JF2160: Second Generation Investor Lessons With Pankaj Sharma

Pankaj Sharma Real Estate Background:

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“Patience, it’s a long term game, it’s not to get rich overnight. Consistency and Patience.” – Pankaj Sharma

TRANSCRIPTION

Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless. This is the world’s longest-running daily real estate investing podcast where we only talk about the best advice ever; we don’t get into any of that fluffy stuff. With us today, Pankaj Sharma. How are you doing, Pankaj?

Pankaj Sharma: Hey, I’m doing good. How about yourself?

Joe Fairless: Oh, I’m doing great and welcome to the show. A little bit about Pankaj – he’s a second-generation multifamily owner operator with 20 years experience. Personal portfolio, well, that consists of 2000 units in five cities, host of KarmaKast, based in Spring City, Pennsylvania. With that being said, do you want to give the Best Ever listeners a little bit more about your background and your current focus?

Pankaj Sharma: Right now, like I said, we manage about 13 properties in five metro, tertiary, second– I would say, secondary markets, and all in Pennsylvania, Allentown, Redding, Pottstown, Harrisburg, and Chester County. When I was about ten years old, my father bought his first property, no money down. He borrowed and he got owner financing, and he borrowed the rest of the money, about $90,000 down, for a property with 54 units. Well, now it’s 54 units but it was 52 units at the time. So I grew up painting apartments, cutting the grass and doing various things, holding the bucket for my father; he would do maintenance requests at times, fixing problems. So growing up, I didn’t think this is something I was going to get into, and I tried to get further as possible from it, but as I got older–

Joe Fairless: How come?

Pankaj Sharma: I just thought I had another calling, I had my own journey to go through, and always like the grass is greener on the other side type of thing.

Joe Fairless: Of course, yep.

Pankaj Sharma: So they always tell you to follow your passion, follow your passion stuff, and that confused me for a while. I realized that I can invest my passion, I can turn on the switch of passion anywhere with anything, and I can be passionate with what I’m doing as an investor. I saw everything from a different angle and perspective, and as I grew older, my perspective and my angle started to change.

I would only see the problems. I didn’t see where this is going. I saw the problems and the headaches and that kind of thing. Which is good; I’m glad I had that background and basis. So I’ve done everything from painting apartments to managing a property myself to doing those things. I never loved property management; I got into it, I poured my blood, sweat and tears into it, because we would take over properties at times and it was really in bad shape. So we’ve made a portfolio consisting of buying mismanaged/distressed properties, buying them at a good price and fixing them up and keeping for the long haul, and building a portfolio like that. Collectively, our family has a portfolio of 4,500 units. My brother, he has about 2,500 units and I got about 2,000 units.

Joe Fairless: So your bread and butter is buying mismanaged, distressed properties, getting them to stabilize, and holding for the long haul. What was the last property you purchased? Let’s talk about that.

Pankaj Sharma: So the last deal we did was in July of 2019. It was the biggest deal we’ve ever done, which is over 800 units. Five properties in the city of Harrisburg, which is the capital of Pennsylvania. The deal came to us and it wasn’t really that interesting. It was really mismanaged, really distressed properties, two high rise buildings, and I’ve had a high rise building for a while. But we came very close to signing the property, and then I just at the last minute backed out. I was away on Thanksgiving vacation [unintelligible [00:05:51].03] and the deal was all ready for me to sign. It was being pushed through. It wasn’t one of those deals where you could do a whole lot of due diligence. It wasn’t even on the market; it was off-market deal, and I backed out at the last minute. I just had this really gut-wrenching feeling that something was not right, and I backed out.

A few months later, the property came to us again, but it came and it was wholly different. The owner was more relaxed; he wasn’t desperate, I guess, and he was more relaxed and it wasn’t the property management company anymore. He was managing it himself, which is a lot easier to do a takeover when you have something that’s self-managed, as opposed to a property management company.

Joe Fairless: Why?

Pankaj Sharma: Because we self-managed all our properties. When we’re buying a property, we’re not just looking at the investment figures of it, we’re looking at the operational aspect as well.

Joe Fairless: Okay, but how does that help?

Pankaj Sharma: The way it helps is because it’s an easier transition. When the property management company– they don’t have an investment in the new owner because they know they’re going out. So they’re like hi and bye, and then it’s a harder thing to fill the roles. But if the person’s managing themselves, those people want to work with you. So you’ve already got a team there, and then you can sift through the team and work out. So you have time, whereas those property management companies are gone, and it’s a big operation like that, five properties across the city, and to bring in a team and hit the ground running, it’s a really tough time.

Joe Fairless: So the two things – one is just the staffing and then two is the attitude?

Pankaj Sharma: Yeah, the property management company, they don’t have an investment in the property. They’re out of the job now that you’re coming and taking over their property. They have no investment; and property management – they don’t have investment in the property period anyway. So even when they manage the property itself, they’re not as attached to it as the owner would be.

Joe Fairless: So you backed out last minute around November. A few months later, came back to you–

Pankaj Sharma: February, yeah.

Joe Fairless: –and what did those terms look like, compared to the original terms?

Pankaj Sharma: Well, we got the price dropped a million dollars.

Joe Fairless: There you go.

Pankaj Sharma: I think we could have went for $2 million, but we definitely — that’s a really good term. The owner was really trying to push through the deal in 30, 60 days, doing a quick close, do your due diligence upfront and once you sign, you can’t get out of the deal. It was really a lot of pressure, and even when we signed the deal in February, it wasn’t till July that we could finally close on this deal, because there was so much going back and forth between the lawyers and the legal work and looking at things and checking out violations, and that kind of stuff. So it was a crazy deal to get through all those months, and to get to the closing was very extraneous.

Joe Fairless: What was the purchase price?

Pankaj Sharma: So the purchase price was $50 million. So we go it for about $60,000 something a unit; $50 million, 828 units, approximately. The numbers changed. Originally, we went in 828 units; now it’s 820-something else. That’s the other thing.

Joe Fairless: Why is that?

Pankaj Sharma: They’ll add units. Because they’ll add a unit here or there. So you realize it’s a few here and a few there, so there’s definitely a difference. So I don’t remember what the last total was, but it wasn’t– 828 was sealed in my brain because that was the number. So I always did– what is it, $50 million divided by 828. Yes, it was about $60,000 a unit. There’s no inventory here. Joe, there’s nothing on the market. So the guy was wanting to sell and we needed something.

Joe Fairless: Why was he in a distressed situation, to the best of your knowledge?

Pankaj Sharma: He was also a second-generation, and he moved a lot of his money into New York City, and so he was a distant manager. He never really came to Harrisburg, he never came to the locality. A property management was managing most of the properties for him, and he kept the one property that was pretty well stabilized, he kept that for himself. And he was always constantly moving his money to New York. He was always taking the money from Harrisburg and moving it to New York. So he wanted– and now looking at the whole situation, if we didn’t come and get the property at some point, I think he would have even lost the property. He was also a second-generation multifamily owners, as myself.

Joe Fairless: Well, it’s the second generation. Second-generation’s supposed to grow the business; the third generation’s supposed to lose it all.

Pankaj Sharma: Exactly.

Joe Fairless: He was one generation early.

Pankaj Sharma: Yeah, I wouldn’t say he’s losing it all, but his management style was very different from us, and then it was a real story because a lot of vendors were not paid, and a lot of bills were not paid. So you got a high rise building and it’s over $40,000, the electric is due and they want to come and shut off the electric. So a high rise building with 270 units, the gas company wants to come off, shut off the gas, these things. Our understanding was that all these things– well, I’ll get to this later because you’re gonna ask me what’s the biggest mistake I probably made at some point [unintelligible [00:10:30].07] I’ll get more into that, but yeah.

Joe Fairless: Well, just mention it while we’re on the topic. What were you gonna say?

Pankaj Sharma: So we’ve never taken over a property and the person who was the previous owner just left so many people high and dry. And then you have all these people coming to you and we’re just like–

Joe Fairless: [unintelligible [00:10:47].13] want their money.

Pankaj Sharma: “Well, we bought the property. We didn’t buy the debt on the property,” but some places you had to break out deals and work. So luckily, we had a good reputation in the area and some of the vendors just knew us because of our name, and that gave us the benefit of the doubt that we weren’t gonna do them dirty.

Joe Fairless: So the distressed high rise building, I heard you, you said five properties across the city. How many of those five are high rises?

Pankaj Sharma: Two of them are high rise, and one high rise in particular — people were interested in buying three or four of the properties, but nobody wanted the fifth one.

Joe Fairless: What was the fifth one?

Pankaj Sharma: Fifth one was a high rise building.

Joe Fairless: Okay, how many stories?

Pankaj Sharma: I would say 11…

Joe Fairless: 11 stories.

Pankaj Sharma: 118 units, it’s two different towers. It’s a pretty old building, built in the 30s. Most of our stuff is in the 70s. So we put a lot of work into that building. There was no cameras or anything. It was a lot of all kinds of shady activity going on there. It’s come a long way in a short period of time, and I’ve had a high rise for over 20 years. That was a foreclosed property that we had originally bought for $2 million as a foreclosed property. I had 96 units in it. Today, we built another 60 units because there was two floors of empty commercial space that we added 60 units about five years into the property. And today, that property is worth a lot of money. So high rises, if you manage them properly — but they’re more intense as far as… They’re more management intensive.

Joe Fairless: Please elaborate. I’ve never owned a high rise. What should we be aware of when we look at high rise buildings versus garden style?

Pankaj Sharma: Yeah. Elevators is an important issue, because that’s what’s gonna be [unintelligible [00:12:16].06] Everybody’s gonna be traveling in the elevator. So if it’s older building elevators, it’s a really key thing.

Joe Fairless: What about elevators?

Pankaj Sharma: The condition of the elevators, the maintenance of the elevators, how well they’ve been maintained, how old they are. If you buy a building that was built in the 70s, if it’s got original motors and everything is 50 years old, at some point stuff starts to go. So elevators is a key.

Joe Fairless: Are they expensive?

Pankaj Sharma: Oh, yes, elevators can be very expensive to refurbish and to modernize. I think it could take a lot of money.

Joe Fairless: What’s a lot of money?

Pankaj Sharma: Depends on the elevator, but you could easily spend $100,000 easily. We’ve spent, I don’t know, $50,000 for motors and parts in different times. So we were lucky with this building Bellevue towers because the building was shut down prior to us buying it and he had to redo the elevators and he had to do a lot of work in the elevators, so we weren’t stuck with that.

Joe Fairless: What else about high rise buildings?

Pankaj Sharma: The other thing that’s very important to look at is the boiler operations, because if you’re in a high rise building, you’ve got huge mechanicals. So the elevator’s a huge mechanical– you’ve got a boiler system, the heating system, those are huge mechanicals as well. Some buildings will have independent heat, hot water, HVAC per unit. Some even might have a collective, depending on when it was built. So I’ve got a high rise here in Pottstown, the 156 unit, the one I told you about. The hot water is collective. The Bellevue Towers, the hot water and the heat is collective. So that’s the other thing. You’re going to be paying for the hot water, the heat, those things as well.

Joe Fairless: So as a resident, it’s an all bills paid property?

Pankaj Sharma: They just pay their electric. Bellevue Towers, that property the heat is included as well. It’s one of those baseboard heat system.

Joe Fairless: Yep.

Pankaj Sharma: You’re familiar with it; it’s a new thing for me. But we spend a lot of money updating and working on the system as well because it’s– these bigger operational mechanicals, i f they’re not well maintained and sometimes people will do cheap fixes or patches, and it gets very crazy at times.

Joe Fairless: It’s got to be an interesting transaction whenever– it’s February and he comes back to you, and then you don’t close until July. So what are a couple of things that– I imagine the closing was pushed back a couple of times. So what are a couple of things that pushed back the closing?

Pankaj Sharma: Well, there was a lot of blame going on with the title company. They were blaming the title company. The title company was out to lunch. So getting a good title company– we’ve never had that experience before, but the title company that was used, that was our lawyer’s title company, was really out to lunch, and it took a while for them to get their gears spinning. And because of the amount of issues, the city had sued this guy at one point. He took the city to court and he lost, and even at the end, he was laughing with these like, “They got a warrant for me in Harrisburg. I can’t even go to Harrisburg.”

Joe Fairless: Oh my.

Pankaj Sharma: So the violations, and things of that nature… Because the city there, they monopolize the trash, like they can only get the trash to the city. So you pay more trash-wise for these properties in this location than you would another property, because there’s no competition. It’s all through the city of Harrisburg. So he tried to fight that, and I guess he lost.

Joe Fairless: That was in the middle of it being under contract?

Pankaj Sharma: No, no, no. I think he did these things before. So it was a mess with the title company and then lawyers and then– luckily we refinanced another property and that’s why we were able to close this deal… Because the property itself didn’t have strong fundamentals that it could finance itself. Most of the time, you buy a property, you’re able to put 30% down or whatever down and then you’ll be able to finance the rest. Here, this wasn’t the case, because the property wasn’t that strong. It didn’t have a strong tenant base, it wasn’t well managed, it didn’t have a strong rent roll.

So even when we took over in July, in August, the collections were about 70 some percent, and then there was a lot of weeding that was going on because they filled a lot of the units with people that could fog the glass or fog a mirror for whatever reason, but it was to beef up the rent roll. For whatever reason, people that were not adequately qualified to be residents were given apartments. So we had to do a lot of cleaning out as well, but now– we moved fast and we went from something that was in the 70% mark of collections and occupancy, to – just last month, we reached 94% collections.

Joe Fairless: Congratulations, bravo on that.

Pankaj Sharma: And then all of a sudden, we’re hit with this whatever we’re hit with, this whole thing.

Joe Fairless: Yeah, the pandemic.

Pankaj Sharma: But luckily, we were able to build a strong base prior to that, because if we hadn’t, something like this could really take us down. Our mortgage on just on those five properties is $400,000 a month, principal, interest and taxes.

Joe Fairless: So you refinanced another property to purchase this portfolio, but then you just mentioned you have a mortgage. So how much down–

Pankaj Sharma: It was highly leveraged and the person probably wasn’t at this point able to pay the bills. The reason why the bills were left unpaid was because he couldn’t pay them at the end, I’m pretty sure. Because if the rent roll total is about $625,000, which now it’s at $627,000, the gross rent, and $400,000 of that is mortgage, how are you going to pay the rest of the bills? So luckily, added our $400,000– I don’t know how he had his finance, but we do a 15-year loan. Obviously, we’re going to be paying a lot more per month than most investors, because we’re paying off 15 years so our mortgage payments are higher; but we’re getting equity faster as well. By the time that 15 years is over, we’ve got a building that’s paid for that then is worth usually two to three times more than what we originally bought it for, and then you can take that money back out and then buy another property.

So the one property we had bought a long time ago, I think in ’96, we bought for less than $5 million, 296 units. That property itself today could easily– well now, who knows, with the corona thing, but prior to just last month, if I were talking to you, I could say you could easily get $100,000 a unit for that property. So that’s over $20 million. We took $15 million out of that property and refinanced. That property was paid off a couple of years ago.

Joe Fairless: So what percent down did you have on the $15 million?

Pankaj Sharma: So $15 million plus another $5 million is to 20 million right there, and then bank financed the other $30 million, which is 60%.

Joe Fairless: Okay.

Pankaj Sharma: So we just had to put $5 million now cash, plus the closing costs, which was another million and a half, 0.7 million or something like that.

Joe Fairless: 70% to 94%.

Pankaj Sharma: So check this out. What industry can you buy something for $50 million with $5 million cash?

Joe Fairless: Hey, I picked real estate for a reason. Yeah, good thing whenever you were looking at other passion projects, you ended up back here.

Pankaj Sharma: Right. Now with my understanding, I realized  – what business can you operate like this, where you can get something for $50 million dollars, which is probably worth a little more than that; we got it at a good price – only $5 million cash, and then 15 years, a big chunk of that is gonna get paid off.. .Because we had two loans. The one loan for the $30 million is 25 years this time, but the other refinanced one’s 15. And then you got another property that’s paying off that portion of it; the $150,000 mortgage paid off from the refinance. So the five properties themselves are only paying about $250,000 of the mortgage.

Joe Fairless: How does your team go in and change collections from 70% to 94%, and over what period of time was that?

Pankaj Sharma: So we’re looking at August, six, seven months; eight months total. It was really just being laser-like, going in, putting the money to do some of the capital improvements to fix up the outside, get the curb appeal up, start creating an energy that the change is here, and people that realize that they’re not going to be able to stay here because of the improvements going on, they just start leaving. And the ones that don’t leave that just can’t pay, you have to go through that process. So you have to clean the house, you have to weed the garden. Apartment investing is a lot like gardening or farming. One seed grows into many seeds, but you got to maintain and nurture the crop. You got to do the weeding, you got to clean out the weeds, and then you got to prune the tree in a fruit tree scenario, so that you can bear more fruit from it.

Joe Fairless: You mentioned curb appeal. Is that the first thing that you do?

Pankaj Sharma: We had to pick our battles, because there was so much going on. So in this situation, I did curb appeal, but then there’s other things like new roofs that were put on, and things of that nature that were not something that you could see from an aesthetic point of view, but that was necessary needed to go in.

There was sidewalks that were really bad. There’s just one sidewalk, I think I spent $40,000, $50,000 just for doing a whole block of sidewalk; it was really bad, and the trees were bringing it up, so you don’t want the trip hazard. But doing those types of things created news in the area, as well. The mayor was seeing what we’re doing, the mayor wanted to meet with us, and it never happened, but at least the word was out that somebody new is in town and they’re taking care of business, they’re being responsible. Because a big part of, like I say, investing, is not just looking at the numbers, but changing a community. When something is mismanaged, distressed, just the darkness comes in. And to be able to go in there and bring light and to make this place a little bit more beautiful, a little more safer, a little more pleasant to look at – it’s a positive thing, it’s making the world a better place.

Joe Fairless: Taking a step back, based on your experience, what’s your best real estate investing advice ever?

Pankaj Sharma: Patience. It’s a long term game. It’s not a get rich quick or get rich overnight scheme. It’s consistency and patience. That’s what I’ve seen, what my father has done, and then what we’re able to continue is just being consistent and not giving up.

It’s also a game where you need balls, you need courage. It’s not for everybody. It’s not for the weak at heart; because you’re going to see things, you’re going to go through situations that are really going to test you. So you need some grit, you need some guts. A lot of people through the years have come to our family and asked for advice and wanted to get in real estate, but they really didn’t have the courage. My father was able to — he didn’t know nothing about apartments when he started out, and I’m really amazed at the courage and the faith he had and going for it.

Joe Fairless: Wow. 828 units, five across Harrisburg, distressed, two of them high rise buildings. That takes some faith and some courage, that’s for sure. Especially whenever you are refinancing out a successful project and using that money as a down payment for this, because I’m sure there were some internal dialogue about “Do we really want to do that, or should we just be happy with this $15 million refi and not plunk it down into this major major challenge ahead of us?”

Pankaj Sharma: That city, when we first bought the property that we did the refi is Allentown, Pennsylvania, and where that city was 15-20 years ago and where it is now, it’s amazing, the shift that’s happening. So Harrisburg is behind, but we can see that even the growth there in the last ten years– my brother has been there for ten years, and he’s seeing the growth that’s happening there.

Now there’s all kinds of cranes and stuff in Allentown. There’s no cranes or anything in Harrisburg, except for they’re building a courthouse. So that long term game of 15-20 years, we just see the evolution of how real estate continues to evolve and grow over a long period of time.

Joe Fairless: I like your business plan, with the 15 years, and then just doing your business plan, self-managing and then refinance out at that point, and then do it again or do something else with it. We’re gonna do a lightning round. You ready for the Best Ever lightning round?

Pankaj Sharma: Sure.

Break [00:23:46]:05] to [00:24:56]:03]

Joe Fairless: What’s the best way you like to give back to the community?

Pankaj Sharma: Like I said earlier, giving back is investing in a mismanaged, distressed property and bringing the neighborhood to a place where it’s safe, where it’s harmonious, where there’s peace, there’s not unrest, and I never saw that before until this last year, really seeing how investors can make the world a better place.

Joe Fairless: We talked about a challenge that you’ve come across. How can the Best Ever listeners learn more about what you’re doing?

Pankaj Sharma: We started a YouTube channel a few months ago when we were getting into all this crazy stuff with this test deal, and it’s called Sharma’s Karma on YouTube.

Joe Fairless: Oh, cool. I’ll check it out.

Pankaj Sharma: We’ve got videos, we got our podcasts on there as well, and we show what we’re doing.

Joe Fairless: Is the KarmaKast your podcast?

Pankaj Sharma: The KarmaKast [unintelligible [00:25:44].17]. This one’s Sharma’s Karma.

Joe Fairless: Alright, I will put that in the show notes as well; the Sharma’s Karma YouTube channel. I’d like to check that out. I’d like to see what type of projects you are working on, like see them in person — or not in person, but through video.

Pankaj Sharma: The last video, we did a $20,000 rehab on an apartment. This guy had lived there for over 20, 30 years and it was just terrible. It was like the walls were yellow with smoke and everything from cigarette smoking and the apartment was so– there was no breathing [unintelligible [00:26:13].24] So we showed the before, during and after with that project.

Joe Fairless: Enjoyed our conversation very, very, very much. I loved talking to you about what you’re doing. Grateful that my team found you, however they found you; grateful that I found you.

Pankaj Sharma: Shoutout to Jerome Myers. I think he connected me with you.

Joe Fairless: Okay, well grateful for that, and thank you for telling us about the 828-ish unit portfolio in Harrisburg and just your overall process. Enjoyed it. I hope you have a best ever day. Talk to you again soon.

Pankaj Sharma: You too, Joe. Thank you so much.

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