Jason Yarusi Real Estate Background:
- Founded Yarusi Holdings, a multifamily investment firm with over 800 units under management
- The host of “The Multifamily Foundation”
- Has a family construction business focusing on raising and moving structures
- From Westfield, New Jersey
- Say hi to him at:https://www.yarusiholdings.com
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Best Ever Tweet:
“How you lay out your plan to your investors is vital and can either create confidence or uncertainty” – Jason Yarusi
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 again, Jason Yarusi. How are you doing, Jason?
Jason Yarusi: Doing great. Hey Joe, thanks for having me back.
Joe Fairless: Well, my pleasure. And I said again, that’s because Jason’s been on the show a couple of episodes – Episode 1538 and Episode 1788, and on a previous episode, Jason talked to us about a 94-unit that him and his team purchased with investors, and it returned a lot of equity. Jason, when you talk about — you can fill in the gaps on how much equity was returned… And you did a refinance on that deal, with the intention of holding on to it for a period of time. But – newsflash, he did not hold on to it for a period of time, or a longer period of time, I should say. Instead, he decided to sell it.
So the purpose of today’s episode is to talk about how do we think about the decision of should we hold on to this longer? What are the pros, what are the cons, versus selling it and exiting out of the deal if the deal is performing? So what are the things to consider? So a little bit about Jason – he founded Yarusi Holdings, which is a multifamily investment firm with over 800 units under management; he’s the host of The Multifamily Foundation, he is based in Westfield, New Jersey, and the website is yarusiholdings.com, which is in the show notes. So Jason, do you want to just give a refresher on the 94-unit, so we’ve got a little bit of context? Best Ever listeners, you can go back, there’ll be links in this show notes for the previous episodes, so you can listen to those episodes if you want to refresher… But can you give us a refresher, and then let’s go right into the thought process?
Jason Yarusi: Absolutely. So we bought this property back in May of 2017. It was our first large acquisition going from a three-unit to this 94-unit. So it was the first property that we brought through syndication with our team. It was a great find. We found it through – we’ll call it a distressed owner; but the owner had passed, his kids were now running the deal, and they really didn’t want to be in this industry; they don’t live in the state. So it was a prime product to really go in there and just improve the efficiencies of the property.
The buildings themselves were in good shape, but we were able to add a lot of value really just through capturing the loss to lease, getting rent bumps up to really a $100 to $125 per unit based on just the properties right across, and we did a number of savings programs on the property that we talked on prior episodes.
After month 13, we had knocked out really a majority of the business plan. It was really month five or six that we had knocked out a big portion of all the cap ex than we had planned on that, taking really conservatively between month 14 and 18… But really just got in there, knocked it out, and by month 13, we were able to refinance the property and pull out about 75% of the capital back to investors.
So our plan and our thought process was great. The property was optimized, we were just turning the units, just capturing really on turning it to classic units going forward. It wasn’t an area that really called for premium units. So that’s what we continued to do, and really just improving on making this a better place for people to live. And we were accomplishing on that and we were building it through.
What came up though, is that there was a large property around us, and that large property has about 284 units, and that really dictated the way the area was going. So one thing is that that submarket couldn’t warrant RUBS, but because that owner had decided against it, he was controlling the narrative. He didn’t want to do it. It wasn’t in his game plan. So other owners who had tried, who had smaller properties around it, were really getting hit back because tenants were saying, “Well, I could just go over to competing property that wasn’t having this with the billing system for the property.”
That property, he started going in there and doing premium upgrades and capturing some of the rent; then pretty quickly, he put the property up for sale, and it took a minute, but he sold it at a pretty astonishing price point; just really the market had grown so much and the path of progress was coming right down the pipe that we caught really just the wind of it moving along with us. So he sold this property at a very high price point, and that price point alone really would serve well for our property.
The biggest difference is he had a lot of two and three-bedrooms, where our property was predominantly one bedroom. So it was about 83 one-bedrooms, 11 two-bedrooms. But looking at the market and looking at where we were, we just had to give it a hard thought here. This was the best comp that was gonna be there for us; and when we took it over, that owner was a lifer owner, he had no intention to sell. So we really said okay, then we can track off that owner. But when he sold, he sold at such an attractive rate that we had to take a really hard look at our property, size down what we thought we could do and where we can go from that.
We had never had it in the business plan to do premium units. We didn’t capitalize for that and we were continuing to roll the property, doing classic units; we had turned about 65 of the units. So with that and with the way the market had grown, where cap rates were compressed and there was still very attractive debt, we decided that we were going to really just soft touch it to the market.
We didn’t list it, we didn’t put out there, but I had a number of connections where I reached out to about ten people and just said, “We’re considering listing this property. We want to give you the first opportunity to have a look.” What we found was because you could get really attractive debt and you had 94 untouched units that can now be turned to premium units, and it was not a lot of heavy lifting on the property, that we had six offers come over. So we knew we were moving in the right direction.
Looking at that, where we would sell at that point, we exceeded our investor expectations over a seven-year hold. So weighing on this cost and looking at the uncertainty that where we are, it makes us look great today, but where our thought process was that in year seven, we wouldn’t have this good comp, and ultimately how attractive things are today that we probably wouldn’t have the best market conditions, so now would be the ideal time to test the market, which we did, and we had a very attractive number.
Joe Fairless: Did you work with a broker?
Jason Yarusi: It ended up that I did work with a broker, but it was never listed. It was actually the same team who represented the seller when we brought it. I’d worked with them on other transactions and I reached out to them and talked to them about the potential of listing this, and he brought a buyer to the table.
Joe Fairless: Sometimes I get a question from our investors whenever we have an opportunity, and they ask, “Well, if the property’s doing so well, why are they selling it? Why don’t they just upgrade the units like you’re going to upgrade the units?” You have explained in your business model, you just didn’t have in the business plan to do those premium units. So you would either have to allocate some money from a refinance or supplemental loan, or you’d have to do a capital call, or you’d have to do a personal loan to the property in order to do that business plan. So you had a performing property, but you just had a different business plan than the buyer, right?
Jason Yarusi: That’s correct, and what I felt is that with this business plan being to simply go classic, that it did lead to a very attractive narrative for us to have a talk track for other buyers. So we could, but then it gets into us going through cash flow or going through reserves or just changing really the landscape of the property. But I also didn’t feel that this area, although two and a half years really could make a big difference in an area, I didn’t feel that the growth of this area could warrant 94 premium units and have all this go on and another 284 units going on where they were hitting all these rent bumps, and that the hard capture here is you have to think, “Okay, so if we do premium units, this is not 100% change of the model. How many tenants are coming in this area that can afford these rent bumps?”, and that would be a pretty big change to our existing tenant base, and we didn’t want to have to go through that hiccup where we’re going to have some delta between the vacancy levels just to get those rent bumps. We felt this was an ideal time that another bullish buyer would come on board, they’d be able to implement this business plan, and we’d be able to get the cash out to our investors at a very attractive rate.
Joe Fairless: Were there any discussions about doing one or two rent premiums renovations to prove that that business plan would work at your property?
Jason Yarusi: Actually, no. It moved so quick and I made a quick decision that I didn’t want to go through the process there just for any reasons, because I set my mind that this was the right time, and for whatever reason, I just moved quick on it with the prospect of it happening.
Joe Fairless: From a return standpoint with your investors, how do you think about that? …Because there might be one or two of your investors or a small percentage of them who say, “Well Jason, we’re doing so well. We just killed it on this refinance. Why don’t we just hold on to this puppy for the long run? What’s the rush?”
Jason Yarusi: Funny enough, I actually did not have any feedback in that response from any of the investors. I think because the way I laid it out, I said, “Listen, I feel that this is our best comp and this isn’t going to be available again for us in four years. I also feel that the market conditions are the most favorable we’ve seen them, and just to think that we’re gonna have another four-year runway here would not be a conservative thought process for me. So I’m making this decision that we’re going to move forward to sell the property.” Another point is that, it’s not like when we sold the property we were at a big lag on where the potential returns would be. We actually were right at where our multiplier was going to be on a seven-year hold, and we just crushed the IRR from where we were. So there wasn’t much pushback from any level on the investor side.
Joe Fairless: Anything else that you think we should talk about that we haven’t talked about as it relates to the thought process you had when thinking about this decision to sell early?
Jason Yarusi: Yes, I would definitely talk to legal. I would definitely talk to your accountants. You want to know where it falls from responsibilities here. Also, we had done a cost seg study with the thought process that we were going to hold this for the long run. So you want to see what the effect’s going to be and how that’s going to trickle down, not only to you but your investors overall.
You also want to have a survey with your investors too, because the narrative has to be that if we’re going to give them back a chunk of money, they’re gonna have taxes they’re gonna pay, but ultimately they may not have another opportunity to put it into. Maybe they’re fine with that, maybe they’d like to have money back into their pocket, but ultimately, you want to make sure it’s not putting a large part of your majority base in some difficult position. But the group was very excited about it. They were very opportunistic about what’s going forward next and where we stand today. It put us in a good light that we’ll be ready for future opportunities quickly as they come about.
Joe Fairless: How can the Best Ever listeners learn more about what you’re doing?
Jason Yarusi: Go over to yarusiholdings.com, like you said. If you want to see me run 100 miles, 37 miles, somewhere in between pretty frequently, go over to @jasonyarusi at Instagram. I run a lot, and we usually track it in some fashion, and we actually encompass The Multifamily Foundation podcast into our parent podcast; we almost called our channel now The Jason and Pili Project, because we were finding we were doing so much fitness, self-development, mental fortitude along with the real estate that we really just wanted to bring that to the masses.
Joe Fairless: Jason, I love following you. I’m not on Instagram, or I personally am not. I think my team on my behalf is on Instagram, but I personally am not, but I see you on Facebook and we were talking before just how much of an inspiration you are for others and myself. I love seeing what you’re doing from a fitness standpoint and just from a mindset standpoint. So thanks for sharing with us the thought process, congrats on this deal and talking to us about the different components of what we should consider prior to moving forward or not moving forward with the sale early. So thanks for being on the show. I hope you have a Best Ever day and talk to you again soon.
Jason Yarusi: Thank you.
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