Kyle Mitchell, Founder of Limitless Estates and Managing Partner of Vertical Street Ventures, returns to the Best Ever Show to share his insight on multifamily asset management. In this episode, he details the importance of having a good asset manager and how to create an efficient, scalable business using this role.
Kyle Mitchell | Real Estate Background
- Previous Episode: JF1784: Doing First Multifamily Syndication Only Eight Months In with Kyle Mitchell
- Founder of Limitless Estates and Managing Partner of Vertical Street Ventures, a real estate company focused on multifamily investing. Also the best-selling author of Best in Class.
- Portfolio: GP of $107M in AUM.
- Based in: Scottsdale, AZ
- Say hi to him at: LinkedIn | https://limitless-estates.com
- Best Ever Book: Who Not Now by Dan Sullivan
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Slocomb Reed: Best Ever listeners, welcome to The Best Real Estate Investing Advice Ever Show. I’m Slocomb Reed and I’m with Kyle Mitchell. Kyle is joining us from Scottsdale, Arizona. He’s the managing partner of Vertical Street Ventures. He’s a GP on 107 million in assets under management. Kyle, can you start us off with a little bit more about your background and what you’re currently focused on?
Kyle Mitchell: Yeah. Thanks, Slocomb, happy to be on. My background is now in multifamily real estate, we focus on value-add apartment investing in the Arizona and the Texas markets. We’ve got about 14 different properties that we’ve done syndications on; I’ve been in real estate since 2010. In my previous life, I was on the golf management side of things, so property management, but for golf courses. I did that for about 20 years, got burned out on it, and I ended up finding an online course for real estate, and then 11 months later I left my full-time job to pursue it full-time. So I’ve been full-time in multifamily for the last three and a half years, and I live in Scottsdale where we acquire most of our properties in the Arizona market.
Slocomb Reed: So you’ve been full-time in real estate investing in the last three and a half years. You’ve acquired 14 properties in that time?
Kyle Mitchell: That is correct.
Slocomb Reed: Gotcha. You’ve been busy.
Kyle Mitchell: Busy for the last 12 to 18 months, I would say. Yup.
Slocomb Reed: Okay, how many of those deals are in the last 12 to 18 months?
Kyle Mitchell: Seven of those deals were in the last 14 months, actually.
Slocomb Reed: Seven deals since basically the beginning of 2021, end of 2020?
Kyle Mitchell: Yup.
Slocomb Reed: And what markets are those in?
Kyle Mitchell: We have one that we closed last November in Arlington, Texas. That was a 352-unit property. And then the rest were between Phoenix and Tucson, which is where our core markets are.
Slocomb Reed: Phoenix, Tucson, and Arlington, Texas. It’s not like you’re the only guy who’s looking for deals there. I imagine the vast majority of people who are looking for deals in those areas, even those with your experience, aren’t locking in seven deals in about the last five quarters. What do you perceive to be the differentiator between you and the other people writing these offers?
Kyle Mitchell: Yeah, I made a big move in my life last year, actually, in April; I moved from Southern California to Arizona. Prior to moving to Arizona, I was still flying into Arizona every other week, but I just wasn’t able to build the right relationships, or better relationships, like I do now, and also being able to react much quicker. So now that I live in Arizona… If a broker sent me a deal, in the past, I would say, “Yeah, I’ll be there next week. I’ll take a look at it.” Well, by that time, 20 other people have taken a look at it. We’ve literally been sent a deal on a Saturday, I go look at it, we underwrite it, and we’re making an offer by Saturday afternoon or Sunday, before anyone else looks at it. So that’s been a huge factor. I’ve been able to be the boots on the ground and really build the relationships with the brokers here, and then been able to react very quickly.
Slocomb Reed: Gotcha. So moving into your target market from SoCal. And that’s not the time that you were going full-time; you were full-time for a couple of years before that, weren’t you?
Kyle Mitchell: That’s correct.
Slocomb Reed: Gotcha. So you perceived yourself losing out on deals because you couldn’t get to them quickly enough. So you’re already full-time doing this… Why not go be where you’re looking to buy deals, so that you can be Johnny-on-the-spot? You hear about on a Saturday, Sunday you’re there, and Monday you’re writing your LOI. Is that about right?
Kyle Mitchell: Yeah, exactly. There’s even the same day that we’ll write an offer or provide feedback to the brokers. When you can provide feedback to brokers the same day, they tend to like that. And whether I do that one deal or not, they’re going to continue to throw deals our way, because we get back to him pretty quickly and we move quickly. So that’s been a huge factor. And just the fact that I live in this market, I can see it real-time, things that are gentrifying, areas that are good, that are not good, that we’re not interested in, and then just understand the market and building the relationships – it’s just gone a long way for us since we moved here. We’ve grown exponentially since we moved to the market.
Slocomb Reed: Gotcha. I understand, Kyle, obviously, you’re involved in acquisitions and deal-finding. I understand you’re also involved in asset management. Is that correct?
Kyle Mitchell: Yup.
Slocomb Reed: A bit of my background, Kyle – I am an owner-operator, so I’ve worn all of the hats, or almost all the hats for all of my properties thus far. And I’ve read the Best Ever Real Estate Syndication Book multiple times. Because of my experiences as an owner-operator – I’m the property manager, I’m the asset manager, I am the person to whom I have to answer on most of my properties. You guys hire third-party property management then?
Kyle Mitchell: We do right now. We’ve had the discussion about bringing it in-house now that we’re over 1,000 units. I came from the property management side of things, but from the golf course perspective. But it’s the same thing. It’s a lot of people, low margins, it really is a thankless business. So for me, if we can have a strong third-party property management company that allows us to customize things and works with us on a lot of our key performance indicators, our targets, and how we do things, then for right now I’m okay with having a third party.
I can see why people bring it in-house, but that’s not something I would pull the trigger on yet. Like I said, it’s a tough business, there are a lot more moving parts because you have a lot of employees involved, and that changes things, so we’ve decided not to bring that in-house. However, we are bringing construction management in-house, which is somewhat similar, but the goal of that is to help alleviate some of the supply and labor constraints that are out there right now.
Slocomb Reed: Over 1,000 units, you have some property management background… Tell us, Kyle, what’s factoring into your decision? You guys are considering bringing property management in-house, but you haven’t done it yet, and it sounds like you’re not going to, based on your current portfolio. What are the factors in that? Why is that?
Kyle Mitchell: It’s just tough to manage people. The more people you have in your business, the tougher it is to manage. We’re happy with our third-party property management company to this point, and we are probably one of the larger groups with them, so we get some flexibility. We sit down with the owners, and they allow us to customize certain things the way we want to see it. So as long as we have a partner in that, we want them to be focused on what they do best, and we can focus on what we do best, which is finding the assets, and then managing from an asset management level, execution of the business plan. But if you have a strong third-party property management company, I do like the fact that they’re focused on that and what they’re really good at. Again, I understand why people bring in property management in-house. A little bit more control, there are some ways to save and increase your NOI. But right now, I think we’re sticking with a third party.
Slocomb Reed: Thank you, that’s very helpful. When it comes to asset management, tell us a little more of what the, not necessarily day-to-day, but month-to-month and quarter-to-quarter of that looks like in your relationship. Do you have one property management for the whole portfolio?
Kyle Mitchell: We have two. We have one that is based in Tucson and one that is based in Phoenix.
Slocomb Reed: Gotcha. And then you’re using another property manager in Arlington, Texas as well?
Kyle Mitchell: Actually, the same one that’s in Texas, because they also manage properties out in Texas. They have a portfolio out there and that they manage so that’s worked well.
Slocomb Reed: Okay, nice. Yeah, that is convenient. Tell us about what asset management looks like for you guys. What is it that you’re focused on in your relationship with your property manager, but also, what are your key performance metrics, the ones that you’re tracking? And how frequently are you pinging the property manager to see how things are going?
Kyle Mitchell: When it comes to asset management, I think a lot of people think that you can just hand the keys to the property management company, they’re going to execute the business plan, and you call it a day, you move on to the next property. But really, you do value-add investing, and the more you can force the NOI up, the more forced appreciation, the more value you’re going to get on the property. Asset management is critical to make sure that the property management company, number one, understands what your business plan is, they know going in, and they execute it properly.
As I mentioned, property management is a people business, and people are not perfect, so there need to be systems in place to manage people and manage the execution of the business plan to get the best results. That’s where asset management comes into play.
We look at it more as a partnership with our property management company, where we’re partnering with them to execute our business plan together. Asset management, one day, could just be hopping on a call with them, understanding and letting them know what the budget is for a certain project, and making sure they stay on time. Another day, it could be going to the property, double-checking their work, and really pushing them to hold them accountable for things that are not getting done properly. But what our cadence looks like is during the value-add phase, we have weekly calls with our property management company, and we have a checklist that we go over, and a task list that we go over every week, to make sure everything’s staying on track. Once the property is stabilized, we’ll go every other week, or even once a month, depending on how the property is performing and all that. That’s a lot of what asset management has to do with; we have a full-time asset manager on our staff who does all this. But right now, especially with where we are in the market, in my opinion, I think speed, execution, and efficiency is critical. Making sure that you’re working in tandem with your property management company to finish out that business plan as quickly as possible is crucial.
Slocomb Reed: Speed, execution, and efficiency are words that everyone’s using about the acquisition process, and we were just talking about you moving your life to Arizona to make that possible with acquisitions. Meeting with your property manager once a week during the value-add phase – how often is a member of your team visiting each of the properties, during the value-add phase and then afterward?
Kyle Mitchell: It depends on how heavy of a lift. If it’s a light value-add, it’s going to be much different than a heavy value-add I would say. If it’s a heavy value-add, it’s once a week, to be honest with you. But right now, if it’s just a light standard value-add, that’s our on the fairway type of deal, at least twice a month, and maybe three times a month.
Slocomb Reed: Kyle, what counts as a heavy value-add for you?
Kyle Mitchell: Well, we have a deal we’re closing on in a couple of weeks where we’re putting 70 grand a unit, $7 million into it, and it’s a 100-unit property.
Slocomb Reed: You’re putting in 70 grand a unit?
Kyle Mitchell: Yes. That would be a heavy value-add. I would say a light value-add for us in the Phoenix area is probably 10 to 15 grand a unit.
Slocomb Reed: What are you getting for 70 grand a unit?
Kyle Mitchell: What are we getting for 70 grand?
Slocomb Reed: In Cincinnati, Ohio, 70 grand a unit is more than I want to pay purchase and rehab for most of the stuff that I’m looking at, Kyle… So you’re blowing my mind with 70 grand per unit for rehab. Well, first of all, tell me the gross rents on these things and what you’re doing to the gross rents by spending that much money. And then please explain what 70 grand a unit is going to get you in Arizona right now.
Kyle Mitchell: 70 grand a unit it’s going to get us a rooftop deck, it’s going to blow out the entire bottom floor, brand new amenities, brand new office space, offices, common area amenities, and exterior work as well, rebranding. What else are we doing to it? Interior renovations are going to be between 20 and 25 a unit, so that’s not [unintelligible [00:16:34] the interiors. This is a tower, it’s a nine-story tower, so we have a lot of interior work, and then deferred maintenance. I would say probably a third of the 70 grand is going to be to defer maintenance to things like the roof, plumbing, etc. But this is in a great downtown location, huge units, and so 70 grand a unit for this one. In-place rents are $400 below market on day one, and another $600 to $700 after renovations.
Slocomb Reed: You’re adding $600 to $700 per month per unit with your renovations?
Kyle Mitchell: Yup. But on day one, they’re $400 below market. So when it’s all said and done, from today until the end of the renovation, it’s over $1,000 in increase.
Slocomb Reed: Oh, gotcha. So you’re getting 1000 a month increase for 70 grand a unit?
Kyle Mitchell: Yup.
Slocomb Reed: Gotcha. Give us the bigger picture numbers as well. You gave enough math to figure out how many units there are. But how many doors is this? What’s the purchase? What’s the rehab? What are you expecting this to be worth? And what do you expect to be producing on the back end?
Kyle Mitchell: It’s a 96-unit building, ’60s build, downtown Tucson. Let’s see, 70 grand a unit is what we’re going to be spending on it; purchased it for about 27 million, and when we’re all said and done, looking at it to be worth about 43 to 45 million.
Slocomb Reed: Gotcha. So you’re going to be all in for around 34.
Kyle Mitchell: Yup.
Slocomb Reed: And it’ll be worth about 10 million more than that when you’re done.
Kyle Mitchell: Exactly.
Slocomb Reed: Underwritten to the five-year hold?
Kyle Mitchell: Underwritten to the five-year hold. Correct.
Slocomb Reed: Okay, and what kind of return are you projecting?
Kyle Mitchell: About 2.1 multiple, 17% IRR.
Slocomb Reed: Gotcha. Yeah, I’m willing to call this heavy value-add too, Kyle. How are you expecting your asset management relationship to go with this? And you mentioned you’re bringing construction management in-house; is that for this deal, because there are so many things going on?
Kyle Mitchell: It’s not specifically for this deal. The reason why we’re doing that is like I said, we’ve got about 14 deals, and about six or seven of them are still in the value-add phase. And we’ve just seen, between COVID and labor shortages, and supply constraints, what used to be eight to 10 units a month that we could do has really shrunk down to three or four. And we feel we’ll have a lot more control bringing it in-house; obviously, our team will only be working on our properties, so they don’t have to go to other properties. So we’ll have a little bit more control on being able to be more efficient when it comes to our renovations. The scope for that heavy value-add, we’re bringing in an outside general contractor, architect, design team, because it really is a huge lift, and our in-house team is not going to be able to blow out the entire bottom floor of a building and do all that. So that’s kind of separate. But again, it’s really been the market environment for the reason that we’re bringing construction in-house.
Slocomb Reed: Gotcha. So asset management for your property manager, but also for all of these vendors that you’re bringing in to complete the rehab. I have a feeling that at first you’re going to be on-site more than once a week. What is that going to look like from an intensity perspective, frequency of how often you’re there, how many people are you keeping track of, that kind of thing?
Kyle Mitchell: The good news is that we have a full-time asset manager as well. A lot of his time is going to be focused on this property when we close on it in a couple of weeks. I will also be involved, since I’m boots on the ground. But when we’re first getting started, I’m probably going to be there two to three times a week to start for the first month or two, until we feel really comfortable with what’s going on.
There are some city permits and requirements, so we’ve got to go through some of those items, so we’re not going to start for four to six months. So we do have it staggered in a way that it’s not going to be too extreme. But yes, when we’re doing 70 grand a unit heavy value-add on a deal, we’re going to be very hands-on and be out there as much as possible.
Slocomb Reed: Blowing out the first floor – are you going to have tenants living there in the meantime?
Kyle Mitchell: The first floor right now, which is actually good, mainly consists of open storage and commercial space. We’ll do it in sections. So yes, there’s no living spaces in the bottom section, so we’re going to be able to do it while the residents are still living there.
Slocomb Reed: Gotcha. Kyle, let’s talk about asset management from a hypothetical perspective. I’m taking the perspective of a property manager, for myself, and thinking that I’m being brought on to manage a value-add asset, probably closer to the lighter value-add, that we may have some major mechanicals that need to be replaced. We’re doing some cosmetic updates in the apartments. We have a reasonable time frame, so it’s not like we’re emptying out the buildings to get everything done quickly. Thinking from the perspective of your property manager, how often should I expect to hear from you, and what level of decision making can I make on my own? And what do I need to get approval from you for?
Kyle Mitchell: Great question. We hired our asset manager about three months ago, and we were just talking about this yesterday… Because there are a lot of things that go on in a business plan, and a business plan doesn’t end the way it started; it just never happens that way. It would be great if everything stayed on timeline and stayed on budget. But essentially, what we do is we’ll have a meeting with our property management company and our asset manager is involved. They’re there for due diligence; we talk through the business plan together, they know what our budget is. So they have our budget, they have our business plan, and so does the property management company. So that person has full rights to make sure that everything stays on the timeline, within the budget. And if anything goes outside of the budget or changes, is when we get an email or a request for our input on the deal.
So we want to make sure there’s some flexibility and freedom for the asset manager; otherwise, they’re essentially just an assistant. It’s important to make sure you have the right person though. For the first couple months, we’re going to make sure that that person has good decision-making ability, asks the right questions, asks good questions. When we feel that he or she’s ready to take on the project a little bit more, then we’ll give them a little bit more rope. But as long as it’s staying within the budget and the timeline, we’re not going to get as involved as something that’s going over budget or an unforeseen item.
Slocomb Reed: Last question before we move on to the next segment of this interview, Kyle… What are the key metrics that you’re looking at for the performance of your properties?
Kyle Mitchell: We look at a ton of different metrics. One that I’m really interested in right now is lease trade-outs. The reason for that is lease trade-outs on renovated units, but also least trade-outs on existing, just classic units. Our market, in and of itself, has gone up 15% to 20% on rents over the last 12 months, so what we’re actually seeing is that we can get a lot of that rent increase without renovating a unit. So we want to make sure it still makes sense to renovate the units at the full level to make sure we’re getting our ROI on it. So looking at the lease trade-outs between what classic rents are and what renovated rents are one thing that we really focus on right now.
Slocomb Reed: Focusing on making sure that you’re getting the right return on your rehab dollars, as opposed to the return that you’d be making if you didn’t spend as much of course. Gotcha. Kyle, are you ready for our Best Ever lightning round?
Kyle Mitchell: Let’s do it.
Slocomb Reed: It’s been a few years. You’ve been through this before. You came on the show right after getting your first syndication deal, right?
Kyle Mitchell: Exactly.
Slocomb Reed: For anyone who wants to find him, that is Episode 1784. Kyle, what’s the Best Ever book you’ve recently read?
Kyle Mitchell: Who, Not How, by Dan Sullivan. It changed my perspective and view on things over the last 12 months.
Slocomb Reed: What is your Best Ever way to give back?
Kyle Mitchell: Our Vertical Street Ventures company is starting a nonprofit arm that my wife and other partners are working on. We’re really excited to give back in that way. We also have an academy where we teach other people how to get started in the Arizona markets. It’s a tough market to break into right now, so we are helping people get their first deals out here in Arizona.
Slocomb Reed: What is a Best Ever skill you develop since your first deal?
Kyle Mitchell: Best Ever skill. Great question. I would say just honing in my skills on asset management. I come from the management side of things, but just changing industries is — it’s not a perfect transition… So just honing my skills on the asset management side. I’ve learned quite a bit on how to do that, and managing people.
Slocomb Reed: Awesome. What is your Best Ever advice?
Kyle Mitchell: I think last time I said it was consistency, and I still stick to that. If you’re consistent in this business, you’re going to be able to beat out 95% of your competition. It’s one of the toughest things to do, is be consistent for a long period of time. If you do that, you’re going to be successful in this business. Things don’t happen overnight, but over two, three, four years, it’s amazing how much you can accomplish if you’re consistent.
Slocomb Reed: Absolutely. Kyle, where can people get in touch with you?
Kyle Mitchell: Yeah, verticalstreetventures.com is a great place to go; it talks about our team, our portfolio, and even the academy that we offer.
Slocomb Reed: Or the phone number and email address in your background for those who are watching on YouTube. Best Ever listeners, thanks for tuning in. If you’ve gotten value from this episode, please subscribe to our show, leave us a five-star review, and please share this episode with your friends, so that we can add value to them too. Thank you and have a Best Ever day.
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