October 25, 2019

JF1879: Best Ever Lessons Learned Last Week #FollowAlongFriday with Theo and Danny

Today Theo will be doing Follow Along Friday with Danny Randazzo, who is also an apartment syndicator controlling over $225 million in apartment communities. Theo will be mentioning three lessons he learned last week while performing the interviews for the podcast and Danny will provide additional insights and thoughts. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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“You can put annual rent increases in the lease”

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Theo Hicks: Hello, Best Ever listeners, and welcome to the best real estate investing advice ever show. I’m your host today, Theo Hicks. Today is Friday, which means it is Follow Along Friday, where typically Joe and I will go over the lessons that we learned from the previous week’s interviews. A sneak peek into what you’re going to learn in the coming months.

We are going to do that today, but instead of me and Joe doing it, Joe is in Aruba right now, so I hope he enjoys his downtime and vacation there… So we are joined by Danny Randazzo again, as the co-host. Danny, how are you doing today?

Danny Randazzo: I am doing great, Theo. Glad to be back. Just excited to be here with you for this Follow Along Friday.

Theo Hicks: Awesome. As I mentioned, we’re going to go over three lessons that I learned from interviews last week… But before we do that, I wanted Danny to just briefly give us another introduction of himself. You should know who he is already, but if you don’t know who he is, Danny, do you mind just giving a rundown of your background and what you’re focused on now?

Danny Randazzo: Yeah. My name is Danny Randazzo, I am a real estate investor and entrepreneur. I’ve been a three-time guest on the Best Ever show, so you can go back and listen to those episodes to see my evolution and journey over the years. I really got started one deal at a time. Today my company controls over 225 million in multifamily deals. We syndicate large apartment deals. Today we look for deals that are 150 units or more, and greater than 30 million dollars in purchase price. So that’s what we’re focused on today.

I’m also the host of my own podcast, the Danny Randazzo Show, where I love to talk about money, mindset and investing. So that’s what I’ve been working on, and… Any questions, Theo, from you? Otherwise let’s get into the show.

Theo Hicks: Yeah, let’s just jump right in. The three lessons that I learned — well, it’s more than three lessons, obviously, as we always say, but these are just three interviews that we wanted to highlight.

The first one is from Alan Schnerr. He is a syndicator. He has bought more than 2,000 units and he’s managed more than 7,000 units, but he doesn’t syndicate your typical multifamily deal. He does triple-net leases. I had obviously heard the term triple-net leases before, but I didn’t actually know what it meant… So he gave a really good rundown of what they are, and then the benefits of the triple-net lease. In my opinion, it sounds too good to be true.

The one thing that he said was for multifamily, for every dollar that would come in as income, he would be spending 60 to 80 cents going out as an expense – operating expenses, debt service, things like that, which… 60 cents – fair enough. For triple-net leases he says that he’s able to keep 90-95 cents on the dollar. So when he told me that, I’m just like “Well, why isn’t every single person on the planet doing triple-net leases?” And maybe it has to do with them not knowing about it, but basically what he told me is the main difference between a triple-net lease and a regular lease is the reimbursables. So insurance, taxes, the majority of the expenses are all reimbursable to you, the owner. In multifamily the owner pays for all  that stuff. In triple-net leases the retail tenant, office tenant, the warehouse tenant pays for all that. It comes out of their pocket.

He went into more details on the budget, and how that’s sent to them, but… I thought that was interesting. I didn’t know what triple-net leases were. The other thing that you can do is you can put annual rent increases in the lease, because typically these aren’t your one-year lease, like it would be for a regular tenant. If you have a national tenant – and he talked about how to find national tenants – if that particular branch that’s in your building goes bankrupt, whatever, you’re still gonna get paid, because the national Starbucks is gonna pay you money even if that particular Starbucks isn’t doing well, or something goes wrong where they can’t be open. You can also get a percentage of sales, the tenants will have to pay for a property management company as well… So overall, he was saying how this is a more dependable income stream as a syndicator.

The main reason why I thought it was interesting is because he has done basically every single type of real estate investing you could think of. He’s bought medical, office, warehouse, shopping centers, custom homes, apartments, and he has been in the business for 20+ years. He’s really excited about triple-net leases and he says that his best advice was he wished he had done this earlier. Danny, do you know about triple-net leases? What are your thoughts on it? Is this too good to be true, or is this truly something that can allow you to maximize the amount of money you make per dollar invested?

Danny Randazzo: I do know some things about triple net leases. Actually, the first deal that I ever purchased was a one-million-dollar office building.

Theo Hicks: Yeah, I remember that.

Danny Randazzo: That was my first real estate investment, and I think back to the first best ever show that I was on, I covered that deal in detail… But he is on the right track. I don’t know if 90 to 95 cents is accurate in terms of net profit, because again, you would have to pay your debt service, so I think that’s a little bit off… But you definitely keep more money from a cashflow perspective with triple-net leases, because yes, the tenant is paying for the insurance, the taxes, any sort of community maintenance fee, they’re paying their water, utilities, all of that. And typically, if there’s something that breaks down inside the unit, like the toilet stops running, the tenant is gonna pay for a plumber to come out and fix it. So truly, gross income collected is almost identical to your net income. Then once you have your net income, you then pay your debt service.

So I think from a cashflow perspective, triple-net leases are great. However, once you have a fully-occupied building, there’s not much value-add opportunity. So if we compare it to an apartment deal where even if you buy a 95% occupied apartment community, and let’s say it’s a nice B class asset that hasn’t been renovated in 15 years – well, you can go in and you can add value to it, and instead of increasing the rent by 3% annually, which is typically a triple-net lease annual increase, you can increase rent by maybe 20%, 30%, 40% if you’re taking an apartment rent from $1,000/month and you renovate it, and now you’re renting it for $1,200. Well, that’s  a 20% rent increase, and that’s a huge equity forced appreciation that you can have.

So I definitely like a triple-net lease from a cashflow play. It’s a good place, like you said, to put your money in and have a national tenant backing it and paying the bills. If I can put $100,000 to work and know that Starbucks is gonna pay me for the next ten years, I feel pretty good about that. If I put $100,000 to work in a small office building where you might have an insurance broker and an attorney renting from you, that to me isn’t as secure… So I just think you have to weigh the pros and cons of what type of triple net lease you have, what the tenant quality is, and who’s really backing that, to understand what type of return you’re going to get, what are you comfortable with.

I always tie an investment back to what is the real goal here. Buying a triple-net lease to generate monthly income – that is a fantastic goal. Buying a triple-net lease to force appreciation – not a good goal. You would wanna buy an apartment community where you can force appreciation and create equity. So – absolutely, triple-net lease you can retain a lot of gross income as net income and cashflow every single month, and that’s really the primary purpose of having those investments.

Theo Hicks: Yeah, I think first of all the point about the value-add is definitely huge. I’m remembering now why he said 90%-95% on the dollar, and why we’re gonna bring him back on the podcast… Because once we got off — because again, we can only do these for 30 minutes. Once we got off, he was going on and on and on about all these different things that he did, that were very unique, that allowed him to bring in an extra 20k, 30k, 40k per month in rent, which would obviously increase the value.

One of the examples was he did something with a parking lot, built some structure on there, and someone rented it out for 40k/month, or something like that… And he said he has a bunch of other examples of that. So we’re definitely gonna bring him back on the podcast, because he started getting into the value-add stuff at the end and we just didn’t have enough time to talk about it. But in general, as you said, for triple-net leases, most of the time it’s just income coming in, which as you mentioned, you’re not able to force appreciation unless you’re doing something really unique, like Alan.

Danny Randazzo: Yeah. And I think some of those unique opportunities, like — if you own a building, sometimes you can put a weather antenna up, or you can put a cell tower up if you have the right zoning, you could put a billboard up… From a parking lot perspective, I’ve seen people put in ATM machines, the little standalone structure – those can rent for some serious money, and that definitely improves the bottom line, it definitely forces appreciation, and improves cashflow.

I’ve also seen ice machines, or sometimes in some cities they have these new Starbucks that are built out of old shipping containers… So you’re able to put that into three parking spaces, and that can bring in some serious rents.

Theo Hicks: Oh, I bet.

Danny Randazzo: So you can definitely be creative if you have enough land, the right zoning, and of course, the demand from a tenant who needs an ATM machine, or a cell tower, or whatever that is.

Theo Hicks: [unintelligible [00:11:38].11] learn more about triple-net leases from you, Danny. I appreciate that. Alright, so the second interview that I did was with John Bogdasarian. Basically, what he does is he has a firm that helps passive investors find deals to invest in. He works for a real estate firm that works with 300 passive investors… So he talked about really all things passive investor. We talked about investing from the perspective of the passive investor. There’s a few things that he said that I had not heard before, and I thought they were interesting and unique. Again, this is coming from the perspective of a passive investor.

The first one I’ve obviously heard before was as a passive investor, when you are looking at deals — I asked him how should a passive investor analyze a deal. He said the most intelligent investors, when they’re asking questions, will not ask questions about the actual specific deal. They won’t focus on that. Instead, they’ll focus on asking questions about the actual sponsor, the actual people responsible for the deal. What does that mean to people who are syndicators? Well, you need to make sure that obviously you’re giving ample information about the deal that you’re trying to raise money for, but also make sure that you can answer questions about why they should be investing with you, what’s your background expertise, experience, who’s on your team, that makes you the right person to invest with to grow and preserve their capital.

That wasn’t something new, obviously, but I did ask him some questions on how to find sponsors, and he had some very unique responses. One of them was when you’re in a hot market, he said “Look for cranes in the air.” For context, he helps people invest in development deals, too… So find cranes in the air, drive to those cranes; typically, when there’s a development going on, there will be some sort of banner with the person’s name on it… So reach out to that name, the developer, and see if you can get involved in either this particular deal, or some other deal they’re doing in the future, or at least figure out who is the party responsible for it.

Another one was — he said if you go to doctor’s office, if you’re talking with your lawyer, or someone who’s a high net worth individual who has the potential of investing in these types of opportunities – just ask them after they’ve done your check-up what they’re investing in, and see if they’re investing in apartments or some other passive investment source.

And some other ones he said – Google searches, obviously, read news article or local real estate publications… Typically, there’s gonna be some sort of Business Inquirer type publication for your particular market, and you can see who’s doing new development, who bought a new large multifamily building, things like that. Find out who they are, look them up on their website, reach out to them… And then with word of mouth — he said back in the day there was no internet, so there were country club deals. Kind of the same thing – go to places where there are high net worth individuals and then ask them what they’re investing in. Obviously, don’t go to some athletic club and walk up to every single person and say “Hey, what are you investing in?” Be smart about it…

Danny Randazzo: “How are you putting your money to work for you?”

Theo Hicks: [laughs] Seriously… Talk to them first, get to know them first, and then transition into that.

Danny Randazzo: Yeah. My excitement is through the roof right now, because I have the best ever approach to finding a sponsor… And I hope you’re ready for this, Theo. As a sponsor myself, I had this happen to me the other day; someone called me and they said “Hey, I have been looking at all of the SEC filings for private placement memorandums, specifically real estate syndication deals in this specific market, and I saw you just recently closed a deal, and I wanted to connect with you to see what you’re about and build a relationship to possibly invest in future deals.”

Doing that, number one, you always wanna make sure that the sponsor is following the law, abiding by SEC regulations… So when they close a deal, they have to file their offering with the SEC. And again, that’s public information, so Best Ever listeners, this is an excellent approach to see who is syndicating deals in the markets that you want. All of those filings can be found; you just need to hunt for them.

This guy was actively seeking out syndicators and then calling people to build that relationship. I think that’s another phenomenal approach if you are truly interested in buying in a specific market, or anywhere around the country; you can see those offerings, you can read through the details of it, and then of course, go to the folks’ website, look them up, build that relationship, know/like/trust them, which I would highlight as the [unintelligible [00:16:23].02] as a passive investor myself personally, I invest in Ashcroft deals with Joe as a passive investor, and it takes time to build that relationship, to know/like/trust someone. So once you do that and you qualify them, I think investing in the next deal, and the next deal, and the next deal makes it that much easier. Again, do your research, use your personal network, use your extended network, do the Google searches… I guess if you wanna look for development opportunities look for the cranes, call the company that’s sponsored on the fence out front, and use the SEC website to find the filings and then reach out to those syndicators.

Theo Hicks: Thanks for providing that. I had heard that SEC filing one before. It might have been you, actually. I can’t remember who it was. I think it was a syndicator saying that “Make sure you’re registering on the SEC site, so people can find your deals.” But on the know/like/trust, something else than John said about looking for sponsors is that he always recommends to his passive investors to avoid the investor portals, because he said that it’s very difficult to gauge if you can trust them by simply finding them and then logging into their portal and just sending them money. He talked about that a lot. I have seen the portals before, but I don’t know of any investors who just strictly — 506(c),  have people come to their portal, never talk to them, things like that… But obviously, if that does exist, then yeah, it’d be very difficult to know them, to like them and to trust them if you’re never talking to them. So that’s something else that he ended with.

Danny Randazzo: Yeah. I would just put that disclaimer out there that if you are going to invest your own money, you are responsible for it. You need to talk to the main sponsor, or you need to meet them in person, period, before you ever send your money. And if you can’t do one of those two things, then I would just say don’t invest, because that doesn’t make sense, to me personally. My gut wouldn’t allow me to do that without speaking to them or meeting them in person. Again, it’s a huge investment; you’re putting your money to work and you need to know, like and trust. And if any one of those three is off or feels weird, don’t do it.

Theo Hicks: Exactly. Alright, so the last lesson – this will be a quick one. Eachan Fletcher – he’s the CEO of a company called NestEgg. That sounded so familiar when I interviewed him, but it’s a property management and maintenance online platform. He actually used to be the CTO and VP of product at Expedia, which is interesting… So he has a lot of experience of growing companies, startups, venture capital, things like that. We’ll definitely get him on the podcast again, because I wanted to talk to him more about NestEgg, just because it’s kind of a startup company, it’s only in a few locations, and I wanted to know what’s the approach of scaling that nationally… Because that can be very helpful to syndicators, or also investors who are investing in one location and what to eventually grow a business that can help them invest all over the country.

He gave a three-step process for how he started the company from a strategic standpoint, that I thought would be interesting to anyone who obviously wants to do some sort of startup that provides a service to real estate investors… But also, you could apply this to your real estate business as well.

The first step when he started the company was to gain insights on this space, and the customers. So he did a lot of market research to basically figure out what’s missing, and what’s hard about property management. If you want to learn about what he determined, you can check out that interview, which we’ll probably be releasing in a little bit… Basically, he asked himself “What are people who are starting out 2-3 years into being a landlord, with less than ten properties – what do they need help with?”

The second one was to find competitors who are also providing solutions and services to those customers to figure out why people aren’t happy with their solutions. And then the third one is based on all that research on why people aren’t happy – you wanna determine what features your company is going to have in order to make sure people are happy, to fill that need.

And I guess I’ll say what he did – basically, the things that he did for his company was 1) the maintenance. So rather than having the owners have to do the maintenance themselves, or rather than the property management company kind of just taking care of it and sending them a bill at the end, he has an online portal that they could submit their maintenance requests to, and then they’ll take care of everything. There’s a lot of pictures, and back-and-forth, and you can monitor the repairs to make sure that they’re actually fixed… Then they’ll actually monitor the repairs on an ongoing basis. They partner with a lot of contractors, so you don’t have to do that yourself.

The second one was the cashflow issue – people that are starting out need their money, and I know an initiative I had was getting cashflow a month later from the previous month, or two months later, whereas they’ll pay you the rent they collect on October 1st – you get paid October 1st, even if they don’t have that money right away. So you get paid a month earlier than you usually do.

And then the other one was about the maintenance issues – rather than paying last month’s maintenance calls all coming out of the rent for the next month, they’ll spread it out over a 12-month period instead. There’s a couple other things that they have as well, but the main point was his process for creating the company, which was gaining insights, find the competitors, and then determine what features you’re going to create with your company. I thought that was interesting.

Danny Randazzo: Yeah, I think that is very interesting. It always comes back to the Why and the Need. You just need to solve for those things. It sounds like a very interesting approach, and I’ll be curious to listen to that next episode of how the implementation is going so far, and what their value-add approach is to help owners, operators, management companies improve that maintenance issue. Because as we know, in the apartment ownership world your largest expense typically is payroll, which includes your on-site maintenance staff salary. So if there’s a way that NestEgg is able to change the approach to maintenance costs, it could be extremely beneficial to owners, operators and managers to impact and improve their NOI if there’s a new way to handle maintenance requests and decreasing expenses.

Theo Hicks: Exactly. So those are the three interviews. Again, those will probably airing in the January to February timeframe, so you got a sneak peek of what will be talked about in those episodes. Just to wrap things up, trivia questions – we do a trivia question each week; the first person to get the trivia question correct gets a free copy of our book. We’re doing a loyalty trivia question this month – all the trivia questions are things that we’ve talked about on the blog, on Follow Along Friday, the podcast, the book…

Last week’s question was “Of the two main occupancy metrics, which one is more relevant to you when you’re investing in apartments?” The two main occupancy metrics are physical and economic occupancy. Physical is just the rate of people who are in your apartments. So if you have 100 units and 90 are occupied, the physical occupancy is 90%. But let’s say that of those 90 people only 80 are paying rent, and 10 aren’t, for some reason – then your economic occupancy is actually 80%. So the answer is economic occupancy, because if I’m buying an apartment and they tell me “Oh, Theo, the occupancy is 100%”, it’s like “Oh, well is that physical or economic?” “Well, it’s physically occupied 100%.” “And what’s the economic occupancy?” “Well, some people aren’t paying rent, and there’s bad debt, and there’s this and that… So essentially 80%.” That’s a huge difference in income, that’s a huge difference in NOI, so that’s a huge difference in the value of the property.

Joe has talked about this on his first deal as well. If you go to JoeFairless.com and you search “economic occupancy”, you’ll find some blog posts going into more detail on that.

This week’s question is “What is the main difference between the cash-on-cash return metric and the internal rate of return metric?” I guess it could be a one-word answer or a three-word answer, depending on how you answer… But “What is the main difference between the cash-on-cash return metric and the internal rate of return metric for apartments?” Technically, you could use that for really anything.

So you can submit that to info@joefairless.com, or you can comment on the YouTube video. Again, the first person that gets that correctly will get a free copy of our book.

Danny, thanks for coming, I really appreciate it. I really enjoy doing Follow Along Friday with you, because you always have a lot of value to add, a lot of things to say that I haven’t thought of before or that I don’t know about, so… I really appreciate you coming on. Where can the Best Ever listeners get in touch with you?

Danny Randazzo: Theo, thank you for having me, happy to be here. If any of the Best Ever listeners need to get in touch with me, just go to DannyRandazzo.com.

Theo Hicks: Perfect. Again, Danny, I appreciate it. Best Ever listeners, thanks for tuning in. Have a best ever day, and we’ll talk to you tomorrow.

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