February 2, 2022

JF2710: 4 Strategies to Scale as a Multifamily Syndicator ft. Mike Deaton



Mike Deaton and his wife, Ligia Deaton, began their real estate career by flipping land and soon expanded their portfolio to include multifamily. In this episode, Mike shares how he chose his commercial real estate markets, successfully pitched to investors, and the success-mindset that kept him going.

Mike Deaton | 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 Mike Deaton with us. Mike, how are you doing?

Mike Deaton: I’m great, man. Thanks for having me on.

Slocomb Reed: Absolutely. Mike is a co-founder of Deaton Equity Partners. They acquire and operate multifamily properties that complements their land business. They combine real estate professional status with passive income and tax benefits. The current portfolio is 800 units as GP, they’re in 31 units as LPs, and 168 units as KP. They’re based in Woodland Park, Colorado. Mike, my first question I have to ask is what is a KP?

Mike Deaton: A key partner. We’re lead syndicators on our latest deal.

Slocomb Reed: Leads syndicators. Okay, how is that different from a GP?

Mike Deaton: Well, on this one – so we actually signed on the loan, and we’re responsible for running, operating, and doing everything from end to end, versus… A GP can have more of a, let’s call it role-specific. Maybe most of our GPs, they’re helping raise capital, they do a little bit of investor communications, they’re participating a bit in asset management, but our partners are responsible for the whole enchilada.

Slocomb Reed: Nice. Well, hopefully it’s a tasty enchilada. That’s 168 units – and where are you with that deal?

Mike Deaton: We closed in November and it’s a value-add deal. As of this month, we have contractors on-site and we’re renovating about 30 of the 168 units to get started. Then we’ll be doing five to 10 each month after that. So it’s kind of hitting its stride right now.

Slocomb Reed: Nice. Where is it?

Mike Deaton: It’s in Waco, Texas. If you’re familiar with that, it’s just a little bit south of Dallas.

Slocomb Reed: In Waco – I have family there actually.

Mike Deaton: Oh, nice.

Slocomb Reed: 168 units and 30 of them were vacant when you purchased?

Mike Deaton: Yeah. About 25 were vacant. We’ve had a little bit more turnover since we’ve taken over, so we’ve got a batch of rooms that we’re just going to renovate. We’ll be able to make those up to more of a non-classic style and command a little bit of rent, which is our business model.

Slocomb Reed: Got you. Do you self-manage or do you hire third-party management?

Mike Deaton: For asset management, we’re doing this one ourselves, so we’re in there. We have a property management company that’s doing the actual property management, so lease-ups, maintenance, and things like that. But I’m making sure the renovations are on track, getting general contractors in there, and overseeing the business plan itself.

Slocomb Reed: Nice. I’m sure your property manager is happy with you. We’re recording this in late January 2022. I’m sure they’re happy they get to do all the renovating in the winter and do the leasing in the spring and the summer.

Mike Deaton: That’s our aim. Yeah.

Slocomb Reed: Operationally, that’s beautiful timing. My experience is much fewer units than yours, Mike, but I know that that’s the way I like to do things, too. I’m coming out of a lot of renovation and coming into a lot of leasing here very soon myself.

Mike Deaton: Surprisingly, there is a waiting list for rooms of the property. This is not an unfamiliar story around the nation, but occupancy is just maxed out at most properties. I think you have to really be doing something wrong to have a low occupancy in your properties in this day and age it seems like.

Slocomb Reed: Tell me a little more about this property then, Mike. How much did you buy it for? Where would you put its class, A, B, C? What rents is it getting and where are you projecting the market rents to be?

Mike Deaton: This property came on market in the summer and we put an offer in for 14.7, so just a little bit below 15 million on this one, which is what we landed it at. It’s 168 units, it’s an older property, it was built in the early ’70s, it’s a working-class property, so we see it as a C class. There have been no real renovations on site, so all of the units are very dated, kind of in more of a classic, what you would call a classic style. Our plan was to come in and renovate somewhere between 75 to 80% of the units and bring them up. Average rents in the area are a little bit below $1,000 a month, depending on the unit size. This one has a good mix of ones, twos, threes, it even has some four-room unit rooms there. We’ll go in and rents are just going crazy right now, so it seems like every month that we don’t have the units up to a renovated status, the rents are ticking up.

We’ll be able to take these up a good $125 to $150 on average. We’ll get them up just a little bit over $1,000; that’s at least our target. Our property management company is pretty confident that we can get those, and so we’ll test the waters and keep pushing them at that level. Yeah, I mean, it’s a great property. It’s well positioned, it’s not far from Baylor University, it’s surrounded by some employers… Waco is undergoing really a great growth period right now. You’ve got Amazon, Elon Musk is coming into town, there’s a lot of entertainment, they’re developing — the Brazos River comes right along the edge of downtown, there’s a big development going in there… So I think this is a five-year hold for us; at least that’s our business plan.

I think within this next two, three, four years, you’ll see kind of a renaissance in Waco, and just great signs, so we’re pleased to get a property here. It’s more of a tertiary market and it’s a little easier to land a deal there. There are a lot of people shopping in Austin, Dallas, Houston, and San Antonio, and more of the primary tech markets, so we love these little out-of-the-way properties. It’s on I35, right in between Austin and Dallas Fort Worth, so it’s poised for great growth, great logistics; it’s really nice little gem, so we’re hoping to overachieve our business plan and make a nice return for our investors.

Slocomb Reed: The times of COVID have been great for overachieving business plans, for sure.

Mike Deaton: I’ll tell you what, I have someone I know who’s also an investor in syndications… And yeah, there are some properties that are flipping in less than a year. They’re achieving their growth targets and they’re just going ahead and capitalizing on the market appreciation, without having to do too much in the way of forced appreciation. But I’m with you, I like a little more buy and hold, although the syndication model is a bit more five and six-year term, so it’s a good balance.

Slocomb Reed: Talking about preferring the buy and hold, do you have a long-term hold portfolio, or just the syndicated deals that I referenced earlier?

Mike Deaton: Yeah, that’s an interesting question. My wife and I got into real estate, I would say five years ago with our land business, which is really just a flipping model. We buy cheap and we sell more at the market rates, and probably for 90% of our properties, we’ll owner-finance which makes it a lot more attractive for people to get into.

Slocomb Reed: You’re talking about raw land.

Mike Deaton: It’s just vacant land; no improvements, nothing like that. There are people that want to build a cabin, or they just want some land or something. But about two years ago, we expanded into multifamily to diversify, but also to get passive losses, so we could offset our income. And we came into multifamily with a mindset that it would be more of a buy-and-hold business model. And as we got into it, we found our way into the syndication space. And really, in syndications it’s all about investor returns, so it’s five to six year holds, getting good returns for investors. Right now we’re kind of getting our feet wet, growing into the space, learning the ins and outs. It’s all about these indications and shorter hold periods. But I foresee — 5 to 10 years down the road, I would definitely like to get more into a buy and hold situation to where we have just cash-flowing properties and it’s more of a retirement plan. Whether it’s multifamily, storage units, or a business that cash flows. But that’s the longer-term vision, is just to have some things where we can scale back our active level of participation and enjoy the cash flow.

Break: [00:09:21][00:11:00]

Slocomb Reed: Nice. Are you guys still buying land then?

Mike Deaton: We are, yeah. That’s bread and butter for us. I mean, it’s a great business, it brings a lot of revenue in; it’s active in the front end, you definitely have to be out there shopping, checking properties, and buying… But once you lock in — we try to price our properties in terms of owner financing around what you would pay for a car, somewhere between $250 and $500 a month, over five to six years. If you stack some of those up, it’s a really great passive income stream. As I said, it comes with a nice tax bill, so multifamily is a perfect complement for that.

Slocomb Reed: I’m going to take a minute for a personal anecdote here, Mike. I hope the Best Ever listeners enjoy this. My grandfather, Fred, and my grandmother, Evelyn, in the late ’50s, in a small town in Northwest Arkansas, when they were getting ready to have a family, they decided to buy a large plot of land… The thought was they could build their family house on it. But then when it came time for their kids, who eventually were my father and his brother, to go off to college, they could sub-parcel the lot and sell individual lots to homebuilders or people who wanted to buy a land to have a builder put a house on it for them. They did that like a college fund for their kids, buying the raw land outside of Siloam Springs, Arkansas. And what you were saying about buying vacant land so that it can be resold at market, that’s what that reminds me of. That’s a cool connection.

Mike Deaton: That is. That’s great.

Slocomb Reed: It’s a fun investing strategy, that I wish I could get into myself. It’s a far stretch from what I’m doing right now. There’s a lot of learning and studying I’d have to do.

Mike Deaton: Yeah, there’s a little bit to it. But from a business model, it’s not too dissimilar. But yeah, there’s definitely some technicalities that get into the buying, selling, carrying your own notes, and things like that.

Slocomb Reed: There may be an interesting opportunity to do that where I am here in Ohio too, Mike. The Cincinnati, Dayton, and Columbus metro areas, especially between Cincinnati and Dayton right now, kind of seem to be merging. I75 from Cincinnati to Dayton, and then I70 from Dayton to Columbus… Anywhere you saw a farm 10 years ago is now a subdivision or some sort of major retail. All that stuff along there is getting bought up.

Mike Deaton: Yeah. That’s a similar story across the nation. We just moved to the mountains here a couple of months ago. It has kind of been a dream of ours. But before that, we were living close to Boulder, Colorado. Boulder itself, the city, as with a lot of cities, has become geographically restricted for a couple of different reasons. One, you have mountains on one side of it, but the other is the city itself is just not really developing. They’re limiting any type of building permit, so it’s just ringing out. And that’s what’s getting bought up as farmland. The same thing with Dallas Fort Worth, that’s where I’m from. I go back there and it’s just farmland converted into these massive neighborhoods. Yeah, it’s I guess the price of growth.

Slocomb Reed: Yeah. For someone who’s flipping land, if you can call it that, that’s a pretty exciting prospect. Let’s get back to the key partner deal. You said you guys bought it back in November. It sounds like a fairly classic value-add opportunity, underwriting to a five-year hold. When you were sharing this as an investment opportunity for LPs, what were you projecting? What were you offering?

Mike Deaton: So this deal is a little bit better than a 10% annual cash on cash. We put 100% in and get [unintelligible [00:14:35].09] on average.

Slocomb Reed: Is that a 10 pref or is that structured some other way?

Mike Deaton: No, it’s an eight pref.

Slocomb Reed: Okay. Got you.

Mike Deaton: But we’re projecting 10 average over the five years. Also, it’s a double after five years, so it’s about a 20% average annual return. You put your money in and at the end of five years, it should just tick over 100%. That’s the investor ROI pitch anyway; it was almost an 18% IRR on this one, so… Really nice returns.

Slocomb Reed: Now the 800 units where you’re GP is the 168 [unintelligible [00:15:11].01] included in that?

Mike Deaton: No. these are separate units. A good chunk is up in Northwest Arkansas.

Slocomb Reed: Okay. That’s the question here, Mike – you are an active partner on almost 1,000 doors. Where are they?

Mike Deaton: They’re spread out a little bit. We have about 250 units in Des Moines, Iowa, that my partners and I closed on early in 2021, and then there’s a good chunk in Fort Smith, Arkansas; in Northwest Arkansas, we have — I think it’s close to 175 units there. And then we’re partners in some multifamily units in Lubbock, Texas, and then there’s this one here in Waco, Texas.

Slocomb Reed: Gotcha. Now, there are several MSA is within Texas, and then within the states surrounding Texas. Did you pick these deals because of the market, or was it the deal that took you to the market with these?

Mike Deaton: With some of our earlier deals, it was really the deal itself that brought us into the market. We have a broad group of partners, we’re part of a syndication group, so we network widely within that. As partners come up with deals, we all look for partners to help plan to deal. With some of the later ones though, our primary focus is really in the Texas market. I’m from Texas, I’ve lived there pretty much my whole life. I’m from the Dallas Fort Worth area, I love Dallas Fort Worth. It’s just a super competitive market. I really love, like I said, some of these secondary and tertiary markets, where you can get a little bit out of the metro area, but find a great path of growth. I love Austin, but Austin is just scalding hot right now, it’s nuts. We kind of work the I35 corridor within Texas, all the way down to San Antonio.

There are some good little gyms. New Braunfels – I lived in New Braunfels for a few years. I just saw an article recently that it was named one of the top 10 growing cities in the nation or something, which is crazy; it’s like a tiny little town. Yeah, I think in this market, you can really get a competitive advantage if you are deeply focused within a market. So you can really dial in, what are the actual cap rates trending at the moment, you can look at rents, where are they, and understand where you can take a business case. I know a lot of people who are very diverse and broad, and it’s hard to stand out with other people that are underwriting deals, because they’re all underwriting to some — I’ll say vague; they’re not necessarily vague, but to some more standard type variables… When you’re looking at how much is it going to take to renovate a unit – well, it’s approximately 3,500 bucks, or those kinds of things. I think by really getting deep in the market, you can gain that advantage, get to know the brokers better, and really stand out to land a deal.

Break: [00:17:49][00:20:46]

Slocomb Reed: We’re talking about Austin being a scalding hot market. Austin, Texas, that’s a name that everyone who listens to real estate podcasts hears at least on a weekly basis.

Mike Deaton: Yeah. Probably.

Slocomb Reed: I have a thought about scalding hot markets, Mike, and why it’s difficult to syndicate there. I’m not necessarily saying I’m right, but I’d love to get your reaction to this thought for our Best Ever listeners.

Mike Deaton: Sure.

Slocomb Reed: Scalding hot markets are scalding hot because of how much growth they’re experiencing. Not just from what we’re doing in the real estate industry, but because of economic growth, job growth, they’re poised up for a lot of growth and a lot of appreciation. Places like Austin and Columbus, Ohio, to some degree. Here’s the thought I want your answer on, Mike. It is very difficult for syndicators to get into markets like Austin, Texas, and Columbus, Ohio, because they’re investing with other people’s money. They’re bringing in limited partners, and limited partners at least want to see conservative underwriting. Conservative underwriting is often a very responsible way, and often the only responsible way to analyze a deal as a general partner when you’re considering that you’ll be investing other people’s money.

Places like Austin and Columbus are outpacing conservative underwriting, because the people who are buying there are buying either with their own money, or they’re buying needing less of a return than syndicators need in order to provide returns for their LPs. So it’s because of the way that syndicators underwrite and because of the way that they try to provide a return for limited partners that they feel closed out of places where the most appreciation is happening. Because the people who are capable of buying there don’t need the same underwriting standards. I was a little bit circular there. This isn’t something I had written down or prepared, Mike, but what’s your gut reaction to what I just said?

Mike Deaton: I fully agree with you. It’s a little bit of what I was speaking to earlier, where being deeper and more intimate with a market, you can understand what’s happening at this moment in terms of rent growth, who’s coming in… Like in Austin, for instance – Apple just bought an office tower. Facebook also. There’s a lot of growth. I have been to Austin, I have a lot of family there. It’s busting at the seams; like, you can’t drive through Austin without taking an hour or hours. So there is that aspect, but exactly what you referenced as well. The deals get larger and larger; when you’re playing with institutional money that is willing to take 6% to 7% growth, very solid, very lower risk, you could say, at least in multifamily. Commercial real estate might be a little different animal there in terms of risk, but… I do agree that me, as a syndicator, when I have 25 or 50 individual investors that are coming in and putting their own money, they are conditioned to see a certain return. There are certain groups out there I know of that will take an 8% cash on cash, a seven pref, eight pref, a little less than a double. We typically underwrite even more conservatively. It’s harder to find good deals that fit that model. But in general – yes, the individual investor, they may be even less sophisticated than an institutional player, or a private equity firm, or somebody that’s coming in and buying up these deals. So it is really hard from all of those perspectives; the size of the deals gets huge… We live in Woodland Park, but it’s just 20 minutes outside of Colorado Springs.

Colorado Springs is also a super-hot market. I just toured properties there last week, and there’s a property that is beautiful. It’s a 105-unit property, it’s kind of tucked up in the mountains, it’s going to go for $425,000 a unit; it’s almost $50 million that it’s going to go for. As a syndicator, unless I have private equity coming in and really taking a chunk of what we’re going to need to bring that in, it’s just very unrealistic that I’m going to get hundreds of individual investors and bring them into a syndication deal and compete against other players like that. So yeah, I fully agree with you. It’s really hard in some of those primary markets that are taking off like that. But that’s what the market bears.

Slocomb Reed: Are you ready for our Best Ever lightning round?

Mike Deaton: Yeah, let’s do it.

Slocomb Reed: Awesome. Mike, what is your Best Ever way to give back?

Mike Deaton: Generally, I love giving back to my time. I came from the corporate world, in 2016 I left, and we went into the world of entrepreneurship. I struggled actually too, between should I go back into corporate America or go out on our own and start our own business. One of the things that I really missed was coaching and mentoring other people that were on my team; that was a huge plus in a managerial-type role. I still do a little bit of that. I actually got certified as a professional coach right after I left corporate world. I still try to keep one or two clients, more of a boutique-type style, just so I can focus on business, but also give enough time. Whether it’s in a group or interview like this, I think the power of your time and presence is really our most valuable commodity, so that’s one of the best ways I like to give back.

Slocomb Reed: Yeah. What is the Best Ever book you’ve recently read?

Mike Deaton: Nonfiction, I would say there’s a book called Mindset by Carol Dweck. It’s all about growth versus fixed mindsets. It was eye-opening, not necessarily the concept, although the concept is opening to some people… But just the number of areas in your life where fixed and growth mindset come into play, beyond just business. A fantastic book.

Slocomb Reed: Mike, what is your Best Ever advice?

Mike Deaton: Oh, wow, that’s a huge topic. My biggest advice is really work on your mindset, take the time to reflect on what it is you want personally out of life. A lot of the people I coach, we get right into the… I coach a values-based process, where we really get in and look at the values… And I can tell you without fail, we all have values that are really non materialistic when it comes down to it. So if you’ll step back and look at what you want out of life and then reroute your life such that it delivers more of what you’re looking for and less of what you don’t, then you’ll find a lot more happiness.

Slocomb Reed: The last question, Mike – how can our Best Ever listeners get in touch with you?

Mike Deaton: The best way, I would say – two ways. LinkedIn is a good way, I’m pretty active in there. But on our website at deatonequitypartners.com, I’ve put a special page, it’s deatonequitypartners.com/freedom. I’ve tried to bundle a lot of the things that I talk about. So if you’re interested in land investing, I have a little bit of information that could get you started in land investing. If you’re interested in multifamily, there’s a bit about that. I have contact information, phone numbers, social handles, things like that. That’s kind of a one stop shop for people. So I would say just go to deatonequitypartners.com/freedom and you’ll find a way to get in touch with me.

Slocomb Reed: Great. Well, Best Ever listeners, thank you for tuning in. If you enjoyed this interview with Mike Deaton, please follow and subscribe to our show. Leave us a five-star review and share this with someone who you think could benefit from what Mike has shared with us about land investing and about apartment syndication. Thank you and have a Best Ever day.

Mike Deaton: Thanks, Slocomb.

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