Joe and Theo are back for another round of business updates in today’s Follow-Along Friday.
Theo outlines the process he followed when touring an apartment without your property management company and what you need to send your management company in order for them to help you with your underwriting assumptions.
Joe had a new investment offering call last night and offers tips he’s learned from doing over 20 calls.
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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.
Today is Friday, we’ve got Follow Along Friday. Joining us is Theo Hicks, like he normally does on Follow Along Friday. The purpose of Follow Along Friday is to talk about what we’ve got going on as real estate entrepreneurs and investors, and how that can be helpful to you as a real estate entrepreneur and investor.
We’ll kick things off with updates, and we’ve got some announcements on some conferences that I recommend, as well as we’ve got a Best Ever Trivia Question, where we’re giving away a copy of the first book that we wrote.
With that being said, Theo, do you wanna kick it off?
Theo Hicks: Yeah, so last week I toured that 80-unit in Tampa that I was talking about… I didn’t give much information on it the last time, because I hadn’t visited it yet, but today I just wanted to talk about the process that I used, and that you can use too, when touring a property and your property management company cannot come. Because we’ve talked about this a lot, that you want your property management company to help you out with your underwriting assumptions, with your rehab assumptions, and to confirm that, because obviously, they’re gonna be the ones that are managing the property.
A challenge I’ve come across in the beginning is obviously lack of credibility, and your property management company is not going to go see every single property you want to see until you’ve actually done a deal. I’m sure for you guys, if you find a deal, your property management company jumps on it because of how many deals you’ve done, whereas for someone who hasn’t done a deal before it’s a little bit different.
So what do you do? Do you just keep them out of the loop completely until the deal is under contract? Well, that’s not what I did. When I toured the property I went with my business partner this time; it’s actually the first deal that he toured with me… And going into it, my plan was to take as many pictures as possible, specifically of anything that I knew we would need to do some sort of rehab to.
For example, during the tour we saw three different units; one of them had just been updated and turned, so someone was actually in there cleaning it. Another unit was already completely rehabbed, and they were renting it at the moment, so… Those units were basically the same. Then there’s a one-unit that was kind of their standard unit.
At this property they’ve got their base unit, and then they’ve done a few minor upgrades to about ten of the units – new appliances, new floors, new cabinet doors… Well, actually they did a lot. The only thing they didn’t do were new lights, and backsplash, and kind of smaller things.
So I obviously needed my management company there to see the conditions and give me an idea of what it would cost to turn around… So I took pictures of the kitchens, the bathrooms, the floors, ceiling fans, ceilings – because they actually have popcorn ceilings… Essentially, everything that I thought that we would need to address, and then the same with the exteriors.
I took a picture of the monument sign, because we plan on doing a new monument sign if we buy this property. I took a picture of the actual stucco, because we if were gonna paint it… There’s an area for a dog park… So essentially anything on the exterior that I also would wanna touch.
And I went home and I uploaded all those pictures to my computer, and then I essentially created a PowerPoint presentation with side-by-side pictures of the kitchens, the before & after, the bathrooms before & after, the floor before & after, and then exactly what I wanted to do to those. For example, the kitchen – I wanted to put in new cabinets, do new counters, new floors, new hardware, things like that… And then below that a list of everything I needed to do, plus a price.
I repeated the same thing for the exteriors as well, and then sent it over to my management company, where they looked at it and said “All this looks good, except maybe this price is a little bit low, and this price looks a little bit high…”
Joe Fairless: What were those items that they were different from you?
Theo Hicks: One of them was the popcorn ceilings, actually. I had no idea how much that would cost to fix. That’s when you’ve got that weird stuff kind of [unintelligible [00:06:10].01] and repaint it… That was one thing that was a lot cheaper than I thought it was gonna be. They said it’d be about $150/unit, and I thought it’d be like $500/unit.
Joe Fairless: One thing I’ve noticed is residents don’t mind the popcorn ceiling, but owners hate it.
Theo Hicks: Good to know. $150 is not that bad, and if we were to remove it, it’s not gonna change our numbers that much… But that’s still good to know. When you’re done sanding it, it looks really nice.
So I think that is for now the best approach to essentially giving your property management company a virtual tour of the property. Of course, it’s way better for them to come, because you’re only taking pictures of things that you see, whereas they’re gonna see things that I wouldn’t have even noticed.
The first property I toured with them they saw that the railings were too low and they were [unintelligible [00:06:57].19] But this property is a little bit different, because it’s really maintained.
Now, going away from — the problem with this property…
Joe Fairless: Real quick before you get into the problem with the property… Is your management team local to Tampa?
Theo Hicks: Yeah.
Joe Fairless: And do they have units that are in this area already, that they manage?
Theo Hicks: Yeah, they know the area very well.
Joe Fairless: My question is how come they are not already familiar with the property? I wouldn’t think that you’d need to take pictures of, say, the monument sign, and the stucco, and even the interiors, because I would think that they would have already been familiar with the property and had been secret-shopping the property just for market rent comps already.
Theo Hicks: I don’t think this property. The last one they looked at, the 292-unit, they knew all about it. This is a little bit smaller, it’s 80 units, and they knew it was for sale… They know what it should sell at, but I don’t think they’ve actually been to this property before. Now, I know that I’m defending them a little bit, but there are a ton of apartments in this area… Like, a TON of apartments. I’ve never seen anything like it before. So I’m sure if I ask them “Hey, have you heard of this property before?” they’d say yeah, but I’m not sure if they’ve actually been there before.
Joe Fairless: Pros and cons of buying a property with a ton of apartments close by, what would you say?
Theo Hicks: Well, it depends on the actual type of apartments. If it was in an area that had a ton of luxury apartments, I’d be a lot more excited about a property of this size… As we’ve mentioned a few Follow Along Fridays back, you can offer that luxury experience without the luxury cost. But in a low-income area it kind of scares me a little bit, because at the end of the day — and this is something I was gonna get into, that I noticed, and again, this could just be a coincidence and a one-time thing… But when I was looking at the comps in this area, there’s so many apartments that it seems like the rents aren’t based on the square footage, they’re just based on a one-bed versus a two-bed… Because I did six comps, and five of them were essentially exactly what our property is gonna be like once it’s done, and the sixth comp is basically like a market leader, so it’s the nicest property in the area… And all the rents were basically the same, the one-beds and the two-beds, even though the really nice one – the units were way bigger.
So when you look at the dollar-per-square-foot, I think the average for the one-bedrooms ended up being $1.30-something, but for this property, the really nice one, since the units were 200 square feet bigger than all the other ones, the dollar-per-square-foot was something along the lines of $1.10, or maybe even lower. I didn’t know what to even think about that, and I still really don’t know what to think about that.
Joe Fairless: Yeah, pros and cons with being in an area that has a lot of apartments in it already, and people go to an area just to shop a lot of different apartments – a pro is you get more drive-by traffic and walk-ins, because they’re shopping other apartment communities that are next door to you, and then they just go shop yours as well… And then the con is the pricing, because you’re competing with a bunch of other apartments in that immediate area, and that could drive your price down because it’s so competitive.
One solution is to offer a look-and-lease special when you have an apartment community in an area that has a lot of other competition. The look-and-lease special works in the following way – you offer a special to someone who comes in and looks at the property and leases it that day. Assuming that you’re able to get their approval done within that period of time, then if they sign the lease or if they sign a commitment to lease at that time whenever they’re there, then you give them some sort of concession, whether it’s half off the first month’s rent, or something else that you and your team come up with… But you really need to be focused — I’m not saying you, Theo, but just as investors in general, we need to be focused on converting the walk-ins to become residents… Because that’s your advantage, so you wanna play up your advantage as much as possible, so really the key is on that conversion, an increase in that conversion rate. Because then, if you’re increasing the conversion rate, then you’re enjoying all the pros of living in that area, or having an apartment community in that area with other large apartment communities, and you’re mitigating the downside of that.
Theo Hicks: Yeah, and that’s something we would definitely have to implement
at this property if we were to buy it, because there are just so many apartments that, as you mentioned, they’re gonna come and they’re gonna look at ten different apartments, and who knows what they’re gonna do to choose one which one they’re gonna pick. That’s great advice.
Now, the problem with this property is that it’s owned by one of those owner-operators, so something–
Joe Fairless: The management fees…
Theo Hicks: A lot of problems… No management fees, very disorganized T-12, they’ve lumped in cap-ex with maintenance and repairs, so it took a while to pull all those out and actually figure out what the actual maintenance and costs were them renovating units… But usually, for apartments there’s not a price set, it’s just dictated by the market, whereas as this is a smaller 80-unit — not necessarily smaller, but in the grand scheme of things, you know, apartments are 150-200 units, and it’s an owner-operator, so they have a number in mind of what they want, and it’s got a list price… And I know cap rates — I’m not basing the purchase price off of the cap rate, but I was just curious to see what the cap rate would be based off of their purchase price and the in-place net operating income, and it’s 4.75%, in a market that’s 6.5% cap rate. So that’s 6.5 million versus 4.75 million dollar purchase price, and for our underwriting the deal makes sense around a 5.25 million… So the last thing I need to do is hear back from our lender, which — they actually called me right before we went live, so I’m going to call him back to see what the debt quote is gonna be, just a ballpark estimate…
Joe Fairless: What mortgage broker are you going with? Mark Belsky?
Theo Hicks: Yeah. And once I get that, I’ll plug that in my cashflow calculator and get the final number, and if they want 6.5 million and we can only pay 5.25 million, we’re gonna offer 5.25 million and see what happens.
Joe Fairless: You’re gonna offer your best and final price at the beginning?
Theo Hicks: Yeah, sorry, I’m gonna probably start at five. 5.25 is the highest we can go.
Joe Fairless: Hopefully they don’t listen to this episode.
Theo Hicks: They won’t.
Joe Fairless: Like, “Wait a second, you offered 5, Theo? I heard on Follow Along Friday that you’re good for 5.25.”
Theo Hicks: The deal still makes sense.
Joe Fairless: Cool.
Theo Hicks: So that’s that deal, and then I quickly wanna talk about another deal we’re looking at, which is the opposite end of the spectrum of this one. It’s similar size, about 70 units, but it’s in an area where it’s the largest apartment in that area. It’s in St. Pete, which is —
Joe Fairless: Sorry, I’m confused. You said it’s 70 units?
Theo Hicks: It’s around 76 units.
Joe Fairless: Okay. But you said it’s the largest apartment? What do you mean by that? Largest building, largest apartment community?
Theo Hicks: Yeah, number of units.
Joe Fairless: Okay, got it. I thought there was some massive apartment unit that you were referring to. Okay.
Theo Hicks: Sorry, the building with the most number of units in St. Pete Beach. This is an area where there’s no construction whatsoever ever. This is obviously [00:14:17].12] property, but… I’m gonna underwrite it; I haven’t underwritten it yet, I’m gonna do it this weekend, but I wanted to mention it because in the offering memorandum – I’ve never seen this before… They said that the rents can be raised by over $700.
Joe Fairless: Oh, wow… That’s New York City style right there, from a [unintelligible [00:14:33].13] to market rate… Huh.
Theo Hicks: Yes, I’m curious to see where they’re getting that from.
Joe Fairless: Yeah, looking forward to hearing more about that one.
Theo Hicks: I will talk about that one next week.
Joe Fairless: Cool. As far as stuff I’ve got going on, we just had our conference call last night on a deal that we’re buying, and one thing I noticed — so it’s like the 22nd syndicated deal we’ve done, somewhere around there, low twenties… I think I finally figured out the way to prepare for these calls, and I believe this will help everyone listening who also has similar conversations or does similar calls… It might be specific to me, but I’m pretty sure it’ll be helpful for others.
What I did is I have an outline for what I’m gonna talk about, I type it out in detail in a Word document, and then I do research, I find different articles etc, so I’m creating the foundation, and then I think about the flow of the conversation and then I write it down in my notebook, the bullet points, so that I just have talking points, versus me looking at a long Word document that is detailed.
That way, whenever I actually do the presentation during the conference call, it’s more conversational versus robotic. The call went really well last night. I’m looking forward to closing out on that deal. So that’s one thing I thought would be helpful for others who are raising capital for deals, or speaking to investors – just take the approach that I’ve just mentioned.
Theo Hicks: What did you use to do?
Joe Fairless: The part that was missing was writing it down in a notebook, the bullet points. And similar to when I interviewed Tony Hawk – I thought I did a terrible job interviewing Tony Hawk, because I was overly prepared (so I thought), but I think you can be overly prepared as long as you don’t follow all that information to a tee whenever you’re having the presentation or that conversation. I think you can have as much information as you can consume to be prepared, but then go in being focused on the engagement that’s taking place at that moment in time and just trust that you’ve written down the bullet points and you know the things you need to mention… And if you don’t mention it at all, then that’s fine, because it’s more about the engagement and getting out most of the stuff that you need to, versus getting out all of it and being more of in an awkward conversation, or sounding like a robot.
Theo Hicks: It’s something that people that have never done an investment call before, I bet they don’t understand – it is way different when you’re doing a recording talking to someone like we do right now, as opposed to when you’re just talking to yourself. Obviously, the people are on the phone, but they can’t talk back to you, so you’re talking the entire time… So just the flow is way different. When you’re interviewing someone, they can say something and you can build off of that, or [unintelligible [00:17:36].23] whereas when you’re just talking, you miss something and you don’t really know, because no one can tell you, and if you’re not making sense you don’t really know, because no one can tell you until later… So that’s good, you make the bullet points and make sure that you’re not doing a script, because people can tell when you’re doing a script. If you just do bullet points and then you speak on that bullet point for a couple of minutes, it’ll flow a lot better and it’ll be a lot more conversational, as opposed to you having a 10,000 word script written out and you read everything out straight from it.
Joe Fairless: Yeah, I believe we have stuff in our Best Ever Apartment Syndication Book about conference calls too, and how to prepare for those conversations.
Theo Hicks: Yeah, we do.
Joe Fairless: Yeah, more information on that… If you wanna dig in there, just look in that section of the book.
Theo Hicks: Good stuff. Moving on, we’re going to mention one of your client’s conferences today on the podcast…
Joe Fairless: Yeah, Dan Handford. He’s got a virtual summit, 40+ speakers; I’m gonna be one of them, I think I’m doing the keynote… It’s a virtual conference, so you can attend from your living room, or your office. There’s also several in-person meetup events surrounding the summit, like watch parties, pre-event meetups, things like that. You can sign up for the virtual summit; it’s Dan Handford’s Multifamily Investor Nation Summit, January 17th and 19th, at apartmentevent.com… Super-easy to remember, apartmentevent.com. But wait to get your discount code, which I’m about to give you, and that is “BESTEVER”. You get $100 off. You can go to apartmentevent.com and sign up for that summit.
Theo Hicks: That’s great that he got that URL, apartmentevent.com.
Joe Fairless: Yeah, smart.
Theo Hicks: Alright, so on to the trivia question. Last week’s question was “What is the cheapest state to live in based off of cost of living factors?” The answer was Mississippi. If you were the first person, you’ll be getting a signed copy of the first book that we wrote.
You’ll also want to answer this week’s question in order to get your book… I’m not sure if we’ll do repeat, but definitely continue to answer these questions in order to receive that signed book.
The question is going to be “What is the city with the highest total share of high-end apartment buildings?” These are B+ and higher apartment buildings, and this covers all of 2017 and all of 2019 through October. So what is the city with the highest total share of high-end luxury, class B+ or higher apartment buildings?
Joe Fairless: So it’s the percent of apartment buildings that are B+? What city has the highest percentage of B+ apartment buildings?
Theo Hicks: Exactly.
Joe Fairless: Is it buildings or units?
Theo Hicks: It was buildings.
Joe Fairless: Buildings, okay. Well, you have the answer again, in this document I have in front of me — I definitely would not have guessed it. Next week we won’t have the answer in here, so I’ll give my guess for future questions. Good luck, Best Ever listeners, on this one… It’s definitely surprising.
For the winners of previous questions – we will be sending those books out in the next week or two. Samantha, my right-hand person on my team – she’ll be mailing them out; we’ve gotta get some copies in our office first. Then I’ll sign them and we’ll get them out to you. So if you won already – it’s coming, we’re on top of it.
And then February 22nd-23rd – you know what’s going on, don’t you, Theo?
Theo Hicks: Best Ever Conference 2019.
Joe Fairless: That’s right, Best Ever Conference 2019. It’s in Denver, Colorado. Go to BestEverConference.com. A speaker that I wanna mention is gonna be there is Julie Lam of GoodEgg Investments. She is going to be on a panel that I will be moderating, about taking the leap from smaller stuff to larger stuff, and how she has done that, with some specific case studies, and some other people on the panel will be speaking about that topic as well.
It was one of the highest-rated panels that we did last year, and we usually don’t repeat panels, but we are going to have the same focus for a panel this year; different people on the panel, but the same focus, because it’s not only inspiring, but it’s a how-to panel for how others got from point A to point B in scaling their business… So it will be beneficial for you to attend and hear that panel, as well as the others that we’ve got going on.
You get a discount of 5% when you enter the code — I forget the code, but when you go to besteverconference.com, right before you click the Buy Now button, there’s a code in that little section there, so you can simply enter that code and you get 5% off your ticket.
Theo Hicks: Yes, I’m looking forward to that panel, because I’m kind of going into the same thing right now. Lastly, if you buy the Best Ever Apartment Syndication Book on Amazon and leave a review, you have the opportunity to be the Review of the Week, read aloud on the podcast. This week’s review is from Chad Eisenhart. It’s a little bit longer, but I really wanted to read it, because he had reached out on Bigger Pockets and was talking about how grateful he was for the book, and I asked him to leave a review on Amazon, and he did, so I’m gonna read his review right now. He said:
“The Best Ever Apartment Syndication Book tells you the exact steps to work on to buy apartments with investor money. As you can see from the attached photos, (he attached a photo of a bunch of post-it notes in his book) I found plenty of actionable steps to implement.
Apartment syndication is a team sport and they do not give you a bunch of fluff telling you it will be easy or quick. They tell you exactly what to do today, and tomorrow, and the next day, and at the sale. I am in the process of reviewing my notes and making my list of what to start on today.
Add this in with their podcast (free) and syndicationschool.com (free) and if I do not hit my apartment syndication goals I laid out for myself, the only person to blame is me. I joined a mentoring program for $5,000 a few months back; not to insult that group, but Joe and Theo’s content deserved my $5,000, not just the $43 I spent on the book.”
Joe Fairless: He posted about that in the Facebook group. Did you see my comment about that?
Theo Hicks: Yeah, “I hope the check is on the way…”
Joe Fairless: Yeah, I mentioned to him in our Facebook group, which is BestEverCommunity.com – free to join and hang out with us and chat… Theo was wanting you to send us the $5,000, but I said “That’s ridiculous, Theo. He already paid $43 for the book, so he can just send us $4,957.”
Theo Hicks: There you go… [laughter]
Joe Fairless: But in all seriousness, thank you so much for taking time to write the review, and I’m glad it’s been helpful. Most importantly, I’m glad it’s been helpful. And that code for the Best Ever Conference is “take5”. That’s also on the website, BestEverConference.com.
Well, good hanging out with you, Theo, as always. Best Ever listeners, nice hanging out with you, too. I hope you got some value from this – I’m confident that you did – and looking forward to talking to you again tomorrow.