Banner of Veena Jetti, Special Guest on Financial Residency Podcast

This Is the Ultimate Guide to Multifamily Investing

Banner of Veena Jetti, Special Guest on Financial Residency Podcast

It’s no secret that delving into the multifamily investment space will place your investor bucks in the right places. The secret, however, is understanding the ins and the outs of starting on this path, including the risks involved, effectively vetting the market, and pursuing successful financial structures. This is where this content, self-dubbed The Ultimate Guide to Multifamily Investing, comes in. It will provide you with awesome advice sure to help you begin this journey with the mystery-aura lifted.

Veena Jetti and Sapan Talati, Founders and Partners of Enzo Multifamily, joined me to provide our audience with high-quality information on cap rates, CapEx, and IRRs. Along with those crazy sounding acros (acronyms), Veena and Sapan spill their very best tactics for investing in multifamily properties. They share their process workflow in detail and provide listeners with sure-fire knowledge intended to answer some of the industry’s most asked questions.

If you’re looking to invest in multifamily properties, I urge you to gain as much knowledge as you can from as many sources as you can. Beginning with this episode isn’t such a bad idea either.

You don’t want to miss this. Just hit play!

Your Ultimate Guide to Multifamily Investing

Contents

As unfolded on the Enzo Multifamily website, the firm was founded in 2015 by Veena Jetti and Sapan Talati to ultimately provide opportunities for others to gain financial independence through real estate. “After spending years in the corporate world and living the daily work grind, Sapan and Veena realized their true passions embodied the spirit of entrepreneurship. Since its launch, they quickly grew the company to 1,000+ units and $100M+ in assets and Enzo Multifamily is just getting started.”

Get an exclusive look at a sample deal provided by Veena and Sapan by joining the Financial Residency Facebook Community.

What You Will Learn:

  • Multifamily is a conglomerate of housing that is not individually owned.
  • A syndication is where a group of investors get together to build enough equity to make a deal on a property.
  • Multifamily properties have high occupancy rates even when tenants move out, so cash flow remains strong.
  • Investments in multifamily properties are a relatively low-risk asset vehicle.
  • You have to control the risk you have control over and mitigate the rest.
  • Know your market and know your asset class—or else, it’s a kiss of death.
  • In multifamily, you can almost control income and what a property is worth.
  • Asset classes C and D follow a delineation of metrics.
  • Asset classes can depend on whether it’s a new development or repositioning of an existing asset.
  • The pros and the cons of a deal depend on property financials.
  • Agency debt is more dependent on the actual financials of the property vs. the financials of the people buying the property.
  • Financing for single-family homes differs from multifamily properties.
  • There’s a lot of options that go into that when not on the agency debt.
  • What is CapEx and how do you estimate it?
  • An IRR is a statute of a rate at which a project would break even.

Don’t Forget to Add to Your Toolbox, Get Involved and Help. Here’s how:

If you enjoyed this episode, I’m sure you would enjoy reading this: 4 Common Mistakes Physicians Make When Purchasing Their First Home

Join the Financial Residency Community: Don’t forget to join the Financial Residency Facebook Community for exclusive access to taking the Wealth Potential, Investor Composure and Financial Planning assessments.

Help the Financial Residency podcast reach new listeners on iTunes by leaving a rating and review! It takes just 30 seconds. I really appreciate it, thanks!

Full Transcript: This Is the Ultimate Guide to Multifamily Investing

Ryan

Veena, Sapan, it’s so great to have you guys on the show. Thank you so much for being here.

Veena

Absolutely. Thanks for having us.

Sapan

Thanks for having us, Ryan.

Ryan

Of course. So, let’s just jump right into it and talk about multi-family investing. So, what is multi-family investing?

Image of a multifamily housing dwelling

Multifamily is a conglomerate of housing that is not individually owned.

Veena

Yes, that’s like that million-dollar question. I was talking to a friend last night who’s on my Facebook and he was like “I keep seeing you say multifamily. Do you mean that multiple families get together and buy a piece of real-estate?” So, I was like okay, that’s great feedback; we should clarify. So, when we say multifamily investing, we mean apartment complexes. So, you’ll see high-rises in Manhattan all the way to two-story buildings in the Dallas area. So, multifamily is just a conglomerate of housing that is not individually owned, like a condo would be.

Veena

So, we invest in multi-family. We like it as an asset class and it’s a little bit different than single-family investing, because you have, instead of buying one house or a portfolio of ten houses, you’re buying one hundred and fifty units with one roof or two roofs. They’re all sharing common areas.

Ryan

Yeah, it makes total sense. So, for someone who doesn’t really kind of speak the language and is in the details

here, they’re thinking okay Veena, an apartment complex is huge (one hundred and fifty units), that’s going to cost millions of dollars. How the heck would I be able to start investing in real-estate or why would I start investing in real-estate if it’s going to cost millions of dollars to get into?

Veena

I mean, it’s just pocket change. No, I’m kidding.

Ryan

I need to hang out with you.

A syndication is where a group of investors get together to build enough equity to make a deal on a property.

Veena

Yeah, I wish. I wish it was pocket change. So, what we really do and what a lot of people do to get involved, the way we got started in real-estate investing on the multi-family side, was through what’s called a syndication. So, a syndication is actually a lot like what I had said before, where groups of investors get together. They say “Okay, we’re going to buy 123 Main Street and it’s one hundred and fifty doors and then we’re going to split the profits of it and we’re going to operate it together. And so, essentially a syndication is bringing groups of individual investors together that maybe can only invest a smaller amount instead of ten million dollars, but you bring together enough of them eventually you have enough equity to be able to take down that deal.

Ryan

That makes sense. So, if we’re looking at just multi-family as an asset class, right, in a sub-class within real-estate then why do you guys prefer multi-family over something like single-family or retail or office or industrial. Why multi-family?

Sapan

I like multi-family, generally, just from seeing from a risk adjuster return perspective that just touching upon what Veena had mentioned, I’ll use a simple example. Let’s say I have a duplex, which is just two units. If a tenant moves out, now I’ve got a fifty percent vacancy rate, whereas the multi-family, let’s say I’ve got one hundred units, let’s say a tenant leaves, I still have ninety-nine percent occupancy. So, I still get that strong cash flow. There’s significantly less risk associated with that, just in general. Also, if you look at it from a historical standpoint, let’s compare to let’s say the Stock Market or the bonds because we haven’t talked about that. A lot of our demographic, as far as our targeted investors and folks who are with us, are high-net worth individuals, they’re credit investors, and they have large amounts of capital and disposable cash to achieve diversification.

Sapan

So, looking at it historically, you can make that argument, say cash under a mattress has risk. It’s got currency devaluation risk, inflation risk, liability of the U.S. dollar; but it shown that you have three to four times less risk than the Stock Market, if we’re specifically speaking to just risk, and it’s got the best sharp ratio. So, let’s say, who’s investing in multi-family outside of just us; you’ve got triple-A-rated life insurance companies, which are some of the most conservative investors in the world. They’re holding significant amounts of debt, waiting to lend to folks like ourselves. They’ve also got equity into this. You’ve got commercial lenders who finance non-recourse debt…that large LTV, which is loan to value. These LTV’s are anywhere from sixty-five to eighty percent and being non-recourse, they’re essentially saying that the owners and managers, with the exception of carve-outs are not liable for the loan.

Investments in multifamily properties are a relatively low-risk asset vehicle.

Sapan

Most folks can’t even walk into a bank and get a five-hundred-thousand-dollar loan without having some type of collateral, let alone a hundred thousand. We’re talking about fifteen, sixteen, twenty-million dollar loans and so by looking at this, a lot of these lenders and insurance companies and so on, they view this from a similar lens, that it’s a relatively low-risk asset vehicle. We also like it, because it offers tax shelter, it offers inflation protection, it offers cash flow; and it’s asset-backed investment that’s not necessarily denominated in paper currency.

Ryan

Yeah. I mean, there’s a lot of benefits. Right? We go into all of these, but as we’re looking at because we’d be here for four hours. Right?

Veena

Right. A long time.

Ryan

But as you see, there’s a lot of benefits and some of them might have been a little too high-level to kind of talk on, but there are still some downsides and some risks. There’s volatility, there’s default, you know, there’s all sort of things. So, Sapan, would you mind actually talking about just some of the risks associated with being an investor or working in the multi-family space?

You have to control the risk you have control over and mitigate the rest.

Sapan

Yeah. Like anything, Ryan, there’s risk. We like to, when we look at something, we look at we have to control the risk we can control. You mentioned there’s volatility and market risk. Those are risks that we can’t control, but we try to mitigate as much of that as we can; and actually, we do a fairly good job of that. We’ll be in

geographies that we foresee a strong cash flow, whether you’re in a recessionary marker expansion, we look for something where as the business economics shift, are we able to still stay in the deal? Are going to ride it through the recession? Are we going to look at an exit during the next expansion? Are we looking to do a yield play versus a value-add. We can talk all day about the value-add and how that’s becoming a lot tougher to find.

Sapan

So, what works and shifting strategies around that. But, if you look at it even in the recent run of CNBS, those loans, they had a default rate of about 2.08 percent since January, I think the latest numbers were in January, which is like near twenty-year lows. Freddie/Fannie, which we call agency debt is less than one percent, still also near twenty-year lows. But these are lagging indicators, they’re not leading indicators. That can change tomorrow. The point I’m trying to address, is that the risk itself is really low in today’s environment. That doesn’t mean that tomorrow, if we buy something, that we’re buying it because there’s very low risk. Capex, which I think we’ll talk about a little bit later today, that’s the capital permits you’re putting into the property. Well, if you’re budget is under-capitalized, you’re not actually achieving the full potential of property. That in itself, can increase risk. So, there’s a lot of ways of mitigating and managing risk, but you’re never at absolute zero on the risk.

Know your market and know your asset class—or else, it’s a kiss of death.

Veena

I think, sorry to interject real quick, but I think that really all of it can be boiled down to the biggest risk that you have in multi-family is not knowing your market and not knowing your asset class. So, for example, we would never go into a Class C or Class D property and put engineered hardwood in the floors there because ROI is just simply not there. Similarly, we would know the market area, for example, we’ve turned down a property recently where the one-mile radius of medium incomes was around forty thousand and we were trying to push rents up into the almost two thousand-dollar-per-month range; and you just can’t support that, because you’ll find nobody that qualifies on your rental application. So, things like that…knowing your market, I think, is so important. Knowing what other assets in the same area are doing is also really important. You know, it takes a lot of time and diligence to get those factors, but Sapan wouldn’t you agree that is kind of the big one that can be what makes or breaks the deal?

Sapan

Absolutely. We’ve gotten into investments on some deals that we really liked the numbers, but, again, it’s just such a highly-coveted market. We didn’t want to pay premium in certain markets, because certain markets we’re okay with paying maybe a five percent premium, because we see the demographics and we seen that core investment potential of what we can do with it. At the same time, I completely agree with you on that, Veena with the geography.

In multifamily, you can almost control income and what a property is worth.

Ryan

Well, and as you’re talking, a couple of things…so, a couple of things. One is, if you’re willing to pay a five percent premium, you’re obviously looking at and going, you know because in multifamily you can almost control the income and what a property is worth. And, we’ll talk about capering a little bit, but if you improve the property, improve rents, decrease expenses, all of a sudden, that building is worth, or the whole building, is worth a whole lot more than when you had purchased it, even if you’re paying a little bit extra. But real-estate, you guys can obviously speak on it as you make your money when you buy, not when you sell. So, you have to make sure you buy the correct deal and everything like that.

Sapan

Yeah. And we may want to clarify that five percent premium would be on our numbers, not necessarily the seller’s numbers, because we’re forecasting out five, seven years in our model. We can say comfortably, if it was two, three years ago, we’d be okay with paying say five or ten percent premium in the right market or submarket to the seller for the list price; whereas in today’s we want to be careful because we’re seeing a softening of the market that we are pricing that into what we’re looking at in our underwriting. We are pricing vacancy where we’re looking at or anticipating an increase in vacancy, where we’re looking at possibly the flattening if not a drop in rent in certain submarkets or we’re taking those factors into account when we’re doing our underwriting as well.

Asset class C and D follow a delineation of metrics.

Ryan

Yeah. We’ll get into some of the terminology, but Veena, C and D properties; could you just let people know what you mean by that.

Veena

Yeah. So, when we look at assets, there’s like four major categories that we subcategorize them into. So, the first one is an A, B, C and the fourth, surprise, is the D. It’s pretty easy to follow delineation, but it’s a little bit more subjective to kind of what your metrics are, but you will essentially categorize a property based on location and the actual asset. So, for example, if you have a 2017 build with pools, gyms and dog parks in the middle of nowhere (I can’t think of a middle-of-nowhere market that I want to single out right at this moment) market where there’s no job growth, there is a population of fifty thousand people or less, but there’s two hundred units in there, that’s an A property according to the asset type, but not according to the location.

Veena

Now, if you have that same property in Time Square, then you have an A asset and an A location. A “B” asset is going to be a little bit more of a, like it’s going to be your working demographic. It’s going to be people that maybe have two incomes, maybe one or two small kids, both parents are working, they’re saving up for a house and this might be the last or almost last stop on their way out to buying a house. Then you have your C assets, which are a little bit on the, they tend to have a higher return than the A or B assets because they’re a little bit on the riskier side. You might find a little bit more in terms of some higher crime rates. You might have a demographic where only one parent is working and they have kids or it might be a single mom. So, it really is driven by the amenities the property offers along with the area.

Image of a multifamily housing dwelling.

Asset classes can depend on whether it’s a new development or repositioning of the existing asset.

Veena

So, you might have a C asset in an A location, which is a recent project we actually wanted to pursue. We ended up going best and final on it and that was a C asset because it was a 1970s build and needed tons of work on the roofing. They had roof leaks, but it was in an A location. It was in an area where developers are coming in, they’re over paying for the asset just to get the land. So, they’re taking the land, scraping everything and building a brand new dense housing. So, those assets are, you know, we consider them C assets, but we know in an A location, we can push them up to a B or possibly an A, depending on whether it’s new development or repositioning of the existing asset. Does that make sense?

Ryan

Yeah. That’s a value-add that you’re bringing in and looking at it.

Veena

Yep

The pros and the cons on a deal depends on property financials.

Ryan

Yeah, makes total sense. So, let’s kind of recap here. So, we’ve chatted on what it is, what you’re looking at, why it’s good, why it’s bad, the pros and cons of this; and so, let’s say you guys raise some money from some investors, you found a deal; how do you fund a deal now? Let’s kind of give the listeners the other side of the story. How do you fund the deal once you find…

Veena

On the debt side?

Ryan

Yeah.

Veena

Sapan, do you want me to talk about that, or do you want to talk about it?

Sapan

No, go for it, please.

Veena

Okay. So, the way we fund the deal and, it’s so frustrating because this is literally always the answer with almost anything is it depends. You know, it’s not like going in and buying a single-family home and you’ll hear me compare a lot to single-family homes, just because most people are used to the concept of how single-family home works. Right?

Ryan

Uh huh.

Veena

You go, you make an offer, they maybe counter, you go back and forth, and eventually you agree on a price. You open escrow, you pay your down payment, you get your bank financing in order, they put a mortgage on the house, and you close, and everybody hopefully walks away with a win. Right?

Ryan

Uh huh.

Picture that shows a chart with cash and flow.

Agency debt is more dependent on the actual financials of the property versus the financials of the people buying the property.

Veena

Right? So, this operates in a completely different lifecycle than what a single-family home does. Once we have a deal under contract, we, actually, right before we get under contract, we start the process of financing. So, we have preferred lenders that we work with and we work with different lenders, depending on the market that we’re in. So, for example, on multi-family, the agency debt is more dependent on the actual financials of the property versus the financials of the people buying the property. Right? So, when I bought my house to live in, the bank asked me for my personal financial statement, all my accounts, like, my firstborn child, they asked me for everything. Right?

Ryan

Uh huh.

Veena

So then, when we go into a multi-family asset, they don’t care about what my personal accounts are. They don’t care about my credit score. They don’t care about all that. What they care about is what are the financials of the property and can the property operate in such a way that it can make money. So, it’s really like they’re looking at it more as a business than a piece of real-estate. Right? What’s the business plan here? Why do you think you can sell it? What’s your experience to be able to operate this? So, our resume matters way more than our financials as individuals. So, with that being said, one of the things that agency debt, so, Fannie and Freddie loans, a multi-family requires is that there is what’s called the ninety-ninety rule. Right? So, that’s ninety percent plus occupancy for ninety days or longer. So, they’ll look at the historicals on what’s called the T12, which is the last twelve months of the operating income and expenses.

Financing for single-family homes differs from multifamily properties.

Veena

So, they’ll look at that and if it meets the ninety-ninety rule, then we can qualify for agency debt or Fannie/Freddie debt. If it doesn’t, we occasionally will have to put in place what’s called mezz debt or bridge loans, or some kind of short-term debt structure. So, that means we come in and that would be comparable to, well, nobody really does this, but comparable to buying your single-family home with hard money and then getting the deal closed and then refi-ing it out to agency debt or a Fannie or Freddie loan. You don’t really do that on a single-family home that you’re, well, you do it if you’re investing into it. Right? But, you don’t’ really do it for your primary home because it’s really expensive to do that, but it’s different on multi-family, because the rates are much lower. I know Sapan can probably speak way more to this than I can, but we can actually underwrite that in and it’s not like a twelve percent rate. You might see some hard money on a single-family home.

Ryan

Yeah. Sapan, do you maybe want to jump in and talk about maybe some of the typical structuring that this debt looks like when you put a note on a piece of property?

There’s a lot of options that go into that when not on the agency debt.

Sapan

Yeah. At a high-level, if it’s not necessarily stabilized, that’s where we may work with CNBS like Veena mentioned; or put a bridge. There’s a lot of options that go into that when we’re not on the agency debt, where we try to avoid repayment. Sometimes we’ll do it where it’s interest only for the first two years, so we can have what looks like better cash flow up front; and then we may refi that into the agency as we finish our value-add component to it. I’m just going to give you guys an example to put into context, we just recently did a refinance, was it two months ago, and we returned forty percent of the original investor capital back to our investors.

Sapan

They’re still in the deal as if they had a hundred percent of the original principle in the deal. So, it’s very attractive for an investor. You get a nice IRR bond, which is mature rate of return bond. Then, there’s other things I’m sure we’ll talk about, a bit about the tax shelter and other aspects of it, which I like to call the non-realized gain until it becomes realized. How that actually ties into a down market as why we like multi-family when we’re not necessarily in an expansionary phase, but why we also like any downturn as well.

Ryan

Yeah. So, you mentioned IRR. Let’s kind of stop here for a second and just talk maybe some terminology that would be helpful from a high level for listeners who are really getting exposed to these kinds of concepts for maybe the first or second time here. So, you mentioned IRR. What is IRR?

An IRR is a statute of a rate at which a project would break even.

Sapan

To kind of put it in layman’s terms, it’s a statute of rate at which a project would break even. So, we use it somewhat in parallel with NPV, which is net present value. I haven’t really seen many multi-family operators use that NPV. So, basically a lot of folks just tend to focus on IRR and what’s an IRR that I’m getting on that. Really, it’s cash-flow that we compare to our company or our individuals hurdle rate, which is basically what I need to see as the return on that particular investment. So, the higher the IRR, the better it is. Right?

Ryan

Of course.

Sapan

But it’s not necessarily just a straightforward calculation so to speak. As we, each additional year you tend to see that IRR go a little bit lower and lower and lower. A good example would be, let’s say I have an IRR of twenty percent over a one-year period and thirteen percent of a ten-year period; and my hurdle rate, which is what I need to see is ten percent during that period, most folks would think well, let me go with the higher IRR of twenty percent for just one year, whereas those who are well-versed in this would say you know what, that IRR of thirteen percent over ten years is far more attractive, which mathematically it is without getting into the formula of how it’s calculated.

Ryan

Uh huh. Yeah. Yeah, spare everyone.

Veeta

I was just about to say you’re so lucky that he said he wasn’t going to get into that.

Getting down and dainty with the definition of IRR.

Ryan

Although, otherwise me and Veena, my eyes roll back and we start going crazy. So, we’ve got IRR. Right? And then I know some of the industry we talk about is the average annual return. Can you maybe talk the difference on maybe those two?

Sapan

Yeah. I’m going to let Veena take that because she’s been feeling a ton of questions with regards to the average annual return and we’re seeing a lot more of that from some of our, I don’t know what they’re called, the folks who are in our syndications.

Ryan

Okay.

Veena

Oh, great. He lets me talk about the numbers. Our numbers guy just booted it to me. Alright.

Ryan

Just go high-level. Just high-level. Most people just don’t need to know the concepts. Right?

Veena

I’m going to have to because I can’t get much more detailed. No, I’m kidding. I know enough to be dangerous. So, once it starts getting too in the weeds, I send them back to Sapan to get down and dirty with the numbers. From an investor’s standpoint, I’ll kind of talk about what most investors ask us about. They want to know what the average annual return is. So, typically on multifamily, the way you kind of, and actually on single-family too, the way you see your return is you buy it at, let’s say you bought a house at a hundred thousand dollars. Right? Then you pay it down, maybe you’re getting five, ten percent cash flow every year, which is great; but then, your house has depreciated by fifty percent and you sell it. So, you get another fifty thousand dollars on the sale. Right?

It is common to see three and seven-year hold periods.

Veena

Most of your money is made on the sale. It’s not actually made on the cash flow of the property. Now, you know, there’s argument as to okay, well, do you count your personal home in your net worth calculations and all that, but for the purposes of this multi-family-wise, typically, historically, we’ve always seen…I shouldn’t say always, but historically we’ve seen high teens, low twenties as average returns over a five-year projected period. So, for us, we almost always project out over five years on our projects, but it’s very common to see three years, seven-year hold periods. There’s various hold periods that other syndicators will use, all valid. We absolutely model for a two-year, three-year, five-year, seven-year, ten-year; like, we model for everything so we know kind of what our worst-case scenarios are so we can help mitigate that risk we were talking about earlier.

Veena

But, on an average five-year hold period, we used to be seeing twenty percent plus returns with no problem. Now, the market’s shifting. I’ve seen several syndications come across my desk where operators are doing like thirteen percent, fifteen percent; but it’s in a really great asset and a really great market. So, it varies, but we’re definitely seeing that market kind of starting to turn, I would say even as recently as this year. It’s been kind of starting to turn. So, I think for like today and looking forward into the immediate future, we’re looking for more stability. Our game plan has changed a little bit from going for that homerun to getting stability because we do anticipate a downturn in the market; and as we enter that correction, we want to make sure that we can withstand that because we all remember what happened in ’07 and ’08.

Make sure you understand what you’re investing in before you start investing.

Ryan

Yeah and you always want to know what is the worst possible outcome? Right?

Veena

Absolutely.

Ryan

Before you buy anything regardless of whatever kind of asset it is. This is really a good case of make sure you understand what you’re investing in before you start investing. The positives, the negatives, the risks. You know, it’s not all about the pie in the sky numbers of hey, we’re going to hit a twenty-two percent return or something like this.

Veena

Yeah.

Ryan

Make sure you know what kind of risk you’re taking to get that kind of double-digit return. I mean, we see, you know, my dad’s a developer and what we’re doing right now with some grey shell buildings here in town, the investors that are coming in are wanting to see a twenty-five percent return.

Veena

Yeah. That’s the smart thing.

There’s a lot of things that happen in development when you’re just buying raw land and developing it.

Ryan

That makes sense, because they’re taking a ton of risk from a development standpoint. There’s a lot of things that happen in development when you’re just buying raw land and developing it, that are very different, even from this, which is extremely different from just buying an SFR and calling it a day. The SFRs are, I think, the gateway drug, the entry into…

Veena

They really are.

Ryan

Right? Yeah and as your financial situation improves and your financial acumen approves and you go from being a novice to somewhat of an expert, you’re going to start seeking out higher yields, higher returns; but you’re going to also realize that the higher the yield doesn’t necessarily mean that it’s safer. You’re taking a risk and you’re going to get rewarded for that.

Veena

Yeah. You’re definitely not seeing twenty-five, thirty percent returns in this market for multi-family. That would be…

Ryan

No. Not for multi.

Veena

Yeah, not those stable assets.

Ryan

No.

Have extra cushion to ride out a rough period during a recession.

Sapan

We definitely do some analysis generally onsite. We look at a lot of different scenarios that we feel could be potential outcomes. We also look at multiple exit strategies or exit scenarios I should say. Veena mentioned, is it three years, five years, seven years; there’s an opportunity to exit from three years and we’ve got a good game plan in place for what that exit looks like and then what we can do with the post exit, then that’s something we’ll absolutely, consider. You know, right now, we’re very, I wouldn’t use the word adamant, we’re very cautious of looking at three years and we’re really predicting for it to be around five years or seven years in our model because of that area of comparability. But the same thing is on the debt side. We’re not taking any notes that are less than ten, twelve-year notes, so we need that extra cushion to ride out say a rough period during a recession, we’ve got that ability there without going back to that risk we talked about, unnecessary risk exposure because now we’re faced with a refi and maybe and some unfavorable rates.

Sapan

So, we do take a look at a lot of that and I think this is a good segue into some of the other benefits, like the tax shelter and other forms where if were looking at a deal, say we were looking at thirteen percent, fourteen annual as a return, there’s other sides of it that you’re getting a return on that you might not necessarily realize and we haven’t modeled into it where it’s going to be showing on a piece of paper or on any presentation, but it’s really that tax shelter component of it. For example, we just did a cost segregation and for those folks who aren’t aware of what that is, it’s essentially a study that dissects the construction costs or purchase price of the property that would otherwise be depreciated over twenty-seven and one-half years, which is known as the youthful life of the building.

The goal is to identify any property-related costs, like CapEx, that we can now depreciate over five years, seven years, or fifteen years.

Image of a multifamily housing property for sale

Sapan

Really, the goal is to identify any property-related costs, like CapEx, that we can now depreciate over five years, seven years, or fifteen years. So, it allows us to accelerate depreciation. So, maybe taking an example of last year, we picked up a property for 2017 distributions and we had exceeded a little over sixteen thousand percent on the depreciation relative to your distribution. So, our shareholders were thrilled about that, because they had a large, fairly large, negative K1, where now you got some form of a write-off. And again, we’re not CPA’s or accountants, so I would certainly advise you to talk to your CPA on how that could be applied, but for anyone that’s structured their investment on their end, on the personal side, in such a manner that they can take advantage of that, that’s huge. So, if you want to take that as some form of your return, along with we do monthly distributions for all of our passives, and so you combine that with what you got for the year, you definitely come out pretty far ahead.

Ryan

Yeah. I love it and that was a good little segue. I appreciate you kind of jumping into it. There’s a couple of things you…

Veena

He’s taking over your job.

Ryan

No, it’s all good. Hey, I don’t mind. I’ll just sit here, you guys chat. What am I doing? Right? Oh, it’s all good. So, I do want to go back though because you guys have mentioned a couple of things that I still think need to be mentioned for people who, again, are hearing this maybe for the first or few times here. So, we did talk about CapEx. Right? So, can you guys even just mention what is CapEx and how do you estimate it and just give a high-level on this?

What is CapEx and how do you estimate it?

Veena

Yeah. So, CapEx is your capital expenditure, so that is what improvements are you putting into the property. Cap-X is really going to apply to almost any real-estate that you’re investing money into to bring it up to market standards. So, when we look at a CapEx budget, for example, if we have a B or C-quality asset in an A location, we might look at the market and say okay, we need to add a package delivery center, you know, where you can go and enter your code and pick up your packages, instead of getting it delivered to the door. So, we’ll look at that and we’ll say okay, this costs roughly about twelve dollars per user or per box or whatever; can we charge twenty-five dollars for that a month? And so, what we’ll do is we’ll play with different models of where we can really push the NOI or the net operating income of the building.

Veena

For example, a dog park…is it going to cost us like fifteen grand to do that? Carports…is that going to cost us thirty grand to put in carports, but we can get thirty-five dollars a month for those. So, we run various different models with various price points of where we think we can realistically push the rent based on what the capital expenditure is. Now, there are going to be some things, like your deferred maintenance, where the previous owner just hasn’t taken care of certain problems or addressed certain problems that needed to be addressed. Roofs are a big one we see; ACs, boiler killer units, if they have them, depending on the age of the building; parking lots are a big one. So, you just want to be aware of whatever money you’re going to have to put into the property, because you have a leaking roof…you have to replace the roof.

Veena

How much does that cost you? Is it going to be a hundred-thousand-dollar roof or a five-hundred-thousand-dollar expense. Those are really important to know, because that can make or break your business plan. So, I would say when you go into a property, if you’re looking at a multi-family, you would look at it the same you’re looking at a single-family home in the sense of you’re going to want an inspection or you want to walk it with a contractor and/or property management so that you can see okay, what do we need to do to bring this up to market level? If we put purple pain on the walls, is it going to get us an extra ten dollars in rent? If we charge for a pool view, can we get an extra ten dollars or are we going to start seeing vacancies go up? So, different nuances of the local market, we rely on property management and we also rely on our contractors to help us narrow down what our true costs are so that we can underwrite it.

You will look at a multifamily property as you would a single-family home.

Veena

So, I would say for us, what we do is, once we’re heading into a best and final round, we start tightening up our numbers. So, our initial pass at underwriting is very detail-oriented, but it’s not so detail oriented that I know that we’re spending two hundred and six-eight thousand dollars on a roof. We might put in three hundred thousand or three and fifteen thousand, and then we adjust those numbers going into best and final, and we see oh, okay, we have an extra hundred thousand dollars. We can go up here. Let’s come up on our purchase price by a hundred thousand. So, we start tightening up numbers once we have a good idea that we’re getting into that best and final round. We start spending time with contractors, engineers, specialists. If there is foundation issues, we’ll start bringing in foundation repair companies to see what that looks like.

Veena

Any costs that we can foresee, we absolutely put it into our budget. Any costs that we can’t foresee, we try to increase it and we like to be conservative, so we always overestimate what our expenses are and we underestimate what our income is.

Ryan

Right. That’s a pertinent maintenance component there.

Sapan

We usually want to be aware of, just so we know where that is. A lot of times, that ends up being a point of conversation agenda with the broker of what that looks like. So, we’re well aware of what we can be aware of going into a meeting.

Veena and Sapan share their process flow that anyone can benefit from.

Ryan

Yeah and I appreciate all the behind-the-scenes that you guys are giving all of us here, because…

Veena

Absolutely.

Ryan

Most people don’t have the, let’s say, connection, where the ability to talk to people that do this all day every day, that know their stuff, and are willing to share the process flow and what’s going on and how you look at things and what you’re analyzing. This is a, I think, a really good learning experience for everyone. They might not be investing multi-family themselves. They might at some point invest in it as an investor on the debt side or whatever it might be, but I think this is a really good learning experience for everyone to hear the behind-the-scenes on it. So, I really appreciate you guys going into a lot of detail on that.

Veena

Absolutely.

Ryan

And speaking on process flow, so what is the process to, walk me through the acquisition process.

Veena

Yeah. So, I’ll field that one since I’ve been kind of heavy on acquisitions recently. First of all, to address your comment before, we appreciate you having us on the show, because we can totally geek out talking about real-estate all day long. So, you’ll have to probably cut us off at some point, but I actually agree with you. I think a lot of syndicators or a lot of investors don’t like to share what their process is, but I think that’s such a disservice to the industry, because how are people supposed to learn this. We didn’t start off knowing all of this. I had the good fortune of having a family that’s been investing in real-estate for like thirty-five years. So, I think it’s really important to be open with this knowledge and share it because when other operators operate well, it actually benefit us as well. So, we are very interested in having colleagues that we can refer to, especially if there’s an investor looking for a specific asset that, maybe it’s not in our will house, but they, Susan Smith over here, she does a great job with this. Let me pass you on.

It is important to Enzo Multifamily for other people to be well-versed and good at what they do.

Image of a screen shot of the Enzo Multifamily website - Financial Residency Podcast

Veena

So, it’s important to us that other people are well-versed and really good at what they do as well so that the industry keeps thriving, because it benefits all of us. So, with that being said, you asked me another question and I totally lost track of it, because I went on a tangent.

Ryan

No, it’s all good and it’s funny. So, we’ll stay with that for a second. Right? Because that’s what I, kind of, my belief, and this is why I wanted to have you guys on, is for the finance industry, everyone’s been sold on this black box concept. Right? For years and years and years, thinking back to like our parents’ age and everything. And now, Google exists and a lot of the stuff in financial planning isn’t rocket science. Like, it really isn’t. It takes some time and dedication and desire to want to learn some of this stuff, but a good majority of it can be learned through a DIY-type approach. The more that I give out to people, I’m hoping that it helps educate them to take control of their finances to weed out potentially the bad in the industry that still exists.

Veena

Yeah.

Deal flow will stop going to the industry’s bad apples.

Ryan

I think my industry is plagued with terrible people, unfortunately. The multi-family space or even real-estate in general has some bad apples, but I think it’s significantly less, because deal flow will stop coming to them, banks will stop coming to them, banks will stop lending, they’ll stop having partners. Their reputation is significantly on the line every time you do a deal, every time you pass a lead on. So, I just wanted to kind of touch on that. The question I did ask you though, was to walk me through the acquisition process from a high-level. What does that even look like?

Veena

That’s right. Okay, yeah. So, acquisition process. So, basically, I’d say the first step, so I’m going to talk about this as if someone wants to start getting into the active side of multi-family investing. So, their first step is going to be to narrow down markets that you like and I always like to start with markets that you know or have some connection to that are thriving. There’s strong job growth. There’s strong indicators the market will continue to thrive. They’re in great locations…locations that you want to own assets in a down turn. You’re always thinking about the worst-case scenario. Right? Because when money is free-flowing, then it’s great, no one cares; but what happens when that stops? So, I would say, first you narrow down your markets. You’re not going to be able to be really great in fifty different markets coming off the bat. You need to start with one, maybe two, possibly three that you feel comfortable with; that you know that you’re willing to travel to and you want to start making broker relationships there.

Really start to understand the market.

Veena

You want to start really understanding the market. Why do you like this area? Why don’t you like this area? Why do you like one zip code versus another? Where is it in relation to all the job markets? Who lives in those markets? Why do they stay there? What forces them to go to another property. So, those are all intricacies of the market, the local market, that you want to hone in on; and the more information you have, the better. So, we start by learning the market. We then go and we create and foster these broker relationships. A lot of times, it takes several, several points of contact; several offers; several deals closing; or a reputation or track record to be able to get in front of the right brokers because a lot of markets are sixty or seventy percent controlled by one or two different brokers. So, you want to know those brokers and you want them to know you.

Veena

The secret is, there is a kiss of death, and the kiss of death is making an offer and having it accepted and then not being able to close the deal because of funding or something that you made a mistake on. So, once you make an offer, if it is accepted, you better close that deal, because if you don’t close one deal, it will go through all the brokers, all the sellers in the area will know and you won’t be able to get any other great assets.

Ryan

And that’s kind of what I was chatting on just a second ago, was like the industry is still, I think, small and really tight-knit in real-estate. Right? I see this just from our family with developers and I just understand how small that really is, that even though the finance field is very vast and you could screw someone and no one else know, even the guy that just walks in right behind you has no idea.

Your peers will go “Mean Girls” on you if a deal go side-ways because of the lack of planning.

Veena

No idea. Yep.

Ryan

It spreads like, you know, it’s high school and it goes everywhere if something bad goes wrong in real-estate.

Veena

Yep, we’re like Mean Girls over here. We will all talk about it.

Ryan

That’s how it works.

In real-estate, your reputation is everything.

Veena

Your reputation is everything. And so, even for us, we are very, very careful if we take on an asset, we know we’re closing it come hell or high water, it’s getting closed.

Ryan

Uh huh.

Veena

So, that is absolutely the kiss of death and everybody starts hearing about it. You’re absolutely right. It’s not just the brokers. Lenders will learn about it, other investors will learn about it, syndicators, like, everyone will start hearing about it. Deals do fall out of contract, it wouldn’t be unusual for a deal to fall out of contract, but it better not be because of something that you messed up or that you could have prevented.

Ryan

Yeah, you didn’t have your financing in order or you ran numbers incorrectly and you made a horrible offer based on that. I mean, there’s a number of things. Right? But if you come down and you start to do soils and you look like oh man, there was toxic waste here. Like, yeah, you’re not going to close. I mean, that wasn’t disclosed. I mean, that’s obviously…that’s a horrible reason why.

Carve-outs are structural items you can’t foresee.

Veena

And that’s what we call carve-outs. So, we carve-out certain things, like if there is something structural we just can’t see. It might not even affect closing, it may just affect where the purchase price of the asset is. So, there’s different ways to work around it, but if you’re not closing because you didn’t get your funding in place or you didn’t have your stuff together, then you’re in trouble. So, I would say, the next step is you meet your brokers and maybe you get some deals that you like. So, let’s say we see a deal we like, 123 Main Street. Right?

Ryan

Uh huh.

Veena

So, we look at 123 Main Street and we say, okay, the first thing that I do is, and this is how it works within our team. The first thing I do is I look at it and I say okay, does this meet all of these five high-level metrics? Check, check, check, check, check. If it does, then I take that information from the T12 rent-roll OM, everything; and I put it into a very high-level underwriting spreadsheet that my partner Sapan has so graciously supplied me with all of the formulas. So, for me, it’s easy. I just put number, number, number, number and I transfer everything over. If the numbers still look good and it still meets our metric of what I think our investors at that moment are expecting or looking for, because I interact with our investors frequently, so I have a really strong idea of what they’re looking for, what their tolerance is, what they want to see.

The world needs more spreadsheet guys.

Veena

So, if I see that and I say okay, yeah, you know what, this meets everything. I think this deal is going to work; I then send it on to Sapan, who is our numbers guy. I mean, you heard him talking about numbers earlier, so you know he’s like a huge nerd with a spreadsheet.

Ryan

No offense.

Veena

I totally mean it and he knows it too.

Ryan

Yeah, I’m one of those guys too. Don’t worry about it.

Veena

Oh, great. There’s two of you on this call. Well, good. We need, the world needs people like you, because there are people like me that will not do spreadsheets to that extent. You know, he’ll call me sometimes at like two in the morning and be like hey, and I’m like hey, is something wrong? Is there a unit on fire? What’s going on? He’s like no, I just got into this spreadsheet and I’m really excited; and I’m like it is two o’ clock in the morning. Call me at six AM.

Don’t wake Veena up at 2 AM.

Ryan

Could this have waited?

Veena

Yes, call me at six AM. He’s like no, I’m just really excited about the numbers. I’m like well, stop.

Ryan

Or maybe the baby was keeping him up and that was…

Veena

I know. Right?

Sapan

That is usually the case.

Ryan

That’s what it was. He wants you to go through the pain of it.

Veena

And to be fair, he’s two hours behind me. He’s over in L.A. and I’m in Dallas, so, I get it. It’s midnight for him, but I’m like an old lady. I sleep at like nine o’ clock and I wake up at like six. So, I like the early hours.

Ryan

It’s the beauty sleep.

Veena

Yeah, call me at the after party. Don’t call me before.

Ryan

That’s funny.

Get your marketing guru on developing a marketing package.

Veena

Yeah. So, basically, he will go through it and he will really dive deep into the numbers, to a level that I have no desire to ever really look at, but I end up having to, because once he’s done, if it passes that green light, he sends it back to myself and then we have two other partners, Puja Talati and Neal Dandona. So, Puja is our marketing guru. Everything pretty you see from us, it’s all her. So, she will take the property if it looks like something we want to offer and either her or I will put together what’s called an LOI and we will send that to the broker and that’s usually our first offer. Once that gets accepted into what’s called a best and final round, so it’s kind of like a bidding process, you have to try to get into the next round; and if you get into the next round, sometimes they’ll do a third or fourth round depending on the offers coming in. If they don’t, then usually they’ll just choose an offer right after…best and final.

Veena

So, it’s essentially a way for a seller to get the most money and make us all come up and put our best foot forward. Either her or I will prepare that. We’ll send it out. We’ll communicate with the broker and let them know hey, this is what we came in at, either we’re firm here and this is what our best and final is going to be or hey, we have some room for negotiation, we just need to tighten up our CapEx budget after our property manager walks the property. At that point, usually by that point, one of the four partners have walked the property and seen it in person. If we haven’t, then in-between the initial offer and the best and final round is when one of us will fly out or head down and do a tour of the property physically, just to get a good idea of what we’re looking at.

Put items together that is relevant to your business plan.

Veena

Because there’s certain things a broker can never tell you and there’s certain things that they’re just simply not going to tell you, because they won’t think it’s relevant, but it’s relevant to your business plan. So, you always want to see it physically. At that point…

Ryan

Oh, and they have a conflict of interest too, somewhat. Right? They want to close the sell, because they get a pretty nice payday when that happens.

Veena

Yes, and they typically represent the seller. So, absolutely, but I will say the brokers that are really great and especially the ones we work with, they will tell you okay, there’s maybe three hundred or four hundred thousand in roofing costs, because they want you to underwrite it as accurately as possible, because otherwise there’s a higher chance it falls out in escrow. So, I will say the good brokers are usually pretty in-tune with what deferred maintenance and CapEx looks like, but they won’t always be able to tell you that the vinyl tile that you have is really ugly and we have to replace it, even though it’s in great condition.

Ryan

Well, and that’s the expertise that they just don’t have and that’s okay. Right? Yeah, it’s maybe, I’m a glass half full guy, so I always think people do the right thing. So, maybe they’re doing the right thing, they just don’t know all of it.

Find lenders who are confident in what the deal structure looks like on the debt side.

Veena

They don’t know. Exactly. And they don’t know what’s in your business model. Right? They don’t know whether you’re thinking about doing, increasing trash service or putting up carports. Like, they don’t know what’s in our business model. Sometimes we have to go and we’ll see it and we’ll say oh, wait. We can’t put carports over here, but look, we can do this over here instead. So, that’s why it’s important to walk the property. Once we walk it, let’s say we get into best and final, we’re awarded the property; before we even get to best and final, our underwriters on the financing side are already looking at the property alongside of us. They’re telling us yes, we like the deal or no, we don’t. So, going into best and final, we already have a lender who is pretty confident in what the deal structure will look like on the debt side.

Sapan

They’re in-tune with our business strategy. I mean, we have it down to, let’s say we have a CapEx budget and we’re deploying it over, you know, whatever that period of time is, it could be up to twenty-four months, thirty months, or sometimes twelve or eighteen months; one of the first things we like to do is look at the curb appeal. If it’s something that we’re going to go in and renovate the interior units, so we’ll underwrite it where we’re doing our proforma for year one a little bit heavier on the curb appeal side, because that’s what’s going to drive some of those newer tenants towards the property first. So, we’ll look at the marketing. Is it understated? Do we need to add more to the marketing budget, relative to the previous seller or owner? So, we really go through what their previous T12 expenses are. We also take that, without getting really into underwriting, I’ll look at the T3s, I’ll see what kind of concessions…are the numbers artificially pumped up?

This is what the post-acquisition process looks like.

Sapan

Is there a lot of deferred maintenance? Why is there deferred maintenance? So, those are just some of the things that we really do look at as we tighten up those numbers, kind of going into the acquisition. And of course, post-acquisition, we’ve got a laundry list, checklist of things that just need to be done, like checked off; almost like when you’re moving into a new house. You know, change your mailing address and things like that. So, there’s a laundry list for the next several months. We’re pretty busy just getting all of that running and moving and put together as well.

Ryan

You mentioned the after-acquisition, so could you just give a couple of examples of what that laundry list might look like? What hits on that list once you’ve acquired the property?

Get into a candid conversation of the property to gain a good understanding of a property.

Veena

Yes, so for me, what I personally handle alongside either Neil or Puja is, we actually start running with getting our marketing package together. So, Puja will put together our offering memorandum. Neil and I will usually strategize on what we’re going to do as far as a conference call, just walking through our business plan so that investors or other people that are involved in the deal in a significant way can kind of hear our thought process. A lot of times, any two, three, or four of the partners will get on a conference call and will just record us talking about the property in a very candid conversation. Why do we like this? Why don’t we like this? Is there a risk here? Is there not a risk here? What do we want to do with this? Where do we think this property is going? We’ll just talk and we’ll all give our opinions and I think it’s interesting too, because a lot of times, there’ s four of us. Right?

Veena

So, a lot of times my view on something is completely different than one of my partners. For example, Neil and I, we actually toured a property together, because he’s based out of Dallas as well. We toured two properties together and we went, we saw them, we talked about it, we laughed. We got on our team call on Tuesday and Puja and Sapan asked “So, which properties do you guys like better?” We both had exact opposite answers about which property, if we could only go up for one of them, which one we’d go after. So, it’s kind of nice, because it’s an internal checkpoint for us, where we start saying okay, but this is why I like this; and then someone says but no, you’re forgetting about this risk. And so, we go back and forth. We start getting a conference call together where we talk about our business plan so that people know that we’ve really thought this through.

There is a lot of strategy that goes into vetting a multifamily property to invest in.

Veena

This isn’t something we did on a whim, because it’s a Thursday, we decided to buy this. We get that conference call going. We immediately start the lawyers on all paperwork on the investor side and on the purchase agreement side. Once that’s in place, we start inspections, we start getting our contractors through. We contract with property management. Lending is obviously running at a hundred miles a minute all the time, but we mostly have an idea of what we’re looking at going into the deal. So, it’s not usually a surprise coming out on the other side of being awarded the deal.

Sapan

Right. We’ve contracted services, I mean, just to give you an example, it could maid service agreements, it could be carpet agreements, it could be turnkey agreements, fanning agreements; you know, we may have guide and rental agency agreements and depending on what we’re doing with laundry, we may have that. We may have vending machines, pest control, sweeping services…a lot of different things. If there’s a pool, we’ll have pool service…just to kind of name some of the contractor services and if we’re talking about just other legal docs, it’d be getting those things in order. Like, the utility letters, zoning letters, seller certification. So, there’s a lot that goes in that. And then, of course, the studies, we want to make sure, like, we’ve done a lot of this doing our due diligence, but just having that stuff allocated properly; like the structural inspection, drainage inspection reports. Generally, we don’t do soil tests unless we’re looking to do some type of add-on.

Sometimes, deals don’t work out in your favor.

Sapan

We had a deal where we were looking at that where that was perceived as a risk. It didn’t work in our favor; though, it had the potential to do so. And then, we just go through the inventory that we’ve previously done due diligence on and we go through that again. So, there will be like clubhouse inventory, or maintenance shop, the tools and things like that that should be there. So, just kind of running a lot of stuff off the top of my head; I just wanted to give everyone an idea because a lot of folks don’t really know what goes into that checklist.

Ryan

No.

Veena

The lease on it, that takes forever.

Ryan

Oh, yeah.

Sapan

Yeah.

Be prepared to have a laundry list of things you have to do every time you acquire a deal.

Ryan

Oh, yeah. And you look at it and it’s like there’s so much. So, I primarily invest personally in our family, like, we do a lot of single-family and every time we acquire a deal, I have a laundry list of like fifty things that I do and that’s one door. Right?

Veena

Yeah.

Ryan

So, when you have a hundred and fifty doors, it’s totally different. There’s a lot of bigger things and it’s funny you mentioned soil, and I know I mentioned it earlier in the show. That’s more of a development thing. You guys are more buying and you don’t really add-on as much. You’re kind of looking at what’s existing. So, it’s just funny how inside real-estate, things are different there. So Veena, you mentioned management of the property. Right?

Veena

Yeah.

Ryan

So, who manages, typically, and how does that work? How do you guys kind of structure that or at least speak from a high-level on how that works.

Consider using professional management on your single-family properties.

Veena

Yeah. So, property management. So, this is actually the reason that we love multifamily compared to single-family homes. Right? Both of us have single-family home portfolios, so we’ve done that already. But I would say the biggest blessing for me, and I use professional management on all of my single-family properties; but I still have to respond with okay, this tenant broke the toilet. Like, I just had a tenant recently say that they tried to replace the toilet themselves and totally messed it up and so now property management calls me asking me for a not-to-exceed amount to send their personnel, and I have to be like well, make sure you’re billing back the tenant for this because this is their fault. But I still have to oversee property management.

Ryan

Yep.

Veena

In the case of multi-family, it’s very different, because you have a leaky faucet, they’re not going to call me to find out if I approve a hundred-dollar fix and what not. It goes into our budget, we can see the numbers; and we review the budget and the financials with property management often and as we see certain trends…if we start seeing an increase in one expense, we say hey, wait a second, what’s happening here? And we try to find out what those outliers are. Was there a one-time expense or is this something that’s ongoing? Is this mismanagement of the property? So, we hire professionals and we’re actually really big believes in that. We pay professionals, who are really good at what they do, to tell us what we should be doing. You know, financial advisors, I know you had mentioned DIY’ing it, but we pay financial advisors very well because they do this all day long; and you think of it like a specialist. Right?

It’s important to consider professionals when dealing with different aspects of a deal.

Veena

You don’t want to send your spouse to an anesthesiologist to diagnose a rash on your leg. That’s not what they do, but you do want them when you’re getting surgery and you’re having anesthesia done because that’s all they do. So, we believe in paying for good expert advice and property management is absolutely the same way. You want to find someone who’s experienced in that market, who understands the demographics, who can notice and correct a problem as quickly as possible, and who also has enough employees to keep it staffed is one of the big things.

Sapan

Yeah. What I want to add to that is that we don’t just view it as we get different property management for different properties. It’s definitely a partnership. We’re working with them even on deals that we don’t even have under contract because we’re looking at numbers, we’re talking all the time, hey, we just sold this or we just moved into this one and here’s where we’re at, here’s what we’re seeing here. What do guys seeing? And it really helps us shape-up underwriting. It helps us shape our model to see where we want to be in that submarket. Do we want to still be there or not? Because they’ve got vast status of it. You know, the property management company’s got fifteen, twenty thousand units…that’s a lot of real-time data. So, it’s like myself, who loves spreadsheets, guess what, that’s a lot of useful information for me versus just using comps that we may have pulled off the costar or just comps in general that you find on Google. All these things have value, it’s just I look at the big picture as a whole and how can all of this together really be packaged into something that’s meaningful for us.

Working with good property managers makes a world of difference.

Veena

Uh huh. Absolutely. I think property management, having a good manager, can be a world of difference on what you’re looking at. So, it’s very relational for us. We use the same property managers over and over across properties when we can. And as we enter into new markets, if they don’t have a presence there, then we look for the best of the best in those markets and work with them.

Ryan

Yeah. That makes sense. I mean, you’re entrusting them to help manage, right, a multi-million dollar investment. You want to make sure that you’re choosing the right thing, you do a lot of due diligence, because it’s not just your money. Right? It’s investor money, it’s bank money, your reputation. You’ve got to make sure you’re doing the right thing.

Veena

A lot of fiduciary duty there.

Join the Financial Residency Community for the sample deal.

Ryan

Absolutely. So, you know, we’re approaching the one-hour mark here and there are so many other things that I wanted to kind of jump into, but one of the things that I’m going to put inside the group, the Financial Residency Group, is a sample deal that you guys just kind of mocked up, and again, it’s all fake numbers, all sample data; and it’s a couple of slides that I will put in for the group. So, for those listening, if you’re not a part of the group, come join us at Financial Residency and you guys will have access to this. But, if you could, just for like two minutes, just let people know kind of what they’re looking at with this sample deal that you guys have kind of provided.

Sapan

I’m going to let Veena walk you through that. Also, on the color, I think Veena had mocked that up with Puja?

Veena

Yeah, actually, Puja put this all together. So, when you guys see it, you’ll know what I mean about her making everything pretty.

Ryan

It is pretty. I love it.

Veena

She’s fantastic. She comes from Hershey, so Hershey Kisses were her product. So, she’s very well-versed in marketing and it definitely shows.

Ryan

Yeah, you guys have some nice stuff. So, if you don’t mind, Veena, just like for two minutes, just kind of jump in and tell us just a little bit about what we’re seeing in these three slides.

Veena

Yeah, absolutely. So, the first is, and again, this is a sample deal, this is not a real deal. You’re not being offered anything, it’s just a sample.

Ryan

It’s just education material. Yes.

The sample deal is just educational material.

Veena

Yes, educational material, just so you can see kind of what we look at. So, financial summary is the first page that you’ll see here. Basically, it talks about what this looks like from the investor side. We go through the cap rate on this, it’s 5.1 percent. I would say that’s pretty average, between five and six percent is really what you’re seeing in the market these days. The reversion cap is at 5.6, so we added half a percent to that. Expense ratio…

These factors play into the cap rate.

Sapan

Oh, really quick. So, maybe before until today, right, folks were saying hey, if the cap’s say 5.1, I’m going to underwrite this with an exit of maybe 4.8, 4.75; because we kept seeing cap progression. Now, we’re doing quite the opposite and so that’s what the reversion cap is. What’s the value on the sale that we’re seeing? And so, what this means, at a higher cap, it’s just like a bond, it’s inverse relationship that as the caps go up, the value comes down. So, there’s a whole different discussion around what do you do, knowing that the buy is coming down? There are a lot of things you can do to mitigate some of that or ride it out through that. And then, as we talked about, there’s other benefits, like tax shelter, so you can do that. But, going back to expense ratio, typically, we see somewhere in that forty-five to fifty-five, typically higher; I mean the fifty, fifty-five range is what we’ll normally see on a T12 expense ratio and this gets a little bit lower, which is telling you that it might be managed a lot better high-stream line may not even be something that we potentially could see, or we strive towards. Go Veena. That’s yours.

Veena

That’s her risk coverage ratio. Basically, can we cover the debt comfortably? I’d say most banks look for, I mean, what’s the lowest you’ve seen, Sapan? Like, 1.1, 1.1, 1.2-ish?

Sapan

Ah, ish. I mean, you’re not really seeing that as much. A lot of the deals we’re looking at, again, we like to be conservative, we’re typically getting in around the high one’s…like 1.8, 1.9; but I think the minimum is usually 1.25, is what you kind of need. And you’ll probably see that going up a little or potentially increasing as well.

Ryan

So, listeners are probably hearing that term for the first time. So, can you just tell them what the debt service is and what you’re kind of referencing with the ratio there?

You will look at every dollar of income you have.

Sapan

You don’t want to take that?

Veena

Yep. So, basically, what you’re looking at it for every dollar of income you have, how much of the debt surface can you cover? So, if I have ten dollars coming in, can I cover, how much of that can I cover in terms of what the outstanding debt is? So, for example, on this sample, we have 1.4. So, for every dollar of debt we have, we have a dollar forty coming in.

Ryan

Yeah, that makes perfect sense.

Veena

Yep.

Ryan

And then, you know, Veena, I hate skipping forward on some stuff, but if we could just look at the CapEx budget that you guys have here and just kind of talk through, I know we’ve really talked about a lot of this inside of the call today, but maybe we could go just a little bit further into the CapEx so they can understand that a little bit better.

Take a look at your CapEx budget.

Veena

Yeah, absolutely. So, if you look at the CapEx budget, I mean, it’s broken down into kind of what we’re seeing as a total per unit. Now, we take a lot of these numbers from real-time data, because we have so many units. We know what it typically is going to cost. For example, to put vinyl flooring in the Dallas market, we already know those numbers because we’ve done it across so many units. So, a lot of this will be real data for us, not projected data. But, you know, some of the things that we’re seeing now, the USB outlets in the kitchen; backsplashes, I didn’t know the backsplashes were so coveted until I started putting them in, but people love them. So, we’ve spent some money there. And it’s just, you know, the changing pace of the area. So, before browns and woods were really in and now it’s all about the quartz, the clean lines, the greys. So, you know those are things that we look at.

Veena

We look at what the market calls for. I mean, the CapEx budget is fairly self-explanatory. For example, carports, we’re going to put in sixty-eight on this at a cost of about a hundred and eighteen thousand. That, on the other end, you’ll see in our proforma, where we anticipate that bringing us in revenue. So, is it ten dollars a month, twenty dollars a month? What does that look like and how does that affect the NOI?

You might end up passing up on deals that just don’t seem right for you.

Ryan

Yeah.

Sapan

Yeah. And then, you take, for example, I’m going to use that sixty-seven number for interior rehab. We know that in Dallas, that’s going to get you a different ramp up, all else being equal, versus a place like in Oklahoma. And we’re seeing some of those numbers change, but it gives us, like because we’re in different markets we have a very good idea of what a per unit CapEx will get us in different markets and is that worth it or is that something we don’t want to look at? So, that ties into even before we get into a deal, when we’re just kind of looking at a very high level of okay, this is what it’s trading for; here’s the whisper price; this is roughly what we think it’ll take on terms of value-add. Immediately it’s just like okay, we’re going to pass on this deal and move on to the next one. And we look at literally hundreds of deals and we offer on very few. So, just to kind of give you an idea that there’s more to that number on that CapEx than just we’re seeing. Okay, well, do we want to put vinyl, you know?

Ryan

Oh, yeah. There’s a lot more to this. Right? But this is a good sample for everyone to see, because when you talk about CapEx, and even if you’re talking about well, this is what we’re doing inside, it’s hard to really visualize it. That’s why I was saying let’s get a sample, you know, sample data, everything is fake inside this, but you get at least a good overview of like oh, okay, you’re talking about like showerheads and lighting and fixtures. I just think it’s a good thing for people to see and so I’ll definitely make sure I put it inside of the Financial Residency Group so everyone can take a look at it and at least have something tangible as they’re kind of going through the show and trying to understand what we’ve been kind of discussing.

Enzo Multifamily is gearing up to have its biggest year yet!

Ryan

The last little bit here…

Veena

It’s pretty self-explanatory, so it should be easy to follow through.

Ryan

Yeah, I totally agree. It’s just, some people are audio, some people are visual learners, so it’s always nice to have some other outlets.

Veena

Yep.

Ryan

So, I want to end the show with you guys just telling a little bit about what you guys are doing at Enzo and just maybe kind of wrap it up here in the last few minutes of the show.

Veena

Uh huh. So, Enzo Multifamily is probably gearing up, hopefully to do a bigger year this year than we did last year. Last year, we did just over a hundred million in assets, multifamily assets, specifically; but we’re looking to increase that this year and we’re actually getting prepped to go into this downturn. I know we keep talking like doom and gloom, going into the downturn, but we are internally preparing for that so that we can take advantage of any downturn that is there, because then we can acquire more assets. Basically, I would say for all four of us as partners, we are really into the educational aspect right now. We love just talking about what we do. I know I personally am in a lot of these Facebook groups, much like your group, Ryan. I like to answer questions…are you guys getting a lot of feedback?

The Financial Residency Community Facebook group provides a lot of value.

Ryan

Yeah.

Veena

Okay, there. I think it’s gone. I don’t know if that was me or what, but sorry. Should I start over?

Ryan

Yeah, just start over from how can people learn more about what you’re doing and how you’re doing it?

Veena

So, we have been really involved in these Facebook groups, much like your group, Ryan; which we have loved, because it gives us access to people who are also as excited and as passionate about what we’re doing. So, we take a lot of time to help people underwrite their own deals. Anytime someone’s looking to invest into a deal that’s operated by somebody else, I always tell them, you know, send it over to me; I’m happy to take a look at it and give you some feedback or some good questions to ask. For our stuff, we do send out educational materials in newsletters. Luckily, it’s only like once a month, so you’re not going to get seventeen emails from us a day; and our newsletter is on our website at www.enzomultifamily.com. I do want to say too, for you Ryan, I think that space that you’re providing for this is so important and I know it’s physician-centered. As somebody who’s married to a physician, I can say that if I wasn’t involved in investing or just the financial world in general, my degree is in Finance.

Be open to the wealth of knowledge available to you.

Veena

If I wasn’t involved in it, I don’t think I would know where to start; and I think the feedback that I get from so many of my friends that are in the group is, it’s just a wealth of knowledge and it’s a safe space to ask questions. My sister, Pria, she’s married to a cardiology fellow and she’s always calling me and she’s like hey, did you see that one post in the group, what does this mean? You know, she’s just, she loves talking about it now; and she would have never approached any of these questions. So, I think education is the big thing that I see a lot of the “experts” or people that are really great in their respective fields, I see them going after that and just really helping educate others, and it’s very collaborative. That’s one thing I love about social media and where we are these days. Information can travel so quickly and it’s so easy to find answers to what you need. So, I’d say this year is about education for use. We’ve also picked up a lot of philanthropic projects.

Veena

Our most recent is we did a grant match for Safe Mothers/Safe Babies. It’s a non-profit that helps labor and delivery out of Uganda. So, we did a matching grant on that last month and raised enough to help babies through the whole year and so, things like that are really kind of what we’re into this year alongside multifamily.

It’s all about giving back.

Ryan

That’s awesome. That’s neat. I appreciate the feedback and that’s what this is all about. Right? It’s just giving back, educating, going through the whole process. I saw the stuff that our friends, pretty much all of our friends are physicians, and what my wife was being pitched. It’s frustrating to me and I love the technology age that we’re in right now because we can sit here and all talk to each other, record a conversation, and really help people understand something, whether it’s multifamily or insurance, or banking and budgeting and all this stuff, which was previously kind of held back when Google didn’t exist and the internet wasn’t around. Like oh, I’m selling this black box and if you don’t do this now, your family’s doomed or if you don’t come with me, you’re always going to be poor or whatever else they were pitched. So, I love that you guys are putting out content. I’ve subscribed to your newsletter because I’m always interested in what other friends are doing and how we can all collaborate. So, I’m excited to have you guys on the show. Thank you so much for being here, both of you, and it was a pleasure.

Veena

Thank you for having us. We love talking real-estate, so any questions you have or anything else you want to talk about, you just call us up, we’re happy to do it again.

Ryan

Awesome. Everyone, Veena is in the group, so you can always tag her and ask any real-estate question. If it’s single-family, I know that you’re probably just going to retag me, but it’s okay.

Veena

I’m sending them right back to you.

Ryan

I know, I know. You don’t like it, but it’s all good.

Veena

Nothing seems the same anymore about my single-family portfolio.

Ryan

It’s all good. Well, thank you again guys for being on the show.

Veena

Absolutely. Thank you so much.

Ryan Inman