How to Safely Invest Passively in Multifamily in Today's Market

0:00We went vertically integrated as a company just about a year after we last spoke so I think it was 2021 and what vertical integration means is we brought our property management inhouse and we brought our construction management inhouse and then we launched a trademarked procurement process that we call Shore home and I'll start with that procurement process as being one Competitive Edge that a lot of other groups aren't doing the vast majority are not so shome is a process where we're going directly to manufacturers and we're having them manufacture materials for our properties overseas they're custom designed they're custom built they're shipped from you know Taiwan and other places worldwide to

0:49Texas they're trucked up to Dallas where we have warehouses and in these warehouses we package these ready too kits for our team with most of the materials that they're going to need to turn our units and so they go in these little crates and they get put into a shipping container gets trucked off to the property that we're closing or just closed gets set usually on the back side of the property our team is on site now inhouse day one opening the shipping crate there's a bunch of individual kits for say 50 units and they can get started right away with things like ceiling fans and door knobs and light fixtures and shower rods and cabinet pools and you know in some cases

1:37You know backsplashes and paint and screws and nails and tools they have most of what they need we do not ship the bulky heavy custom items like countertops flooring Windows appliances but everything else is put into these kits generally speaking so what does that do well one it gives us brand recognition in the industry no other properties in the surrounding area have the custom materials that we have and why that's important I'll give you one practical example just to drive this point home you think about a flush mount light that you might go buy at a local hardware store a Lowe's or Home Depot you put that up there first of all you're you're going to pay the markup for the the retailer okay you're going to have inefficient packaging with plastics and styrofoams and all this

2:25Stuff most of them will have two light bulbs in there hopefully they're LED or you have to go out and buy them and then if you break that light either the the person installing the light or say a resident by accident breaks that light what do you do you have to go back to the store you have to buy a new light the whole entire kit potentially the bulbs as well and that could be a $3 30 $40 fix our custom designed lights the flush mount lights we have the parts and components to actually fix these materials on site so we actually have glass that fits into these so that if the glass cracks we just replace the glass sleeve for maybe you know 50 cents we don't have to go out and replace the whole light in addition there's one light bulb that comes with the LED instead of two

3:14So you know it's just these little things you think well who cares it's 30 bucks it's 40 bucks well we've acquired over 21,000 units as a company so the little things do add up when we're saving $10 times 20,000 units that's a big number and so that cost savings flows through to our investors so also last thing I'll say about procurement process it's it shortened our turnaround time to 14 to 21 days to fully renovate and turn a unit I I can't remember what it was before but it was like 30 to 35 days or something like that so we've we've tremendously shortened down that time frame and once again it it's environmentally friendly when we order shower rods there's going to be a box of say 500 of these shower rods without the styrofoam without the colored

4:03Cardboard packaging without the Plastics without the bulk and the weight and the size it's just very inefficient to do things like we're doing at scale without doing something like our little mini Amazon so to speak so that's one Competitive Edge among of course having your own in-house property management and construction arms wow 21,000 units I didn't realize you guys had had acquired that many so are you standardizing like a fles mount light across all 20 21,000 or is it different different ones in different properties yeah good question so we have two trademark Brands under the Ashcraft umbrella for our properties our Holston brand which means that when we buy a property we we first we Rebrand it new website

4:51New marketing new monument sign out front holen is what most of our properties are that's for our newer nicer higher end finished properties then we have the Elliot which is for our more vintage properties say something that we're holding that was you know built in the 70s 80s early 90s that might be an Elliot so there's slight subtle differences to what we do on turning these units the Hon's going to have the granite quartz countertops and the stainless appliances and the crown molding and all the best of the best that that we have to offer the Elliot's going to be just scaled down slightly you know a faux wood floring faux 2in wood blinds maybe stainless maybe not maybe used appliances instead of brand new there's just subtle differences because the ROI isn't necessarily

5:40Justified on some of the older properties you're not going to get the rent bump that we would get on some of our our newer nicer product but generally speaking to answer your question the the small things like like the pendant lights and the flush mount lights and the door handles and door knobs those are generally all the same across the board for our properties yeah wow wow that is super interesting I never even considered that but when you have that type of scale now all of a sudden these these changes make a make a huge difference even if it's just a little bit per unit that's that adds a lot to the bottom line so you also made a change when it comes to insurance can you kind of share a bit about how how your insurance works like portfolio wide yeah so again we you know hitting scale this this would be a conversation

6:29For GPS and LPS to be aware of when you're a company or working with a company that has thousands of units we at at some point here about three four years ago went with a portfolio wide Master policy and some benefits to that is that we operate in Texas and Florida and Georgia and North Carolina well as many of your listeners probably know and myself being a a Florida resident property I'm sorry insurance has gone tremendously over the last five years specifically Florida and Texas have been impacted the most out of you know all 50 states so the master policy helps us save money by putting all of our portfolio under one policy and and I'll

7:17Give you a practical example of how this played out in in real life for us in Dallas that several years ago the unexpected deep freeze some people call it snow mageddon happened un unexpectedly and it affected a lot of our deals I think we had maybe 17 properties out in Dallas at the time so let's say eight of these properties were affected in one way or another from this deep freeze whether it be busted lines or you know things breaking and and and having to displace tenants and stuff so we pulled one claim with one deductible and we covered all the properties that were affected at that time in Texas and then of course we have adequate cash Reserve on hand to account for unexpected events like this so we never had to stop the cash flow distributions

8:06During that period of time for for that reason and so it just basically saves us overall so when we buy a new deal like we're buying in Orlando right now and the insurance is really high it's offset by some of the North Carolina and some of the Georgia properties and things like that and and the last thing I'll say about a portfolio policy is that we have full actual replacement cost coverage so a lot of policies if you if you really read through the terms of maybe even the one that you might have for your single family home a lot of policies just kind of give an average or estimate replacement cost you know based on other properties nearby you may not be fully covered in the event that something really catastrophic happened so we have full actual replacement cost which covers all the labor all the materials everything of the actual cost it's going to take to

8:54Rebuild and then we get reimbursements for what would have been paid to us in rent if we have to move or displace tenants and so we're not out that cash flow or income in the event that something like that happen so another creative way again operationally speaking that you can help investors and save money and be more efficient yeah yeah a couple of key things in there with the replacement cost and then rent replacement too I'm sure if all a sudden a property burns down that you know yeah you can rebuild it but the meantime you know where how are you supporting your your business so I think that's really smart and then just from an ease standpoint too you know ironically I'm going through a claim process

9:43Right now because we had a hail storm come through where I invest in Michigan City Indiana just about a month or two ago and I've got all individual policies with several different insurers and but you know the the storm hit the whole area so right so I've got all these different claims going and it is just it's it's a lot of chaos it would have been so nice to have one policy I file it across all the properties that were affected and then I don't have to worry about you know working with 20 different adjusters or whatever it is so that's a great great Point so from your how many deals have you done to this point up to to this point as a limited partner I've

10:31Invested well over 50 I've lost count at this point I used to keep that as a as a little metric but out over 50 probably slightly less than 100 so somewhere in that range yeah wow that's incredible what would you say is the biggest change or biggest lesson that you've experienced as you've gone through lots of different deals I'm sure there's been some that have been painful and some that probably weren't as painful but still a good lesson to to learn yeah a couple thing to come to mind the first is that you got to bet on the jockey and and not the horse you know it really comes down to the team their expertise their track record are they are they a real true operator do they intend to be in this business long term or is this

11:20Again something they heard about a couple weeks ago and thought yeah I could be a syndicator let's try it out that makes a huge huge impact my most successful deals are with with the tri andrue operators because they have connections built they have Broker relationships they have relationships with insurance and with lenders they can pull strings they can make things happen right they know what to do if X Y and Z were to unfold so just think about that because as a limited partner the only thing well not the only thing the biggest thing that we have to look at as to you know the operator is the experience in the track record do you specialize in what you're doing how many times have you done it what have the results been if you had a deal go bad or sideways what were the Lessons Learned that's that's the biggest Chunk in

12:08My opinion of the due diligence the second thing I've learned especially over the last two three years with these Rik cycles and these different debt structures is betting on appreciation isn't always the best play and and thankfully I knew this early on from flipping houses and having some not be so profitable yeah and and then realizing that many of them were so profitable because the market was you know on fire at the time and it wasn't really me or my skill set so I'm a cash flow focused investor that's what I'm vetting the most in a deal and that's what I'm projecting for myself as I look forward and I say you know where where could I potentially be in five years or 10 years and when I run that kind of analysis I'm really just focused on cash flow and I'm not

12:57Buying into the you know double your money in three years yada yada that was all the hype before this rate hike cycle and you know in some cases it happened in a lot of cases it didn't and especially in the 2021 deals it's it's highly unlikely that that's going to unfold in those deals so I like a combination of cash flow potential Equity upside and tax advantages so I try to find a sweet spot within there and the last thing I'll say about Lessons Learned is you got to check in with your psychology so I've always been a dollar cost average mindset investor and it wouldn't matter if I wasn't even a real estate guy and I was a stock market guy if I was going to do stocks I'd be buying in consistently with equal

13:45Amounts of money year toe into some Diversified Index Fund or something like that because you just can't time markets you just can't there's too many things obviously out of our control what the FED does what the government does Wars inflation you know you can't predict this stuff so you just keep dollar cost averaging you know I had deals from 2015 16 17 18 19 do incredibly well as a limited partner better than most of the deals I did actively and then I'm going to have some subpar deals from 2020 21 maybe 22 we'll see and then now again as Prime Time opportunity I might have some of the best deals coming up again than I've ever done here in 24 25 26 so time will tell but you know if

14:34You ask investors are you long-term most investors will say yes but the psychology works against you right because when things start to go south you go oh wait a second maybe I'm gonna sit on the sidelines maybe I'm not going to invest anymore maybe I'm going to change strategy so a lot of people are in that camp right now it's unfortunately the case but it's why I want to come on your show and and really get this point out to others that are thinking about commercial investing right now yeah yeah to your point like if if you are a cash flow investor and I love hearing you say that because I've interviewed so many people on this show and everyone who is more of the appreciation investor mindset you know that that's what they're going after they have great stories of win and big and then

15:22They've all had if they've been doing this for long enough they all have the story of almost or or at some point losing everything and it almost destroying their life at at you know especially in the 09 crash time period it's almost like a gambler you know because you can't like you said you can't predict the future and so if that's that's the main thing yeah you're gonna have some high times but you're also going to have some struggles at times but if you have cash flow to your point like you know if the market goes up that's great you you capitalize on that if it goes down you're still collecting cash flow on a monthly basis the underlying asset value yeah it might go down temporarily we know over the long term it's always going to appreciate I mean at least if you look at historical Trends over any period of long period

16:10Of time so so I think those are all just really really great lessons to take away and I can tell you've had a lot of experience with this and you're speaking from experience you're not just kind of somebody who's just getting started and reading this stuff out of a book it comes from hard Lessons Learned so yeah I'll leave your audience with one actual true case study here case in point to what we're talking about so a lot of syndicators will have they'll outline a three to fiveyear business plan and there's nothing wrong with that but that's the most typical business plan we're going to get in add value renovate sell okay cool I do a lot of those and I love them but I've also worked with operators that never intend to sell and when I say never it doesn't literally mean never it just means we don't know when we're going to sell might

16:59Sell in 10 years 20 years 30 years next year we don't know so some of those deals I got in 2016 early 2017 I'm still in them right now they put longer term fixed rate debt on these deals and I tell you every year the cash flow just keeps going up and up and up there's no chance or possibility right now of a capital call of pause distributions there's no re the valuation may be lower but to your point Kirby every year approximately that cash flow goes up by 1% some of these deals are paying out to me right now 15 to 177% annualized cash flow wow and they don't need to sell and they're not going to sell at least not

17:47Right now you know ask them in five years maybe but the cool thing about strategies like that you know when it makes sense you can refinance and send money back to your investors we saw that happen a lot leading up to the the recent rate hike cycle and it's it's why I balance you know a diversification is what I'm trying to articulate here in a in a poor way u i diversify with a strategy like that with a three to fiveyear hold over here with a multif family apartment there with a self storage here with a mobile home park there with a car wash over there with a not lending fund over here diversification is so important and there's so many you can be Diversified even within commercial real estate in my opinion and that's what I've been doing this

18:36Whole time at least since 2015