JF2330: Using Closet Space to Increase Net Operating Income With Jim Monk

Jim Monk Real Estate Background: 

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“Trust your team” – Jim Monk

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 Jim Monk. Jim, how are you doing today?

Jim Monk: I’m doing great. How about yourself, Theo?

Theo Hicks: I am doing well, thanks for asking, and thank you for joining me. So a little bit about Jim — He’s the founder of CLOZZITS. And if you’re watching this on YouTube, you’ll see that he is in a closet right now. CLOZZITS is dedicated to increasing NOI and overall asset value, resulting in immediate rent increase of an average of 2-5%. He has two years of experience in multifamily, and he’s passively investing in 623-units. His current focus is on optimizing closet space for multifamily companies. He is based in Dallas, Texas, and his website is https://clozzits.com/.

So Jim, do you mind telling us more about your background and then what you’re focused on today?

Jim Monk: Absolutely. So first thing, I hope you and your family are all doing well, friends are all doing well with everything going on, coming from big D to you, as well as longtime listener, first-time caller. I love what you guys are doing.

Theo Hicks: Thank you.

Jim Monk: So a little background on myself and what we’re doing today – we are in the closet space. It’s not an area that a lot of individuals think about, especially multifamily owners think about, as a way to increase their revenue. But there are a lot of differences that are occurring, a lot of changes that are occurring in today’s marketplace, and I’m excited to share that with you guys a little further. So as you said, you want a little bit more about my background, is that right, Theo?

Theo Hicks: Yeah. And so when did you start CLOZZITS?

Jim Monk: So myself and a partner started CLOZZITS roughly about two years ago. The way we got started was, I was just exiting out of a company where I had turned that company around; the company had been around for 40 years, it was on a negative decline, and I was able to get [unintelligible [00:05:04].06] company, we grew very rapidly. So I’m all about hyper-growth, and that’s been my background.

So a little bit about my background, before we get a little more into where CLOZZITS is today. I came out of the financial services space, I’m what they would call a serial entrepreneur. So I, out of college, went to work for one of the largest insurance companies in the country, Farmers Insurance, rose through the ranks there. After about 7-8 years, I started getting the bug to start my own company, I exited and then [unintelligible [00:05:33].24] from my house to the time of the sale of the company that I had created [unintelligible [00:05:38].08]  we got to about 8000 employees, so about 300 million in revenue, and sold three months before the fall of Lehman Brothers in 2008. So I really dodged a bullet there.

Theo Hicks: Yeah.

Jim Monk: Really dodged a bullet. So I sold there and then went into a technology play, scaled that up, and again, sold to a Canadian-based company, and then moved into manufacturing. It was a calling from a small client of my previous company who said, “Hey, we’ve seen what you’ve done with your companies,. Can you come in and do something to ours?” I felt the challenge to go in there and take this family-owned business and turn it around. And as I exited that one, I was sitting down with a friend of mine, Steven Bolos, who if most of you are not familiar with, started a company called United renovations, which became KATERRA. It was acquired by KATERRA, which is a $5 billion company in the construction-renovation space. Steven has a massive background in the multifamily renovation business, doing tens of thousands of renovations. And as we were sitting there drinking coffee together and talking – and this happened about two and a half years ago, Theo – he had said, “You really need to figure out what your next play is going to be.” And I was looking at real estate as a passive investor, like you talked about, and I said, let me ask you a question, “What has not changed in the apartment space as it relates to renovations?” And he sat down and he thought about it long and hard, and he said, “Well, the problem you have today, that most REITs and others are having is, a lot of these properties if they’re not relatively new, they’ve been through 2-3 iterations of renovations. They’ve had the hard surfaces upgraded, they’ve had the appliances upgraded, the stainless steel, the floor has been upgraded, we’ve put paint on this… So we’re at a level right now where there’s not a lot that can be done.”

So I thought about it, and my question that I rephrased was, “What hasn’t changed in the apartment at all then?” And he said, “Well, the closet.” So we started researching that process of looking at the closet and said, “Okay, is there a way for this to make business sense to the ownership?” And that business sense needs to be how can I improve my NOI, and how can I increase my asset value in a way that makes business sense, one plus one equals two.

So as I told the story, we got into the manufacturing side. So CLOZZITS today is a manufacturer, an advanced closet system, that we can either sell direct to the multifamily industry, which we do, we can sell through contractors, which we do, or we’ll do a full turnkey solution to the company. And ultimately, what we’re doing is we’re going in and we’re doing these either make-readies or renovation turns, or [unintelligible [00:08:22].02] new construction, and we’re showing a immediate impact to the NOI with what we consider – which is right behind me – a furniture grade quality product that is reasonably priced to make business sense. So as you mentioned, we’re seeing a 2-5% rent increase, we’re seeing our average customer today, after COVID here, post-COVID, at a 37% ROI, and usually they’re breaking even after a 3rd or 4th year of the product being installed.

Theo Hicks: You said 37% ROI is typically what it is?

Jim Monk: That is correct.

Theo Hicks: Okay. So are you typically installing these closets into — would it be existing homes, or is it mostly you’re getting in on the front end with a developer, and then having them planned into the development, or both?

Jim Monk: Great question. It’s both. We didn’t approach the developer space first, because really, that’s only about 5-8% of the marketplace with new developments. What we were looking at was the existing 90-95% of the market space and saying, “How can we go on there and do this in a way where you can do it on the make-readies as says residents are leaving? Or how can you as an owner do this as an ability to do a lease-up?” So we talked to companies like UDR, Alliance Residential, the Harbor Group… Big companies. Pinnacle, on the management company side, with their executive team, and we said, “We’re going to beta test this out. And so what do you need to see?” And for them, it was all about the economics of it, and they wanted to look at it both from how do we do this to our existing, and how do we do it in the new development side of things?

So their original focus was on existing, and how to kind of rip out, tear out very quickly, and so within a three hour period, you go from a wire rack or MDF to what you see behind me today, which is a high-quality product that allows that ownership of that property to now have something unique and something that people are willing to pay for. That’s the thing that we keep talking about, is that the numbers are there, we have multiple case studies that talk about this, that today’s residents want resort amenities, they’re willing to pay for those resort amenities, and they’re looking for ways to have additional space options. Because let’s be truthful on this, we all want to accumulate. Unfortunately, we all wanna accumulate, and especially after COVID here, a lot of people are staying in place, they’re working from home now and they’re really focusing on what can I do in the square footage that I live in to be more of a home?

Theo Hicks: Yeah, exactly. So if I have an existing property, how do I know if my existing closet is big enough? Or when I go into closets, there’s an array, and I say “My closet is this big.” But if my closet is really, really tiny, do you have options for super-tiny closets, or does it need to be a certain size already?

Jim Monk: Again, good question. So typically, what we’ll do is, being a guy that is focused on the numbers myself, I always ask the client or that prospective property owner, “What are you trying to achieve here?” And a lot of times, we’re trying to guide them to say, “I’m trying to get a rent increase first off,” and our very first question is, “Can you get to a minimum of a $20 to $25 rent increase on a monthly basis?” And the reason being is, we’ve found that that break-even based on our installation cost and overall cost of putting the product in is about $20 a month. So anything above and beyond that is where our clients benefit immediately, they’re cashflowing immediately off of our installation.

So what we’ll do is we’ll say, “send us your designs, as far as your layouts or floor plans, we will for free do the design and layout of it and show you what the cost is going to be for each of those designs.” And then the question we do—we have a whole calculator that we built out, which goes into here’s what the investment is, from the investment of the closet system here’s your cap rate on the property, here is what a rent increase would look like at $20, $21, $22 and so on… And what we’re calculating out is, here’s what the ROI would be and really what the asset value is going to be if there’s an exit. Because at least our experience has been that you have two different types of ownership; you have the ones that are really wanting to hold for the long term, and those who are wanting to keep for the short term. And depending on that approach and strategy, they’re really looking at the numbers a little differently. So if you’re looking for the more immediate, for that NOI, to see the rent increase, then here’s what that means to you from an ROI perspective. And oh, by the way, if you’re looking at the asset value as an exit, later down the road, then here’s what that means to you if you’re able to support those numbers.

Theo Hicks: Perfect. So I send you my closet size, and then you’ll send back a report with some designs and then a rundown of the costs and the ROI, and then the potential exit value based off of whatever the cap rate is?

Jim Monk: Correct. And we’re just using real numbers here; we just say, “Look, this has got to make business sense to you guys.” So what we will then do is say — we can do one or two things, and a lot of our clients started out with a beta test. So they’ll beta test it and take 20-units or 30-units and they’ll say, “Let’s see if we can get supported rents on that.” And then what’s the amazing part about this, Theo, that I really like to see, is when the client calls us back and says “Hey, not only is it working, but oh, by the way, I’m here ready to purchase more properties,” or “I need to put this in my existing other portfolio of properties.” And they’re either working with asset management, or working with operations… And then again, we sit down and say, “How do you want us to support you? Do you want us to support you by installing and doing full turnkey with you? Do you want us to teach your staff, your maintenance team on how to install this directly?” We have both English and Spanish instructions and videos so that we can teach the maintenance teams. And if not that, we can work with your GC directly; we can work with whoever your GC is, and we’ll do the designs, we’ll ship them the product and they can do the installation, during a renovation or a new build.

Theo Hicks: So you mentioned that I would need to see an increase of about $20 to $25 per month, so that’s to cover the cost, right? And anything above that would be a return?

Jim Monk: That’s correct. So some of the things that we’ve done that’s very unique in the industry as a whole, especially after post-COVID, what we recognized, Theo, was – obviously, everyone’s being impacted right now. So what we came out and looked at was twofold. If they’re a large enough company – and right now, all of our clients, and one of the reasons why we’re doing podcasts like this, is to talk to those groups that are not in the current client base. Our current client base, most of them have portfolios over $4 billion, so they’re really large; 50,000 or 100,000 units. A bunch of [00:14:57].22] people that have 500, 1000, 3000 or 4000 units that this applies to. And the nice part is that we say, “Look, you can turn to a number of companies and we can show you those companies and what they’re doing.” They’ve crunched the numbers down to a point that it makes sense.

But one of the things that we launched was a beta test that we’re working through right now, which is where we will finance the deals personally. As a company, we will finance the deals for 4 years. Now, why would we do that? You have those portfolio of companies that say, “Look, I don’t have the budget for this. I love the idea and I want to do it. But I don’t want to wait for a cap-ex. So what do I do?” So what we said was, let’s try to start working with partners and working step in step with them to finance them. We’re now beta testing with some very large companies out there, but we’re open to conversations with others as well, if it makes sense; it has to make sense.

But then on the other side of that, we can sell them just the raw materials. And so if we just sold the raw materials, that $20 break right there – that’s for us a full turnkey. If we’re talking just the raw materials, at about $16 a month in rent increase, they’re at a break-even stance, if they’re using their own labor, so we’ve seen.

Theo Hicks: Okay. So do you guys do the rent comp analysis? In your report, will you say that “Here’s how we know how much you’ll get in rent increase”? Or is that something that me, the operator, will have to do on my end? The reason I’m asking this is because I want to know if this type of closet is in demand nationwide, across all asset classes for multifamily, or is it specific to class-A in big Metro markets? Where are your clients located? Can you do this everywhere, or do I need to be in a certain spot?

Jim Monk: So pre-COVID – and I’ll talk about the post-COVID  here for a minute… You know, it has been a big impact on, again, our business, and everyone else’s too. Pre-COVID, what we found is – and we still find this to be the case – it’s almost a no-brainer at the A-class. At the A-class, they’re able to get the rent increases. At the B, it really depends on the B-class and what they’re trying to do, or where they want to spend their dollars, again, on the renovation. But we have, I would say — if I had to look at it, A’s, we are probably very dominant in. B’s are secondary. But we have been able to get the numbers to make sense in the B-class. And really the B-class is where we started, because if we can make it work in the B, we can definitely make it work in the A. So those are the two classes that I would say it definitely makes sense to have a conversation on.

What I would tell you is pre-COVID, we were doing a tremendous amount of business on the east-west coast, through major metros, down to what I consider your secondary markets, like Saint Paul, Minnesota, we’ve done work in Seattle, New York, New Jersey, Florida… Some of these markets, post-COVID now, have definitely slowed down or have been in lockdown. So one of the things I would say is – and I think your audience would agree – that you don’t want necessarily contractors coming in and potentially impacting their residents or exposing their residents to things.

So some of these markets where it’s been on heavy lockdown, it’s slowed down, but we fully expect you to open back up. And yes, the major metros are where we see the most demand, because there’s so much more competition. And one of the things that we try to teach and educate on is that instead of giving up concessions — like here in Dallas, it’s very competitive here. And so a lot of the ownership – they are giving major concessions, in my opinion; instead of giving them concessions that are going to burn off, why not look at something that’s going to increase the asset value, stay there and be there permanently on the property?

So one of the things that our clients have done is that, we’ll upgrade your closet at no cost to you or at a nominal cost to you, or they’ll do it on the lease-up. So that’s a strategy that they’re taking in these competitive marketplaces, to not only differentiate, but retain the client base.

Theo Hicks: And then last question before the money question. I think you mentioned this already. You said, this takes 3 hours to install?

Jim Monk: Correct. It’s a no cut product. So literally, we could go sell this product right now in the retail space. And we’ve had a couple major retailers approach us on it. That’s not what we designed this for. This product was originally designed from the ground floor up as being a multifamily – that includes senior living, student housing, even large REITs that have single-family homes, groups like Tricon and so forth, are coming out to us, because they own a number of doors… So it’s a product that can be installed. If [unintelligible [00:19:21].06] they’re installing about 20-units a day a team of two; it’s amazing. You know, but they do this day in and day out. So we’d always say about 3 hours is what the average would take for someone that’s a novice at it.

Theo Hicks: Alright, Jim, what is your best real estate investing advice ever?

Jim Monk: Well, as a passive investor, it’s not rocket science… I’m not in the business on a daily basis, so what I tend to do is lean on those who are experts… So leaning on business partners that are in real estate business, that have what I call a track record that I can vet out. Working with my legal team, my accounting team – it is really critical, especially if you’re a passive investor that’s not in the day to day as to what’s going on in the market today, is that I lean on my team, and making sure that they’re vetted out and that I can trust them. That trust is majorly important to me. And being able to depend on them to give me sound wisdom and guidance, so that I can make decisions and place my money where it needs to be.

So the best advice that I can give, especially if you’re a passive investor and not in it on a daily basis, is trust your team, but make sure you vet them out, make sure that you’re sitting there and talking to them… If they give you references, call the references. At the end of the day, I feel that I’m a protector of my money, and so whoever I’m going to trust to put my money to work for me, they need to be vetted, they need to be trusted, especially in today’s marketplace.

Theo Hicks: 100%. Alright, Jim, are you ready for the best ever lightning round?

Jim Monk: Absolutely. Throw it at me.

Theo Hicks: Alright.

Break: [00:20:47] to [00:21:33]

Theo Hicks: Okay, Jim, what is the best ever book you’ve recently read?

Jim Monk: Blitzscaling by Reid Hoffman; he’s the co-founder of LinkedIn, if you’ve never heard of him. He’s also one of the original founding executives for PayPal. He’s in Silicon Valley, amazing guy. But Blitzscaling is all about taking and doing beta testing, test, test test, and then scaling it up as quickly as you can in a very informed way, but making sure that you’re doing it with numbers versus just pure emotion.

A lot of times we go off emotion, especially as an entrepreneur like myself; it’s all about doing it in a formula, in a way that allows you to scale quickly. As I told you before, CLOZZITS is two years in the business and we’re already nationwide, so we’re moving fast, and I have to say Blitzscaling is one of those books that have helped entrepreneurs out a lot.

Theo Hicks: If your business were to collapse today, no one wanted closets anymore for some reason, what would you do next?

Jim Monk: Well, first off, it’s not going to, I’m confident of that… But if it were to, for myself, there’s two things that I’m pulled into. One is I love companies that are growing, that have a growth strategy. So you would find me in executive operations for another company that is looking to try to grow and scale in a very unique way; as I like to call it, disruptor. That’s why I look at CLOZZITS as we’re a disruptor. We’re really in the business of getting ownership to make more money. But I would be working there, and I’d also be working with startup founders. There’s a lot of millennials out there, Theo, that do not have necessarily the guidance or the tools; I’d love to help out and that’s one of the things I’m working on, is helping them out and seeing how they can grow their vision and their ideas.

Theo Hicks: What is the best ever way you like to give back?

Jim Monk: So there are three charities that we’re heavily involved in, not only in CLOZZITS, but also with myself personally. Actually, in our offices here, there’s two of them, literally in our offices here. That’s how committed we are. One of them’s called Living for Zachary. And Living for Zachary is a local – it’s now a national – group out of Dallas, Texas, and it’s focused on defibrillators for at-risk kids who do not know they’re at risk, for athletes and so forth. There’s a lot of sudden cardiac arrest that occurs on the field or when they’re practicing, and this is a way to give free defibrillators to schools in case a certain cardiac event happens.

The other one is called Ring of Hope; it’s an at-risk boxing ring. We have three of them here in the Dallas area, we’re getting ready [unintelligible [00:23:58].00] to Detroit and a couple of other areas, and it’s to bring inner-city kids in to teach them the gospel, but also to teach them how to really focus on education. I’m first-generation, Theo, a high school graduate, college graduate, and I’m a major proponent of education… So getting these kids into school and out of the inner city or areas where they’re at risk to get into drugs or violence is critically important. So Ring of Hope is the other one.

And then the last one is Catholic Charities, but that’s tied to my faith and focusing on Catholic Charities.

Theo Hicks: One last question. So are you actually in a closet right now or is that just–

Jim Monk: No.

Theo Hicks: — a back wall.

Jim Monk: Aactually, if I go over right now, I can literally touch this product right now. This is a closet system. These are the shoes, but I can tell you, Theo, this one’s actually about 12 foot long. It’s a long one here. Our product is a three quarter inch plywood. Our product is not particle wood, it’s not a cheap product. It’s a melamine-based product. We’ve got three plans [unintelligible [00:24:57].00] so we’re very proud to show it off. So we actually have clients that come in all the time. This is not my office, this is our conference room,–

Theo Hicks: It’s a conference room. Okay.

Jim Monk: –but when they come in, they go, “Wow, that’s really amazing,” and they can see and touch it and go, “Yeah, people would pay for this.” So people ask us all the time on calls, “Is that real?”

Theo Hicks: Well, I was asking if you [unintelligible [00:25:18].18] because there’s one other person I’ve interviewed before who was actually in their closet, and so I was like, “Oh, he’s in his closet. That’s interesting.” But I now it makes a lot more sense.

Jim Monk: I will turn it so you get to see the whole thing.

Theo Hicks: There you go.

Jim Monk: It goes all the way down. I’m very proud of this; it’s a floating system, so it floats. I actually have drawers in it, so it becomes a furniture, great product. So for a lot of those A-class properties, they want something like this because a lot of them don’t have space for the furniture. You see the top right there… So it actually becomes a lot more shelving. So it’s something that I love, and I think a lot of our folks are. You know, I always tell people, and I’ll show them real quick. When you got wire racking here, or this, I can tell you right now, that’s going to get a rent increase over this; and this is what we see most often [unintelligible [00:26:03].21]

Theo Hicks: Alright, Jim. Well, thanks for joining me; it’s been very fascinating. I’ll definitely look into it some more. Make sure you check out his website, https://clozzits.com. It talks about really the benefits and advantages of focusing on the closet space at your existing properties in order to get a rent increase, which will ultimately result in a higher ROI and a higher property value.

And then something else you also mentioned that was interesting was if you’re in a really competitive market, rather than offering some sort of rent concession, like you’ll have a reduced monthly rent, or something that you mentioned that burns off over time, you can give them a free closet that obviously they will get it for free, but then the next person moves in, and you’ll be able to realize that gain, plus you’ll be able to get someone in there, reduce your vacancy, reduce your loss to lease, everything like that.

So again, Jim, I really appreciate it. Thank you for joining us. Best Ever listeners, as always, thank you for listening, have a best ever day and we’ll talk to you tomorrow.

Jim Monk: Thanks, Theo. Have a great one. Stay healthy.

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