JF1092: How to Increase Value in Multifamily Buildings with Brian Hamrick

TRANSCRIPTION

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 fluffy stuff.

With us today, Brian Hamrick. How are you doing, my friend?

Brian Hamrick: I'm doing great, Joe. I'm a fan and a listener, and I've been looking forward to being on your show.

Joe Fairless: Well, I'm a fan of you too, and the reason why is because yesterday you interviewed me on your podcast, which is The Rental Property Owner And Real Estate Investor Podcast, and you asked me incredibly thoughtful questions that I hadn't been asked before. Best Ever listeners, if you want to check out Brian's podcast, I recommend you do so, because of the quality of interview style is what I experienced, and you've got a great thing going.

Brian Hamrick: Well, thank you very much.

Joe Fairless: A little bit more about Brian - he is the owner of Hamrick Investment Group. He has sold over 16 million dollars in single-family, multifamily and apartment real estate. He's syndicated three large apartment deals, raising over six million bucks from private investors, and he's got 15 years of investing experience in single-family, multifamily and apartment real estate. Based in Grand Rapids, Michigan... With that being said, Brian, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Brian Hamrick: Sure, Joe. My background is similar to yours in that I come from a marketing background. I have 20 years experience in motion picture, theatrical marketing. I've worked on trailer and TV campaigns for movies like Remember The Titans, Ocean's 13, The Hangover, 8 Mile (the Eminem movie). So I come from a marketing background too, and I feel that that's informed somewhat in the transition to real estate. Currently, like you said, I've got 360 units that I control, worth over 16 million, and I've been doing it for a while.

My current focus is really just asset managing what I already have, to make sure it's performing at its peak.

Joe Fairless: Were you working in your industry that you mentioned and simultaneously doing real estate investing? Is that how you got to 15 years of experience?

Brian Hamrick: Yeah. At one point it was like having two full-time jobs, because I was working remotely from Grand Rapids, Michigan for a company in Los Angeles... So I would start work around 12 or 1 o'clock in the afternoon and worked till 9-10 o'clock in the evening. That gave me time in the morning to focus on investing locally, and I started doing that in 2008.

Joe Fairless: You started doing it in 2008... What was the first property?

Brian Hamrick: In 2008 I bought my first multifamily. Now, before that I had bought a bunch of single-families, but for the purposes of this question, I bought a 12-unit here in Grand Rapids. We moved to Grand Rapids, Michigan in 2005, and I knew I wanted to get into multifamily investing, but I also felt strongly that there was some sort of bubble happening. So I waited for that bubble to burst, and in 2008 I was able to pick up a 12-unit in Heritage Hill, which is the historic portion of downtown Grand Rapids.

I picked it up for about $380,000, and just refied it a second time and it was worth (I wanna say) around 740k.

Joe Fairless: You refinanced it twice... Can you tell us the timeline on that thing?

Brian Hamrick: Sure. When we bought it, it was managed pretty well, but the market had really shifted because the rental market was not as strong as it is today. I was able to bring in new management, bumped the rents up, improved the property (we put about 90k into the property) and then we refied it in 2010-2011, and that allowed me to pull some of that money back out, some of the money I had into it. I didn't get all my money back out, but I refied, and then -- actually, it must have been more recently... Like I say, I'm focusing on asset management right now, so I was looking at my assets and saying "Okay, what do I have...?" and as you know, commercial loans (especially small commercial loans) are five-year balloons...

Joe Fairless: Yeah.

Brian Hamrick: So I'm looking ahead to what could be possibly another bubble, but definitely a downturn in the market. With that kind of uncertainty, even though I had about two years left on that loan, I thought "You know, I'd better really lock this in", so I was able to get another five-year balloon... Which is a little shorter than I would have liked, but at the same time, rather than pulling the money out, I turned it into a line of credit. So there was about $200,000 I could have pulled out. Instead, I left it in the equity of the property itself, but I put a line of credit on it. So I have access to that money, I'm just not paying the interest on it.

Joe Fairless: Right, until you use it. Did you get that line of credit with the same lender that you have the loan?

Brian Hamrick: Yes, the lender who I refinanced with previously, they refinanced me a second time and put that line of credit on it.

Joe Fairless: Okay. How did you increase the value from 380k to over 700k now?

Brian Hamrick: Well, a lot of it has to do with the market. It's in a great location. At the time, the rental market was not very strong, and as you know, in 2008 values were plummeting. That had a lot to do with it, but also just getting the net operating income up, improving the rents pretty dramatically, partially through just improving the property.

When we bought it, some of the bathrooms had carpet on the floor, just to give you an idea of the type of property it was. But it's also a historical property, so it's got hardwood floors, a lot of historical character... It was built by a civil war veteran in 1870.

Without putting granite countertops in, we put nice countertops, nicer finishes and tile backsplashes in the kitchen, tile on the floor... That allowed us to get better tenants. We've got some medical students, some doctors, lawyers...

Grand Rapids has a lot of colleges and universities, so we definitely get a lot of more serious type of students there. That, as well as lowering our expenses; getting our energy costs under control... It's a historical building, so we couldn't just put in new vinyl windows; we ended up putting storm windows over the existing windows, we put in some energy-efficient devices that helped us control -- it's hot water boiler heat, and we're paying the gas and the water for the building.

By controlling the temperature that can go to each unit and controlling whether or not that boiler kicks on depending on what temperature it is outside, that actually helped us save quite a bit of money on energy costs.

Joe Fairless: When looking at the property appreciation from 380k to over 700k (the appreciation that's happened), what percent is the largest percent of being at the right place at the right time, what percent is the boiler heat control...? Maybe top three percentages for how you got that increase and appreciation.

Brian Hamrick: I think number one was timing. Timing was everything on this property. We bought it when it was a buyer's market. It had been sitting there, there had been no buyers. Today if it were on the market you'd have 10 people looking at it the first day and probably five offers. So timing definitely made a big difference. I think the availability of financing is very important, too.

Joe Fairless: That didn't have to do with the value, though.

Brian Hamrick: I'd argue that, but I think putting the 90k that we did up front, going in strong and really turning it around as quickly as we did - that had a lot to do with it. And then just keeping strong management on the property to screen the tenants, make sure we're getting in the best possible tenants - I think that made a big difference, too.

Joe Fairless: And will you elaborate on whenever I mentioned that didn't have to do with the value - please educate me, tell me your thought process.

Brian Hamrick: Well, in 2008 it was very hard to get a loan for these types of properties. Banks weren't lending, they were going out of business, so there was a lot of fear on the bank's part. That inability to get financing for a lot of people meant that there weren't any buyers. And when there's no buyers, you have to accept less as a seller for your property.

Now I think we're back to the point where banks are lending like crazy and they're very aggressive. Well, because of that and because you can get better terms, now people can afford to pay more for the properties.

Joe Fairless: What's the total value of your portfolio right now?

Brian Hamrick: The current value of the portfolio is around 16 million.

Joe Fairless: So this is a small aspect of your overall portfolio. What makes up the largest chunk of your portfolio?

Brian Hamrick: Well, I've syndicated three larger apartment deals, and I've done that within the past three years. The first one we actually sold. If we had been talking a year ago, I'd have had 450 units. But we sold the 71-unit last summer, the one that we (again) brought strong management and gone in strong and invested some money into the property.

We bought it for 1.7 million - this property was in Lansing, Michigan - and we ended up selling it last summer for 2.375.

Joe Fairless: Outstanding, congratulations. Why did you sell? Obviously, you made a profit, but was there another reason?

Brian Hamrick: Well, the honest reason is because it was in Lansing, and it was the one property that I was in control of that was really outside of my neighborhood. Currently, all the properties I own are in Grand Rapids or Wyoming, Michigan. Wyoming is adjacent to Grand Rapids. What I've kind of determined is that I like having properties that are close that I can get to in 20 minutes. That allows me to really keep my finger on the pulse of what's going on at that property..

And then also,  we got an unsolicited offer that really started me thinking "Hey, if I can get this much for the property and return right about 19% internal rate of return to my investors, then I would be remiss not to take that kind of offer seriously.

Joe Fairless: Two questions. One is how did the buyer find you, since it was an unsolicited offer?

Brian Hamrick: Well, the unsolicited offer came from a buyer who ended up backing off.

Joe Fairless: Ah... Punk!

Brian Hamrick: Yeah, so I got a call one day; the buyer was saying "You know, this could be worth 2.5 million." They were sophisticated enough to know their valuation.

Joe Fairless: Okay. How did they find you?

Brian Hamrick: Public records.

Joe Fairless: Okay, alright.

Brian Hamrick: So they were sophisticated enough to know how to find me... And it got me thinking, even after they fell out, so I contacted a couple brokers in the area and I said "What do you think it's worth?" I got their valuations, and all of them came in -- brokers will give you a range of what they think you can get. One broker gave me such a wide range that I thought "Well, if I sold it at the bottom of that range, I'd lose money. If I sold it at the top of that range, I'd be doing cartwheels.

The other broker gave me a pretty decent range, and then he said "You know what? I already know who's gonna buy it, and I'll just come with an offer next week."

Joe Fairless: [laughs] That's like the analogy if you ask someone for a cookie, they might say no, but if you have a plate of cookies in front of their nose and it's right there, "Here, take a cookie", they're like "You know what? I think I'll have a cookie."

Brian Hamrick: [laughs] Yeah, so I took the cookie, and it tasted good.

Joe Fairless: Did you notice a difference in performance? I'm thinking you did, to some extent, with the Lansing property being far away, because now you have kind of the rule of thumb, you wanna be within a short drive. Did you notice a difference in the overall performance of the property with you being remote?

Brian Hamrick: Do you mean performance in the other properties--

Joe Fairless: Well, the difference comparing the Lansing property to other properties in your area. Because you sold it because it was in Lansing and you could get a good return; now your rule of thumb is you wanna be close, so that leads me to believe that being close helps, in your mind, the performance of the property itself. So my question is "Did you notice that the Lansing property was slipping slightly compared to other properties, since you were far away?"

Brian Hamrick: At one point that was the case. Early on, things were going well once we acquired it - going strong, we put some money into it... But then about a year in I realized that things were kind of slipping. They were partly slipping because I wasn't paying close enough attention. Working with the management company, they ended up changing the person on-site as the property manager and the leasing agent. That made a huge difference.

I remember having a meeting where we were really concerned, because this was somewhat of an in-between property. To the West were much more nicer houses and more of a B community; to the East it was not so nice houses, and sort of a C or D community. This was sort of in between, and it could go either way.

Every time we would get rid of a tenant who we weren't happy with, another tenant would jump in to take their place to cause problems. So we realized we were having these issues, and we identified three things to do to turn this around. This was about a year in.

The number one thing was installing security cameras. That made a huge difference. The number two thing was additional exterior lighting, and the number three thing was to improve the landscaping even more than we already had. That was a tough conversation, because those three things required about $25,000 that we did not have in our budget.

Joe Fairless: So what did you do?

Brian Hamrick: Well, rather than do a capital call, which I know is something that you have to prepare your investors for, I turned that into a no. Basically, I got a loan from one of our investors for $25,000 (it was only at 7%, so it was a pretty good interest-only loan), and that allowed us to get those security cameras in. I'll tell you, security cameras - I've done that on all three of the large apartments that we have... Because we invest in B-, C+ type properties. And when you do, you're always gonna get those C-, D type tenants that you have to sift through in order to really turn the property around.

The security cameras let those tenants know, "Hey, you're being watched, and you need to behave." It lets the good tenants know that we are paying attention and it sends the signal both to the good tenants and prospective tenants that this is a safe community.

I don't know if it's all across the country but where we live, we can't say this is a safe community.

Joe Fairless: Yeah, you can't say that anywhere.

Brian Hamrick: But you can send that signal, and I think when someone walks into the leasing agent's office and sees the monitor on the wall with the security camera footage, especially if they're with their parents, it sends the signal "Hey, this is safe." Also, if anything does happen, you have a recording of it.

Joe Fairless: Now let's transition to the other two syndicated deals that you currently have. Tell us a little bit about those numbers and business plan.

Brian Hamrick: One of them was a pretty steady eddy deal. There was definitely upside, but we bought it, it was cash-flowing -- actually, it's two separate communities that we manage and operate as one community. This is in Wyoming, Michigan. 207 units, and it was part of a much larger portfolio that was under contract by a group out of New York. These two properties did not fit their criteria. They were more interested in the 1980s and the more recent type properties. These were basically 1970, 1980 properties. They were looking to peel them off, but they were closing within 30 days. So with my partner, we were able to get in there, find an investor to basically put up 2 million dollars as a bridge loan so that we could close on these, do our due diligence and be ready to close in 30 days.

Because we were able to step up and do that -- and also, they were peeling these two properties off, they had already done all the third-party reports, they had already acquired the financing, so they also needed an investor with financial strength who could step into their shoes to just take over everything that had already been put in place as far as financing.

Because we were able to do that, we were able to pick up 207 units for 7.6 million, and we had an appraisal on them for 9.6 million.

Joe Fairless: Wow, I love that. When was this, and what have you done since then?

Brian Hamrick: This was about three years ago, and since then -- like I say, we like to go in strong, which means we budget enough money to do everything that needs to be taken care of, and that sends a signal to the tenants, "Hey, new management... They're taking care of things."

Really with this property, like I said, it was a steady eddy property, so the tenants were actually pretty good, and it's just been getting better, because that rental market is very strong in Wyoming. The location is good, it's off of a very busy road... But we've done some capital improvements, put in security cameras - again, I think that has helped - and run it pretty well. Like I said, it's steady eddy, so we haven't really had to do anything too dramatic to turn it around.

Joe Fairless: The other property - is this the 207 units...? You just combine the two?

Brian Hamrick: There's a third syndication deal that we did. This was a property in downtown Grand Rapids, 96 units, historical property again. This is a much longer story, so I'll just give it to you in a nutshell... It had been somewhat undermanaged; we were able to acquire it off-market. The owner had passed away, and the property manager was kind of managing the sale part of it. We worked directly with.

Joe Fairless: How did you create that relationship?

Brian Hamrick: Well, my partner owns a property management company, and he had been working with this woman to kind of help her with some of her managerial duties with his properties, so he had sort of the inside scoop.

Joe Fairless: Okay.

Brian Hamrick: We paid the pre-payment penalty on the existing loan, rather than assume it. We were able to pick it up for about 3.2.

Joe Fairless: When does it make sense to do that instead of assume?

Brian Hamrick: Well, we sat down with the loan broker and really went over the difference in "Do we just assume the existing loan and then get secondary finance on it?", which was a little tougher at that time, or "Do we just pay off the payment?" In the end, looking at what our strategy was, it made more sense to pay roughly about 300k to pay off the pre-payment penalty.

We budgeted 700k, but we put well more than that into the property. The exciting thing about this property is there's vacant commercial space. Next week we're going before the board of zoning appeals to get a use variance -- even though this property has had restaurants and commercial business since it opened in 1923, in addition to the 96 apartment units, it's zoned residential, so we have to get a zoning variance. We're doing that next week.

We have a restaurant operator who's excited to take over the space once it's available, and we also have a fitness studio that's excited to take over the other space. So this is kind of a mixed use residential and commercial that hopefully next week we get a zoning variance to allow the commercial to happen again.

Joe Fairless: And what did you buy it for?

Brian Hamrick: We ended up paying about 3.2, and like I said, we put (I would say) at least a million dollars into it at this point.

Joe Fairless: And you said you budgeted 700k, but have put in more... How did you get the extra 300k?

Brian Hamrick: Well, when we purchased it, it was somewhat undermanaged, it was losing money. We've been able to increase the rents by just better screening, improving the units... The rent, by the way, includes all utilities.

Joe Fairless: Electric, too?

Brian Hamrick: Yeah, it's probably one of the best bargains in Grand Rapids... So we've priced it accordingly for that. And because we control the utilities, we also control the expenses, so we've put in high-efficiency water heaters, and just on everything we can -- we did a utility audit before we purchased the property to kind of tell us "Hey, if you spend this much here, you'll have a three-year payback. If you spend this much there, it's a 45-year payback." So we had a pretty good plan to get the utility expenses under control.

Joe Fairless: So it made sense once you invested those dollars. My question is though, you budgeted 700k, you put in about a million, so there's a $300,000 difference there... Where did that $300,000 come from?

Brian Hamrick: The rent increases. The rent increase and the occupancy increase. We've increased there by an average of 40%. We cycled out the previous tenants, who were placed under previous management, with the tenants that we put it.

We also got the occupancy up from 80% to -- well, last month we were at 100%.

Joe Fairless: Wow. What's the economic occupancy?

Brian Hamrick: Economic occupancy is pretty much in line with our actual occupancy.

Joe Fairless: That is outstanding. How many units?

Brian Hamrick: 96. 96 plus about 6,000 square feet of commercial space.

Joe Fairless: What is your best real estate investing advice ever?

Brian Hamrick: I would say in this climate, patience. Like I said, I moved to Grand Rapids in 2005, I wanted to start investing, but I saw a bubble on the horizon. That concerns me now, too. I think in some markets - not all markets, but in some markets, people are definitely overpaying, and there is going to be something happening that I can't predict when, that will cause a downturn in the valuation of a lot of these properties.

Joe Fairless: Are you ready for the Best Ever Lightning Round?

Brian Hamrick: Sure I am.

Joe Fairless: Let's do it. First, a quick word from our Best Ever partners.

Break: [00:24:10.29] to [00:25:09.01]

Joe Fairless: Best ever book you've read?

Brian Hamrick: I listen to your show, so I'm gonna say a book that I don't hear too often, and it's called The 48 Laws Of Power.

Joe Fairless: I love that book, Robert Green.

Brian Hamrick: Yes, it's a dangerous book, in my opinion, because it is somewhat of a handbook for sociopaths and con artists, but it's a great book to use to kind of prepare yourself for negotiations, so you can understand why people do what they do or say what they say.

Joe Fairless: Best ever deal you've done?

Brian Hamrick: I've had a four-unit that we purchased for 21k, and put it in an LLC called Prospect Property Investment, because it was on Prospect street, sold it for 115k, and did a 1031 exchange into a five-unit that we purchased for 218k, also on Prospect street, so I got to keep it in the same LLC (the LLC makes sense), and it's currently worth about 250k-270k.

Joe Fairless: Best ever way you like to give back?

Brian Hamrick: Well, hosting the Rental Property Owner & Real Estate Investor Podcast is one way. I do a lot of work with the Rental Property Owners Association. I teach a class for them on advanced financial analysis, and I also do some volunteering with Children's Literacy. I'm doing some volunteering this summer helping some underprivileged children with reading.

Joe Fairless: What's a mistake you've made on a transaction?

Brian Hamrick: Letting legal fees get out of control. I've had deals where the legal fees have just spiraled astronomically due to negotiations, and that's something I always work on.

Joe Fairless: Best ever way the Best Ever listeners can get in touch with you, Brian?

Brian Hamrick: Listen to the Rental Property Owner & Real Estate Investor Podcast, and you can go to my website, which is higinvestor.com. You'll find all of my information there.

Joe Fairless: Brian, thank you for being on the show. Thanks for talking about how you've done three syndications, what you experienced on the 12-unit that you bought in Grand Rapids - done two refinances on that - what you attribute the appreciation of over $300,000 on that property to: timing in the marketplace, but then also some operational enhancements that you've done.

Thanks for being on the show. I hope you have a best ever day, and we'll talk to you soon.

Brian Hamrick: Thank you, Joe.

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