Michael Margarella, founder of Next Play Investments, delves into the nuances of commercial real estate investing, shedding light on the intriguing dynamics of the multifamily and self-storage sectors. In this episode, we uncover the evolving trends and opportunities in these markets while gaining essential insights into the strategies and challenges that resonate with commercial real estate investors in 2023.
Key Takeaways:
- Shifting Market Trends in 2023: Michael discusses how market trends have evolved in the commercial real estate space. In 2021 and 2022, self-storage opportunities seemed abundant, but by 2023, there was a decline in available self-storage opportunities. Multifamily, on the other hand, started to see more appealing opportunities in the latter half of 2023, attracting reasonable sellers. Understanding these market shifts is crucial for investors to adapt their strategies.
- Direct-to-Seller and Broker Relationships: Michael emphasizes the importance of building strong relationships with both sellers and brokers. He highlights the value of getting direct to sellers and shares his plans to enhance this aspect of his business in the coming years. Additionally, he discusses the significance of being on brokers' shortlists and fostering connections that make investors top of mind when opportunities arise.
- The Power of Lean Investing: One valuable lesson from the conversation is the importance of avoiding over-reliance on pro forma assumptions. Michael shares an example where their pro forma projections were heavily dependent on a new building, leading to challenges, delays, and increased costs. This experience highlights the significance of lean investing and relying on existing property fundamentals rather than overly optimistic assumptions.
Michael Margarella | Real Estate Background
- Next Play Investments
- Portfolio:
- Self-storage facilities (200,000 sq. ft.)
- Multifamily (~200 units)
- Based in: New York, New York
- Say hi to him at:
- Best Ever Book: Rich Dad Poor Dad by Robert Kiyosaki
- Greatest Lesson: Specific to self-storage, never move forward on a deal that only pencils with the addition of a newly constructed building on the property.
Click here to learn more about our sponsors:
Transcript
Narrator:
Quick disclaimer, the views and opinions expressed in this podcast are provided for informational purposes only and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action. For more information, go to bestevershow.com.
Michael Margarella:
Just lean into the uncomfortable because progress is usually on the other side of that.
Narrator:
Welcome to the Best Ever Show, the world's longest running daily commercial real estate podcast. Our hosts interview commercial real estate experts every day to get you the best advice ever with none of the fluffy stuff.
Slocomb Reed:
Best ever listeners, welcome to the best real estate investing advice ever show. I'm Slocomb Reed. Today we are joined by Michael Margarella. He is based in New York City. His company is Next Play Investments. They operate a private equity firm that focuses on multifamily and self storage. The current portfolio includes around 200,000 square feet of self storage and around 200 units of commercial multifamily apartments. Mike, can you tell us a little bit more about your background or what you're currently focused on?
Michael Margarella:
Yeah, I appreciate you having me. So we're based in the New York area. And as you mentioned, we focus on self storage and multifamily and we operate a private equity firm. So we are joined by partners in acquisitions of those commercial assets. And our main focus nowadays is just continuing to build our network of partners and continuing to get out there and look for deals.
Slocomb Reed:
Mike, is it fair to assume that you engage with operating partners and possibly also acquisitions partners on self storage and multifamily and you focus on investor relations and raising capital for those deals?
Michael Margarella:
Yes and no. Those are roles that I am intimately involved in. I'm also involved on the acquisition side a bit and a bit on the asset management side, but I'm a bit less involved on the granular day to day and the property management side of the business.
Slocomb Reed:
What markets are you all invested in?
Michael Margarella:
We focus mainly in the Midwest. So Indianapolis is the main market where we focus. It's where we started years ago. And so we have a whole lot of connections there from brokers and contractors and lenders and things of that nature to make projects easier in the Indianapolis area. We've since expanded and we're also in Michigan, Tennessee, and now Louisville, Kentucky.
Slocomb Reed:
Mike, you said before the interview that you're a listener of the podcast. You may already know that I'm based in Cincinnati and I'm an owner operator. So all of my whole portfolio is here in Cincinnati. Why did you choose Indianapolis?
Michael Margarella:
We first started in the single family and small multifamily space. So I think like a lot of others, I got started just looking on bigger pockets about the best markets to invest in the markets with the strongest cash flow and of course markets like Cincinnati and Dayton came up as did Indianapolis and dozens of other markets. And so we did some of our own diligence on these markets, just looking into some data, probably a lot of the same data that's subsumed in a lot of these top 10 lists from population growth to job growth, to the industries that are on the ground and what the rent to price ratios look like in these various markets.
And I think we did probably more analysis than was necessary. And we came to a point where we just had to pick a market. So that's when we finally picked Indianapolis. We dove in and that was a big turning point for us because all the efforts that we were spending thinking about and analyzing which market we wanted to go into was now focused exclusively on Indianapolis. So that really helped us scale quite a bit in the beginning.
Slocomb Reed:
Have you always focused on the Midwest?
Michael Margarella:
Yes. Indianapolis was the first market that we focused on. We grew into that market. So some of the ancillary markets that we're in now sort of grew out of that, whether through contacts in Indianapolis, sending us deals, for example, in Louisville or whatnot, our main markets have always been in the Midwest.
Slocomb Reed:
Mike, I'd like to couch my next question within a summary of what's happening across the country right now with regards to apartment investing, particularly with acquisitions or with the transaction process. We're recording in the middle of the fourth quarter of 2023. So we have a very sophisticated listener base, as you already know, Mike. Most people are familiar with what's going on with interest rates and property values, the increase in cap rates, if it is happening, is lagging well behind the increase in interest rates that we've experienced over the last year, year and a half, and a lot of apartment investors and other real estate investors are finding that a lot of other parts of the country simply do not make sense because their cap rates are so much lower than the interest rates at which they can borrow that acquisitions simply are not happening.
That's being said with me being a Midwestern and investing in the Midwest with you investing in the Midwest. I still know some apartment investors whose acquisitions have not even slowed down much less pause during the market of the moment. I'm under contracted by something right now for the first time in a while. I say all of this to ask, are you currently acquiring in Q4 of 2023 or are you waiting for improved market conditions?
Michael Margarella:
Yeah, we never took a pause per se. I'd say activity certainly slowed down, especially in early 2023. There was just so little supply out there available for us to even look at and not to mention all the economic factors that you touched upon. So we're currently under contract as it stands now on an asset that we hope to close in the next month, but that will just be our third acquisition of 2023. So it has been a bit of a slow year as far as acquisitions go, and it's been challenging on a lot of fronts.
I think you mentioned interest rates and that's just one of the challenges that we're having with lenders right now. The other is lenders not wanting certain types of assets on their books, whether it's a C-class asset, a B-class asset, an asset located in a specific part of town or an asset that maybe isn't 85, 90% occupied.
There's just a lot of challenges that we're finding now that we weren't finding in the past couple of years with lenders. And then of course, there's the insurance markets. And I think it's been a bit more pronounced on the coasts, but even in the Midwest, we're seeing, we're not immune to those rising costs of insurance. And especially if you get into a 1960s, 1970s vintage multifamily product, our insurance costs are significantly more than what they were in 2021 and 2022. So that's another challenging part of acquisitions nowadays.
Slocomb Reed:
Still you're buying something this quarter and you've had acquisitions in 2023. Let's focus on the investor relations perspective on real estate investing right now, Mike. First, let me ask, are you fully funded for the closing coming up later this month or next month?
Michael Margarella:
Yes.
Slocomb Reed:
Okay. So that's three fully funded deals in 2023, two of them close one of them under contract to be closed and fully funded. That's three sets of conversations that you have had with investors. Looking back on those three sets of conversations, Mike, that you've had with your investors. How have you seen their expectations shift and how have you seen the projected returns that you're offering shift from the offerings that you've had in 2022 and before that?
Michael Margarella:
I'd say investors nowadays are definitely more cautious than what they were years ago. And I think that's something that we probably all share in our day to day. So when we're speaking with investors, we're finding this year, at least that they want to take a deeper look at the numbers and the deal itself. And obviously trusting us is step one, but that hasn't been enough in 2023, there's certainly some extra effort that our investors have put in this year.
And then as far as returns, I think investors are starting to realize a bit of the new normal. And as you mentioned earlier, what cap rates look like now compared to interest rates and what returns look like and what some of their alternative options are, whether that's treasuries or a high yield savings account. And those are things that of course, we try our best to explain to them.
But it's just one of those things where it's hard to find the same deals that investors were finding in 2021 and 2022. So if our investors want to be active, the returns now are more or less the new normal.
Slocomb Reed:
Two questions here or two part question. What are those returns that you're projecting now by comparison to the last few years? And how is it that these deals are matching the more conservative hopes and expectations of your investors?
Michael Margarella:
I'd say nowadays we're generally targeting a mid-teens IRR return. That's generally the baseline of what we're shooting for. Obviously the whole period somewhere in that three to seven year mark, depending on the deal. And then as far as returns, I think something that we've really focused on in 2023 is being really careful with our underwriting and being really careful with what our projections look like.
And something we've really tried to hone in on is, is take that as is income, that as is NOI, try not to add a whole lot to it and try to make the deal work as is, and then any pro forma income that we could gain from that. That's just gravy for us. So I think everybody's a little different with how they use pro forma is like that, but that's an approach that we're really trying to focus on. And that's something that we try to convey to our investors to give them a bit of added comfort that the deal itself will pencil.
Slocomb Reed:
I want to make sure I'm hearing you correctly. Are you projecting a mid teens IRR based on actuals without value add?
Michael Margarella:
Correct. And that depends on the asset. So of course there's rent growth, which we're going to add in year over year. I'm more so talking about, let's take a self storage facility. For example, our very first self storage project was premised upon building additional self storage somewhere around 6,000 to 8,000 additional square feet of self storage. So part of our pro forma included the increase in NOI that we would have yielded from that build out and we were met with a lot of resistance from the local township in building. So it took us a bit longer to build those buildings. It took us a bit longer to lease up those buildings and it cost us a bit more to construct the building.
So, we were fairly fortunate in that we were able to get those buildings constructed. We were able to get them leased up. And so we were eventually able to hit pro forma, but it was just a lesson, especially now with interest rates, where they are in cap rates, where they are. That if you have a project that's premised upon a pro forma buildout, let's say it's a dangerous time. So that's something that we never assume in our pro forma, just as way of an example in the self storage industry. If there's some vacant land for a build out, we may be interested in doing that build out, but that's going to be gravy for us.
Narrator:
We'll get back to the show. The first of sponsors, I'm confident you'll find value in learning more about deciding how to invest your capital is more challenging than ever. That's why it's never been more important to partner with a company with a solid track record and that has thrived through various economic cycles. Companies like BAM Capital. BAM Capital is a trusted multifamily syndicator that has delivered a historical average of over 35% IRR with an average hold period of three and a half years. BAM Capital has never missed a preferred payment, never lost an LP's investment, and never called capital past the subscription amount. BAM Capital is currently raising capital for a fund designed for accredited investors targeting a 15 to 20% IRR and a two to 2.5X equity multiple to its investors over a three to five year hold period. If you're an accredited investor and you want to learn more about multifamily investment opportunities with BAM Capital, visit capital.thebamcompanies.com. Again, that's capital.thebamcompanies.com.
Are you a real estate investor struggling to streamline your property management? Are you tired of juggling multiple systems to effectively manage your portfolio? Meet Rentec Direct, your ultimate solution for automating management tasks, reducing errors, and most importantly, saving you time. Rentec Direct offers an all-in-one platform for accounting, marketing, tenant screening, rent collection, and much more. And the best part? You're never alone. With US-based live support and award-winning customer service, RenTec Direct is the partner you need to streamline your property management so you can focus on what's most important, growing your business and getting more deals done. If you're an investor looking to grow your portfolio, join the more than 15,000 investors and landlords who manage real estate assets totaling more than $200 billion using RenTec Direct. Just go to rentecdirect.com forward slash best ever and sign up for a free trial Plans start at just $45 a month and you'll receive 20% off your first year just for being a best ever listener. That's R-E-N-T-E-C-direc.com forward slash best ever for 20% off.
Slocomb Reed:
Mike I'm experiencing a bit of a mental disconnect here, and maybe it's just the deals in Indianapolis are that much better than deals in Cincinnati the last few years. But when most business plans that are driven by internal rate of return as their return metric, when they're looking at a three to seven called a five year hold period, and they want to mid teens or recently higher IRR, there's almost always a value add component. There is something that new operations, a new influx of capital into the property can do to significantly increase NOI, not just revenue. It sounds like you guys acquire for a mid teens IRR without expecting that kind of value add component.
Am I hearing you correctly or do you have a more traditional value at business plan?
Michael Margarella:
I'd say the first thing we're focusing on is buying right and trying to buy at a discount as best we can. And admittedly that's something we could get better with and getting direct to seller more frequently. So I think if we're buying it at a discount right off the bat, that does help quite a bit in executing the business plan, but more specific to your question, we are generally projecting an increase in NOI and we always are looking for value add properties to increase the value of the property that we're purchasing. We're just a little more careful with it than we were a couple of years ago.
When, for example, we would assume an entire build out at a self storage facility, for example. So we're going to be really careful with where we think market rents could go. We're going to be really careful with how much we think we could drive down expenses and then we'll stress test that and we'll formulate our projected IRR based on that.
Slocomb Reed:
Between multifamily and self storage right now, which opportunities have been more appealing in 2023?
Michael Margarella:
I'd say in 2021 and 2022, there definitely seemed to be more self storage opportunities. I think there was a lot more demand in the multifamily space and it felt a bit more saturated. I'd say in 2023, we've seen at least personally a decline in available self storage opportunities. I wouldn't even say necessarily that the returns on those types of projects have decreased. It's just a matter of the volume of them. We're just not seeing as many sellers nowadays in the self-storage space. Whereas I'd say in the second half of 2023, I've noticed, and this is a bit subjective here, but I've noticed more multifamily opportunities come into market and more let's call them reasonable sellers in the multifamily space.
Slocomb Reed:
What do you think accounts for that difference?
Michael Margarella:
It's a good question. I'd say just generally speaking, the multifamily market might've been a bit congested leading up to the pandemic. And especially in 2021 and 2022, I think self storage just at a high level is a bit of a newer asset class. I think it's gotten a lot more attention in the past few years. And I think that kind of came to a head in the past couple of years. And now maybe the market's catching up a little bit, but I don't know if I have an exact answer for that.
Slocomb Reed:
Last question here before we transition the episode a bit, Mike, you mentioned that you focus on buying with as much of a discount as possible, oftentimes by going direct to seller. Are your 2023 acquisitions all direct to seller deals and what advice do you have for our bestsever listeners in getting direct to seller right now?
Michael Margarella:
Yeah, two of our deals were as far as advice for building out a direct to seller funnel. As I mentioned, admittedly, that's an area where we think we could improve, but I would just say it's like anything else, treat it like a business, whether that's bringing on virtual assistants or other team members to help you source the data, aggregate the data and do the outreach, obviously formulating a plan within a CRM to do that. And so I would say treating it like a business is an important decision to make.
Slocomb Reed:
I may have missed it due to our connection. Did you say which of your 2023 deals were direct to seller?
Michael Margarella:
Yeah. Two of our 2023 deals were direct to seller. I'd say there may have been a bit of luck to that. And as I mentioned earlier, getting direct to seller is a part of the business that we'd like to improve on because I think there's a lot of value to be had in getting direct to seller, but it is something that we want to focus on in 2024 and beyond.
Slocomb Reed:
What is your typical deal size right now?
Michael Margarella:
On the self storage side, we're generally looking for facilities that are 30,000 net rentable square feet plus. And on the multifamily side, we're generally looking for somewhere between 30 and 60 units.
Slocomb Reed:
Transitioning the episode to give a little more direct advice to our listeners. Mike, you already referenced getting direct to seller as an opportunity to find discounted deals by being able to buy at a discount definitely helps with your IRR if you're not relying on a value add business plan. What other advice do you have for our listeners with regards to finding and executing on deals in this space right now?
Michael Margarella:
Direct to seller is just one method, of course. So we also focus quite a bit on broker relationships and we'll spend a lot of time keeping in touch with brokers via email phone, getting in the market personally, grabbing coffee or a meal with them.
So I think that's very important and being on those quote unquote short lists of brokers so that you come to the top of mind when an opportunity that fits your buy box crosses their plate. That's something I think that's important and just trying to fill that funnel as much as you can with different avenues to get deals because supply as we've talked about has been a challenge in 2023. So if you can widen that net, I think that's really important.
Slocomb Reed:
Any advice specific to getting into investing in the Midwest?
Michael Margarella:
Yeah, sure. I'd say first and foremost, just getting in the ears of some brokers. You could even look at deals that are on market right now and look at who's brokering those transactions and just give those brokers a call, introduce yourself, let them know what your portfolio looks like and what your buy box is and what your goals are. And of course, as we all know, it's unlikely that after one phone call or two, the broker is going to send you a deal. But, it gives you a baseline there to build a relationship with them and maybe follow up quarterly. Try to meet them for a coffee or like I said, a meal, if you could get into town and just show them that you're serious. You're willing to devote some time to building a relationship. And basically that you'll close the deals that we've gotten direct from brokers. I'd say it's because they either know that we've transacted in the market before and have closed or they know about us from another broker contact.
So I think as much as you could do to get on the top of those lists of brokers, the better your acquisitions and that is going to look. Get into the Midwestern markets by focusing on broker relationships.
Slocomb Reed:
That makes a lot of sense. Mike, are you ready for the best of a lightning round? What is the best ever book that you recently read?
Michael Margarella:
I'll go Self Storage here, the Investor's Guide to Growing Wealth in Self Storage. It was written by A.J. Osborne.
Slocomb Reed:
Nice. He's a friend of the show. I've interviewed him at least once. What is your best ever way to give back?
Michael Margarella:
Our goal, especially in multifamilies, to provide safe quality housing for families. So that's one way that we look to give back and then some personal charitable contributions, of course.
Slocomb Reed:
Mike, on the deals that you have acquired, what is the biggest mistake you've made and the best ever lesson that resulted from it?
Michael Margarella:
Buying a deal based on pro forma, as I mentioned earlier, assuming for self storage, to use an example, that you're going to be able to build a whole other building on a deal that really, it wasn't a development deal, right? This was an existing self-storage facility, and we were able to make the numbers work only by adding this building. So even assuming the rent increases and the NOI growth that we get from the existing buildings, we weren't able to get to a deal that penciled without that additional structure. So fortunately we were able to get that to the finish line. But like I said, it was met with a lot of challenges, delays, increased costs. So that is definitely something we've learned and we've adjusted accordingly moving forward.
Slocomb Reed:
And what is your best ever advice?
Michael Margarella:
I'd say lean into the uncomfortable. We launched our first fund in 2023 and came with a lot of thought between my partner and myself. And we weren't quite sure that the fund was the direction that we wanted to go. I woke up and I was just a bit uneasy about the thought of it and that's the moment We knew it was time to launch the fund and we did so I'd say just lean into the uncomfortable because progress is usually on The other side of that.
Slocomb Reed:
Last question. Where can people get in touch with you?
Michael Margarella:
Yeah, you can visit my website Nextplayinvestments.com and you can feel free to shoot me an email or schedule a call with me there.
Slocomb Reed:
That link is in the show notes. Mike, 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.
Michael Margarella:
Thanks so much. I appreciate it.
Narrator:
Hi Best Ever listeners, Joe Fairless here again. And one last thing before you go, would you like to receive a short weekly email with proven tips from experienced investors, free tools and resources, and a roundup of the week's most relevant news and Best Ever content? Well, if so, join the community of nearly 15,000 commercial real estate passive and active investors who receive the Best Ever newsletter. Just go to bestevercre.com forward slash access and you'll get the very next one. I hope you enjoyed this episode, and as always, thank you for listening, and have a best ever day.
