-recourse loan. But they're gonna be looking very heavily at the property. They're gonna want it to be 90% occupied for the last 90 days, and then typically they're gonna want a third-party property manager, so somebody who -- you don't necessarily have the experience, but you are hiring a third-party property manager that maybe has 2,000-3,000 units in that submarket, and then Freddie Mac can get comfortable with that property and that loan based off of a stabilized occupancy, and not a lot of deferred maintenance, and then a good operator in there.
Joe Fairless: What would be a common challenge, or maybe the most challenging aspect of your job?
James Eng: The most challenging aspect right now is finding deals for general partners. A lot of times general partners will come to us and say "We need 80% leverage on this deal, or the deal doesn't work, the returns don't work", and in today's environment, the demand for multifamily - especially in Texas, especially in Dallas even more so - is being able to get the loan proceeds to loan to 80%. So if someone comes in, and let's say they're buying a property for 10 million and they want a 8 million dollar loan, and the debt service right now does not support 8 million, it might only support 7,5, so a 75% loan-to-value -- so we sometimes have to be creative to get there, in terms of maybe it's more aggressive on the operating expenses, maybe the revenues have to improve significantly before we get there... But it's not like a couple years ago, where the leverage of every deal was at 80% because the cashflow was there. Right now it's more of a debt service constraint issue that we're running into on financing deals at full leverage.
Joe Fairless: Can you elaborate on the "get more aggressive to get their part" in the couple examples that you used?
James Eng: Sure. A lot of times -- probably 75% of our business is acquisition financing...
Joe Fairless: Okay.
James Eng: So Fannie Mae is gonna go and look at the historical financials on the deal to size the loan, and let's say payroll right now on the property is $1,500 a unit on a 200-unit deal. The new operators are gonna come in, they're gonna maybe use one less maintenance first and one less leasing agent, or they have some sort of economies of scale where they can run it at $1,000 per unit... So convincing the lender to use a lower payroll number might be able to cut your expenses from 60% expense ratio down to 55%, and that allows you to get to the higher loan proceeds. That part of it is a lot of the value-add where we can come in and really look at the deal and help the borrower make sure that they're presenting the deal correctly to the lender, to get that higher loan proceeds.
Joe Fairless: During that presentation to the lender to get the higher loan proceeds, let's go with that payroll example - what is your approach for convincing the lender to use a lower payroll number that the buyer is going to use, versus the trailing 12?
James Eng: Let's say a person owns three deals [unintelligible 00:11:04.05] and they're running them all at $1,000 per unit. Then we will show how we're running other properties, or maybe how that management company is running other properties, and we can show the proof behind that, and as long as it's in line with the expense comps that the appraiser uses and it's reasonable, then the lender is able to adjust their underwriting to get there.
Joe Fairless: What are some areas of financials... You mentioned payroll - is that one of the main areas that you can show that the buyer will do better than what the owner is doing, and if that's the main area, then are there others that come to mind?
James Eng: If you go down the list, there's not much you can do on real estate taxes. On insurance, maybe you have ten properties in DFW and you can come in, and the person who owned it before only had one, so you can bring the larger portfolio of insurance to an agent and that allows you to reduce insurance from maybe $300-$350 a unit down to $250 a unit, so that insurance is definitely one of them, and then that will have to be proven up once you get your insurance quote.
Then another one really is on utilities. Let's say on water, for example. If it's a 1970's, 1980's multifamily deal and the toilets haven't been upgraded, there's no aerators on the shower heads or in the sinks in the kitchens, then a lot of times if you can prove that you can come in and reduce water to, let's say, $50/unit per month, then they can sometimes underwrite that lower utility number, because in your capex budget you're gonna have let's say $500/unit to come in and do toilets and aerators, and they'll be able to bring that number down compared to historicals.
Joe Fairless: What's been a deal that you've been most proud of that you've helped finance?
James Eng: Right now there's one of the harder transactions... So when somebody goes to buy property, it's either offered free and clear, where the buyer can bring new debt to the transaction, or it's offered as a loan assumption, and they can sometimes bring what's called a supplemental on top of that. A lot of loan assumptions and supplementals take probably upwards of 60-90 days, and we were under a time constraint to get a deal done in essentially 50-55 days; that's with the assumption and the supplemental. So we really had to leverage our relationship with that lender to get that done in order to get that acquisition completed by year end.
That deal - I'm proud of it because not only the deal closed, but then also it was two properties, so it was a total of four loans done in 50 days on an assumption supplemental with Fannie Mae, which almost never happens.
Joe Fairless: Wow, yeah.
James Eng: And then in that, the listing broker on that deal, because of the execution and the ability to do that loan on an assumption supplemental on two different properties in the fourth quarter, whenever they list a deal, they call us and make referrals to us because of execution like that.
Joe Fairless: And now, for better or worse, you've set the bar that you can do these in 50-55 days, so now moving forward, that can be the case for all of them, right?
James Eng: Well, we're about to close one next week that will be under 50 days, so...
Joe Fairless: Wow! [laughs]
James Eng: ...it gets harder each time. On this particular transaction that we were looking at -- this is getting into the weeds a little bit, but on Fannie Mae loans when there's less than seven years to maturity, that makes it more difficult to get the supplementals, so we're up against that deadline on this one, not necessarily a year-end deadline. There's always deadlines in real estate, so as a lender you have to be responsive and be able to see sort of around corners, and understand what's coming up in the next week to three weeks, so that your borrower is prepared, and you have your ducks in a row.
Joe Fairless: A Best Ever listener is listening to this interview, they're getting a lot out of it and they're thinking "I wanna get into multifamily. I already own some single-families... When should I approach James?" What's the answer to that?
James Eng: I think now. There's a lot of education that needs to happen on the front-end, and I wanna lay out a roadmap for you. So depending on where you want to be in 3-5 years, I wanna understand sort of where you're going. The education piece is important, so that when you start looking at deals -- a lot of people, we will review their personal financial statement today, and then we'll lay out "Okay, based on your financials and based off of your experience and based on the amount of time you have, is it better for you to be a general partner or a limited partner, or maybe a key principle on someone else's deal?" and understand that piece of it, so that you can start taking steps in the correct direction. That's usually how we start - education, and then understanding what your personal financial situation is today.
Joe Fairless: I love how you narrowed it down so succinctly - what's your financial ability and buying power now, what's your experience and how much time are you planning on dedicating towards this? Those are the three main factors that you look at?
James Eng: Yes, because that's gonna determine what role you should be playing in your first deal. Let's say you come to me and you say "I wanna be a general partner, but I also have a full-time job and also I have limited capital to even put down earnest money." That's gonna be very difficult for someone to get started, so I might recommend somebody like that to build your education piece, build you capital, and then let's go try to get some deals under contract.
Joe Fairless: Based on your experience as both a lender and someone who is a limited partner, what is your best real estate investing advice ever?
James Eng: To me I think you have to find -- it doesn't necessarily have to be a paying job, but some sort of job that makes you a better investor in the property type that you wanna be in. A lot of times you wanna have inside information. To me, you have to get a better understanding of that industry and that property type that you wanna be in.
The way I looked at it - I was leaving GE Capital, where one month I would underwrite an office building in Phoenix, the next month I might underwrite a multifamily in Austin, and the next month it'd be something different. It was very difficult to be an expert in a submarket, in a location and a property type, so when I came over to Old Capital, it was very heavily -- we did a ton of multifamily and we did a lot in Dallas, Austin, San Antonio... That allowed me to learn those submarkets and be able to [unintelligible 00:18:00.15] like we went through.
So the ability to do, whether it's a job or a project or a part-time gig where something that makes you a better investor and gives you inside information is my advice for all the real estate investors out there. The last piece of that is -- I forgot where I read it, but it was "Every decision you make should move you from a laborer where you're using your time, to a capitalist." So basically taking your earned income, wherever you earn money, and investing that into properties that cashflow. If you do that consistently over time, you'll win.
Joe Fairless: That's outstanding information, I love that - find a job that makes you a better investor in the property type you wanna be in, so that you get that inside information or the competitive advantage whenever you are entering into that particular field. Are you ready for the Best Ever Lightning Round?
James Eng: Sure, let's do it.
Joe Fairless: Alright, let's do it. First, a quick word from our Best Ever partners.
Break: [00:19:02.09] to [00:20:01.17]
Joe Fairless: What is the best ever book you've read?
James Eng: Everyone says Rich Dad, Poor Dad, so I'll start there, but second one, "The Dip" by Seth Godin. It talks about anything that has value has a big dip associated with it, so the dip is really starting the mastery. That slog, that amount is really what differentiates people and creates a ton of value. In multifamily I think the dip for investors, general partners is finding deals and raising equity. Once you're able to get through that dip, then you're able to have a huge unfair advantage compared to everybody else.
Joe Fairless: Best ever deal you've invested in or helped with the transaction, however you wanna approach this?
James Eng: In early 2015, I invested in a 288-unit deal here in [unintelligible 00:20:50.17] and essentially after that Toyota was announced, Liberty Mutual was announced, 25,000 jobs were announced five minutes from the property. That deal will get a supplemental this year and return all the equity in two years, so easily the best deal.
Joe Fairless: And you maintain the same level of ownership.
James Eng: Maintain ownership, yeah, so it will still cash-flow 6%-7%, and all your equity has been returned in two years.
Joe Fairless: Outstanding. What's a mistake you've made on either looking at a deal from an LP standpoint, or just in business in general?
James Eng: The easy answer for real estate is I should have started sooner, that's number one. Number two, I would say drive any property that you're gonna invest in, not only driving it at 10 AM on a Thursday, but also driving it at night, at 6 o'clock on a weekday and on Saturday, because it's a completely different demographic sometimes in those different times of day.
Joe Fairless: And when you said you should have started sooner, it made me think that I've heard that before, but I've literally never heard any guest say they started too early. [laughs]
James Eng: That's right. To me, real estate is forgiving. I think once you get educated, you've gotta take action, because I feel once you write a check, you learn a lot more when your money is on the line.
Joe Fairless: What's the best ever way you like to give back?
James Eng: We have a 5k that we do at our church that I help run. Basically, it supports homelessness. It's called OutRun Homelessness, and we partner with organizations that are trying to get rid of homelessness in Northern Dallas county.
Joe Fairless: And how can the Best Ever listeners get in touch with you?
James Eng: A couple ways - e-mail is probably the best. It's firstname.lastname@example.org. My phone number to reach me is 214-300-5035. We have a podcast as well, OldCapitalPodcast.com. That's another way to see blog articles and podcasts that we record.
Joe Fairless: Excellent. And OldCapitalPodcast.com, is that what you said?
James Eng: OldCapitalPodcast.com has the podcast, and that's probably the best way.
Joe Fairless: James, thanks for being on the show and giving us lessons in lending and underwriting for multifamily... The ways that if we need to get creative or more aggressive on the projections based on how we can realistically operate the property compared to the trailing 12 of the current owner, both on payroll, insurance, as well as utilities, talking through those specific scenarios, as well as just talking through the most challenging part of your job right now, finding the deals and getting that leverage amount so that the returns work - or not, and the deal just doesn't work, because you can't force-fit something, but how you proactively or creatively approach this, because it isn't an exact cookie-cutter business, it's a dynamic and fluid process. Thanks for explaining that, talking through the details.
I hope you have a best ever day, James, and we'll talk to you soon.
James Eng: Thanks a lot, Joe.
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