January 22, 2022

JF2699: 3 Ways to Generate More Income Through Property Management with AJ Shepard


As AJ Shepard started taking on bigger multifamily investments, he knew he would need to find a way to generate more income to qualify for more financing. That’s when he realized he could start his own property management company and oversee his own investments as well as others, bringing in the necessary cash and then some. In this episode, AJ shares the benefits of not only being an investor, but also running your own property management company.

AJ Shepard | Real Estate Background

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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed. This is the world’s longest-running daily real estate investing podcast. Today we have AJ Shepard with us. How are you doing AJ?

AJ Shepard: I’m doing well. How about yourself?

Slocomb Reed: Doing great. AJ is the owner and managing partner of Uptown Syndication and Uptown Properties. Uptown Syndication focuses on purchasing large multifamily assets through partnerships with passive investors. They have a portfolio of 150+ units that they also manage as Uptown Properties. Uptown Properties manages a portfolio of over 700 units. They are based in Portland, Oregon. AJ, general partner in apartment deals and also property management… Were you in property management before you started investing your own money and other people’s money?

AJ Shepard: We actually started out by buying single-family homes and then kind of worked our way up to duplexes and fourplexes. The property management company was kind of a way for us to generate more income to qualify for more financing.

Slocomb Reed: Generate more income to qualify for more financing. I feel you. I started as a house hacker, so with single families. But I formalized a property management company as my portfolio grew to the point that I needed to hire people. Is that how it worked for you or was it something else?

AJ Shepard: Yeah, we started buying houses in 2007, and I think we started the property management company in 2010.

Slocomb Reed: I know a bunch of people here in Cincinnati, Ohio with portfolios between 50 and 500 units. Every single one of us asks ourselves all the time whether or not we should get into professional third-party property management to make money. And all of us say no. You said yes, you’re in Portland, so coming from my perspective, why do it? Why would you manage for other people?

AJ Shepard: It’s a steady income. We were looking at the crash in 2007, and a lot of brokers and other people in real estate services went away. My brother and I had W-2 jobs, and when we got away from that, finding another source of income was super nice, and this was a stable way. Also, it was a way for us to manage our own properties, and hire employees, and do it with a professional aspect. Coming to lenders and saying “No, we don’t just own our properties. We professionally manage them.” It gives us kind of like a step up, allows us to qualify for more financing, and it’s just a better picture overall for that kind of lending aspect as we got into more multifamily deals.

Slocomb Reed: Absolutely. Thinking about Best Ever listeners who may be in a similar situation to you or me, AJ, I’m thinking about the decision of being an owner-operator or being a GP who’s also involved in management, thinking about the decision to take on property management third party. I think why most of my buddies in Cincinnati don’t do it is because we can’t see ourselves working as hard on other people’s properties as we do on ours. Shoveling cat litter out of the parking lot before the showing because it’s not normal to have cat litter in the parking lot, but also because you know you want the place to show well… I think a large part of it, and one of the reasons that a lot of investors, non-local investors are struggling up in Cincinnati is that it is so hard to find quality property management here. That’s certainly one of the reasons that I self-manage. Tell me if you agree or disagree here. Portland, Oregon is a much higher cost of living area than Cincinnati, Ohio.

AJ Shepard: No, it definitely is. Rents are going to be much higher. Portland is still one of the most affordable cities on the West Coast though. If you compare it to Seattle, LA, or San Francisco, we’re significantly cheaper, but we’re not going to be as cheap as Cincinnati, Ohio.

Slocomb Reed: If you had to ballpark it AJ, across your portfolio, what is the average monthly rent?

AJ Shepard: Probably 1,500, maybe 1,600.

Slocomb Reed: Yeah. So for simple math, 10% of that as 150 to 160 bucks. So if you’re charging 10% for management – I’m not saying that you are; just for simple math – that’s 150 to 160 bucks a door. A C-class one-bedroom in Cincinnati right now has seen some very sharp rent growth recently, thanks to COVID and all the things that have happened in the economy since then…

AJ Shepard: Yeah, a lot of people move out of California.

Slocomb Reed: Yeah. But it’s not so much into C neighborhoods in Cincinnati. The average is probably around 650 to 700 a door. If you start adding B neighborhoods, your one-bedroom average rent will be around 750 to 800 a door, but 10% of that is 80 bucks a month. So a property managers making half as much for different work…

AJ Shepard: The same amount of work as I’m doing, for sure. Maybe that’s why it works in my market or works in larger appreciating markets. One of the ways that we really worked on our investments was by doing value-adds. In the higher rent districts, like where we’re at, we’re able to find those places that have $1,000 a month rent, $1,100, and be able to take them up to $1,400 or $1,500 with some good value-add.

Slocomb Reed: Everything you manage is in the Portland area?

AJ Shepard: Portland is comprised of metropolitan areas, so we have multiple different cities around, like Gresham, Beaverton, Tigard, Lake Oswego, even Vancouver, Washington too… So nstead of Seattle, where Seattle has neighborhoods, we’re just a little bit different. But we try to stay in the Southwest of Portland, create our niche. That’s where we move predominantly buy, and it allows for us to not get into some of the lower rent districts. You hit it right on the nose – if we’re going to do property management, we want to do it for high-rent districts. So when you get out towards the east of Portland, you get into like Gresham, there are lower rents, like what you’re talking about in Ohio. You see more of like the 700 to 1100 type rents. And for us, to drive farther and manage less money, it’s just not worth it. So we’ve kind of picked our area and we’re like, “You know what? We’re going to really focus in on this.” We know that we can get good management prices for that, and it make sense.

Slocomb Reed: Yeah. That makes a lot of sense.

AJ Shepard: The other thing that we do too is we use a lot of off-site professionals. We have probably 12 or 13 girls in the Philippines that work for us, and they do a lot of the heavy lifting. I would have to have to someone in person to go remove that cat litter, but taking that tenant call, the complaints about it – we’ve got someone that does that, and then kind of all the backend office work. That’s a way to definitely reduce your costs in property management.

Slocomb Reed: I have two people full-time in the Philippines right now, and two I’m starting part-time. One of them is for lead generation, for acquisitions. But specific to property management, for our listeners who are more active, there are some mental hurdles that need to be jumped, that some people need to jump before they hire someone completely virtually, who’s halfway around the world. How did you get into using VAs and how do you think it compares to having local employees?

AJ Shepard: VAs are great. In the Philippines, they have the BPO industry, which is specific to like the financial industry and providing customer service. So they’ve got this like background and customer service that they can kind of graduate, in and that lends to be very good in property management. Listening to those tenant complaints, amd addressing them, and being very cordial about it.

Slocomb Reed: They are intensely polite.

AJ Shepard: Yes, it’s super nice. I belong to NARPM, it’s the National Association of Residential Property Managers, and they have a great conference that we have found a ton of vendors and a ton of value from. I volunteer with that organization still. So that’s kind of how we got into them. But as far as implementing them, it’s really dialing in your processes. If there’s anything that you can do is write down what you’re doing and how you do it, then every time you do it, review it, and make sure you do it the same way. Once that process is 95% or 90% to like where you’re going to redo it the same way every time, or you’ve sorted out all the unique positions, or whatever — the unique situations that happen, and trying to get the process written so it handles 90% to 95%… Then you take that, take it to another employee, and then have them start doing it.

One of the ways that we’ve worked really well with virtual employees is using Zoom here, and recording what it is that we do on the computer. If I do a process, I’m able to record it and then they can review it multiple times without having to ask me. It saves a ton of my time.

Break: [00:10:08][00:11:47]

Slocomb Reed: I’ve learned that I have to be way more detail-oriented with remote employees. There are a lot of cultural, not really barriers, but there are a lot of things that we would assume, that someone would assume the same way we do, that the people in the Philippines will not. So there are a lot of small course corrections. My portfolio is one-tenth the size of what you manage, AJ, so I’m probably much more involved in the day-to-day, because I have to be. I’m getting questions from my VAs constantly about the things that we don’t have scripted yet. But our scripts are precise, and we write everything down. And every one of our meetings, as you said, we record. In part because I don’t feel like repeating myself, and I don’t feel like slowing down so they can write everything down. I just hit the Record button and then they can go back and listen to me as many times as they want. If they have a question, they can reach me whenever they need to.

You know, I said earlier… This is a point I want to drive home for the Best Ever listeners. I said earlier that I show my own apartments. In my experience — AJ, this is a kind of coming from the gut number; there’s not a lot of analytics behind this. But I think wages in the Philippines, what I’m paying my people in the Philippines is about one-fourth of what I would need to pay someone in the United States to get the same quality. Is that about right for you?

AJ Shepard: Yeah. 25% to 40%, I would say.

Slocomb Reed: Awesome.

AJ Shepard: Granted, they’re limited on the capabilities of the type of things that you can do; it has to be behind a computer. Like if you need a handyman or people that are going to have to be physically out of the property, then you’ve just got to bite the bullet. That’s where we have an office that is a bunch of hot desks, and most of my people are not in the office; they are out at properties, visiting stuff, making sure that things are going alright, putting lockboxes on, managing contractors, that sort of stuff.

I was going to say, we actually implemented self-showing lockboxes. Even my leasing agents – they just put a box on, then wait until some tenant decides that they’ve seen it and liked it, then we move forward, then the agent then goes back and picks up the lockbox afterwards.

Slocomb Reed: I have, by door count, about 20% to 25% of my portfolio is in A locations. I would totally do that there, but I’m not doing that and C areas. But I totally get where you’re coming from. Back to what I was saying about doing my own showings… What the leasing process looks like for me right now, having a virtual assistant, considering that I’m the property manager for the portfolio – when we get an inquiry online, from Zillow, Apartment List, or any other website, it goes to my VA, Izzy’s, inbox. She’s the one who texts them to see if they respond, she’s the one who asked them preliminary questions, gets them on the phone, and pre-qualifies them. Assuming they meet our pre-qualification standards, she has my calendar, she’s the one booking the showing. All I do is show up.

I show up, if it seems like they want to apply or if they tell me they want to apply, I message Izzy the apartment they want, we have scripts for all of this. She’s the one who sends them the application, she’s the one who reviews the application, calls the references, sends me a summary of the application that includes specifically the qualification criteria that allows me to read an email and make a decision.

If they’re declined, we have scripts for every single reason you would tell someone that they’re declined, in writing, making sure that we are following all federal housing guidelines. And assuming they’re approved, Izzy is the one who tells them they’re approved; she’s the one who fills out the lease in our electronic document and signature platform, I review it, approve it, sign it, she sends it, tenant signs it, and she’s the one putting them in our software, setting them up to pay the rent, and the security deposit. So I say that I’m showing the apartments and I’m the property manager, but 90% of the work involved in getting a great tenant is being done by somebody in the Philippines.

AJ Shepard: Yeah. I mean, as long as 90% of the work can be done behind a computer, there’s no reason that you can’t teach them how to do it. Most of mine are college-educated; they speak great English, it’s awesome. If someone is on the phone, a tenant’s talking to them, they have no idea whether they’re in the US, or in the Philippines, or in Brazil, or wherever. I think the pandemic has definitely shown remote work is really going to be prolific kind of going forward. Why not take advantage of the economic differences?

Slocomb Reed: Yeah. Absolutely. So your 150+ units as GP – how many different properties is that?

AJ Shepard: So we started out in single-family and small multifamily, so it’s going to be probably a lot higher.

Slocomb Reed: Are those single-family or small multifamily deals that you syndicated?

AJ Shepard: No. My brother and I started out just buying ourselves, doing the BRRRR method, and then kind of graduated to two units, and then four units, and then eight units.

Slocomb Reed: When did you start?

AJ Shepard: We started buying in 2007. I didn’t start syndicating until 2020. So we did our first syndication in 2020, and it was a 12-unit deal. We bought it for 1.25 million, and then it was kind of a cash deal. Then we had it appraised at 1.8 six months later. Then we did another 12-unit, and we’ve since done a couple of 20-unit deals. When you ask about my 150 plus prop units, it’s probably across like 60 properties, maybe 50 or so.

Slocomb Reed: Got you. I have in my notes here that your limited partners – you guys are operating under exemption 506(b), so these are limited partners with whom you have prior relationships.

AJ Shepard: Yup.

Slocomb Reed: So when you bring in limited partners, are you underwriting to the five-year hold? Are you planning to continue with the BRRRR method, cash-out, refi, and hold long term? Are you selling quickly? What do you do?

AJ Shepard: The first one that we did, we had planned on doing a little bit of a cash-out refi. It was actually during COVID and we had a bunch of reserves. Whenever you buy property, that’s typically where you make the money. I think even when we were buying it at 1.25, it appraised for 1.4. So when you’re buying a property, that’s where you get all the equity.

We are kind of on that five-year hold timeframe. With our first set of investors, we promised to hold it for at least five years, and we’re going to hold to that word. Obviously, the returns would have been super juiced if we would have just turned it real quick. Typically, a lot of times, the way syndications work is the quicker you can add value and the quicker you can liquidate, the better it is for everyone; investors get their money back. But a lot of times, that just creates more work for the investor and then they have to go find another place to invest it. Maybe there’s some time in between where they’re not making the returns that they wanted. So there are pros and cons to it. We’ve been around the block and are a buy-and-hold company. Ideally, we’d be able to hold our investments longer. But we are new to syndication, and when we say that we’re going to do something, we do it. We are planning on turning those properties over after five years.

Slocomb Reed: Got you. I have not gotten into syndication myself yet. I’m a buy-and-hold, cash flow investor. You started in ’07, I started in 2013 or 2014, depending on how you count. I would like to think at least that I’m on a similar trajectory, given the success that you’ve had, AJ.

Let’s talk for a minute, let’s brainstorm. We’re both buy and hold guys, we both want the long-term benefits of real estate investing, and we care about cash flow, we care about the tax advantages of the long-term hold. How can people like us structure syndication deals such that limited partners would be incentivized to stay in a deal with us for the long haul? Not expect a five-year sale or seven-year sale, but buy-in planning to be in the deal for the foreseeable future?

AJ Shepard: That’s a great question. I wish I had that figured out. But if I was to brainstorm and off the top of my head, it’s putting together a deal that kind of outlined refinances on the timeline and the expected returns of those. Kind of like in our portfolio, what we’re seeing is a refinance every seven to nine years, and being able to pull out a good chunk of change. I mean, maybe you commit along that schedule.

As a syndicator though, it’s tough. The way that those deals are written, there’s an IRR hurdle or a preferential return, just signing on to make just the amount over the pref for the long-term, and providing all the services that go along with it. Syndicators typically want to be paid for their additional efforts in adding value, and hitting a good deal, and making that home run. On the deals that I own 100% of, I’m stoked about a home run, but I’m also stoked about it providing kicking off a bunch of cash flow for the foreseeable future. And I know that when I sell it, I’m going to reap those rewards that I really put it in the beginning. With syndication, the rewards that I get are so small in comparison, because I’m owning maybe 2% or 5% of the deal. Where I get paid is off the services. We hit a home run, and anything over a certain amount of percentage is where I really get that benefit.

So I think structuring it in some way that having refinances happen on a schedule, and a fee goes to the syndicator on that schedule might be something. I definitely think that for the long-term hold, having less expectation of a return. It’s just not feasible to hit those 20 to 30 tight numbers on a long-term hold that goes for 15 to 20 years.

Slocomb Reed: Unless you can produce a really juicy cash-out refinance.

Break: [00:21:51][00:24:48]

Slocomb Reed: If you’re starting with an asset that’s more distressed that you’re buying at a steeper discount, you buy it for a million, you put in 500,000, it appraises for two – you could feasibly give your LPs all of their money back and leave them in an equity position in the deal, and still reap some sort of benefit. Of course, you would need limited partners who are interested in taking that kind of risk…

AJ Shepard: And limited partners that want to be in it for the long haul. I think that’s the key, is finding those partners that are like, “Yeah, I want to hold it 20 years. I want to hold it for 30 years.” If you start out looking for those partners, they’re going to understand that it’s nice to have your money in a place and kick off some returns after refinances. We both love that, we’re buy and hold guys, we know the benefits of it. There’s got to be more people out there like us that don’t want to be the active person in that type of deal.

Slocomb Reed: We either need LPs who want to be long haulers in the investment, or we need to structure the investment opportunity in such a way that LPs could leave early if they chose, and that there was some sort of streamlined way to sell their interest at like a contemporary valuation, four, eight, 12 years later, for personal reasons, or because their investing appetite has changed, they want to get out…

AJ Shepard: I mean, life happens.

Slocomb Reed: Yeah. If people like us had some way that we could easily facilitate an exit and a sale of that equity in the deal to someone else, I think that would be helpful as well.

AJ Shepard: Yeah. I’m super interested to see what happens with Blockchain technology and a lot of these fintech —

Slocomb Reed: I was thinking the exact same thing.

AJ Shepard: There seems like some applications like that where an investor could then just parse it out, sell it off, and liquidate whenever they wanted. I just don’t know…

Slocomb Reed: Yeah, they make it resaleable.

AJ Shepard: Yeah. I just don’t know of anything that’s available like that yet. I’m definitely looking forward to the future. I feel like it’s kind of on the precipice. There are a lot of people talking about it, and once you get the conversation going, then something hopefully will happen.

Slocomb Reed: Yeah. I know I won’t be the innovator in that space, but I may be eager to be the early adopter.

AJ Shepard: Exactly.

Slocomb Reed: Somebody else creates a platform, I may pounce on it, and start putting my deals up, because I love this idea. I love the idea of using the power of syndication to take down larger deals, and combine it with all of the benefits of the long-term hold, for myself personally, but also for all the investors. Real quick, we’re running a little over on time, AJ… But you were telling me before the episode that you and your partners run a bottle shop and brewery because you got a good deal on the building? I need to hear more about that.

AJ Shepard: Yeah. My brother and I are the ones that run our company. We had a fraternity brother of mine approach us and be like, “Hey, this building’s been empty for a couple of years. I know the owner, I know he’ll give us a lease option to buy on it.” We’re like, “Okay, You’ve piqued our interest. What are we going to put in there?” We didn’t want to lease to a third party, so we decided to start a business. That business is now Uptown Beer Co. and Binary Brewing. But we started out with a bottle shop, a homebrew supply shop, and a couple of taps. Now it’s morphed into a brewery, 36 taps at it, and we now own the building. We actually just had our 10 year anniversary in December, so that’s been awesome.

Slocomb Reed: That’s awesome. So in December — so that’s late 2011 that you bought the building. How good was the deal on the building that you were willing to put this business together for it?

AJ Shepard: We just love getting more real estate and getting into it. So by the time the two-year lease option had kind of run its course, real estate had kept appreciating, it’s more than doubled in value since the time that we bought it.

Slocomb Reed: The building. What about the business itself?

AJ Shepard: The business itself is running well. We’re actually expanding operations and putting together a new brewery location and restaurants. That should be opened up here in like April or May in Beaverton. Unfortunately, we are leasing that space but that’s from a good friend of mine that’s an owner as well.

Slocomb Reed: So 10 years ago, a frat brother brings you an opportunity to get a lease option on a space, you start a bottle shop and then a brewery with him, then you buy the building, and now you’re opening a second location that’s a brewery and a restaurant because you got a good deal on some commercial space 10 years ago. That’s awesome. That’s good to hear that it’s all working well. AJ, are you’re ready for a Best Ever lightning round?

AJ Shepard: I think so.

Slocomb Reed: Awesome. What is your Best Ever book you’ve recently read?

AJ Shepard: I really enjoyed Joey Coleman’s Never Lose a Customer Again. Just that idea of the customer experience and how it goes through the business. I worked with my business development person on that for our property management and third-party clients. Developing that touch system was really, really helpful. That one, I think, doesn’t get mentioned a lot but has been very influential in a lot of our businesses.

Slocomb Reed: Never Lose a Customer Again. I’m writing that one down too. What’s your Best Ever way to give back?

AJ Shepard: I think I mentioned it before. I volunteer for NARPM, I’m currently the regional vice president over California and Hawaii, and help provide education to over 700 property management companies and property management company owners.

Slocomb Reed: Great. What is your Best Ever advice?

AJ Shepard: My Best Ever advice is keep the grit, don’t give up. If you’re going to do something, do it, jump all in, and get it finished as quickly as possible. Hyperfocus.

Slocomb Reed: AJ, where can people get in touch with you?

AJ Shepard: People can get in touch with me on uptownsyndication.com, that’s an easy place. My brother and I also do a podcast, it’s called West Side Investors Network, so you can find is on West Side Investors Network.

Slocomb Reed: West Side Investors Network. Awesome. Well, Best Ever listeners, thank you for tuning in. If you enjoyed this episode, please subscribe to our podcast, leave us a five-star review, and share this with someone with whom you want to share the best real estate investing advice ever. Thank you and have a Best Ever day.

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