April 18, 2023

JF3148: Change Your Perspective on Debt ft. Alan and Elena Neely



Alan and Elena Neely are multifamily investors and the founders of Andover Holdings. They began their investing careers building townhomes in the Seattle area and are now limited partners and general partners in 27 apartment syndications nationwide. In this episode, they discuss what they look for in third-party property management companies, the technology platforms they use to run their business, and the importance of embracing good debt.

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Alan and Elena Neely | Real Estate Background

  • Founders of Andover Holdings
  • Portfolio:
    • GP in 8 deals
    • LP in 13 deals
    • Total of 5,400+ units
  • Based in: Seattle, WA
  • Say hi to them at:
  • Best Ever Book: Acres of Diamonds by Russell Conwell and The Richest Man in Babylon by George Clason
  • Best Ever Advice: Don’t overanalyze, just get out and get started.


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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 here with Alan and Elena Neely. Alan and Elena are joining us from Seattle, Washington. Alan runs Andover Holdings, the multifamily investing firm, and Elena runs My Seattle Realty, a residential real estate brokerage. Their current portfolio consists of eight multifamily deals in which they're general partners, 13 deals in which they're limited partners, for a total of over 5,400 units of multifamily. Alan, Elena, can you tell us a little bit more about your backgrounds and what you're currently focused on?

Elena Neely: Well, first of all, thank you so much for having us on the show today. We really appreciate to be on the Best Ever podcast. We started our residential real estate journey in the year 2000, with purchasing real estate properties. And soon enough, we discovered that sometimes the best rehab is doing it with the bulldozer, so we started doing new construction, and that's when Alan started his construction company, and started building townhomes, right?

Alan Neely: Yeah. So in about 2005 we started building townhomes. We did them all build to rent. So by 2017, we had a portfolio of around 16 new townhomes in Seattle. We reached our number that we should be able to retire at, but the cash flow was really, really not there. It was about one and a half percent on our equity. So we started exploring parts of the country, and we've settled in on Texas, and we just started flying out to Texas, going to different meetup groups, and then we met all kinds of people that are into apartment syndication. So we started investing passively in apartments syndications. Now we're GP in eight deals and limited partner in 13. And all total, I think we've been involved in 27 different apartments syndications.

Elena Neely: Some of them went full cycle by now.

Slocomb Reed: The deals in which you are general partners, those are all in Texas as well?

Alan Neely: There was one in Nashville, Tennessee, new construction apartments, 70 units. And there's one in Cleveland, Ohio right now. But the rest are all Texas.

Slocomb Reed: And within those general partnerships, what are your roles, responsibilities?

Elena Neely: Well, being from Seattle, Washington, we have been really focusing on partnering with general partners who would be asset managers, who live locally. So our role has been really involved participating with the property management calls, and Alan being involved in the cost segregation studies. And we also have a very strong group of investors based here in Seattle, Washington, so we've been focused on maintaining investors relationships as well.

Alan Neely: And we tour the properties; at least once a quarter we go to Texas, probably six times a year we're in Texas. And we're going to be going to Dallas soon, so we'll tour all of our properties in and around Dallas over the course of two or three days. And then our next trip will be in Houston, and we'll tour all the properties in and around Houston for that trip.

Slocomb Reed: Nice. So one thing I wanted to say that I think is to your credit, Alan and Elena - you said that you were building townhomes, ground-up construction. It sounds like you did that for around 10 years, and you had a portfolio of 16. Do you still own those 16 townhomes now, or have you sold them?

Alan Neely: We own one eightplex, the last thing we built. We'll be starting to sell them off in about probably late summer. We're in the middle of subdividing. This is why we left Seattle. It's been five years working on the subdivision of -- what used to take six months, now it takes five years, and it's just a hassle.

Elena Neely: It's going down the hill...

Alan Neely: It's constant roadblocks set up by the city.

Slocomb Reed: Hopefully going down the hill figuratively, not literally. [laughter]

Alan Neely: Yeah, exactly.

Slocomb Reed: I think it deserves to be said though, as long as you have been investing in Seattle, one of the reasons I would imagine that you're at one and a half percent cash on cash return is because of the explosive appreciation that Seattle has seen over that period of time. So the annualized return after you sell the property will be significantly greater because of the amount of appreciation you've been able to realize since you built those. That makes a lot of sense. So you were putting money in the bank, you just had to wait until you can catch it.

Elena Neely: Exactly. And it was a great opportunity for us, because we literally started with nothing, and built it up from zero to opportunity now to invest passively, and be GPs. The Seattle market's been great exactly for those reasons, for great appreciation over the years.

Alan Neely: Yeah, if you average it out, we had about 50% equity in every townhome once the construction was complete. So we're getting one and a half percent on a few million dollars in each project, I guess.

Slocomb Reed: 50% equity after construction is very impressive. I want to take this as an opportunity to ask a couple of follow-up questions about your townhome investing. But what I want to point out is the difference between a couple of metrics in the way that we often hear them used. The one and a half percent number that you're referencing sounds a lot like return on equity. At any moment in time - the time being now for the sake of that calculation - you look at the amount of equity that you have in a property and you calculate your net annual income as a percentage of that equity, and that gives you your return on equity. That's a bit different from ROI in a lot of ways. The first is I imagine you've refinanced those townhomes along the way, and pulled all your cash back out, haven't you?

Alan Neely: The funny thing in Seattle - even though the rents are really high, the cost of construction is also really high, and everything we built, we subdivided into townhomes. So each unit was worth around $1,000,000, or $800,000, something like that. And we were renting out these units for about $3,500 a month. And then there's roughly 25% expenses on that, since we self-managed everything we built. We had our own property management company for a while.

So yeah, those are rough numbers. But there wasn't enough income to take on any more debt other than the 50% equity. So we did one project every other year, essentially. We had to let our cash reserves built back up before we took on our next project. And then we started taking on partners, and leveraging our partners. That's why syndication is so great, because you're really leveraging the contacts and knowledge, everything, of the general partner team.

Slocomb Reed: That makes a lot of sense. Without the ability to refinance because of the debt to income ratios for those properties, of the DSCR ratios, you've still been able to amass a lot of equity, and put yourself in a position where you can now get it deployed for much better cash on cash return ROI. That makes sense. You said you used to have a management company. What are you all doing for management right now?

Alan Neely: In Houston, we try to stick with one property management company. We look for very large property management companies, with 5,000 or 10,000 units under management in that market. And it's just very high-quality management companies. They do the property management, and --

Elena Neely: Renovations as well.

Alan Neely: Yeah, most of them do the renovations as well. They oversee the renovations. And one that we own in Tomball, Texas, it's called the Bridgewater Apartments, the property management company is also overseeing the renovations. And at the same time they're doing ours, they are also doing roughly 2,000 units, so they're really getting competitive pricing on the painting contracts, the granite countertops, the new cabinet doors, flooring, everything. We get really competitive pricing by just piling on with a property management company when they get pricing on 2,000 units.

Slocomb Reed: That makes a lot of sense. And with your portfolio currently in Seattle, what are you doing?

Elena Neely: Well, we're finishing it off, managing it ourselves. I am the one doing the tenants placements and any requests. And right, now that eight units probably takes more of our time than managing the big portfolio in Texas.

Alan Neely: I think it truly does. We're involved in somewhere around 5,000 units in Texas, and our eightplex that we self manage takes a whole lot more time. Now it's a five year old building, but --

Elena Neely: It's a newer building, yeah.

Slocomb Reed: And hiring third party management for a property that small tends to be expensive, all things considered. Are there any technology platforms that you're using to help you manage right now?

Elena Neely: Yes, we use Buildium just for the tenants portal, and that's been very helpful, because for the newer construction building all of our tenants mostly work in the IT industry. So it's kind of a given. They want to use a portal; they don't have checks, or anything like that. So we use that. And it's a great location, so we always had higher-quality tenants, working in the IT industries, or working in [unintelligible 00:11:12.04] medical hospitals. So it's been relatively easy to manage, but it's still time-consuming.

Slocomb Reed: Moving back to talking about your Texas investments, the multifamily, particularly where you all are general partners... You're involved, you said, in a lot of investor relations. Let me ask, how is it that you're handling your communication with your limited partners on those deals?

Alan Neely: We rely heavily on Cashflow Portal. We used to use another portal, which we didn't like, and our general partners - we all decided, the ones that were general partners, to migrate all of our data into the Cashflow Portal. As a GP, it has gotten so much nicer. And as a limited partner, the people that have migrated to Cashflow Portal, everything is right there in one place. It's easy for us. We can look at our own investments, we can communicate with our investors easily... The support is phenomenal. Perry Zing, the owner Cashflow Portal just built a phenomenal, easy to use software. We can't say enough good things about it.

Elena Neely: And we even had an opportunity to do some investor education through the Cashflow Portal. We did the webinars on it, and it's also great to continue updating our investors.

Break: [00:12:38.06]

Slocomb Reed: The limited partners that we interview with Best Ever all talk about the value of consistent communication when it comes to their investments. That makes a lot of sense. How involved are you currently with acquisitions for new multifamily projects?

Alan Neely: We have our little select neighborhoods that we're looking in; we don't look at a whole city or a sub-market. We have it down to a couple block radius of where we really want to find deals. And then we share with general partners whenever an apartment comes up in that little neighborhood. We'll have our general partners that live in the area, that will ultimately be the asset manager, they'll go look at the property and give their feedback, and then we decide as a team whether or not to continue.

Elena Neely: Yes, being limited partners and general partners now in quite a few projects, we really focus down to which areas, what year of construction, how many units, and what type of properties. So now we're really focusing and targeting that specific area. Because in the syndications there is so many markets, there's so many types, there's so many opportunities, but we really choose to really focus on what we decided would be the best fit for our investors and our portfolio.

Alan Neely: It's places where we already know we have a quality property management team there. We know there's explosive growth going on, because we visit those areas frequently... So we don't look at all of Texas, and look at South Carolina, and look at Florida. We hyper-focus on certain neighborhoods and certain tertiary markets in Texas.

Slocomb Reed: And that's because of the operational efficiencies of being able to continue using the same management companies you're already with, along with the fact that you're already seeing results in those areas because of the properties that you already have.

Alan Neely: Yes. Correct.

Slocomb Reed: That makes sense. And it also makes sense as a way to continue investing conservatively in a time with some intriguing economic volatility, if it can be called that. Coming out of the first quarter of 2023 right now, what has changed about - not necessarily the deals that you're looking at, but the way that you're analyzing them, by comparison to the acquisitions that you were doing in the past?

Alan Neely: Ultimately, I call it a financial engine; it still has to run. You can't choke it off with debt. The debt markets - it's expensive to borrow money relatively to where it used to be, and the price of the asset has to come down to justify the increased interest rates. So if it's not a deal, we just don't buy it. We don't set goals that we have to buy 1,000 units this year, or anything like that. We just look for solid deals that make sense. We're not out there trying to 10x ourselves in a year. We don't want to lose money. And on the deals over general partners with, we're extremely conservative.

Elena Neely: Even more than when we invest.

Alan Neely: Yeah. We don't want to take a risk. There's no reason to go buy something just for fees.

Elena Neely: And I think we've always been conservative underwriting the property. So now it has to fit the same conservative underwriting with new debt structure, and with the new, maybe higher LTV ratios. So it all has to make sense.

Alan Neely: Yeah, you mentioned before DSCR... Most people we talk to don't understand that term, but it's got to be a safe DSCR. Certainly higher than 1.25. But yeah, the safer, the better as far as we're concerned. So we're not in any big hurry to go write 1,000 offers on 1000 apartments. We're staying hyperfocused.

Slocomb Reed: That makes a lot of sense. Alan, Elena, are you ready for the Best Ever lightning round?

Elena Neely: Sure.

Alan Neely: Sure. Bring it on.

Slocomb Reed: What is the Best Ever book you recently read?

Elena Neely: I really keep going back to "Acres of diamonds." And that's really the book which helped us a lot in really focusing and sharpening out focused on utilizing the resources that's already there, and focusing on your backyard, so to say, on maintaining and deepening the already existing relationships with our investors, with our partners, with Cashflow Portal, who we love, and really focusing on what's present and what we have at hand. Rather than chasing the bird in the sky. What's your book, Alan?

Alan Neely: Recently, I actually re-read The Richest Man in Babylon. And I just love that book.

Slocomb Reed: A couple of classics here, yeah.

Alan Neely: Yeah. We like age-old wisdom. We're not into the fancy, newest, shiny penny way to do something. We just look for tried and true--

Elena Neely: Centuries-proven principles.

Alan Neely: Yeah. Jim Rohn, Earl Nightingale, a guy named Brian Buffini... We love all those guys. We like simple, age-old, tried and true. We're not here to invent a new wheel.

Slocomb Reed: What is your Best Ever way to give back?

Elena Neely: I think educating everybody on real estate investing through our real estate investing. We really have been very adamant about everybody investing in real estate, and starting maybe as a landlord, maybe as a passive investor, but just starting; and not over-analyzing, but investing long term in their real estate in any possible way.

Alan Neely: Yeah, to give back I look at my parents; they never learned how to passively invest, and they more or less - it sounds kind of mean, but they worked until they died. And life's too short. I want to go out and enjoy it, so we set our goals and we're starting to just give back to the community saying "Hey, you need to set some goals. Educate yourself on passive investing. You really need to educate yourself on taxes." There's so much you can learn, and all the information is so easily available nowadays through the Best Ever podcasts, and blog posts... It's just simple to find knowledge now.

Slocomb Reed: Alan, Elena, what is the biggest mistake you've made thus far in your real estate investing, and the Best Ever lesson that resulted from it?

Elena Neely: I think my biggest mindset mistake was for the longest time I was so adamant about keeping all the rental properties and paying the debt down, and being completely debt-free. And the best learning was for me when Alan finally convinced me to look at the debt from a different perspective, and really start investing passively, and making money work for you, rather than working for money till the end of the days. And that's really been a great opportunity for us to extend our horizon and really move to the next level.

Alan Neely: For me, it's we went outside of our wheelhouse one time, so to speak. Instead of doing townhomes on Alki Beach in Seattle, or Green Lake in Seattle, both beautiful neighborhoods, we bought two houses from a bank on a lot, and we spent two and a half years getting plans and permits to build a 46-storey apartment building with commercial spaces on the first floor. It was way out of our wheelhouse. It was the hardest thing I did. And we didn't lose money on it. When we sold it, we walked away with $60,000 cash, after investing a lot of money in it...

Elena Neely: And time, yes.

Alan Neely: A lot of time, a lot of money. It wasn't quite a million dollars, but it was up there, like 800,000 or so. And it took a lot of capital, and there was no return for those two and a half years of my life. I was just happy that somebody bought it.

Slocomb Reed: Alan, I do have to say that if you made $60,000 in two years of an $800,000 investment, that's still better than a one and a half percent cash on cash return. [laughter] On that note, Alan, Elena, what is your Best Ever advice?

Elena Neely: Best ever advice would be to start doing, to start learning, and not over-analyzing deals to death.

Alan Neely: I spent two years trying to buy our first apartment in Texas, and I was way over analyzing. And then I've yet to find my perfect ideal deal, but we get as close as we can. You've just got to get out and do stuff. Go meet people. In five years, you're going to be the exact same person you are today, except for the books you read and the people you meet. So go to meetup groups, get out of your house and go meet people; pick up the phone and call people.
In the syndication world I am shocked at how giving everybody is with information. There's very few people that try to hold back information, or hide gotchas... So I just love this apartment community.

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

Elena Neely: Our website is andoverholdings.com. So the best way to get a hold of us is to email us, info [at] Andoverholdings.com. And we're also happy to connect on social media, and always encourage people to get in touch with us. We have our in-person meetup in Seattle, Washington. So if anybody would like to join and attend our live events, we have a passive investing meetup every third Wednesday, and we'll be happy to share that information as well.

Slocomb Reed: Those links are in the show notes. Alan, Elena, thank you. Best Ever listeners, thank you as well for tuning in. If you've gained value from this episode, please do subscribe to our show, leave us a five star review and share this episode with a friend you know we can add value to through our conversation today. Thank you, and have a Best Ever day.

Alan Neely: Thank you so much, Slocomb. Those were great questions.

Elena Neely: Thanks for having us.

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