February 26, 2018

JF1273: Deep Value Add Apartment Syndications with James Kandasamy

James has recently bought two apartment communities, rehabbed the units and refinanced all of the capital out of them. What’s more impressive is that he acquired these properties by texting the owners! A lot of great tips for all investors in this episode, especially for syndicators or want-to-be syndicators. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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James Kandasamy Real Estate Background:

-Owner of Achieve Investment Group

-Multifamily Sponsor owning 340 units in Central Texas Area with a focus on value add deals

-Syndicate large Multifamily Apartment properties by raising money from accredited private investors

-Say hi to him at http://achieveinvestmentgroup.com/

-Based in Austin, Texas

-Best Ever Book: Think and Grow Rich

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Joe Fairless: Best Ever listeners, how are you doing? 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, James Kandasamy. How are you doing, James?

James Kandasamy: I’m doing very well, thanks for having me here.

Joe Fairless: My pleasure, and I’m glad you’re doing well… And of course I’d love to have you here, because you are closing on large deals, and you’re doing apartments, and well, selfishly, I wanna learn more about what you’re doing, and I’m sure a lot of the Best Ever listeners do as well.

A little bit about James – he is the owner of Achieve Investment Group, which is a multifamily sponsor owning 340 units in central Texas, with a focus on value-add deals. You can say hi to him and learn more about his company at his company’s website, which is in the show notes; you just click that. He’s based in Austin, Texas. 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 Kandasamy: Absolutely. So we started – “we” means we and my wife – with single-family houses; we bought 13 houses, starting from 2013. We bought 13 houses within two years, built up almost 400 equity, which resulted in more than 30% cash-on-cash return and more than 500% equity capture… Then before moving on to multifamily in 2015; almost to the end of 2015.

So we’re focusing a lot on class B and C value-add. We’re basically syndicators, which means we raise money from private investors, and our focused market area right now is in San Antonio, and that’s where all our deals are. Up to now, we have bought like 45 units in South San Antonio, 174 and 115 units, which was recently closed, maybe like 2-3 months from now.

The 45 units, when we bought it, the value at which we bought was 35k/door, and then it went up to 58k/door, within 12 months of operation. We were able to refinance almost 110% into a long-term Freddie Mac loan. That deal, just because of the refinancing, very quickly, within one year, and then we still expect it to continue paying double-digit returns to our investors. The IRR is expected to be above, more than 40% for a five-year investment cycle.

The second deal we bought is 174 units. This is in San Antonio, as well. We bought it at 39k/door, it was appraised more than one million on day one of closing… And we’re putting rehab of almost 9k/door for this property. It’s a deep value-add. The property looks really good, the bones are really good, and the current valuation, after 11 months of operations — keep in mind, we bought it at 39k/door, and right now after 11 months it’s almost 72k/door.

Joe Fairless: Wow, and you’re all-in about a little under 50k.

James Kandasamy: Correct. What do you mean 50?

Joe Fairless: 50k/door. You said 39k a door you bought, and put 9k into it a door, so you’re roughly almost 50k a door into it, and it’s worth 72k/door.

James Kandasamy: Exactly. And right now we are looking at refinancing that property, it’s coming soon. The other interesting fact in this deal was once we bought it, the occupancy dropped from 89% to 77%; that happens a lot in the deep value-add space… And within six months, we brought it up from 77% to 90%. It was a lot of hard work going in – a lot of rehab, a lot of turning around the properties.

Joe Fairless: You said 77% to 90% occupancy?

James Kandasamy: Yes.

Joe Fairless: And that’s the 174-unit?

James Kandasamy: The 174-unit. That’s the physical occupancy.

Joe Fairless: Physical occupancy, okay. You said it was a deep value-add; you stressed the “deep” part. What does that mean exactly?

James Kandasamy: Well, with value-add – there’s two types of value-add. One is you buy a cash-flowing property and then as the tenants turn around, you basically go and rehab the interiors and you bring up the rent… Whereas in deep value-add, you buy almost a distressed property, and then you start changing the interior units very quickly, you’re doing exterior rehab very quickly, and you’re also changing the demographic of the tenants. Usually, on the normal value-add we probably put in like 3k/door, maybe 5k/door, but when it goes to deep, it can go up to more than 5k, to 20k/door. So in this case we’ve spent like 9k/door, which is quite significant for that property.

Joe Fairless: Where are you at from a timeline standpoint with the 174k units?

James Kandasamy: We’re 11 months into the operation.

Joe Fairless: Okay, 11 months into it. You bought at 39k/door, it’s in San Antonio, you’re rehabbing about 9k a door… How did you find the property?

James Kandasamy: Both of my first two properties were bought directly from the seller. We use our own strategy to get in touch with the sellers and work directly with them. That’s the primary point on why we were able to get it at a good price/door.

Joe Fairless: Oh, wow. So how do you do that?

James Kandasamy: The way we do it is basically we look at the rent roll of all the property owners, from websites, like the BCad, which is the county tax website, and also there’s another website called [unintelligible [00:07:30].05] where you can basically go and download all the property information, and then you have to do a skip-tracing to find the owners. And once you do a skip-tracing, you basically try to contact them using mailing, using cold-calling, using texting, and it’s a lot of work… But the amount of work gives you some of the best deals.

I think in this hot market it’s just so hard to hope on brokers to bring you deals, because brokers do have fiduciary responsibility to make sure that they get the highest price for the sellers as well. And there’s a lot of sellers out there who have other problems that they don’t wanna bring it to market. These two deals – the sellers didn’t wanna go to brokers, and they were able to trust me because I built a relationship with them. Once you do enough marketing, you build relationships with them and they’re able to trust you and they’re able to allow you to buy it at a good price.

Joe Fairless: As far as the owner goes in this situation, you walked us through the process for how you track them down, but then do you remember if there was a phone call or a text? It was a text?

James Kandasamy: Yes, correct.

Joe Fairless: And what did your text say?

James Kandasamy: The text said basically “Hi, I’m an apartment investor in this region (Central Texas) and I saw your property at XYZ, and I’m interested in buying it. You can sell it directly to me, without any broker’s commission. Would you like to talk further?” That’s a very expensive text, because you get really good deals with that text.

Joe Fairless: [laughs] What did they text back?

James Kandasamy: They would say “Why not you talk to this guy?” So you would have sent maybe 500 texts and you might get less than 1% response, but within that 1%, you might have a 0.1% acceptance ratio, and you’re able to basically work on that deal from that point on. But apart from an immediate response, you also build relationships with these people. Sometimes they do come and ask you some more details about you, and they may say they are not selling right now… They may say they are not selling, but at least you know you have the contact of that seller, and you’re able to follow up from time to time.

So the key to this off-market strategy is basically persistence and following up and consistency in contacting them. A lot of people try to do this on their own, and they do it once and they forget about it. However, the market is getting hard. A lot of sellers who want to sell off-market are also having trouble buying a replacement property, even though they wanna sell it to people like me at a good price, but they’re having difficulty in buying the next property. That’s a problem right now, but I think if you hustle and you’re persistent in your approach, you should be able to find a ton of good deals out there.

Joe Fairless: What was the reason why the seller of the 174 units didn’t go to a broker?

James Kandasamy: Well, that’s a good question… The reason they didn’t wanna go to a broker is because they have a partnership issue within the seller and his partners. One partner wants to sell and the other partner didn’t wanna sell. The partner who wants to sell has a relationship with me, and he was trying to force the other partner to sell through me, than bringing it to the market. So basically they trust me and they want to get it over with, and they just were comfortable enough to sell it to me. And keep in mind, I bought it at a 6% cap rate when I bought it at 39k/door; it was just a badly mismanaged property, even though it’s one of the largest property management companies. It was mismanaged, and I bought it at a market cap rate 6%, but within 11 months we increased the cap rate to 12%, and right now we are working on a refinance at a 6% market cap rate again. So the market didn’t compress, it’s just the value – you just increase the building equity.

Joe Fairless: Because of that — because a lot of people get caught up with the going in cap rate, but in your case it doesn’t sound like you did, because that was just how they were operating, and not necessarily how you were operating it… So how important are cap rates to you when you initially evaluate a property?

James Kandasamy: It’s not important at all. I was looking at a 3% cap rate deal a few days back, and I thought it was an awesome deal. People get caught up with cap rates just because they’re looking at — actually, I’m not sure what they’re looking at… [laughter] The entry cap rate really doesn’t make sense, it really doesn’t matter. I’d rather buy a low cap rate property with a low price per door, versus a high price per door at a market cap rate, because I know most of the time, in fact, a lot of properties have property management issues.

My wife and I, we do A to Z – we do property management, we do general construction and we also do asset management, so we know once we go in, we can run the property at the highest efficiency. We know we can fix it and bring it up to the normal property management standards. So we don’t really care about the entry cap rate, even though it’s 2%, 3%. It doesn’t matter, as long as the price is not ridiculous.

There are a lot of sellers which put a very high price on a low cap rate that doesn’t make sense, but there are some realistic sellers who know that they have to sell at a lower price per door just because the income is slow for that property.

Joe Fairless: It’s fascinating that you’re getting these deals through your own persistence and being consistent about it, so let’s dig into that a little bit more. What does that mean exactly in terms of how frequently you’re doing outreach? Can you just help us understand how much you’re doing and what you’re doing?

James Kandasamy: Basically, what we do is we do a marketing campaign using mailing. The way I was doing it, I was doing it every six months, because every time I’d get a deal and I slowed down — because we do end-to-end; we do property management, we do rehab… So I don’t do anything for the next six months, until I’m [unintelligible [00:13:56].28] and I start doing again. So I know that is not an efficient model I think the best model would be every three months you should send out some mailing, some touches to the sellers. In that perspective, they’ll be always touched by you, and it’s all about timing and when they wanna sell.

This is the same strategy that the wholesalers and all the commercial brokers are using. I’m just cutting the middleman in between, and I’m going directly to them. As I said, it’s a lot of work, but you get some of the best deals out there.

Joe Fairless: What would be some suggestions you have for people who are going to start trying to find off-market deals in whatever city they’re in, in terms of a process?

James Kandasamy: I think in terms of the process, if they can start with identifying the target area that they wanna look at, and if they want to — basically, once they identified the target area, they have to identify the classes (B, C etc.). Third of all, they have to go to this websites where you can download LLC’s of all the owners that meet that criteria. Primarily, you wanna look at properties which are more than five years being owned, and you can do that on some of the websites like for example List Source or ProspectNow… You can do that from there. Because most of the time the sellers who are selling the property within the past two years or three years, they didn’t build enough equity to give you a good deal, but the owners who have the property for more than five years, they may have bought it at 15k/door or 20k a door, but they don’t mind selling it to you at 40k/door, because for them it’s a good deal, even though the market is at 50k/door.

So you wanna screen out all the people that didn’t sell for the past five years, and focus on them, and start mailing them. But to get to the right seller — because most of the LLC’s have contacts with property management companies or has contacts of the LLC (it should be some office suite)… So to find the right seller’s contact, you wanna do skip-tracing. You can use LexisNexis or TLO to find the owners, and then from there you wanna start marketing to them. That’s the process.

Joe Fairless: How much is it to do skip-tracing through LexisNexis or TLO?

James Kandasamy: I believe LexisNexis is a monthly subscription; I believe it’s like $700/month. I didn’t use LexisNexis…

Joe Fairless: $700/month?

James Kandasamy: Yes, correct. It’s not cheap.

Joe Fairless: That’s a chunk of money.

James Kandasamy: It’s a chunk of money, but when you’re playing in the commercial space where you’re making millions of dollars, it’s okay to spend that money.

Joe Fairless: Yup.

James Kandasamy: And for TLO… It’s a bit hard to get into these two systems, just because there’s a lot of requirements. TLO is $1/search, but you have to be really good at it. It takes a few months for you to be really good at it, and you have to identify who’s the owner, and once you start marketing, you will know that “Oh, you made a mistake. You shouldn’t have seen this result, you should see the other results.” It’s a hidden maze, but it’s the best way to find the direct owners. As I said, the response rate and the success rate is really low, but I think it’s the best way for a newbie to start. Most of the brokers are not gonna take your calls, are not gonna listen to a newbies who have never done deals, because the market is so hard, even the experienced guys are finding it hard to find good deals. So for the newbies, I think that’s the best way. You have to hustle and be persistent in finding your own deals.

Once you do at least one deal, then you will be in a credible page with the brokers and they’ll be more than happy to send you more deals. So my first two deals, I did it with communication directly with the sellers. My third deal – I bought it from a broker.

Joe Fairless: Okay. I wanna talk about the third deal, but before we do, on the first deal (45 units) why didn’t they go through a broker, because they ended up going with you off-market?

James Kandasamy: That’s a good question. I guess they probably wanted to save the broker’s commission. They wanted a price for that deal, and I gave them the price; they were happy with the price, so they just went ahead and did it. I don’t see any other reason on why they sold it that way. In fact, the seller, in the first call with me and the guy who was working me – he had some kind of agent who was working with me – he told directly on the phone call “Actually, I’m not sure why I’m selling it to you… I never thought about selling.” [laughter] But yeah, I don’t know.

And I was thinking – it’s not like you can send e-mail, or send mail, or do cold-calling and you’re gonna get a deal. You have to have many other things – you have to have a marketing strategy, you have to have listening skills, you have to have empathy… You have to be able to build trust with people. That’s the whole sales process, I guess. I’ve never done sales, but you build that relationships and they are willing to sell it to you.

Joe Fairless: Now your latest deal. Can you tell us about that?

James Kandasamy: So the latest deal is 115 units; it’s a fully rehabbed property. I bought it from a broker. I bought it at 44k/door, which is a really good price for this deal, because when we bought it we put in 1.8 million, and it was appraised around 1.1 million more when we bought it. We just captured the equity (60%) at closing, on day one. So we bought it at a really good price.

So we bought the property… It went under contract a few times and it dropped out of contract; many investors looked at this deal and they did not pursue it, because the problem with this property — it’s very clean, it’s fully rehabbed interior/exterior, but there’s a problem with a parking space shortage. There’s only 1.06 parking ratio, because this property was built in 1965; at that time people didn’t have two cars in their household, so they had a shortage on parking.

I always believe either you’ll be the first one – which is basically direct marketing; be the first one – or the last one. This property was on the market for two months and nobody really looked at it. I just sent a mail to the broker and said “Hey, is anybody looking at this deal?” They said “No.” He was also not marketing it, but it is on the website, anybody can go and see. And I gave them a very aggressive price. I said “If you give me this price, I’ll buy it.” I gave them two weeks feasibility, which is very short, but I know I can do it within two weeks. But I gave them really good terms…

And what I did on the other hand is I looked at the land beside this apartment, which allows me to be an additional parking lot. We contacted that owner and we put the land under contract for another 300k.

Joe Fairless: Wow.

James Kandasamy: So we basically have a solution. There’s two different assets side by side, and we took a huge risk in this case. We bought the apartments, put them under contract, and we also put the land under contract, and we said “Let’s do it.” The apartment side I was very clear, “I don’t wanna know anything about the land, it’s your problem. I don’t want my contract to be contingent on that contract”, and the land person really didn’t care, because they didn’t see the land for the past 20 years, so they were okay to sell it off.

So basically, we bought these two assets. The apartment was bought at 44k/door and the land was for like 300k, and we’re gonna build additional parking lots… But we had to go through a lot of replan and rezoning processes which we are going through with the city right now. All seems to be really good right now.

The other problem with this deal was it was always 80% for the past five years; the occupancy has been always 80%, and nobody could solve this problem. We closed on this deal about three months ago, and right now we are at 91%.

Joe Fairless: Wow. And with a strong economic occupancy?

James Kandasamy: With a strong economic occupancy, absolutely. When we visited this property, we basically went to the office, and by experience you can see how much marketing is being done by the current property management. There was zero marketing for this; no phone calls coming in. This property was also nearby to my 174, so I know in my 174-unit the phone keeps on ringing, because we do a lot of marketing to lease up as quickly as possible.

So we know there’s a management problem in this 115-unit… So I know that, and I know there’s a parking problem, and we can solve that. So right now we’re going through the process of replan and rezone, and we’re gonna do some construction to build 35 parking spots to solve the parking issues there.

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

James Kandasamy: The money you make is a direct correlation to the value you provide. For me, it’s always you have to solve some problem to get extraordinary returns. If you are doing a deal which is stabilized you may get a good deal, but you’ll get a much better deal if there’s a problem in that deal and you’re able to solve it. That’s the reason I really like deep value-add or properties that people don’t wanna touch. It’s more risky for them, but I think for me the upside is very important… Because with that upside, I’m not really depending on the market appreciation, I’m basically just realizing that upside just by fixing the management, or just increasing the rent to the market rent.

And always do what you call Buy, Rehab, Rent, Refinance and Repeat strategy. That’s where you make the most money. Always buy deals with potential upside, always be the first one or the last one to look at a deal. I almost always avoid market-advertised deals, because there’s too much bidding war going, and you’re probably over-paying at the end, even though you win the bidding war. You’re probably the guy who paid the most for that.

Joe Fairless: You win the battle, but you lose the war.

James Kandasamy: Yeah, correct. In a strong market like right now, like in Austin and Dallas – the market is so strong, you don’t have to have a lot of property management skill or you don’t have to have a very strong property management company, because the market itself is swinging you up in terms of rent increase. But that’s not gonna be all the time. When the market turns around, you have to have some kind of buffer to make sure that you take care of the returns.

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

James Kandasamy: Sure.

Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.

Break: [00:24:41].11] to [00:25:33].23]

Joe Fairless: Best ever book you’ve read?

James Kandasamy: Think and Grow Rich. It’s all in the mindset.

Joe Fairless: Best ever deal you’ve done?

James Kandasamy: Best ever deal I’ve done… My 115 units. We bought it at a really good price, we stabilized it within three months, we captured 60% of the equity on day one of closing… There’s not much work in that property, but with the addition of the land, it’s gonna be increasing the value manifold.

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

James Kandasamy: The mistake – I think in the beginning before my first deal where I went into contract with single-family homes, I didn’t have any mentor or any education, so I was doing a comp of a property, and I know that the comps of single-family homes need to be done by the surrounding properties… So I could not get the value I wanted on paper, and I used a button to evaluate the comps on square footage, and “Oh, okay – this property is bigger, it’s gonna give me a lot more money.” It’s basically a mistake in doing the wrong comps for appraisal.

I’ll always make sure that I am very diligent in doing any comps in terms of rents for my multifamily, and in my single-family home which I [unintelligible [00:26:45].20] I always make sure that I look at the comps very carefully.

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

James Kandasamy: We give back 10% of our earnings to Orphan Life International. It’s education for orphans in Africa. Currently, we are sponsoring 150 children for their education – these are orphans in Africa; I think it’s Liberia and Kenya – on a monthly basis. That gives us joy. And I also do coach and mentor aspiring new syndicators to find deals.

Joe Fairless: And how can the Best Ever listeners get in touch with you?

James Kandasamy: I can be reached at James@achieveinvestmentgroup.com. You can go to my website at achieveinvestmentgroup.com.

Joe Fairless: Very impressive, and I love how you got into the details with us on how you’re finding these deals. That’s a number one challenge a lot of people have, myself included – finding good deals right now. And you just walked us through in detail how you’re doing it, and even told us the text message that you wrote that’s been effective. I’m really grateful for that. I know the Best Ever listeners are gonna get a lot of value from our conversation.

I know this was the first podcast interview that you’ve done, and boy, you nailed it. You added a lot of value, and thank you for that. I hope you have a best ever day, I appreciate you spent some time with us, and we’ll talk to you soon.

James Kandasamy: Sure. Thank you, Joe.

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