Frank Roessler Real Estate Background:
- Founder of Ashcroft Capital
- Has overseen the acquisition of over $700,000,000 of institutional quality multifamily investments
- Based in NYC
- Say hi to him at ashcroftcapital.com
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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.
We’ve got a special segment for you today. It is a case study conversation on a 200+ unit apartment community that my business partner and I, and our team, and our investors worked on and completed. Any time we close a deal, I’m going to attempt to have a conversation with Frank, and we’re going to have a case study conversation with you all, so that you can learn the lessons that we learned. Ultimately, this is about helping you out, and identifying things that we came across along the way, some challenges, and successes, and also things that didn’t go according to plan, how they were overcome, ultimately so that when you’re doing deals you have a guide to help you when and if you come across similar situations.
First off, Frank, how are you doing?
Frank Roessler: I’m doing very well, thank you for asking. How are you?
Joe Fairless: I am doing very well, as well. I’ve interviewed you on this podcast, right?
Frank Roessler: Yeah, we definitely did that.
Joe Fairless: Alright, so I’ve already interviewed you. We’re not even going into your background, because we’re gonna be doing multiple case study episodes when we close deals, so we don’t wanna have to have you go through your background every time. Let’s get right into it.
The deal that we’re talking about today was formerly called Timberlodge, and you and I and our investors refer to it as Eleven600. Tell us about the business plan, tell us about the deal.
Frank Roessler: Yeah, sure. I was thinking a little bit before this call about things that went right; it resulted in a very good return for our investors, and there’s a number of things that went right. The business plan is definitely one of them. I thought I might start off kind of before the business plan, with just the submarket and the purchase. Is that alright to do that?
Joe Fairless: Yeah, please.
Frank Roessler: So starting from the beginning – we bought this deal, and we bought it right; we bought this deal off-market. I think that added a lot of value, because we avoided a bidding war. We got it at a price that we felt was very attractive at the time. One of the things that went in our direction was that the seller was a group that we had purchased from in the past, a group called Bridge IGP, Bridge Investment Group. We bought Woodglen Village from them, and it always helps when you buy from a buyer, if you can, to close and close well; without retrading, without being a challenging buyer. While maybe retrading might get you a lower price on that one deal, if you don’t need to retrade and you just close and you’ve maintained your reputation, it can lead to opportunities like this, where that same seller presents you with another deal, and that’s just what wound up happening here. So I always recommend, if you can, to have a very smooth due diligence and closing when you buy.
So we bought this deal off-market at a great price, avoided a bidding war; we bought from a group that we transacted with in the past.
Joe Fairless: Are we able to say how much we bought it for?
Frank Roessler: There’s a confidentiality agreement when you sell most deals, that prohibits you from doing that, so unfortunately we’ve not publically stated what price we bought it for or what price we sold it for, but we can definitely talk about the returns to investors.
Joe Fairless: Yup.
Frank Roessler: So anyway, we also didn’t just buy Timberlodge because the seller offered it to us. As you know, we did a very robust research project on all the submarkets in Dallas, and just looked at, okay, we know where the desirable markets are; we all know where Highland Park is, and Preston Hollow is, things like that, but what are the markets that are actually in growth mode? Just because it’s desirable doesn’t mean things are growing or are headed in the right direction.
We’ve found that the North Lake Highlands Area/Richardson was a challenging market for the previous ten years, but that it was really turning around. The community was investing significant dollars into that submarket. Other owners like us had bought apartment communities and were renovating, therefore improving the demographics… And the databases didn’t lie; they told us there was huge rent growth, a very strong vacancy, I should say… So that was one of the reasons that led us here. And then by great coincidence, this deal that came across our desk was being sold by a group we bought from before.
So I just wanna make that point, that yeah, we bought at a great price, but we also bought in a great submarket. We had a lot of wind behind our sails just going into this property.
Joe Fairless: A couple follow-up questions on that… When you say we bought off-market – we went through a broker, but it wasn’t publically marketed, correct?
Frank Roessler: Yeah, that’s a great question, Joe. And yes, that’s exactly what happened. Transwestern brought us this deal from Bridge, so it worked well that we had bought from them in the past; it helped to convince them that we’re gonna close and not screw them over (pardon my French). But then the broker did a great job of convincing the seller that, for whatever reason, this was a good offer, and that it made sense to just sell directly to us, rather than going through the hassle of going through a bidding war… So we owe a lot to the broker we used.
Joe Fairless: And just generally, when a broker does not have a listing fully marketed, but they’re representing their client, and it’s considered off-market, but there’s broker representation, how often is that broker sending it out to a whole bunch of other people, just not officially? …so it’s pretty close to being on market, since they’re already sending it out to a whole bunch of people.
Frank Roessler: It’s case-by-case, but everything you’ve just said could happen. It could be the case that a lot of brokers when they get a property and they don’t wanna market this thing for the next two months and do 50 property tours, so it would be great for them to just sell it to a buyer directly… And sometimes that’s the way things go – they kind of quietly e-mail the financials around to the most common buyers in a market, see if they can just get it done there, and if they can’t, meaning those prices don’t meet with what the seller wants, then they go through the process of fully marketing the deal, and launching it out.
I know on this property this happened very quickly. We were dealing with a broker, Taylor [unintelligible [00:08:52].01] who we’d dealt with many times in the past… And he’s always done a good job, from our perspective – we never know what’s going on fully behind the scenes – of really just sending us the first look at a deal… And it’s an exclusive (but short) look for us, to see if we like this price, if this price makes sense for us, and if so, okay, make an offer, start negotiating a purchase and sale contract. He doesn’t say “Hey, I’ve got this out to five other groups.” So that was the case with this one – it came to us, just us, we came to an agreement on price and we moved forward. So it worked well on this deal.
Joe Fairless: The initial price that Taylor presented – was that the transaction price?
Frank Roessler: No, it wasn’t. But it wasn’t far off, either. I think we were just a few hundred thousand dollars below the price that he brought it to us for.
Joe Fairless: So off-market and submarket strength going into the deal, so we were set up for success… And what was the business plan?
Frank Roessler: The business plan was ideal for us. We tried to look for low-risk deals with value-add. What we tried to do is find an apartment that is under market, its units are outdated, but it has almost all (if not all) units unrenovated, and we can see comps which were… But then we’re buying from a great seller, hopefully, that has taken great care of the property, so we’re buying a property with good bones, that we don’t need to invest funds for maintenance, like replacing roofs or repainting the property, things that don’t really drive net operating income, but that you have to do every five to ten years or so. And that was the case with this deal. That’s why we liked it so much. Bridge had taken excellent care of the property, it was very well maintained. They have a business plan where they try to be very, very troubled assets, stabilized, maintain, and then sell with full value-add. That is indeed what happened here. They bought this deal when it was at a point of very low occupancy, it had a tough demographic on it…
So they stabilized it, they did a good job of that, and they replaced the roofs, they renovated the clubhouse, did a really good job on that… So when we bought it, it was served to us on a platter, so to speak, of having no units having been renovated, yet the market as I said was in growth mode and several comps were fully renovated and they were achieving rents 20% to 30% higher than what this properly was achieving, as well. It’s everything that you look for in a value-add deal, and that’s what wound up happening – we wound up buying the property and just slowly implementing that business plan.
If you’ve listened to our calls, one of the things I always say is the huge risk in this investment game is the execution of the business plan. You can do everything I’ve just said – buy it at the right price, in a great submarket, with a great business plan, but if you can’t execute, you can really screw up an investment. So I’ll get into lessons learned, Joe, if that’s okay.
Joe Fairless: Sure.
Frank Roessler: One would be we took on a very complicated, heavy lifting value-add project in Timberlodge. We wanted to further improve the demographics, we wanted to rebrand this property, so get rid of all the brand recognition, start anew. We wanted to add revenue-generating projects like carports. Then we wanted to renovate every single unit, and we wanted them to look nice. We didn’t wanna tank occupancy, but we wanted to keep going on renovations whenever someone moved out. So we wanted high occupancy, we elected to put granite in a 1980’s asset, when no one else in the market was doing that, and we put in those carports.
So we didn’t have CityGate at the time that we acquired this company.
Joe Fairless: The property management partner?
Frank Roessler: Yes, thank you. So we were out interviewing groups. We knew we wanted to go with a small, yet sophisticated property management group, because we wanted our business to be important to them, but we interviewed four different groups — CityGate was actually managing one of the comps that we said “If we can do that on this property, we’re gonna do really well.” So that was in their favor, and ultimately we were impressed by their proposal; we happened to like that group a lot, and we said “Okay, let’s go.” But that’s probably a gamble. I wouldn’t recommend doing such a heavy value-add project with a property management company that you’re not too familiar with yet. And that’s what we did, and we wound up getting lucky here, because we did a good job of interviewing… But still, it was an unproven group to us, and this is a big, heavy renovation project, rebranding project, a repositioning. So if they would not have been able to execute as well as they did, we would have had to have replaced them… We could have been in a lot of trouble on this deal, and we were fortunate that they performed, and performed well.
I look back at that and I do think we did things right, but I do think we got fortunate… If someone else was looking at the property and they didn’t have a group set up yet, third-party, I’d recommend maybe going with a large, large property management group. While they might not care about your business so much, they’re probably not gonna do a very bad job…
Joe Fairless: Right.
Frank Roessler: Or, alternatively, maybe start with a property that doesn’t require so much attention, renovation, operationally, as well as cap-ex… An easier project, that hopefully a group can get in and do a good job on no matter what. Maybe one of those two directions.
Joe Fairless: Yeah, that’s very helpful. I remember — so you and I invested in this deal, obviously, like we do all of our deals… But then also, for this deal, we have one investor. He invested with us a couple times (more than a couple) leading up to that, and then he said “Hey, I wanna be the only limited partner on a deal. Will you go find me something to partner with you guys on?” So we ran this scenario by him, and he was fine partnering up with this group, CityGate, who we now have our portfolio with… And they are a third-party management company. So there was just one person to have that conversation with, versus us mentioning it to a network of investors, which is different, because it’s just a different conversation, and you don’t have to have a lot of people being on board with it; you just have to have one person, who’s bringing the equity.
But I love that lesson, because even thinking about it from, “Okay, how do I pick a property management company, regardless of if it’s heavy value-add or medium value-add?”, well, how about looking at the comps, and if they’re managed by a third-party, and as you said, if you’re thinking “If we can do that, then we’ll do really well with this property”, and simply interviewing the managers for those comps.
Frank Roessler: Yup, and that’s exactly how things worked out. We got recommendations in from Taylor, our broker, and some other guys, about what third-party to go with… And then when I was shopping the comps, I saw CityGates’ name on the door, and that’s actually how they came to us. They were just included in the process, and it worked out really well.
Joe Fairless: I think you said two lessons… Was that the first one?
Frank Roessler: That’s the first one. Now, the second one – putting in granite and spending almost 7k/unit on a 1980’s property… This is, again, case-by-case issue, and sometimes that makes sense. This happened to be the fifth project that we had done. We looked at these units and we said, “Let’s do granite, let’s do stainless steel, let’s make it look beautiful.” We replaced the vanities in the bathrooms, all the lights, floors – you name it. We made these units shine and sparkle, and I do love that we did that. It showed that we’re capable of doing something like that, and we got great rents. I think we would have gotten just a little lower rents by spending a lot less. I think we didn’t need to go to that level with this demographic, and we couldn’t have gotten away just resurfacing the counters, even just maybe black appliances… The list from where the units were beforehand, completely unrenovated, with white appliances that were ten years old, carpets that had just been washed for five straight years, vintage lighting in there – from where it was to where we took it, I think we didn’t need to take it that far, and we could have gotten a higher ROI by maybe only spending $4,500/ unit. So I think that was the lessons learned of “Don’t under-renovate, but renovate to the appropriate level for the demographic.”
So now we found that if we do scale back and do the latter of what I said, which we’ve done on several properties in this submarket since – like Estencia and Belterra – you’re still gonna get a very, very strong rent bump, and therefore ROI, but you don’t necessarily need to do that big of a project and spend that much money… So I’d say that was also a lesson learned for us on this property, too.
Joe Fairless: For future properties and future acquisitions, what aspects of the subject property and the comps do you look at in order to determine “Okay, granite countertops, stainless steel” vs. “Resurfacing and black appliances”, or something in between?
Frank Roessler: Yeah, it depends on two things, which go hand in hand. One, what are the comps doing? Are you going to be the nicest property on the block? You probably don’t wanna be there… And then two, what is the income level of the demographic at that property and at the comps? Are you buying a property that has primarily workforce housing, that while they do want nicer units, maybe can’t necessarily afford a $200 premium, but could afford a $100 premium? I’m just picking those numbers our arbitrarily, but saying pay attention to the average household income of your residents, as well as the demographic around.
Or are you on a property that maybe because it’s built in the year 2000, it’s more of a core-plus asset, and it has a white collar demographic to it, with average household incomes of 85k or greater? Typically, on deals like that and the comps around it you will see a higher quality of finish that often includes granite and stainless steel appliances, undermount sink etc.
In order to really determine if you can get that return on investment that I’ve just described, you really need to take a look at the market, take a look at the comps, and take a look at the demographics of your property.
Joe Fairless: The business plan was five years, we sold it in less than half than that… What were the results of this project?
Frank Roessler: So we did an outstanding job on not only executing the business plan… We renovated approximately 60% of the asset, so we left a lot of meat left on the bone. We bought at the right time, we sold at the right time… We actually sold this property at 50% greater than what we bought it for, which is incredible to do. And on top of that, we sold in 18 months.
What happened with this asset… As you mentioned, it was a five-year hold, we sold in less than two years – we got an outstanding offer on the property… And like you said, we only had one equity partner; we have a fiduciary responsibility to bring any offers that come our way to our equity partner. That’s what we did. He certainly liked the price. The price more than doubled the equity invested into this property in less than two years. We actually pushed them a little bit more on price, we made them go non-refundable from day one, so that we didn’t waste anyone’s time here and have them retrade or back out of the deal later… And they agreed to the terms that we had them change, and it resulted in a fantastic investment in a very short period of time.
Joe Fairless: The 50% greater than what we bought it for – how much of that was cap rate compression versus NOI growth?
Frank Roessler: It’s definitely both. Our NOI increased 20% over 18 months, so that’s incredible right there, and that’s a direct result of our ability to execute on our business plan. But on that of that, there absolutely was cap rate compression, instead of expansion. We bought this deal at what I believe was around a 5.8 cap, and sold at a 5.2 cap. So if we would have done nothing, we would have made money. But if we would have done nothing, maybe it also wouldn’t have been an impressive return and we just wouldn’t have sold, we just would have held. It was the result of both – good timing and a good business plan.
Joe Fairless: Anything else you think we should talk about as it relates to this deal?
Frank Roessler: I took notes before this, and we went through everything that I wanted to discuss. We bought at the right time, but we did a lot of research as well in the submarket. We bought from a good group, that we’d transacted with before, and it was helpful, because we preserved our reputation by closing and closing at the right price. And then we had an appropriate business plan for the investment, and that’s what resulted in such a great return for us on this one.
Joe Fairless: And then the lessons learned – one, the lesson on picking the right team to do this type of project, and also perhaps not have this be a project that if you’re starting out, or if you’re doing large apartment communities, then this type of renovation overhaul probably isn’t the best first one for you to do, but certainly there’s a lot of value that you can add to it and it can be profitable.
And two is knowing how to renovate to the appropriate levels based on the demographic. And as you mentioned, the two things to look at is 1) what are the comps doing, and 2) what’s the income level of the demographic?
Frank, thanks so much for being on the show, great hanging out with you. I’m confident this is valuable, especially for multifamily investors who listen to this show, which probably makes up a vast majority of the audience. I hope you have a best ever day, and we’ll talk to you soon.
Frank Roessler: Thank you, Joe. I appreciate it.
Joe Fairless: And Best Ever listeners, you can go to AshscroftCapital.com and read Frank’s bio. I skipped over it, but you can check that out, and then see what we’ve got going on over there, too.