Monday, March 12, 2012

Informational Interview - RE Investor

Scott Buckowski


Fin 180

This interview is with Dave Anderson who is a real estate investor in Texas. I tried to ask various questions to allow an interesting look into the life of a real estate investor.

What education and/or skills are needed to be a real estate investor?

I don't think there's any formal education necessary to do what I do (invest in single and multifamily properties). I think in any business it helps to have some financial/accounting ability/awareness/acumen. You need to be able to understand where money is coming from and where it's going. Some people skills. Confidence. Some ability to negotiate. There's some amount of knowledge you can get from classes/books, for example negotiation (Getting to Yes by Fisher/Ury), multifamily (Multifamily Millions by Dave Lindahl), etc. However, there's no substitute for the knowledge you get doing your first deal.

How did you get into the business of real estate?

My parents bought and "flipped" SFRs when I was younger. So, they would buy a fixer-upper, we'd move in, my Mom would generally do most of the repairs, then they'd sell it and buy the next one. We moved every couple of months for several years. So, I kind of grew up around it. When I was 16 I bought my first fixer-upper with my Mom. Lived in it for about 6 months and then sold it and doubled my (small) investment. From there, passively invested in her multifamily deals. I worked for her development company for a year or so when I was about 20 so helped run construction crews, dealt with banks, negotiated loans, etc. From there I went into IT and stayed in corporate jobs for many years. About 8 years ago, I took a voluntary exit package from my employer and was in a position to decide what to do next. I decided there was a lot I didn't like about the corporate world and I liked the flexibility afforded by generating passive income through real estate and so I started doing that. A partner and I bought a Homevestors of America franchise which I ran for about 4 years. I then decided I couldn't buy houses fast enough to generate the passive income I wanted so, with another partner, I began buying multifamily.

What type of properties do you specialize in?

Distressed class C multifamily complexes in the Houston, TX MSA (Metropolitan Service Area). Target properties will either need significant deferred maintenance or have significant management problems that can be resolved to add value.

How many properties do you currently own?

With partner, 7 complexes comprising 617 multifamily units, 120 single family residences.

Do you manage the properties yourself or use a management company?

We use a 3rd party management company; however we are functionally their only client (they have 2-3 other very small clients).

How do you run the numbers to decide whether to invest in them or not?

There's a couple ways to approach buying. I'm probably not going to tell you what your professor wants to hear. Many buyers are what I'll call "cap rate" buyers. That is, they value their current purchase based on the current unlevered yield produced (NOI/purchase). There are also general rules for "per door" valuation. So, an area might support say a value of $25K/door. I know what those exit rates are for a properly run, stabilized deal. So, I look at a distressed deal fairly simplistically. I don't run complex multipage spreadsheets. Some people do. My cousin has an MBA from a very prestigious university. I've looked at his spreadsheets. I've told him when he has half a day maybe he can explain the basics of them to me. If I look at a building and I know it's going to take about $5K of rehab and the Seller is at $10K/door and I believe the exit rate will in the mid-term support say mid-$20K/door then that's an easy buy for me. I think class C properties are all about the debt level. I can generally get 70% loan-to-cost loans. If I'll wind up with a $9-10K/door debt level that's going to be about $60/door/month of debt service.

Do you have any crazy tenant stories?

Plenty. So, last Saturday a tenant moves in. Tuesday, "baby daddy" shows up and kicks the door in. Police are called. Many police show up. It turns out baby daddy is a murder suspect. BD heads out the second floor window and somehow manages to get up on the roof. Police eventually get him down. Now, new property manager started Monday. So, Wednesday afternoon she asks for onsite police support rather than our security guards. I approve. Thursday morning our real onsite police presence starts. So, by 9 am they had arrested two sisters for stabbing each other. New manager will resolve the issues over the next month or so. Net: don't let your properties get out of control. Make the hard decisions quickly.

How important is leverage in real estate investing?

I think leverage is critical but overused. I've bought a lot of property in the last couple years from banks and CMBS pools because the guys that lost the buildings had placed too much debt. We use leverage to boost returns, but we are conservative. I'd say we're at around 50% or less LTV across our portfolio. Of course, some of the reason that's low is because we buy distressed assets and rehab them so we generally have a fair amount of both equity capture at purchase and equity gain through the rehab.

Debt can be your friend or an albatross. As an example, we recently bought a property where we have approximately $9K/door of debt. As it happens the property next door sold at about the same time. However, that person thought they were getting a fantastic deal because the bank would provide 100% financing (with them posting a $3K/door rehab reserve). Well, his debt is closer to $20K/door. Think about that competitively. We're next door to each other. If we're equally talented operators, at any number he can break even at, I can go under him by say $60/door/month. That's a lot of room on $500 rents.

What would you tell someone that would like to be where you are today?

Find a deal and do it. The first one's hard. You'll be nervous and second guess yourself. Your family may tell you you're crazy. I had an advantage and didn't have these issues, but I talk to enough people that do/did. Trust me, the second one is better and the ones after that get easier and easier. I can tell you that we buy 60 unit buildings now like I used to buy houses. Don't listen to people that tell you that real estate doesn't work. Don't listen to people that say "If it were that easy, everybody would do it." I tell you it is that easy and they don't all do it. If you want to be rich, get your advice from rich people not poor people. So, if you want to buy real estate go where real estate investors hang out. Go to your local real estate investor club. Read some books.

What are some creative financing options to get started in SFR rentals?

If you don't have money, partner or hard money. There are a lot of people in the last couple years that have a lot of money they don't know what to do with. They're getting 0.5% on their CDs and know that's behind the inflation rate. So, find an angel that will split deals with you. You find a couple deals and do the work. They put up the cash or cash plus their balance sheet to get the loan. Split the proceeds. Repeat. If you want to do it on your own, find great deals on distressed assets. If you buy at under 70% of repaired value minus repairs an asset based ("hard money") lender will put up the funds for you. These loans are expensive - 12-15% plus points. However, if you have no money and you have enough spread you can do these deals. There are now a number of programs where the hard money lender will also arrange the takeout/permanent financing and blend the rates and points between the loans. So, it's a hard money rate during the rehab and a commercial rate on the back end. That's a reasonable option but it's probably 7-8% of the deal value so again you'll need to be buying properties at a discount.

What newspapers/ blogs do you read daily?

I really don't much. ML-Implode. The Economist sometimes. Watch a fair amount of CNBC and HGTV. I also get market information from regular contact with brokers, sellers, our investment groups, etc.

Do you have any partners/assistants/employees that help you with finding deals? If yes, what do they do?

When I did single families, I worked with "birddogs" or wholesalers. These guys find and negotiate deals, put them under contract, then assign the contract to investors for a fee. There really aren't many apartment wholesalers so it's really few and far between. For commercial multifamily we use traditional apartment brokers. Once you've done a deal, you have a surprising amount of credibility. Once you've done a number of deals and the brokers see that you do what you say you're going to do, don't retrade unreasonably, and close when you're supposed to, they go out of their way to bring you deals.

Describe your “typical” day.

Honestly, I don't really have a typical day. I tell my friends with regular jobs that I have an embarrassingly flexible schedule. I try to go to both the gym and to Krav Maga classes a couple times a week. From there, sometimes I'll drive some of the buildings we own to check in. Several times a month, my partner and I will get together and spend a day doing tours of properties on the market. I do all the books for the business so that's probably 1/2 hour a day. Yesterday I had to sign checks so I had the property manager meet me at a restaurant I was at and he brought them. This really is the benefit of larger multifamily. There's onsite staff at the property - manager and maintenance. Then there's the regional manager/CEO of the property management company. It's rare that a problem needs to get to me. We're really more asset managers so the time is focused on looking for new deals, preparing monthly reports for investors, making sure existing assets are performing well, looking for big areas of operational improvement (say water saving devices, new purchasing agreements, etc.). As an example, we just spent a fair amount of time working with insurance agents to buy portfolio insurance rather than pricing each property individually. This was a huge savings that took some effort, but I can't really tell you how that worked into my "typical" day.

What kind of an individual (skills and personality) is best suited for this job?

Entrepreneurial. If you think a corporate job is safe and you need that, stay there. For me, doing what I do is way safer than working in a corporate job where the hand of God can come take me out at any moment with two weeks notice. Know that this isn't really a "job." It's how I derive my income but I think people think of "job" as a place you go for some set period of time to work.

What great insight from Dave about being a real estate investor. It looks like you just have to get out there and do it!

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