March 5, 2018

JF1280: Multifamily Syndications: Pros, Cons, Challenges, and Successes with Dave Childers

Our guest today is a multifamily syndicator, and a residential real estate broker. We hear great tips for apartment investing as well as asset management. Dave tells us what to look out for when a broker sends an offering, and how you can get started in real estate today. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

Best Ever Tweet:

Dave Childers Real Estate Background:

-Owner/Broker of Residential Investment Advisors since 2011

Brokered millions in multifamily properties and provided resources for investors, bankers, and appraisers.

Experience in commercial and residential real estate including brokering, facilitating financing for multifamily

properties, and ownership and management of multifamily and commercial properties

-Say hi to him at OR

-Based in Nashville, Tennessee

-Best Ever Book: Rich Dad, Poor Dad

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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, Dave Childers. How are you doing, Dave?

Dave Childers: Good, how are you?

Joe Fairless: I’m doing well, nice to have you on the show. A little bit about Dave – he is both a multifamily broker, as well as an owner. He owns approximately 300 doors, and in fact he is a broker-owner of Residential Investment Advisors, so he has experience selling the deals, and then also buying the deals. Based in Nashville, Tennessee. His company’s website is in the show notes, so you can just click that link and check out his company’s website. With that being said, Dave, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Dave Childers: Yeah, how far back do you want me to go? I can go way back, or we can keep it simple. Like you said, I started doing this pretty much right out of dropping out of college, doing real estate investing, and I’ve been doing it about 13 years now. I bought my first rental property with a few financial guys, with a few guys that backed me financially when I was 23-24 years old, and that’s kind of how it all got started, with one simple, small two-unit duplex here in the Nashville area. It has grown now to a pretty good portfolio. Obviously, we’re trying to grow it more right now, but it’s a little hard to find deals. We own 300 doors, and we actually recently purchased an 86-unit down in Pensacola, Florida… So we’re kind of branching out from the middle Tennessee area.

Through that experience, I just kind of came to the realization that there wasn’t a broker that specialized in the smaller multifamily, and talking to a few of my friends that broker large multifamily (100+ units+), he said “You should really start a brokerage firm that specializes in smaller stuff. That’s kind of what we’ve done here in Nashville. We do anything from 2 to 50, 60 units; that’s kind of the bigger side of what we do. It’s a little niche market that we really like and we really enjoy working with individuals and helping them get started in their investing career.

Joe Fairless: And what type of properties do you buy?

Dave Childers: Typically, because I’m raising money, I’m doing syndication, I’m partnering with people, it has to be 55-60 units plus, so larger stuff. I’m not really competing with the people that I’m brokering to.

Joe Fairless: You knew where I was going with that, didn’t you?

Dave Childers: [laughs] Well, it’s a question I get a lot. They say “If it’s such a good deal on this 10-unit, why don’t you buy it?”, and there’s a simple answer – if I’m syndicating them, I get my 15%, 20%, 30% of ownership, it’s really not worth my time to get 20% ownership on a 10-unit deal with the amount of work that goes into it.

After doing this 12 years, I know how involved I am with deals on a daily basis. Everybody’s saying “Oh, you put a deal together and you get it done… It’s pocket money, it’s mailbox money” – it’s not. All my properties I’m looking at budgeting, and numbers, and insurance, and just day-to-day stuff, on a weekly basis; I’m not touching it every day, but I’m pretty involved.

Joe Fairless: Will you talk to us about what you do do from an involvement standpoint with your syndicated deals that you’ve already done?

Dave Childers: Yeah, we can talk about the Pensacola deal. It’s a flight down there to see that property, so I try to get down there quarterly, spend a couple days down there, maybe a day and a half, fly down there… We’re given reports — I’ve got a partner on it that helped me syndicate it, so reporting back to our investors… That property had aluminum wiring, so we’re having to work with the lender and the property management, electrical companies and getting the aluminum wiring fix done, which is a pretty large job in itself.

Joe Fairless: How much did that cost?

Dave Childers: $140,000 for 86 units, so what’s that…? About $1,500/door. Not cheap.

Joe Fairless: Not cheap. You obviously knew that going into it, though.

Dave Childers: I did. The deal still made sense even after that cost. Trying to restructure that deal, trying to take it to another place, so we’re renovating… We renovated 30 of the 86 this year. So just all those daily things that you’re dealing with – vacancy levels, making sure you’re staying out of certain vacancy; do we need to [unintelligible [00:06:14].04]

My big thing that I’ve been doing a lot and I’ve talked about it on other podcasts is using Facebook advertising, mostly in these smaller markets… So I’ll actually sit down with the manager and kind of show her how to do some Facebook advertising to bring people in.

Joe Fairless: When you go down to Pensacola to visit your 86 units and you’re there for a day and a  half, what are you doing there?

Dave Childers: Walking vacants, riding around the property on a golf cart, looking at the things I look at… Let’s stop right there – when I started doing this, my next deal after those couple duplexes I bought, I bought a 114-unit complex here in Nashville area, and that is when the economy tanked… So I pretty much became an owner, daily manager on that property. We were broke; it’s a very long story and I don’t wanna get into it, but I was there every day, so I learned how to manage a property as an owner, and I’d tell people, I did everything from cleaning carpets to paint walls, pick up trash, whatever I had to do. So having that experience and going on-site to a complex – I’ve actually done it, so I kind of know what to look for.

So yeah, when I’m there in Pensacola I’m driving the parking lot, just thinking like a tenant would, looking at just improvements we can make – can we move that dumpster for curb appeal appearance? Do we need to paint that fence? Do we have a model setup, do we have make-readys ready to be rented today? Where are we at in the process of renovating the next set of apartments? Are the front porches clean? Is the curb appeal, paperwork in place? All those kinds of things.

Joe Fairless: And how much of that is the property manager’s responsibility and how much of it do you feel that you really need to take charge in doing?

Dave Childers: I’ve seen this a lot – people buy apartments, and this is kind of back on the broker side… So being a broker makes me a smarter owner, because I see where people fail. So these people will put a group together, they’ll buy this apartment complex and then they’ll call me and say “It’s just not working out, we’re having trouble”, and I’m the problem solver. I’ll go in and say “Well, you’ve got a marketing issue. You don’t have make-readys.”

I see this all the time – they think they’re gonna buy a property, give it over to a property management company, and then they just can walk away and expect this money to come. They never manage their managers correctly. So I think that’s part of it – the accountability, and just building rapport, building a friendship, letting your manager know what direction you wanna take a property. Are you looking to increase rents, or bring the maintenance cost down? What are you trying to do? I think giving that roadmap to your managers and making sure they understand what your expectations are is hugely important.

Joe Fairless: Is that roadmap written down?

Dave Childers: Yeah, and it changes. You might go in with expectations; you know, this is such a fluid business… You can go in with a gameplan day one, and it’s gonna change based on tenants moving out, economic things, switching managers… Managers quit and you’ve gotta find a new one, you might have to reexplain; their skillset versus the skillset of the previous manager might be different… So yeah, those are written down goals, but I think they’re ever-changing as well.

Joe Fairless: Let’s all pretend we closed on this 86-unit in Pensacola. What are your immediate steps? You just got done closing the deal, what are your immediate steps?

Dave Childers: Let’s see… Within the first 30 days I’m probably gonna get down there – maybe even two weeks – and again, make sure everything’s moving forward, in the direction I want it to go. With the property management company there’s gonna be things that you have to flush out – accounts, utility bonds, insurance, all those kinds of things. So a lot of the work on the front-end I think is with the management company, just tedious stuff like that… Switching leases over into whatever software system they’re using. Are they gonna produce a budget immediately for you, which you’ll review…?

Joe Fairless: Prior to acquiring the property, do you share your budget with the management company, so that they know what you’re looking for?

Dave Childers: Maybe not a line by line budget, but an overall “Here’s where we need to be…” An expense/door annually number is definitely gonna be a huge thing, and making sure that we’re all on the same page, that they don’t have $7,000 a year to spend… And also, I think that’s where interviewing [unintelligible [00:10:29].02] property managers and just making sure they understand what kind of owner you’re gonna be. I’m very thrifty, and I hope that comes across with my managers.

Joe Fairless: Does thrifty mean cheap?

Dave Childers: No, thrifty doesn’t mean cheap, but when I get to a property and there’s more marketing material and signage that hasn’t ever come out of a box and I’m paying for it, yeah, I’m gonna make sure that stuff gets returned. There’s so many grassroots type of advertising that you can do today and save yourself money that I don’t think you have to have a huge marketing budget. These are all things that I’ve done in the past with tenant referrals and other marketing ways that you don’t have to be spending thousands and thousands of dollars. So no, thrifty definitely does not mean cheap.

Joe Fairless: Since you call yourself thrifty, it surprises me that you don’t provide them an itemized budget, because then they would know exactly where you’re looking to spend on each item… So how come you choose not to do that?

Dave Childers: Well, the property managers are gonna know more than you do, essentially. I meet a lot of owners that think that they’re gonna know more than myself sometimes, or know more than a property management company on how to run something. Honestly, putting a budget together is a lot of work. I had a preliminary budget, but their numbers are still gonna be what they want it to be.

Joe Fairless: What’s been a challenge on a deal that you’ve done? Can you talk to us about it?

Dave Childers: Yeah, I’ve got one deal that two years into it is still — it just seems like it can’t get over a hump; it’s in a small, rural town here in Tennessee, and it’s a rotating door for people coming and going constantly… And trying to find a good manager when you’re in a town of 15,000-20,000 – which is probably the mistake of buying in a small town… Trying to find a good manager, or trying to even find tenants in some of these small towns, because the population doesn’t grow. You’re just turning over — the tenants are hopping from one complex to another, constantly.

That’s something — I’ve just had a call with a friend and he says “Best advice is never to buy in a town less than 100k.” Okay, I understand that principle now after owning something in a small town… But I tell him what I paid per door, and it’s like “Oh, okay…” $18,000-$19,000 a door. He’s like, “Oh, okay, I understand why you bought it now.”

Joe Fairless: Is the ROI worth the effort? Because it sounds like you’re having to spend a lot more time on it compared to buying something in a larger city in the future, that you might not have much time on, but might make as much?

Dave Childers: Yeah, I think we have three vacant right now out of 56, so we’re to a point now. If we can get six months under our belt on that one, there’s definitely a play to refinance, pull all of our capital back out, get good Freddie Mac financing on it and not have any cash on the deal. So that’s the play on that one, and cross my fingers, we’re six months away from that happening.

Joe Fairless: When you look at a deal, what are some of the things that you look for before you say “Okay, yeah, this is the type of deal I want.”

Dave Childers: Physically, I wanna make sure it’s a property that I would actually want to own and buy, and probably has the physical characteristics. Then, just like anybody else, I’ve got a cap rate that I’m kind of shooting for, but I wanna see an upside to it, I wanna see where I can go in there and add my talent and add value to it and bring the value up.

Joe Fairless: What’s the cap rate that you’re looking for?

Dave Childers: Man, it’s changing these days… [laughs] It used to be if we could find something in that 8, but now I’m saying probably if we could find stuff in the 7-cap. But you know, that’s such a… I get – just like you probably do – packages from brokers all the time, and they tout it as an 8-cap, and then you start digging into it and it’s nowhere near that. The expenses are off, the income is off… They’ve just played around with the numbers to get a cap rate that they’re looking for.

So instantaneously, when I get these packages, I go straight to the expense line and figure out per door what they’re saying it’s running at. If I see a $1,800, $1,200 expense rate [unintelligible [00:14:33].04] impossible and unrealistic.

Joe Fairless: What is possible and more realistic?

Dave Childers: $3,500, $4,000/door annual expense rate, I’d say. It depends… It depends on what kind of amenities you have or don’t have, if it’s an older property versus a newer property… Something I’ve learned in Florida is the insurance down there is probably twice as what it is here in the middle Tennessee area.

Joe Fairless: For good reason.

Dave Childers: …with the wind. Yeah. And good reason — it just jumped up on me quite a bit because of all the hurricanes, so that’s something to think about… When you go into these markets, I think you’ve gotta hedge against those things that you don’t know.

Joe Fairless: How did you have the comfort level to purchase in Pensacola when you live in Nashville?

Dave Childers: I think after doing this for 15 years I’ve just gained that comfort level that I’m confident in my knowledge of what I’m doing to know that — again, back to finding a good management company and a  good manager, that you know is gonna handle it and you don’t have to be there very often… That probably gives you the biggest comfort level.

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

Dave Childers: Oh, man… I think a lot of people I’ve helped through the brokerage firm – they’re so fearful of making a mistake that they never do it, and they look back and kind of shake their head and wish they would have either done it, or done more. I’ve been a part in all these real estate investment clubs, and I talk to the same people all the time, and it’s like “You just need to buy a property.” Even if it fails, you just need to go buy something, because of the experience that you’ll gain just from owning something.

Joe Fairless: When you look at your portfolio, what’s the best performing investment and what’s the worst?

Dave Childers: The one I’ve bought the first time, the 114-unit, it’s the best-performing. I’ve got HUD debt on it, fixed for 35 years, and I’ve got a great property management company. It’s in middle Tennessee, the rents are going up, physically the property is in great condition… HUD makes you put a lot of money away for reserves, so it’s got plenty of capital there to do whatever they want to make the property nicer… That’s probably the best one.

The worst one is probably the one I told you about, the 56-unit… And it’s getting there. If you look at a portfolio, you have some that are right where you want them, some that might be 60 or 90 days, and then you’re just kind of working a system. Then there’s the one that you’re just buying, that you’re just starting the whole process with.

Back to the portfolio, last year I went through and kind of cleaned up — I had some smaller properties, and I looked at them on a time basis… I’m spending an hour a week on this two-unit property that I own a third of. We need to sell that one and get it off, and focus on the bigger stuff. I went through last year and refinanced pretty much everything I own, sold off the things that were taking a lot of my time, moved that capital into bigger projects and just sat back and kind of redid everything that I owned. Some of it I had owned — one of them was the first property I ever bought with my partners 12 or 13 years ago. I didn’t wanna sell it because it was my first property, but then just looking at the time I spend on it, it was a time waste for me by this point.

Joe Fairless: Did you just sell your ownership, or did the whole property sell?

Dave Childers: The whole property sold. We just decided to dissolve the partnership. There was three of us in there, and kind of back to where I started, my job was to manage those properties. The guys put the money up, we all got the loans for the six — they’re just six duplexes, probably a million dollar portfolio… But there was a lot of equity, too. There was a couple hundred thousand dollars worth of equity that we had in those. All of us kind of wanted to go our separate ways and break that up.

For me, I was managing them and spending all this time, and again, back to only owning a third of this $150,000 property, it didn’t make sense for me anymore.

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

Dave Childers: Oh, man… Okay, I guess.

Joe Fairless: I think you’re ready. First though, a quick word from our Best Ever partners.

Break: [00:18:28].00] to [00:19:15].19]

Joe Fairless: Best ever book you’ve read?

Dave Childers: Rich Dad, Poor Dad.

Joe Fairless: Best ever deal you’ve done, not your first, not your last, and that we haven’t already talked about?

Dave Childers: A 14-unit deal I bought in downtown Nashville that was a complete wreck, and I increased the value by like 700k in a year.

Joe Fairless: How did you increase the value?

Dave Childers: Renovated every unit, doubled the rents. I took a big chance on it… The area became hip and trendy, and rents for four, and now they’re $1,000 a month.

Joe Fairless: Wow.

Dave Childers: And I’ve continued to dump money into it. I’ve just reinvested to where it’s now a nice little deal for me.

Joe Fairless: What’s a mistake you’ve made on a transaction that we haven’t talked about already?

Dave Childers: Partnering with the wrong people. Finding the right people to get on the bus with you, depending on who you are and what you need – if you need silent partners, if you need money partners… Making sure you’re finding the right money partners to do deals with you.

Joe Fairless: Knowing what you know now, how would you qualify a new potential partnership?

Dave Childers: Clarify that… What exactly are you asking?

Joe Fairless: You said “finding the right people to get on the bus with you”, so find the right partners. Knowing all that you know now, if you were presented a new partnership opportunity, how would you qualify that individual?

Dave Childers: I buy deals to hold long-term. I’m not one of these fix and flip and get out of it… I wanna be an old man and own lots of doors, and collect doors, and I would wanna make sure that you’re in that same category. I don’t want you calling me in six months needing your $100,000 back. So I’d say I wanna make sure that you’re plenty liquid; you’re not giving me all your liquidity, and you’re in it for the long-term.

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

Dave Childers: Oh, man… So I tell people I’m a redneck on the weekends; we race four-wheelers all over the Eastern United States, from New York to Florida. Two years ago I started a youth summer camp for four-wheeler racing kids. We have 50-60 kids that come and race four-wheelers with us and train with one of the best racers in the entire world for a whole week. I spend a lot of time all year planning for that. I’ve got a farm that we’ve kind of created as a riding facility for youth riders as well.

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

Dave Childers: My e-mail is I’ve done this on every podcast. And then my cell phone number is 615-479-8737. It’s funny how I’ve done these podcasts and they’re California-based, and I talked to one guy, he’s a postal worker right around the corner from my office, and he heard me on the podcast… So call me. If you’re in the area, if you’ve got deals, you’re a broker, anywhere within a day’s drive of Nashville, I’m looking. I didn’t even talk about that – we’ve got a property management division that’s got about 1,500 doors under management around Nashville. We’d love more management business.

We’re just trying to get in it, and stay in it, and mix it up with people. Any way that we can network with people, we’d love to.

Joe Fairless: Dave, thank you for being on the show and talking about your career, your 86 units in Pensacola, walking us through how you approach that trip when you go down there to go visit, walking the vacants, things you look for from a curb appeal standpoint, and then also some of the expenses – $1,500/unit to convert from aluminum wiring. Then the approach that you take with partners, too – making sure that your long-term visions are aligned.

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

Dave Childers: Thanks, Joe.

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