July 18, 2023

JF3239: Arn Cenedella — The Value of Market Cycle Experience, How to Transition Your Investing Strategy as You Age, and Why Investing Requires Realistic Expectations





Arn Cenedella is the founder of Spark Investment Group, which helps people leverage passive real estate investments to grow their wealth, simplify their portfolios, and create the lives they’ve always wanted to live. In this episode, Arn reflects on his 40+ years of real estate investing experience to share what he’s learned from going through several market cycles. He also discusses what to focus on as a young investor and how that should change as you age.

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Arn Cenedella | Real Estate Background

  • Founder of Spark Investment Group
  • Portfolio:
    • GP on 1100 units totaling $140 million in AUM
  • Based in: Greenville, SC
  • Say hi to him at: 
  • Best Ever Book: Golf in the Kingdom by Michael Murphy
  • Greatest Lesson: Invest in real estate over a 10- to 15-year period, and you will be much farther ahead than you are today.

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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 today with Arn Cenedella. Arn is based in Greenville, South Carolina; his company is Spark Investment Group. He has been a real estate broker and investor since 1978, transitioning from single family rentals to multifamily along the way. His current portfolio - he is a general partner on 1100 units totaling 140 million in assets under management. He's also a partner in several smaller JV deals and owns some real estate individually. Arn, can you tell us a little bit more about your background and your current focus?

Arn Cendella: Yes. Hi, Slocomb. Happy to be here. Thanks for the opportunity. So after I got out of grad school from the University of Michigan, with a degree in chemistry, I got into real estate, and went to work for my dad and his residential brokerage business in Menlo Park, California, which is basically Silicon Valley. Had the good fortune to sell property in one of the best markets in the world. Did that for 35 years, developed a single family rental portfolio. Then about nine years ago I moved to Greenville, South Carolina, kind of a life transition, and started to move my single family portfolio into multifamily investments.

Slocomb Reed: Where was your single family portfolio primarily?

Arn Cendella: In the Bay Area and in the Austin, Texas suburbs.

Slocomb Reed: Gotcha. And then where's your multifamily portfolio now?

Arn Cendella: We're primarily focused in my hometown, Greenville, South Carolina, but we have assets in North Carolina, but most of them are local to me in Greenville, South Carolina.

Slocomb Reed: You called it a lifestyle change... I do want to ask, especially how it relates to your investing transition, why is it that you made such a dramatic shift nine years ago? ...in where you live, but also in the areas where you were investing in, the investment vehicle.

Arn Cendella: It's a great question. So to be perfectly transparent, my life partner and I are Bay Area born and bred, I had a big Silicon Valley Career... So we had spent most of our lives in San Francisco, Bay Area and Silicon Valley, and I think we were just at a point in our lives where we wanted something a little less hectic, a little more affordable, a little bit more relaxed lifestyle... So a lot of the move was more about personal aspects of our life, quality of our life, than a real estate related move. But when I got here and saw what was going on in Greenville with tremendous growth, it became apparent to me it was a good place to invest in real estate, so I started investing here, still in single family, two to four units, and then later moved to multifamily.

Slocomb Reed: What prompted the asset class transition, scaling into larger multifamily?

Arn Cendella: Good question. So one of the things I've done - I think many investors do that - you keep a spreadsheet of all your various properties you own, and current market value, loan, equity, gross rent, expenses, net income... So in looking at that, while the single family and small income portfolio did great in terms of capital growth and appreciation, the truth is I was maybe getting about 3% a year return on my equity, because the value of these properties had appreciated. I'm now 68, so I think for me, my personal needs move more from equity growth, capital accumulation to cash flow. So that was one reason for the move.

And then the other thing I think with multifamily there's more a team aspect to it. So there's certain activities I really enjoy doing in real estate investing, and then others that maybe I'm not as good at. So by transitioning to multifamily, I was able to partner with people who were strong in areas that I was weak, and able to focus on the areas that I was particularly good at, and that I most enjoyed. So I think it was the two aspects - greater cash flow, and kind of a team aspect, getting more support as part of a team.

Slocomb Reed: Arn, I'd like to skip ahead a bit in this conversation and trade places. I'm going to sit in your seat, and give the audience the advice that I think I hear you about to give... And then I want you to correct me where I'm wrong and tell me if I'm right on the money. Unlike the vast majority of real estate investors, especially, acutely, those who listen to and are interviewed on podcasts, you have a breadth or a length of real estate investing experience going back to the '70s, that the vast majority of people don't have. That also means that you've invested in real estate as a spring chicken, a summer chicken and a fall chicken. The reason I'm saying it that way is because it sounds like I'm about to hear from you the advice that when a real estate investor is young, they really should focus on equity, especially when they are early in their careers, they are high energy, they have high income earning potential, they should invest for long-term growth instead of immediate cash flow while they have good income... And then when they arrive at a point in their lives when they need to transition, and they want to be generating more income passively, spending less of their time generating income, they should transition those investments from equity investments into cash flow investments to better support the new lifestyle they find themselves wanting, when they are fall chickens. Where am I on base and off base with this advice here?

Arn Cendella: Slocomb, you're a mind reader, and you're 100% correct. And I love to hear that coming from you, because many in the multifamily space repeat "Cash flow is king, cash flow is king." And I'm one of these people that always pushes back against that, for exactly the reasons you talked about. Look, at the end of the day, the person with the biggest nest day egg can generate the most cash flow. And as you rightly pointed out, during your peak earning years, theoretically, your W-2 income should be enough to support your lifestyle. So you really don't need current cash flow now. What you're really looking to do is build that nest egg for the future.

So I would say you were spot on. And what I'd also say - at 68, I still figure I've got another 20-30 years to go, so I'm not playing pass defense, if that makes sense. I still want equity growth, but the scales have just tipped a little bit, if that makes sense to you. That's kind of where I'm at.

Slocomb Reed: Arn, that makes a lot of sense. Now I'd like to defend the people who say that cash flow is king. I will say I have modeled a lot of my investing on what you're saying here. I recently have been calling one of my properties, a 24 unit that I own joint venture 50/50 with another partner - I've been calling it a forced savings account, because we chose in 2021 to put it on a 15-year fixed rate mortgage, and let it get paid down, because of what that would be doing for our finances 15 years from now. Saying that, and a particular to that property, I will still argue that cash flow is king. And the reason why I would say that is because nothing plays defense like cash flow. When you hit volatility in the market cycle or volatility in the MSA, or the neighborhood that your property is in, it is cashflow that rides out those storms, and leads to the longevity of your asset more than anything else. Not speaking about using your cash flow to improve your vacations necessarily, but to improve the capacity of your asset to continue producing over the long-term through market volatility. Would you agree with that?

Arn Cendella: Again, 100%. So I'm an old school guy, okay? My father who was born in 1921, lived through the Depression, the real Depression, taught me the real estate business... And for him, it was long-term fixed rate debt, lower leverage, and ample cash reserves. So I totally agree that cash flow is important to protect against volatility. The way I describe it is I go in and buy an asset where it will pay for itself, even during difficult times. And you do that partially by having good cash reserves, but you also set that up by not over-leveraging the property. Because in my experience, what I've seen in real estate is you're going to have 5, 6, 7 years pretty good growth and expansion, you might have a year or two of turbulence, maybe a year or two of flat, and that just sets the new plateau for the next run up.

So the key for long-term real estate investing is to set yourself up where that year or two of turbulence doesn't upset the applecart. So I think we're saying the same thing, that cashflow provides for the continued security of your investment that will allow you to ride through difficult times. So I think that's right.

Slocomb Reed: Arn, you've seen quite a few real estate market cycles as an investor. I'm not going to ask you for predictions. That said, we're smack in the middle of 2023 as we record; how is that informing the way that you are investing now, in 2023, where you perceive us to be in the current market cycle?

Arn Cendella: Great question. What I would say is going through various market cycles, you understand a little rain must fall. That Murphy's law is going to strike. So my perspective has always been long-term, and the kind of deals I do, I don't flip apartment buildings every two or three years; that's not my style. I don't get floating rate bridge debt, though I understand there's a place for it, and if you're an experienced operator, you can use it properly.

So seeing the downtimes -- I paid 11.75% percent for my first home mortgage, so I'm not going to freak that it's 6%. And I understand 4%, or 3% is not normal. So I don't base my business plan on historic low debt. So I would say going through a few cycles, you understand there are going to be some difficult days, and you can't get too aggressive.

I guess the other way I often describe it is I never swing for the fences, I don't swing for the Grand Slam. I aim to hit [unintelligible 00:13:46.12] drive base hits. And in my mind, if I can buy good properties, good locations, go into properly capitalized, I'm going to win, even if I don't hit a grand slam. So I think what I'm saying also is I'm willing to give up some of the upside to limit some of the downside. And I think the cycle we're going through now, it's going to require a return to fundamentals where when values are going up 20% a year, you don't have to pay attention at fundamentals or operational ability, because the market is going crazy. And I think what we've seen in the last 12 months, the fundamentals do matter, the operational skill matters... So [unintelligible 00:14:41.27] base hits. I don't swing for the fences.

Slocomb Reed: Arn, speaking to my real estate experience more than my age - I am of a generation of real estate investor that started after the Great Financial Crisis, after '06, '08, '10. Some I'm calling from that perspective when I say this, but frankly, so are the vast majority of our listeners and the vast majority of people who are engaged in real estate investing. Everything you're saying sounds great. But in 2023 it's just harder to find good deals than it ever has been before, regardless of the size... Whether it was the single family homes that you used to invest in, or the small multifamily, or as you scale up into larger multifamily... Finding those opportunities to get a solid base hit where you can go in not worrying about being over levered, keeping sufficient reserves, and still generating cash flow and having a decent return. For my generation of investor, having been doing this for 10, 12 years or fewer, it's harder now than it has been before. What's your take on that?

Arn Cendella: I think that's exactly right. The last closing I did was September 2022. So I haven't bought anything since September 2022, based on the factors you talked about - increasingly difficult to find a good deal, and so on and so forth. So I think that's very true. And yes, I think somebody who, let's say, came of age after the Financial Crisis has until the last 12 months only experienced an upward market. So I think the way I would approach it, and the way I'm approaching it for my own and for my Spark Investments is if I can find property that I think has good long-term potential, and I can make it work given current debt, and that there's some qualitative aspect to the property... So there's the quantitative, there's the numbers, but I also pay attention to the qualitative aspect of a location or of a building. If all those factors check up, I'm still willing to pull the trigger and buy, even though I know values could be a little bit less than six months. But again, I think it takes a longer-term perspective.

I think the other thing I would say for investors is over the last 10 years, 18%, 19%, 22%, 30% IRRs were commonplace. I think one's expectations on investment returns should be somewhat tempered given the current environment. So in my mind, if you're looking at a deal that maybe safely can produce a 14% or 15% IRR, even though it's going to be less than it was five years ago, if you can make 14%, 15% on your money, I think that's still a good solid investment. And if things turn around, which I believe they ultimately will, those numbers could be better. But going in, I think the expectations have to be reduced a little bit.

Break: [00:18:10.15]

Slocomb Reed: What I'm hearing you say is reduce expectations from artificially manufactured market conditions that gave us the crazy low interest rates, and the way longer than average bull run in the market cycle. And keep buying. I'm not hearing you say, "Wait." I'm not hearing you say "We're in a small dip of a market cycle, and then we'll have a plateau and then you should start buying as the market goes up." Is that your advice, just check your expectations and keep investing? You just said you haven't bought anything in roughly nine months from the time that we're recording. Are you waiting for something?

Arn Cendella: No, I have some things in contract, but I'm being more selective. Because if a deal doesn't make sense, it doesn't make sense. You can't buy a five cap and pay 7% debt. It's just not gonna work. And we all know that there's this delta between seller expectation and buyer reality... So I would say it's "Be selective, keep looking."

I think the other thing I would say is in my experience you only know the bottom of the market six months after it's happened. So I don't believe one can time the market. I was just at the MFIN Conference two weeks ago in Charlotte, and most of the experts said they think the best buying opportunity is going to be 6 to 12 months from now. That could be right, it could not be. What I would say is once the market shifts, it's going to shift quickly. So I've never been a market timer. I just keep buying; you might say it's kind of dollar cost averaging. That being said, I'm a little more conservative, because there are things to be concerned about. And I think the other thing is your projections about rent increases have to be a little bit lower than they may have been a couple of years ago. So a little bit of cautious, but still look, and if I find something I like, I'm going to buy it.

Slocomb Reed: Arn, one of the biggest struggles you've faced in transitioning your real estate investing from largely single family to larger multifamily?

Arn Cendella: Yeah, another great question. So one of my biggest frustrations is the time it takes to get a deal agreed to. So I come from the single family brokerage world; you write an offer on a house on a Tuesday night, it gets presented to the seller Wednesday, Wednesday night they make encounter, you haggle back a little bit back and forth, and you either get to contract or not in a matter of 24 to 48 hours. Where with multifamily, it's more of one to two weeks of negotiating. You start with the LOI, and of course, you've got rounds of offers, and best and final, and then further negotiation.... Then you can get the call, you've got the deal, there's the haggling over the PSA, that takes two weeks... So I would say that's been my biggest frustration, coming from the residential world, where things happen more quickly, to the multifamily, where it takes longer to come to agreement and know you're moving forward.

Slocomb Reed: Another piece of that same transition, Arn, that I'm in the throes of experiencing personally, is the level of professionalism of the people that you buy from and sell to. I believe that there are more opportunities to purchase distressed assets at steep discounts when you focus on smaller properties when you get to the mom and pops and things like that. And part of it is because of how fast and smooth the process can be. I guess I had two multifamily acquisitions in 2022; they were both direct to seller. In both cases, we effectively finalized our terms over the phone, the seller and me, and when we met in person to sign the seven-page purchase contract, one of those I signed in the seller's car with him. That was primarily formality and making sure that we were on the same page about finer details, and not the bigger picture of the transaction.

Arn, I say all of that because one of the opportunities that I still see in smaller properties is the opportunity to buy at a steeper discount. Put it another way, the opportunity to force greater appreciation faster - in part because the properties are smaller, but also because they can be bought at steeper discounts - is that also something that you're experiencing through your transition?

Arn Cendella: Yes. And again, I'm kind of a contrarian, and I know in the multifamily space people say "Go big, 100 units plus", yada, yada, yada. And while there is rationale behind that, my partner and I are vertically integrated, and we actually like the sub-100-unit market. We like the smaller assets. And yes, I think it's less competitive.

And what I would say is, my investing is kind of focused in one market, Greenville, South Carolina. So it's not like I'm buying 12 units in Atlanta, 12 units in Winston Salem, which would be difficult to manage if they're spread out all over. Here I've got a bunch of assets already, I've got my team in place... So if I buy another 12 units a mile down the road, it's easy to absorb that in the team. So I very much like to buy smaller units, because my team's here.

The other thing I would say is I know this market, because we own assets in this market. I don't have to go to CoStar to get rents, I know the market. And I'll give you an example. I'm in contract on seven units here in Greenville, South Carolina. Second generation owner; they kind of have old school, single family property managers, and I know the rents are probably $300 a month below market without even having to do anything. So I'm right in the middle of closing on a deal, smaller property, long-term owner, and I think I'm making a fairly decent buy. It's not as competitive, they're not as sophisticated, so I think your point is accurate.

Slocomb Reed: Before we transition the show, Arn, do you have any other advice specific to choosing an asset class and asset size, or the time in your life when it is time to transition?

Arn Cendella: No, I just know what kind of works for me. I've been in residential real estate my whole life... So I'm not going to go to office, or retail, or mobile home. So for me, I'm willing to stick in the residential space that I know. To others who are earlier in their career, I think a lot of it is just personal preference. What kind of property do you like working with, what kind of tenants, what kind of property managers? And I think the size also.

So I think finding your niche is very much a personal choice. So I don't know that I really have any particular advice. I know people who love mobile home parks, and they do very well with them. It's just not for me. So I think you try to find what makes sense for you... And I guess the other thing would be it could be partially also what market are you in? Because I think different asset classes could do better in different markets. So I think it's very geographic specific, and also just personally, what you want to do.

Slocomb Reed: That makes a lot of sense. Are you ready for the rest of our lightning round?

Arn Cendella: Sure.

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

Arn Cendella: So two of my passions are golf and spiritual development. So the Best Ever book that I've just recently finished was "Golf in the kingdom", which kind of talks about golf and how it can be spiritual, and how when you're open and present in the moment, good things happen. I think it has business applications. So "Golf in the kingdom" is the last book I read that I really liked.

Slocomb Reed: Who is the author?

Arn Cendella: Michael Murphy. And he established [unintelligible 00:29:33.16] which is kind of a spiritual retreat on the California coast, in a town called Big Spur. So it's pretty interesting. I played golf all my life, so it's a big part of my life.

Slocomb Reed: Nice.

Arn Cendella: Yeah.

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

Arn Cendella: Well, a couple of ways. So I'm a member of an organization called Score, which helps - let's call them wannabe be entrepreneurs, wannabe business people, business owners get started running their own business. So it's a group of often retired former business owners that help people start their own business, and move on that track towards the American dream.

I think the other way is I love meeting with local investors who are often younger than me; I try to find joint venture opportunities for them to help get them into the real estate space. So I take a lot of pleasure in helping them get into real estate. It's created a great life for me, so I'm happy to help others do the same.

Slocomb Reed: Arn, thinking specifically about the properties you have owned... What is the biggest mistake you've made the best ever lesson that resulted from it?

Arn Cendella: That's a good question. I once bought a brand new condominium that was being built on the Big Island of Hawaii. I lived in the San Francisco, Bay Area. This was back about 2004-2005, when the streets were paved with gold, and the real estate market was going crazy... And then when '08-'09 hit, my income dropped significantly and what was easily affordable to me in 2005 no longer was. So that was a case where I didn't look at the downside, got kind of caught up in the current market, and I ended up having to sell that property at a loss. It didn't kill me, but it's certainly a lesson learned.

Slocomb Reed: On that note, what is your Best Ever advice?

Arn Cendella: My Best Ever advice is start investing in real estate. Aim for line [unintelligible 00:31:58.20] base hits, do it over a 10-15 year period, and I'm fairly certain you're going to be much further ahead 15 years from now than if you didn't start today.

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

Arn Cendella: I'm active on Facebook and LinkedIn under Arn Cendella, or Spark Investment Group. So that's probably the best place. Website is investwithspark.com.

Slocomb Reed: Those links are in the show notes. Arn, 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.

Arn Cendella: Thank you, Slocomb.

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