January 7, 2019

JF1588: Find One Market And Scale Until You Can Leave Your Full Time Job with JC Castillo

JC got his start as a part time investor, working hard to get to a point of leaving his job as a mechanical engineer. Now a full time investor, JC is a value add apartment investor. He also has a passion for technology and says that has helped him grow his business. Hear how he was able to quit his job and be a full time investor, and what he’s doing now to continue the growth. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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JC Castillo Real Estate Background:

  • Founder and managing principal of the Multifamily Property Group (MPG)
  • They have been investing in large multifamily for 12 years
  • Based in San Jose, CA
  • Say hi to him at https://www.multifamgroup.com/
  • Best Ever Book: The One Thing


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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, JC Castillo. How are you doing, JC?

JC Castillo: I’m doing good, Joe. Thanks for having me on.

Joe Fairless: Yeah, my pleasure, nice to have you on the show. A little bit about JC – he is the founder and managing principal of the Multifamily Property Group. He’s been investing in large multifamily for 12+ years. Based in San Jose, California. His company’s website is multifamgroup.com. With that being said, JC, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

JC Castillo: Sure. I’ve been investing in multifamily for a good long time, since before the recession. I’m actually a technology guy by degree, mechanical engineer, and I’ve been in the tech business and the semiconductor business for about the last 20 years, but certainly I’ve transitioned over to more of a real estate-focused person these days.

Joe Fairless: Are you a full-time investor, or part-time?

JC Castillo: Absolutely, full-time. I got my property up and running for the last 12+ years.

Joe Fairless: Okay, cool. So you’ve been investing in large multifamily for 12+ years… What does your portfolio look like now?

JC Castillo: We have about a 50 million dollar portfolio; we’ve bought and sold over 1,000 doors in Dallas-Fort Worth. We currently have six properties in our portfolio.

Joe Fairless: And are they all in DFW?

JC Castillo: That’s correct. Everything is in Dallas-Fort Worth, that’s right.

Joe Fairless: When did you buy your first one?

JC Castillo: I bought my first properties in 2007 in Dallas-Fort Worth. I bought a 50-unit and a 24-unit, and then the following year we bought a 31-unit. Those were my first purchases.

Joe Fairless: And did you have a full-time job at that time?

JC Castillo: Oh yeah, back then I was working a full-time job. I’ve always been a real estate guy, always had a passion for it. I had bought several single-family homes throughout my early career in technology, and sold a lot of those. I bought those in the San Jose area, sold a lot of those and decided I wanted to get into multifamily to scale up, because I had limited time, being a full-time technology guy. That was how I got my start in apartments.

Joe Fairless: When did you quit your full-time job, to be full-time focused on multifamily?

JC Castillo: It’s funny – in 2011 I basically left my full-time job; by then, my real estate had really taken off… But interestingly – I’m kind of an entrepreneur by nature, and one of my buddies had told me a really great idea about a networking startup that he wanted to do. Long story short, I joined that company and helped build it up from the ground up, and it became pretty successful. So even though I was running my property business – I’m sort of a technology guy at heart, but I sort of left that company as well, so now it’s full-time real estate.

Joe Fairless: And when did you leave that company?

JC Castillo: August of this year as a matter of fact.

Joe Fairless: Oh, cool. Alright. So you were there about 6-7 years. Why did you leave in August?

JC Castillo: Well, it got to the point where we had built the company up and we had some really great customers, and for me that business was turning into a little bit more of a lifestyle than an exit, which was my strategy on it… So at that point, if it’s gonna be lifestyle really, my real estate business is really what I’m more passionate about from that perspective. That’s why I made the move in August.

Joe Fairless: You call yourself a technology guy… How has that helped you in multifamily investing?

JC Castillo: Well, I think as a matter of fact a lot of my capital partners are all Silicon Valley technology guys as well, and I think what I enjoy about being a technologist is that — I think apartments become a lot less emotional for us; it’s a very numbers-driven game, and our capital partners that are technology guys are actually quite zero and one, if you will, when it comes to investing. They read numbers very well, they’re very analytical, and if these deals pencil out on the financial side, it’s fairly quickly and easily identifiable for them, as well as for me, to understand whether it’s a good deal or not. I think that’s my advantage as a tech guy.

Joe Fairless: And then on the flipside, since you’ve got a 15 million dollar portfolio, you know the execution is paramount in our industry, which gets away from the zeroes and ones, and is definitely more focused on the people aspect… So what have you done to help set your properties up for success, since it perhaps isn’t natural to be focused on that, compared to the numbers?

JC Castillo: Yeah, that’s a really good point. I think it’s actually even more critical than sort of the numbers; build your team, and build your ecosystem right. Multifamily investing, like many businesses, is a team sport, so… I’ve chosen strategically to focus on a very specific major metro, so I’ve gone very deep in Dallas-Fort Worth with my relationships with brokers, lending partners, and a whole ecosystem of partners that get the job done for us. We’ve managed to build a really awesome team out there in Dallas-Fort Worth, that really helps on the execution side, because that’s as important, if not more important than the numbers, of course, as you rightly pointed out.

Joe Fairless: And what are some specific things that you’ve done to find the right team members?

JC Castillo: Well, I always say that the first thing that you need to do when you’re going to a market is basically do the fundamentals. It starts with, number one – especially if you’re coming in from an out of state perspective, California guys and gals have a little bit of a negative connotation… Maybe not as familiar with the local market, potentially not in tune with the price variations, and not as sensitive to the local workings… So I think you have to really come in with your hat in your hand and fairly humble, and sort of go to learn and listen, and ask a lot of questions of the brokers, and sort of be honest with them about your situation. “Look, I’m coming into a new market. I really haven’t participated here before, and I’d really like to know what it takes to be a good partner in this metro, in this market.” I think that’s how you really get started, and that’s probably the best way to get going.

Joe Fairless: What’s been a challenge you’ve come across with a specific deal?

JC Castillo: I think there’s many different challenges. I could tell you specifically one of the challenges that we’ve faced in the past, that we’ve sort of learned the hard way in a lot of ways, is that when you’re looking for these major projects you really wanna try to stay away from as much as you can anything that might be invasive to the current residents’ lifestyle. For example, if you’re gonna go in and replace the internal workings of the units, even for occupied units – let’s say that you’ve got window units, for example, and you need to replace them with a centralized A/C system, or maybe a mini-split system. It sounds easy enough, and especially for the vacants it’s pretty simple, but when you have occupied units and you’ve got people going in and out of the units 2, 3, 4 times, that can actually get pretty invasive in a resident’s lifestyle… So what we’ve seen with those sorts of deals is we’ve seen that we’ve had a little bit more issue keeping people happy residents throughout that transition. That’s probably one of the things I can tell you that we’ve learned over the years.

Joe Fairless: So what’s the solution if you’re wanting to change out window units to central A/C?

JC Castillo: Well, in my opinion, if you’re a value-add guy, which we are, I would steer clear of deals like that. I think that they sound great on paper, but I would say that there’s a lot of logistical challenges. Sometimes you kind of have to say “Look, this may not be such a great model for us”, with those sorts of things. Now, things like cosmetic upgrades, replacing countertops and upgrading  units when they’re vacant, and turning units and all that other stuff, it’s perfect.

Joe Fairless: What are some value-add additions or tactics that you’ve done, that stand out to you as incredibly effective, other than interior renovations of a unit?

JC Castillo: Well, I think I would up-level that question maybe one notch, and what I would say is over the years, as we’ve developed and gotten better at the way that we do value-added properties, one of the things that we’ve really thought hard about and sort of executed on a little bit better, I’d say, is that we try to look at the initial execution in the planning stages and say “Look, let’s attack this from a design perspective before we attack this from a nuts and bolts perspective.” What I mean is we really try to step back and really look at the design elements and the amenities and how we could really maximize the usefulness of the renovated product for the resident profile.

For example, we spend a little bit more money than most people on the leasing office/community center. A lot of people come in and slap some paint on the walls and maybe work within the bounds of what the configuration is, but we’ll actually take it a step further – we’ll usually completely blow out walls, open up spaces, take a lot of time to transform it from something that looks me-too-ish, to something that really blows people’s socks off when they walk in the door… Because we kind of look at the leasing [00:10:59].26] center as kind of the equivalent of the car dealership when you walk into the showroom floor. You really wanna be wow-ed in the showroom floor, because that’s where the decision is gonna happen to sort of decide to live and become a member of that community. For us, those sorts of things, that design element and really taking those pieces to maybe a different level is something that we feel is important to us… And we get a lot of value, we think, from doing that.

Joe Fairless: With the capital partners, you mentioned, who are very bottom-line oriented and look at it in terms of zeroes and ones – and I know, obviously, that’s not all your capital partners, but generally, that’s been a benefit of your background, having those relationships… How do you communicate the bottom line ROI on spending more money than most on a leasing office and/or community center, since those aren’t, for the most part, getting rented out? You might lease some space in a community center, but for the most part they’re not.

JC Castillo: Basically, it all comes down to not only what the numbers look like, but also what your model is. One thing I will tell you about who we are is that our investor profile is a little bit more long-term focused than most. We like to hold deals for maybe longer than your typical 3-5 year exit, and because of that, we’re able to plan for the long-term a little bit more maybe than the shorter-term exits… So investing a few more dollars — and we’re not talking about extensively larger amounts of money, for example for the leasing center remodel; we’re talking about more money putting in than the average bear, but not excessively… But when we look at the long-term benefits of the stuff that we do, we certainly feel like we’re setting ourselves up in the long-run for a much better performance, and a consistent performance.

I don’t think that making those additional investments, at least for our profile of investors and sort of the long-term mindset that we have, is a detriment to us being able to execute or being able to attract capital.

Joe Fairless: With your mechanical engineering background I imagine you love getting into the numbers in the underwriting process. First off, is that an accurate assumption?

JC Castillo: When I first started out, absolutely. I was underwriting my own deals, coordinating with the renovation of our own deals, running through all the acquisition process… Obviously, these days we’ve grown, so we’ve been able to put some pretty wonderful people on the team, that kind of help to do the acquisition and the underwriting stuff… But it is something that I have enjoyed doing, and I still am able to do it at times, but these days I’m focused on a little bit of a different — sort of a growth mode and sort of managing the different pieces that have we in motion these days.

Joe Fairless: The underwriting process that you had at the very beginning – your first couple deals – versus what you and your team have now, what are some specific areas that have been evolved or updated? Just so we can learn along the way from what you learned through those 12+ years.

JC Castillo: Well, when we first started out, the model was a little bit more basic when it comes to — we really didn’t account for, for example, unit upgrades, or how those would be folded into the execution. We would really just say, “Look, let’s underwrite the deal as if we’re buying it, and we’re basically just gonna increase the rents on a holistic level as we go out in time, because we’re value-adding it.” But along the years, one thing we’ve done a much better job of is we’ve really customized underwriting to basically look at how the ramp-up happens with upgrading classic units.

As you’re going through the value-add process for a deal, you’ve got a majority of the residents who are gonna be what you would call classic/renewing; then you’ve got a subset that are gonna exit, and you’ve got vacants that you’ve gonna upgrade… So now you’ve got upgraded units at a certain price, and you’ve got classic units at a lower price, but on the upgraded units you’ve got whatever your number/month that you can turn is, so you sort of have to work that into a year-over-year basis and also multi-year basis in terms of how much you’re increasing your GPR, and sort of how that’s all mapping into your overall performance. We’ve gotten, for example, in that area, a little bit more sophisticated in terms of how we model out time=0 to however long it takes us to transition to fully upgraded units.

Joe Fairless: And did you create your underwriting spreadsheet from scratch, or do you use something else?

JC Castillo: We have. Everything we’ve built, we’ve built in-house, and we continue to develop it. We’ve looked at several third-party software underwriting services, and to a varying degree we’ve seen some of the value that they have, but they always maybe fall short just here or there in terms of the custom stuff we’ve built out…

Joe Fairless: For example…

JC Castillo: For example, one of the solutions that we looked at actually did a really good job of doing what I mentioned about having a certain number of upgraded units, but where it kind of fell short was the way that the data could be generated out just wasn’t specifically formatted to what we wanted to see, from a bottom line perspective. So you get into the details of it — it all sounds good from a high-level, but as you sort of peel the onion back, you kind of go back to what you’re doing and seeing sometimes it just works a little bit better.

And the other thing that’s interesting is when you build something from the ground-up, what you end up figuring out too is that you sort of have a model in place, and that model, the way that you work it, forces you to think about the deal in certain ways, and whether the deal makes sense of doesn’t, and sometimes when you move to these third-party solutions you lose that level of really having to think through the process a little bit more, which forces you to identify areas, if you will, where the deal may not make sense, but maybe from a high-level punch-in-the-numbers it kind of looks right, but it doesn’t after you sort of spend more time on some of the things that  you’ve customized over the years.

Joe Fairless: If we had had our conversation two years ago and I asked you the following question, what would you say? And here’s the question – what’s your biggest challenge right now with your business? And again, if this was a question I asked you two years ago.

JC Castillo: I think two years ago what I would have told you is the biggest challenge is finding the right deal… And what I’ll tell you is if we look at two years ago, the market, while it sort of got maybe a little bit hotter, and maybe it’s cooling off right now, the market wasn’t that much different than what it is now; we’ve been struggling to find truly great deals two years back, so I think finding those deals has always been the challenge.

Joe Fairless: And have you bought anything between today and two years ago?

JC Castillo: We did. We’ve bought one project, and we’re going under contract on another. What I would characterize as net sellers, but definitely opportunistic on the buy side, when we feel like we find something that hits our parameters.

Joe Fairless: And how did you find the contract that you purchased?

JC Castillo: The one that we purchased – off-market deal. We had sold a project with a broker who we’ve known for many years, and we were in a 1031 and he was able to find a really great [00:18:08].24] for us, that was not what I would say off-market these days, where it’s kind of like everybody knows about it, but it’s not officially listed. Truly off-market, that no one ever knew about, and that we were able to get at great terms and we were very happy with it.

Joe Fairless: What type of fee does a broker receive in that type of 1031 transaction when they find you a deal?

JC Castillo: It depends. The situation that we had, once the broker identified a project that might be suitable, then in that situation the seller said “Look, I’ll sell the deal at this number”, which was a really good number, “…but I’m gonna request that the buyer pay your broker commissions.” In that particular case, the broker came back to us and said “Look, here’s the number it’s gonna take for this deal”, which when we underwrote it, it worked immediately… And he said, “But you guys are gonna have to pay my broker commission.”

What I’ve learned in this business is when a broker does that to you, you have a real opportunity to build a great relationship by being agreeable to it, and by being not only agreeable, but being positive about it.

I think one of the mistakes I’ve seen people make is they start trying to nickel and dime the one person that’s actually on your team and bringing you amazing deals… And all you’ve gotta do is look at it as a cost of doing the transaction. If you’re buying the deal at a certain price, that the seller said he would sell it, and the commission for the broker is something they want, then you say “Hey, heck yeah. Let’s take a look at it and run it assuming your commission that we pay you, and if the numbers make sense, we do it.” I think that really sets the tone for the broker that “Hey, look, these guys aren’t gonna nickel and dime me. I’m working hard to find these deals, and when I do, I know I’m gonna get paid for it.” For us, we feel like that’s a great opportunity when a broker does that.

Joe Fairless: Yeah, I completely agree. And what was the purchase price for that?

JC Castillo: I never get into purchase price numbers in public, because DFW in Texas has a whole, as you know, a non-disclosure state… But we’re doing deals these days in the range of 15-25 million dollars or so.

Joe Fairless: Fair enough, okay. I totally get that. What was the commission? …because that’s where I was going with it.

JC Castillo: I believe on that deal it was a $200,000 commission.

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

JC Castillo: Go long, not short. That’s one of my personal investment philosophies. I think it’s been a great run, and I don’t know how much longer we’ve got in the cycle; obviously, there’s starting to be some transitional periods here in terms of what we’re doing… But I’ve always said that if you go long, and focus on the fundamentals, over time I think that you can get over market ups and downs, which do happen, and I’ve been through sort of probably one of the biggest, in the recession… But things like “Don’t overpay” is one of the big rules that I have.

Don’t overpay doesn’t mean look to buy deals for less than fair market value, because fair market value is fair market value… But don’t overpay in this sort of a market, especially in this phase of the market.

When we look for deals, we try to look for deals that have long-term ownership. If we can find a deal that’s been under ownership for 10+ years, that means that we know that most likely there’s some sort of an under market rent situation, and probably plenty of things that we can fix to add value, from the exterior, the amenities, the upgraded units… And look for multiple ways to add value.

All these things sort of speak to the fact that if you go long, you really want a product that can support that. You want the great characteristics, for example a value-add, and then once you add the value, if it’s in a decent location and it’s a good, solid product, you’ll be able to keep it for more than five years if you want, and it should keep continuing to throw cashflow out the door.

Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?

JC Castillo: Lightning round, alright. Go for it.

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

Break: [00:22:00].11] to [00:23:15].19]

Joe Fairless: Best ever book you’ve recently read?

JC Castillo: Best ever book I have recently read… Right now I’m reading a book called The One Thing, by Gary Keller, which I really love.

Joe Fairless: Best ever deal you’ve done?

JC Castillo: Best ever deal I’ve done… Probably a deal called Amber Creek.

Joe Fairless: And why was that the best ever?

JC Castillo: Well, like I said, it’s been owned by a guy for 20 years, and the rents were way under market. We were able to get it for a very fair price, and it had significant upside, and it was an asset in a great location in DFW.

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

JC Castillo: Well, I think we talked about one – we went in and did some major, extensive renovations to occupied units, and I would say that we would wanna shy away from that moving forward.

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

JC Castillo: The way that I like to give back is more on a one-on-one basis… If there’s folks that ever have questions, I’m happy to give advice, I’m happy to help out. That’s what I like to do.

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

JC Castillo: If they wanna get in touch with me then they can go to our website, MultifamilyPropertyGroup.com, and they can click on the Contact Us section and we’ll get  a hold of them and talk with them about whatever they’re interested in talking about.

Joe Fairless: Well, JC, thanks so much for being on the show, talking about your background, how you’ve grown your company’s portfolio from 0 to 50 million dollars, some lessons learned along the way from an underwriting standpoint, the nuances in underwriting in terms of the unit upgrades and how to look as the ramp-up happens, versus underwriting it as though it happens overnight, and being very granular about that process on a progression standpoint.

Then the challenges, how you like to stay away from properties that have invasive updates to residents, and you used the example of windows to the central A/C, and doing that replacement.

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

JC Castillo: Thanks a lot, Joe. I appreciate it.


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