JF2272: Experience Gives Perspective With Arn Cenedella

Arn Cenedella started his real estate career in the 1980s after graduating from the University of Michigan. During this time he invested locally and remotely in Charlottesville, VA and Austin, TX. After 36 years as a broker, he decided to leave Silicon Valley and head to Greenville, SC with his girlfriend in November of 2014. He now has 8 rental properties, 3 subdivisions, 2 condo conversions, and 3 residential lots permitted for single-family development. 

Arn Cenedella Real Estate Background:

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Best Ever Tweet:

“I believe if you approach real estate with a long term perspective, you can ride out the inevitable ups and downs of economics” – Arn Cenedella

TRANSCRIPTION

Theo Hicks: Hello Best Ever listeners and welcome to the best real estate investing advice ever show. I’m Theo Hicks, and today I’ll be speaking with Arn Cenedella. Arn, how are you doing today?

Arn Cenedella: I am doing great, Theo. Glad to be here and pleased to have the opportunity to talk to your Best Ever audience.

Theo Hicks: Absolutel,y and thank you for joining us. Before we hop into that conversation, a little bit about Arn’s background. He’s a full-time real estate investor with 34 years of experience. His portfolio consists of 8 rental properties (13 doors), 3 residential lots, 15 flips, 3 subdivisions, 2 condo conversions, and 4 passive investments. So he has done it all. He is based in Greenville, South Carolina, and his website is investwithspark.com. So Arn, do you mind telling us some more about your background and what you’re focused on today?

Arn Cenedella: Sure, I’d be happy to. So like many of your listeners, I went to college, I planned to become a scientist or an educator, got a master’s degree in chemistry from the University of Michigan, but then I went into the real estate business back in 1978. So I had the good fortune to grow up on the San Francisco Peninsula, basically above Silicon Valley, and went to work for my father who was a great mentor, taught me the brokerage business as well as the investing aspect of real estate… And I had the good fortune to work there for 35-40 years in probably one of the best real estate markets in the world.

Theo Hicks: So you have seen a lot of market cycle ups and downs, so I think maybe a good place to start would be how do you see what’s going on right now, since we’re recording this on August 19th… So how do you compare what’s going on right now to previous recessions? And maybe kind of talk to us about the mindset you have after experiencing a lot of these recessions, as opposed to someone who just started investing in real estate in 2009 or 2010 and has only experienced growth, and hasn’t seen the other side?

Arn Cenedella: That’s a great question and hopefully I can help your listeners feel okay about what’s going on. So certainly, COVID is something new to me. I think it’s new to all of us. But I can tell you, I bought my first house in 1980 and paid 11 and 3 quarters percent on my mortgage. And I was happy to get 11 and 3 quarters; it seems like a lot today, but 6 months later rates were up to about 16%. Been through the dotcom boom, through the dotcom bust, various cycles, Resolution Trust… Not many people remember the S&L crisis, I believe, in the early 1990s.

So there have been various cycles, and in general, I’m an optimistic person and I believe if you approach real estate from a long-term perspective, you can ride out the inevitable ups and downs of economics and just what happening in the world. So I’m optimistic about the future, I’m continuing to invest. Fortunately, my rentals have done well on collections and have had no issues there, and I think by and large from what I understand, rent collations on most residential multifamily properties has remained pretty good, even though the COVID issue.

Theo Hicks: So kind of three options – you either don’t do anything, you don’t buy, you don’t sell, you just chill. The other option is to sell something or all of it. And the other option is to buy. So based off of your experience again with these previous real estate cycles, what are you doing and what would be your advice to people?

Ard Cenedella: So first of all I would say, “don’t panic”, that will be rule number one. And I think hunkering down, getting a read on what’s going on is good, but I also believe that there are always opportunities to buy and sell, depending on your particular situation. I would say if you’re in good real estate investments, cash-flowing, you’re properly capitalized, you can ride out the downtimes while still be looking for opportunities. Right now, what I’m doing is I’ve started to transition my actively managed rental portfolio into passive investments. So over the last 6 months I’ve probably made 4 passive investments in multifamily syndications, primarily in the Southeast, but also elsewhere in the United States. And I generally sold one of my rentals and made a passive investments. So I think there are opportunities to transition one’s portfolio at any time, and I think it’s just a matter of keeping your wits about you and evaluating and making good decisions.

Theo Hicks: Before I ask you about the passive, you’ve mentioned something about– you said if you approach real state from a long-term perspective, then you’re going to be able to ride out the ups and downs. You kind of mentioned cash flowing and being properly capitalized… Is that what you mean? …that you buy properties for cash flow and don’t be over-leveraged. Is that what you mean by long term?

Arn Cenedella: Well, what I would believe is if you invest in real estate and you have a long-term perspective, which is 5 to 10 years, I would say the overwhelming majority at the time those investments will prove to be a positive factor in your life. Certainly, you don’t want to get over-leveraged, because if you are in a situation where you’re over-leveraged, you may be put in the situation where you have to sell when the market is not ideal, and I believe people can get themselves in trouble that way. But if you have good, solid properties, properly leveraged, that are paying for themselves, then yes, time is on your side and you can just ride out the down cycle.

Theo Hicks: So as I mentioned in the intro, you’ve got your active investments, but you also have passive investments. You said that you made 4 passive investments recently. So is this something that you’re doing because you just don’t want to be an active investor anymore, or you’re doing it because you think that’s it’s a better use of money being invested passively in this larger apartment syndications, as opposed to doing your own deals?

Arn Cenedella: It’s a great question, and I would say it’s a combination of both. I’m 65 years old now, and I do not want to be as involved in the day to day management of the property. There are a lot of things I want to do. I have several passions that I enjoy. I’ve loved actively managing my real estate portfolios over the last 30 years. But I’m just at a point in my life where I want less day-to-day responsibility.

So I think freeing up my time is one part of the answer. The other part is – generally coming from the San Francisco Bay area, most of my investments have been more in appreciation markets than cash flow markets. And in looking at my return on my equity on a cash flow basis, it is lower than what I can achieve through the multi-family syndications. So my purpose of transitioning my portfolio is to free up my time and also increase my cash flow. So those are the two main things. And I’d like to help other investors who have a similar history to me. I’d like to help them perhaps consider transitioning into more passive multi-family investments.

Theo Hicks: Are you able to do these passive investments? Because you said that you sold a property. Is that a 1031, that is the passive investment? Is that kind of like your strategy?

Arn Cenedella: It’s pretty difficult to 1031 into a passive investment, so I have to pay Uncle Sam a little bit of money. But we pay Uncle Sam on every dollar we ever make, and real estate gets taxed less than our typical ordinary income. The other thing that will help me is most of these syndications I’ve invested in have a large first year– I believe it will be called bonus depreciation… Where in the first year I’ll receive a K-1 with a relatively sizeable tax clause. Since I am considered an active real estate professional, I’m able to apply that passive laws against any other income. So in my particular situation, I’m hoping the bonus depreciation, which by the way expires I believe in a year or two, will be used to offset some or most of my capital gain. Yes.

Theo Hicks: I just interviewed someone – he’s a GP, and he had a deal under contract before the COVID outbreak, I think he said February. And then COVID happened and he lost the previous lender, and he was able to get an agency loan with a really low interest rate, but he was also able to negotiate a pretty large discount in the purchase price. So from your perspective, when you’re analyzing these passive investment deals, and I’m assuming they’re doing the same thing, they’re getting a discount in there, and they’re assuming some sort of reduction in income that first year or something, do you think that the returns that you’re seeing projected are going to be lower than what you actually see once things turn around?

Arn Cenedella: Well, that’s a 64 million dollar question. And of course, it all comes down to the skill and integrity of the operator, of the syndicator, and how he or she goes about his or her business. So I would say most of the passive investments I’ve made, price reductions have been able to be negotiated. Probably not as big as people think. What I’m kind of seeing is maybe 3, 5, 7 percent off pre-COVID pricing. So there’s no fire sale, at least not yet; there’s no panic. So I believe the prices have been negotiated down a little bit. I think the underwriting has been tightened up. I’m looking at one possible investment now where the operator’s projecting a decrease of $100,000 year one in rental income. So not only are they projecting flat, they’re actually projecting a decrease, and I appreciate the integrity of an operator who does that.

I think what counterbalances is it all out is the unbelievable interest rates you can get on agency debt. One of the partnerships I’m in I believe we got 2.88%, ten years, with maybe 3 or 4 years of interest only. So I believe the rates — and again, I bought my first house at 11 and 3 quarters. So when you’re talking 2.88%, 3%, it’s like they’re giving money away. So I think the financing available now compensates for the potential issues. Eventually, we’ll work our way through COVID, and I’m optimistic about the future. So even with these passive investments, I’m looking more 5, 7,10 years down the road, where am I going to be. Not as concerned about what’s happening 3 months from now.

Theo Hicks: Okay Arn, what is your best real estate investing advice ever?

Arn Cenedella: My Best Ever real estate advice – and this may go counter to many of the people on your podcast – would be slow and steady wins the race; consistent investment over time will lead to financial freedom. In my investing, I focused on solid [unintelligible [00:15:43].28] base hits. I’m not interested in the grand slam. I kind of don’t trust that. I’d rather do it slow and steady. So I believe there’s kind of a logical sequence to investing, to gaining knowledge, and that sequence is beneficial over time.

Theo Hicks: Alright Arn. Are you ready for the Best Ever lightning round?

Arn Cenedella: I think so.

Theo Hicks: Alright, first a quick word from our sponsor.

Break: [00:16:11] – [00:16:50]

Theo Hicks: Okay Arn, what is the Best Ever book you’ve recently read?

Arn Cenedella: Well, since I’m starting a new investment group, Spark Investment Group, the best book I’ve recently read is Building a Story Brand by Donald Miller, which gives some good advice on how to best brand oneself and so forth. So it is a fascinating book and is been a big help for me.

Theo Hicks: If your business were to collapse today, what would you do next?

Arn Cenedella: Honestly, and I say this without trying to be flippant, I’d probably go play golf. Because after all isn’t the point of this real estate investing, passive investing, is to create a passive income, to create financial freedom.  And over four decades of real estate investing I’ve been fortunate enough to be able to do that. So I’d probably get bored playing golf at a certain point, and then maybe go back to selling houses like I did 20 years ago.

Theo Hicks:  Tell us about the Best Ever deal you’ve done?

Arn Cenedella: The Best Ever deal was a flip that a wholesaler sent me. The property was an old beat-up house, fairly good size, but it was on an acre. And I had a good feeling it could be subdivided, so I bought the house, we subdivided the land, created two additional lots, fixed up the house, sold that… I sold the two lots I created to builders, and probably had about a 30% return over 18 months. So that was one of my better ones.

Theo Hicks: What is the Best Ever way you like to give back?

Arn Cenedella: Well, I’ll return to golf; so I’ve played golf since I was 8 years old, and it’s a passion of mine, so I now volunteer at the First Tee of the Upstate, which introduces young kids to golf, but even more importantly, uses golf as a way to instill core values, principles, character, integrity, honesty. So it’s a great program and I love being involved with youth in sports.

Theo Hicks:  And lastly, what is the Best Ever place to reach you?

Arn Cenedella: Best ever place would be my cell, 650-575-6114, or my email which is arn@investwithspark.com.

Theo Hicks: Alright Arn, thanks for joining us today and proving us with your wisdom on how to–

Arn Cenedella: Not sure about that, but okay. [laughter]

Theo Hicks: …how to continuously thrive in real estate through the various ups and downs. So you talked about you bought your first house at an 11.75 interest rate. And then you said that it actually went up 16. I knew that but it is just funny, because now you say that you’re in a deal where the interest rate is at 3%. So it’s a huge difference between what you started off, to where you are now. And you said you went through all the various ups and downs and that it’s really about having a long-term perspective on real estate, thinking in terms of 5, 10 plus years, as supposed to thinking what’s going to happen a few months from now.

So you said that it means not being over-leveraged and it means making sure the property can at least pay for itself, so you’re not forced to sell. In regards to what’s going on now with COVID, you said that hunkering down is totally fine, but you also think that there are always going to be opportunities, to sell, depending on where you’re at in your business. And you mentioned that right now you’re transitioning from active to passive; you made 4 passive investments in the past year… And that the reason why is: one is to free up your time, but two, because a lot of your deals are in this appreciation markets.

The cash flow that you get in these markets is not nearly as high as the cash that you can get on these vacation deals, so that’s why, as you mentioned… And sometimes it makes sense to buy, sometimes it makes sense to sell, or do both during these types of economic environments.

We talked about what these sponsors are doing to conservatively underwrite their deals, price reductions, underwriting, lower year one incomes compared to T-12’s, and then the fact that the interest rates are just insanely low.

And then your Best Ever advice was, “The slow and steady wins the race.” Being consistent over time, following that logical sequence will result in financial freedom. And that you’re a base [unintelligible [00:21:11].18] kind of guy as opposed to the home run grand slam. You don’t trust the grand slam; you like the consistent, steady investments.

So, Arn, I appreciate you coming on and speaking with us today. Best Ever listeners as always thank you for listening. Have a Best Ever Day and we’ll talk to you tomorrow.

Arn Cenedella: Thanks, Theo.

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