Listen to Michael Becker as he shares his bullish view on multifamily apartment investing. This guy has done over 50 syndicated deals for over 10,000 units. He started buying properties at $30,000 per door. Those same properties may be trading at over $100,000 per door in today's market. Listen in to hear why Michael remains bullish on the apartment investing space!
Table of Contents:
- Where To Listen To The Podcast
- The Multifamily Investing Show With Michael Becker
- Put It Back Together and Get It Going
- A Guy That Did a Lot of Apartment Investing Deals
- A Dramatically Higher Interest Within the Apartment Investing Space
- People Are Doing Apartment Investing for the Appreciation
- The Guy Who You’ll Go Apartment Investing With
- Falling Into the Apartment Investing Niche
- How to Reach Michael Becker
The Multifamily Investing Show with Michael Becker
Darin: Michael Becker lives in the Dallas area. He grew up here, went to school here, started his company here, invests in apartments here and in Austin. Michael has quickly become a leader in the multifamily space. He's completed over 50 syndicated multifamily deals with over 10,000 units.
In addition to winning deals, Michael recently launched a high-end YouTube show called The Multifamily Investing Show with Michael Becker. It’s where he shares his wisdom and brings on extremely high-caliber guests in the multifamily industry.
I only got involved in multifamily about three years ago. When I did get involved, I started listening to a lot of podcasts. The three that I focused on were Old Capital, Rod Khleif, and Joe Fairless. Michael Becker is on a lot of the Old Capital podcasts, so I was able to benefit from his knowledge.
When I joined the multifamily mentorship group, there are a lot of people who would bring up his name as a leader in the space; both living in Dallas. He's really grown his market in the multifamily space, and his reputation. Michael can you share how many properties and how many units you're currently invested in?
Michael: I should know this a little bit better. We bought a deal this week so I think that's like 25 or 26 on the portfolio today. We've done 50-ish, maybe a little bit more than that, we've done a little bit over 10,000 units. We have about 6,000 units today. It's kind of funny when you get into this business, you have a podcaster show. We started out with dozens and dozens of listeners and now you're at 40-50,000 downloads a month on the show.
Never Thought Life Would Lead to Apartment Investing
Michael: You go to some of these events and my life isn't quite what I thought. Michael Becker didn't think his life would turn out like this. I've got to have good-looking 20-year-old blonde girls hanging out with me. Got this 50-year-old middle-aged guy who thinks I'm kind of cool.
Darin: I can imagine you'd go show up at a conference and you meet somebody for the first time. You don't really know much about them but because they've listened to so many of your shows, they feel like they know you. So, that's kind of a weird situation for you.
Michael: Funny story, I was at a dinner at Plano, not too far from where you're at. We go to have dinner with my in-laws and my wife's uncle and his wife. So we go to Roy's, the Hawaiian place in Plano, and we're sitting down. Some guy comes over to me and he's like, "Are you Michael Becker?" He listened to the show.
My wife was all embarrassed because it's happening in front of her mom and her uncle. It's just kind of funny how that is. I'm a minor celebrity in a very, very small niche. It's funny how guys like you are excited to talk to me. But you go home and no one cares about any of that stuff when you get walking.
Darin: You can go to the grocery store, they'll leave you alone. But you go to a multifamily conference, and they're all over you.
Michael: Or you walk into your own house. No one seems to care.
Large Wealth Opportunities In Apartment Investing
Darin: Especially the kids. I don't know how old your kids are but I've got two teenagers and once they turned into the teenage realm, forget about it. Anything that comes out of my mouth doesn't make sense. It'd be great if you could share a bit about your story. There's a lot of listeners that get into the multifamily field.
When they come in, they're working a W-2 job and they hear that there are large wealth opportunities in multifamily. But, they don't really know how to make that transition. You have an awesome story, so if you can just share a little bit about that, that'd be great.
Michael: As you mentioned, I'm based in Dallas; grew up in the area. Went to college at the University of North Texas. I'm in my early 40s now, so I cut my teeth kind of early 2000s. I got my professional career, which was in banking. That's kind of what I did. Worked my way through school. One of my little jokes I like to say is I was in college for a long time.
I ended up working full-time going to night school the last part of it. My joke is I'd be Tommy Boy by a year. I was in college for a year. Had a good time and then finally got serious. I realized I don't want to be the guy that goes to college for seven years and doesn't graduate. So I finally got myself together, graduated, and then I worked at the bank.
I got into the credit department. Coming out of it, I was in the retail side and got in the credit department. That's where I learned how business actually happened, just underwriting a bunch of loans.
Commercial Real Estate Lending for Apartment Investing
Michael: I worked for a bank that did a lot of commercial real estate lending. Did that for two-and-a-half years, then got promoted into the production side. I became a loan officer, and the first couple of years of my career were great. You couldn't make a bad loan Darin. Everything was going up and one day, that all changed. In 2008, it just changed overnight.
I go from making a bunch of loans to doing a lot of problem loan workout. All these loans that were good when we made them, quickly didn't turn out very well. That was a really tough time but it was a great learning experience. Through that process, my bank actually got purchased by Wells Fargo. I ended up going to Wells Fargo and hid out for several years there.
It was a valuable lesson to see all these kinds of optimistic things that everyone had back in 2006 and 2005. How that turned out to be a little bit different when they just weren't fundamentally setup. And how do you get to work these deals out and collect your money. Have some very difficult conversations with a lot of people.
Fortunately, I had a paycheck throughout all that, so I didn't have to worry about keeping the lights on. Then, coming out of the great recession, really, I kind of got into it. I made loans on all the various income-producing asset classes, commercial real estate, land loans, and development loans.
But I have experience loaning in office, industrial, and retail. Coming out of the great recession really the only thing that was working was multifamily. I was like, "Okay. Well, let's work on that."
Put It Back Together and Get It Going
Michael: Because I did some of that kind of going in to 2008. Then built a program out. Got in a real good groove with Paul Peebles who's a co-host of Old Capital Podcast. He was my biggest referral source when I worked at Wells Fargo. In about a three-year period, about 150 loans on apartment investing so we’re just kind of making up bridge loans.
Taking all these broken properties coming out of the recession, give them a bridge loan, reset them, fix them up. That's probably what we'll call a Humpty Dumpty loan. It was kind of broken, you gotta put it back together and get it going. So, the 150 loans, nearly 100 of those were through Paul. We did a ton of deals.
In that process too, I realized I was making all these loans to all these people. I was making a good living, but all my clients were getting rich. Particularly at the time, there's a group that's still around, called Lifestyles Unlimited. I did a lot of loans, I know you're a member of Sumrok’s group. Brad was running the Dallas office and that's where I got to know Brad. He was the head of the Dallas office at the time.
Just watching those guys and realizing these guys weren't any smarter than me. A lot of them didn't have as much money as I did, because I was a good boy and lived below my means. I saved my money and things like that. And I started out about a decade ago buying some smaller stuff, some single family houses, and that was good.
Transitioning To Apartment Investing
Michael: It’s probably unnecessary with the benefit of hindsight, but it allowed me to get some real-world project management experiences. Running and fixing these broken properties on a small scale and using my own money. I did that for a couple of years. That wasn't very scalable, because I was really busy at work. I had a wife and two kids and 16 rent houses so I decided one day let's transition over.
One at a time, sort of got one every two months. I was buying, renovating, leasing it out, refinancing, and repeating. Every other month I was doing one for about two years, then started getting into multifamily. In 2013, we bought our first deal. It's a 120 unit deal in Garland Texas, or Eastern suburb of Dallas, and was built in '74. We paid $3.8 or $3.9 million. If you do the math, that's kind of 30-ish thousand a unit.
Darin: It's not like that anymore.
Michael: I owned it for two-and-a-half years, sold it for about 6.4 million, 55,000 a unit. Sold it for 80,000 a unit, and it's probably worth 100,000 a unit today. 10,000 units later and the Old Capital Podcast. Then I started a new show, The Multifamily Investing Show with Michael Becker, on YouTube or iTunes. That's what I was spending much time on. Now, here we are talking to you.
Darin: There's a lot of people who want to figure out a way to get into the investing game. Some people start in single family, some people go right to multifamily, some people analyze, analyze, analyze. They could never get off the fence. First, talk about that fear of doing your first deal.
The Fear of Moving From Single Family to Apartment Investing
Darin: I've talked to a lot of investors that have 1,000s of units. They started with a single family. That single family may have been one of their more fearful transactions because they didn't have the confidence. They didn't have the process down yet. Did you have fear? Did you start investing while you were still at the bank?
Michael: The first house I bought was a three-bed, two-bath house in 2010 or '11. It was around 75,000 bucks and I put 10 or $15,000 in it. I leased it out for 1,100 bucks a month. It’s like 15,000 was out of pocket, so that was good bite size. If I lost 15,000 bucks it would suck but it wasn't going to bankrupt me. I wasn't going to end up on the street.
That's how I got myself. My wife was obviously fearful as well. It’s a lot easier to say you're going to do something like that at the time than actually doing it. You weren't sure if we're going to go right back in the great recession. It was still kind of choppy out on the marketplace, but it felt like a good time. I made about 500 bucks a month in cash flow of that deal, then I did the next one.
At the time, you could make about $500 on these houses in cash flow. My goal was to get $10,000 in cash flow. I was like, "I got to do 20 houses." Then I started doing a lot of work and I was managing it. I was like, "That's a dumb goal."
A Mattress Salesman Trying To Put A Loan Together
Michael: "I shouldn't have that goal, I need to kind of modify it." So I got to about 16, I realized that's counter-productive. I decided to transition in 2013, really use what I was using because I was looking at all these guys. He's a friend of mine too, Aaron Katz, from a few episodes ago.
I made him his first loan, I remember distinctly. He walked in, it was at Paul Peebles old office and he had a one, two or something. Did a little meeting in his office, the conference room, and had 10 prospective investors. Paul and I were there talking about how you put these loans together.
There's Aaron Katz, a mattress salesman, trying to put a deal together. I saw him, I distinctly remember towards the end, before I decided to make the transition. There was one of the guys in Lifestyles, there were like two guys together. One of them had a good job. The other one was a bus driver, he drove a bus for a living and made 40 grand a year. He and another guy were going to buy a $1 million-plus deal.
I was going to give them a $1 million loan. Thought to myself, "What am I doing putting bus drivers behind a $1 million deal." I'm sitting here at the bank and giving them a loan. That just got me going. The first four deals I did, 800 units for about a six-month period. I did that while I was still employed. It’s like I still had most of the houses, I have these four deals, I have proof of concept. It was time to go.
It’s Been a Good Run
Michael: As a banker, you're bred to be a little bit more conservative. I had to take little steps. Be a little bit more measured if I would've just really gone out and just gone for it. Like in 2011, on the multifamily. If I could've, instead of Michael Becker, I would have been David Moore with KnighVest and had 10,000 units. But you know, I don't have too many regrets or too many complaints. It's been a good run.
Darin: One of the things you did was to take action in getting in the single family units. Once you started building that out, you realized you had the wrong goal. Seeing the guys come in, the Lifestyles guys, Aaron Katz, other people, and your relationship with Paul at Old Capital.
Talking to other people, at some point it clicked to you that, “I should stop doing these single families. I should focus on multifamily.” Is that how it went down?
Michael: It was a lot more scalable and you're still using all your own money. Obviously, you leverage other people's money, you get non-recourse debt, you do these bigger deals. You can leverage a management company more efficiently. It was a much more scalable business.
I don't know if it'd be interesting, it's hypothetical as you never know. If I just would've kept on the trajectory, I would have had it built out a company invest can do single family homes, I probably would've had 1,000 houses, or something, at this point.
I don't know, maybe I would've been better off financially doing that versus what I did. It's worked out well, obviously, I don't have too many regrets. There's no right or wrong in this business. Whatever kind of works for you.
You Need To Take Action
Darin: Some of the things that are learning lessons for people is depending on where your mindset is. At some point, you need to be able to take action. I've seen people bypass single family and go right to multifamily, maybe some of them smaller. I have seen people go right to 100 plus unit deals, 200 plus unit deals.
Whatever you can believe that you can accomplish in your mind, that's the first step. You actually have to believe that you can accomplish it. Go and do it and take action. Michael thought he was going to be just building a portfolio of all single family homes. But at some point, he ended up coming in contact with these other people. They educated him that he could scale more by going multifamily.
He probably wouldn't have ever done that, had he not started with the single families. So at some point, you got to take some action. The other thing you said was they're not smarter than you. That's important for the listeners too. In life, we want to put people up on a pedestal that have success. Sometimes, we put them up there and think that we're not worthy. But then, when you surround yourself with them, you realize people are people and you can do it too.
Everybody started with nothing, no investments. Then they built one after the other. I want listeners to know that we have the Michael Beckers of the world on here who have owned 10,000 units. He started with one single family and then built it from there. Talk about your latest show because you just came out with a show on YouTube. What prompted that? How's that going? What's the focus?
An Extremely Highly Produced Show
Michael: We've started The Multifamily Investing Show with Michael Becker's what we're calling it. It was a real original name and everything, but I saw a little bit of a void. I’ve been with the Old Capital Podcast for, six years now, and it's great, still going to do it. We do it on audio and on iTunes, we're doing it because we're both pretty busy guys, Paul and I.
Now, we're bringing James Eng in to help out a little bit more because we're all so darn busy. I thought there was a little bit of a void in the marketplace with being an extremely highly produced show. I do it in the studio, I actually recorded an episode today. That's why you see me wear a jacket. I don't normally wear a sports coat unless I'm going into the studio or a funeral or something.
But go to a professional studio, record it. We were trying to go upstream and there’s a lot of shows out there that are great. Old Capital, your show, and 1,000 other ones that are kind of along the lines. I thought I would just be really highly produced, do video, content also released in audio form. We're really trying to get some pretty high quality, high-level guests where ownership groups that have done billions of dollars in transactions and the most prominent brokers in the mortgage across the country. Obviously with Texas, because that's where I'm in and where I play at. That's really who I talk with. I have Pat Jones on today from Newmark in Austin. He sells you $2 billion of apartments in Austin and San Antonio.
Surrounding Yourself With the Right People
Michael: He's probably number two in the marketplace down there. We've done a few deals with Pat. So it’s been a pretty good show. I’m thinking of it as if the Old Capital show is kind of like high school, this is kind of like graduate level is what I'm aiming for.
Darin: First of all, the background studio looks fantastic. If you haven't seen it yet, check out Michael Becker's show on YouTube. It looks like a very professional studio, like you would see a TV studio or a day talk show studio.
Darin: The niched Oprah. Because Michael has such experience, he's been involved in 50-some odd deals and 10,000 units. He has relationships with people that are just at a high level. He can get those guests to come on and share their wisdom. Between Michael and his guests, there's a lot of wisdom to be had there, so definitely check that out.
One of the other things that you talked about was learning from others and you've done 10,000 units. Some people may think, "I could never get there and what else does Michael have to learn?" But you are continually bringing people on that own a billion-dollar worth of assets.
You're learning from the next guy up, which successful people, that is what I've seen them do time and time again. As they go to reach one goal, they're already setting their next goal.
Michael: A lot of it is who you surround yourself with and aspirations. I'm in my early 40s now, so I can't just sit at home anymore. Still got to kind of try to go up and do more and where can I grow and scale.
A Guy That Did a Lot of Apartment Investing Deals
Michael: I was always a guy that did a lot of deals from the nature of my professional background. Being a banker's very transactional, you do a lot of transactions. We had that part down what's become the interesting part over the last eight years or so of doing this.
It’s really how you take that and turn that into a company and scale it. I do a lot of stuff I really like to do, and I do a whole lot of stuff I don't like to do. Like right now, it's tax season, so we're doing 1,300 and something K-1s right now. That's such a laborious process, you have to have systems and staying on top of all that stuff.
Team members, growing and scaling, dealing with 700 and something unique investors, and it is just a lot. It's not always fun. But the more interesting side of the business is how do you become a company from just a guy doing some deals to a natural, real company, and that's the lot of it.
That's what I like to learn from the other people I talk to, especially in my space. Many will talk with a lot of the brokers in town. The markets I handle are genuinely friends and we hang out together and we all have common interests. So it's good staying abreast of what's going on with the market.
It's a completely unfair business. A lot of this is who you know, what you know, and what chips you can trade. It's an imperfect market and a lot of this data is if I know something that the next guy doesn't know, I got an edge.
If I Can Take Action, I Have An Edge
Michael: If I had this relationship that the next guy doesn't have, I have an edge. Or if I get this data first, I know this deal is out there and I can take action. Then recognize a deal, go quick and go hard at it, that's an edge. What used to be my competition are similar type firms than ours and now we are going to buy bigger, nicer, better stuff.
We're competing against some pretty heavy hitters, some institutions that have billion dollar funds. It's been the evolution of that and how do you compete against someone that's got a billion cash sitting in their bank account.
I'm nimble, they’re not. They have all these rules and committees and I put my own money up. I'm the cowboy out there and they're all formal. It's harder to deal with these institutions that have to check 1,000 boxes before they can commit to something. I just go and look at it. We do underwriting and our diligence. I can get to a yes a lot quicker than they can.
We're evolving in our business and doing different types of deals. There’s a lot of interesting things over the last couple of years. It's cool to say I beat this 70,000 units company a couple of years ago and they were all pissed. Here's little me and we beat out four, five other names you would know in town, on top on that deal.
I had a relationship and I had done two other deals with the seller. And I got a great relationship with the broker. We end up going hard and passing through some money to do that. Related can't do that. They got to check 1,000 boxes before they could go.
Making the First and Last Call
Darin: I'm a small fry and there are people smaller than me. There are big guys like you, then there are big guys that are above you. You have some brokers talk to you and, "Hey, I got this off-market deal, I'm only showing it to you." Then I'd call somebody else about, "Hey, have you seen this deal? Would you potentially want to partner, if the numbers work out?" "Is it this deal? Yes, I saw that last week."
That partner saw it last week and you saw it two weeks ago. As you get more experience and as you do more deals, as you can be more nimble and have an edge and make things easier for the broker. Then you're more than likely to get more of those calls earlier in the process.
Michael: If it's an off-market deal, you want to have the first call. When it's a marketed deal, you want to have the last call. That's what I'm always positioning myself to get, that first call in off-market deals. I have the first shot. If I can react quickly we can just take it before the marketplace figures out what's going on.
The last call, maybe I get that last piece of information. Say, "Hey, if you do this, you pay this, you put this term in, it's your deal." That's what I'm always working to try and get myself a position for.
Darin: Your first deal was a 120 unit 1974 asset. When you started out, you were doing B/C assets. Everything I've seen you do in the last couple of years has been more on the A side, B+ to A. Can you talk about that kind of evolution? Why have you moved from that B/C to better quality assets?
A Good Apartment Investing Execution
Michael: Well, kind of twofold. First, when we bought our first deal, we needed to raise a million or two. I had no idea how the hell I was going to raise a million or two. You triple your investors money in two years a few times, your building a track record and capital is a lot greater. Some of that's what we did.
We had a good business plan and we executed pretty well in the market. I'm not naïve to think I didn’t benefit from the times and living in the city and state I've been doing business in. But something that’s intentional too, because we took action. I saw the market and thought it was as good time to enter. Our ability to track capital is greater, so am I going to try to put a $1 million equity raise?
That doesn't make any sense because it'd be filled in no time. We got to do a little bit larger transactions. That's one part of it. But more than that, the markets evolved so much. When I started buying deals, I bought a '70s vintage deal for 30,000 per unit that now trades for 100,000 per unit. At the time, you could buy a brand new, class A deal in Dallas for a five cap. A B-deal is like six and a half cap and a C-deal is somewhere between eight and eight and a half.
Fast forward today, A-deal is four and a half, a B-deal's like 4.75, and a C-deal is like a 5. That honestly is probably more like an A-deal is a four; a B-deal is four and a quarter; and a C-deal is four and a half. The market rate and the cap rates have compressed so much.
A Dramatically Higher Interest Within the Apartment Investing Space
Michael: The interest rates and the debt terms are so much better today. My show, your show, a million other things, Lifestyles, Sumrock’s, there are so many new clubs. The interest within this space is just dramatically higher today than what it was eight years ago when I bought my first deal. So the market is completely different, a lot more sophisticated than what it was back then.
Even the unsophisticated money is so much more sophisticated than a lot of the semi-sophisticated money back 8, 10 years ago. It just doesn't make as much sense to me to pay the same or similar cap rate to buy something built in 1974 as I can for something built 2004, 2014. I get that workforce housing generally has you got a value play.
You can go in and you can spend some money and spiff the rents up. Drive your yield to your costs up a little bit just by doing some efforts over a year or two. There's that play, for sure. I'm not trying to discount or say it's bad to do that. It's an unfair business. The better the debt terms get, especially to buy nicer stuff, the debt terms even get better.
You have more options. If you're buying something, a piece of crap property built-in 1974, you got a bank loan. You're like Fannie Mae, then you just have some debt funds and that went away and they're sort of back. Where if you go buy a 2004, 2014 vintage deal, you're going to have all various sorts of life insurance companies.
You Have To Be The Cowboy When You’re Out There
Michael: All these different banks competing for the stuff, and they'll give you a little bit better debt terms. The returns aren't that materially different for today versus when you go buy something. In all honesty, I have a little bit less competition in some of those nicer stuff than I do. It's different competition, but it's a little bit less in scope.
I figured out you just got to be the cowboy when you're out there. Being aggressive and going after these deals to beat these institutions out, or if I have to bang it out with 20 other guys on a 1970's vintage deal. That could get expensive as some of these numbers run from some of these stories I've been hearing. Like we had Al Silva, talked to him on the show, he mentioned the deal.
He sold Fielder's Glen and just how the price moved over 2 million bucks in the process from an initial offer to the ending. They were just like a knife out at the end. It was like a freaking three cap when it was all said and done. It's a difficult environment from a competition standpoint. We're just trying to zig a little bit when others zag. That's where we're at right now.
Darin: I've seen in the last year to 18 months more syndicators as they're scaling up larger, making that transition. For the same reason as you mentioned, A/B/C assets and cap rate spread used to be different for the different asset classes. Now they're almost on top of each other, so why not buy the better asset. I saw you make that shift a year and a half before a lot of other syndicators started talking about that.
Taking The Early Steps Without Regrets
Michael: We were early. Honestly, maybe it was a little too early because we bought all these deals at eight and a half caps. They all had a 20+% upside of rents at the time, and a lot of these deals didn't have rubs in place.
You get another 10 or so percent upside in your income just by billing back water and sewer. Then your eight and a half cap turned into six caps. We are going to triple our money, let's go ahead and sell. Then I just didn't know it was going to go a five cap, otherwise a little bit longer.
Darin: Who would've thought?
Michael: I don't have any regrets because if we didn't sell this one thing, we wouldn't have had the ability to buy the next thing. It's never a static thing because if I didn't do this, I wouldn't have done the other thing.
It all kind of worked out pretty well. We kind of saw it a little bit early, made that trade when I could sell a '70s deal, maybe for 50 bips higher and a cap worth I can buy a 2004 vintage deal. We decided to take that trade three, four years ago.
Darin: Talk about new construction because I have not seen you get involved in new construction. Have you? If you haven't, why? Yes, development, ground-up, for the same reasons you're mentioning, I'm hearing some syndicators get interested.
Not all of them have pulled the trigger on it but have started to look at it, maybe it makes sense to build. I could build at almost the same price I could buy existing property for. So what's your take on that?
The Concept of Risk-Adjusted Returns
Michael: There's obviously viable there. Some just built all the stuff that I'm out there buying at some point in time, that's not a bad thought. What doesn't work, or what has kept me away from it? But I like buying a deal and getting a check like day one.
Darin: The cashflow right away.
Michael: The risk profile's a little bit different. If you're going into a ground-up development thing, there's a lot of people, especially when you're new in the business. They don't fully appreciate or understand the concept of risk adjusted returns. The risk profile, if I go buy something that's 10 years old that I got 15 to 100 bucks.
Upside rent by changing out some appliances or flooring or something like that. It's 95% occupied the day I buy it. That's a completely different risk profile than me buying a piece of dirt in Prosper, Texas, where you live. Then getting the horizontal improvements, building it, leasing it up, stabilizing, and have a three-year window there.
You should make more money if everything goes well. But there's a lot of variables that can come and screw you up along the way that hasn't fit into our current plan. I'm not going to say anything wrong with it. Just making sure if you're comparing a deal like what I do or what I believe you do to a ground-up construction deal.
If I'm showing a 14 IRR, in my deal you better be pushing an 18 to 20 to make sure that risk is rewarded. I wouldn't do a ground-up construction deal for 14 compared to a deal like my typical structure over a 14. That doesn't make sense to me.
Apartment Investing Requires a Lot of Execution and Market Risks
Michael: That gets lost a lot with the maybe a little bit less experienced investors. There's nothing wrong with it. It's just a lot of execution risk and market risk along the way as well.
Darin: The lumber cost jumped up dramatically in a manner of a few weeks. You could build your whole plan and then all of a sudden something like that throws a wrench in it. I'm an East Coast guy, grew up in Connecticut, I lived in South Florida for 14 years. I've been in the Dallas market now for 11. I love the Dallas market.
If I look at all major metropolitan markets across the country, I think the cost of living here is dramatically lower than most other major metropolitan markets. Back in 2013, you were buying 30K a door, and you sold it just under 60K. Then it sold for 80K, and then it's probably worth 100K now. Some people ask me, "Well, Darin, how much further does this have to run?"
My viewpoint is some of the things that are helping, not only Dallas and Texas in general, but other growth markets, are population. More people are moving in from California, New York, Chicago, into Texas, into Arizona, into Florida, the Carolinas.
With more population, there's more competition for apartments, more competition for residential homes. More competition for jobs and more companies are moving into these markets, creating new jobs. There's still a huge gap in affordability between Dallas and, say, the coastal markets, California and New York.
I think over time, that gap will squeeze. I don't think Dallas will ever be on top of California or New York in terms of housing prices and rent. But I think that that gap will continue to shrink.
People Are Doing Apartment Investing for the Appreciation
Darin: Another risk could be that Texas has benefited from being able to have cashflow on these deals. Where you buy multifamily in California and you've got two, three cap rates but people are buying for the appreciation. That could happen in these growth markets, like Texas and Arizona and other markets. What’s your view on this?
Michael: Those are all valid thoughts, I share a lot of them. The market is completely different. I've lived here my entire life and it was a sleepy town all the way up until probably 2011. Dallas was where you came to go eat yield. We had a lot of Californian money back, pre-recession.
So you sell a duplex in California, you'll buy a 50-unit property in Fort Worth. I don't know how many times. They quadrupled their money in California, and then they go get an eight or nine cap deal in Fort Worth. Put a 6% amortizing mortgage on it and they clip 8, 9% cash on cash. They didn't expect to get a whole big pop on the backend of the deal.
The market shifted through the great recession. We've already been pretty big, corporate relocation work for many years. Started well before 2010, but really picked up and accelerated. People started seeing all the stuff that's going on here. It's a much more dynamic market. You live through mostly good times here in your 11 years in town.
But you're here in the early 2000s or the 90s or early 90s. There was downtown and everything else was sort of dead. Now, there are only vibrant nightlife places. Even when you live out in the boonies, and not too far from where you're at. You got Legacy West.
Darin: That's changed our world, for sure.
A More Affordable Housing for Employees
Michael: You got these high-end steak houses and all sorts of stuff there. The market's completely different than what it was a decade or 40 years ago. That's one part of it. We're seeing corporate relo’s and a lot of that's regulatory, lack of regulatory, burden. More affordable way to do business, and more affordable housing for employees of these people, for these large companies.
Just fueling a lot of the growth of the four major Texas markets in general. Then COVID's accelerated a lot of that. In my time, the interest rates and hell for over the last, since about 1983, when the 10-year treasury peaked at 15 or 16% to today for the last 40 years. It has been a basically steady decline of interest rates, that's why you're seeing the stock market and real estate and bonds.
Any of those kind of assets have all done really well. A lot of it's really tied to the declination within the interest rates. We're in historical lows right now or damn near. It's been really great. We have a lot of legs to it. I'm not saying California's dead or New York's dead. I'm sure they'll correct themselves, and bounce back.
People will go back into Manhattan again when they go out to the restaurants and nightlife and things like that. It'll bounce back but it's been like the great economic migration that's been happening for 20 years. Probably brought you from the north-east or south Florida to Texas is a job. I don't know that to be true but you probably had a job.
Falling In Love With Dallas
Darin: My wife's family was here, so the wife kept telling me to move to Dallas. I had started a company a year or two prior to that. I’ve traded loan portfolios and I could do it anywhere, so I made the shift. I was actually the first one in my family to fall in love with it. I love it here.
Michael: You got that and the two markets I’m in are Dallas and Austin. I know the stats of Dallas much better. But the last I heard, two stats are just having to change over the decade a year ago. From 2010 through the end of 2019, that 10-year period, Dallas Fort Worth grew by 1.2 million people. The projections were, at the time, from between 2020 and 2030 basically, it's going to go up by 1.35 million people more. We have 6.7 million population base or something like that here. I'm sorry, 7.6 million person population base, something like that. In the next decade, give or take, we're going to overtake Chicago. That is probably going to accelerate even faster with COVID and the whole migration.
If you look at Austin, on a percentage basis, Austin's grown even faster. Austin's crossed over 2 million people in 2015. It's about 2.35, 2.4 million people today, six years later, it's just staggering to see the growth down there. People ask me to compare those markets all the time. That's what we're in, so talking investors, I think of Dallas.
People move to Dallas because they get a job, people move to Austin because they want to be in Austin. Then they have all these tech jobs and things right there. I actually talked to a broker from Austin today.
The Unbelievable Quadrupling of Prices of Apartment Units
Darin: The pricing has just gone parabolic. It’s just three and a half caps. Everything's a three and a half cap. 80s deals are all trading, and well-located 80s deals are in the 150,000+ unit range. 2005, '06, that's like 30, 40,000 a door. You're talking almost quadrupling the price of some of the stuff. It's just unbelievable.
Then there's just so much money flooding into those two markets. Particularly and at a much lesser extent, Houston and San Antonio. I don't see what stops it, to be honest. If we see that kind of population growth, we talked about lumber going up.
Concrete, labor, you get regulations, you get a $15 minimum wage. All that stuff is going to make everything more expensive, so where are you going to hide? We're all about options. If you want to invest you got to take a risk getting a sort of yield. There's no way to hide out with no risk and get yield because you're going to get 50 bps on your checking account.
You're going to get a 10-year treasury at 120 as 120 bps, 1.2% as we record list. If you want to produce a 5,6% yield you have to take some level of risk. All things being equal, the multifamily space in Florida, Arizona, Texas, Carolinas, Georgia, that kind of sunbelt markets. Those are pretty good risk-adjusted returns. You want to speculate, take a little bit more risk.
Honestly, maybe you'll buy in Manhattan. The cap rate in Manhattan right now is higher than a generic suburban Dallas deal. That should not be the case. When has that ever been the case?
The Biggest Risk in Multifamily Deals
Michael: That's a function of the market being screwed up but you would think at some point that will flip back. Maybe you will buy Manhattan or downtown San Francisco if you can stomach that up and go pull a deal off.
Darin: People from personal contacts want to get into investing but they don't fully understand it. So they'll ask, "Hey, Darin. What's your view on the biggest risk in these deals?" To your point, I have not been through a downturn. The workout scenarios, where everybody's in trouble, from the real estate side.
But I've been on the loan trading side since 2002, trading residential, multifamily and commercial real estate loans. The biggest risk in these multifamily deals is the loan term. Some people will get bridge loans, three years with two one-year extensions. Sometimes those work out great. The longest loans you can get are agency loans, 10, 12-year fixed-rate loans.
Banks like to try to keep it with a five-year duration. My point is that I saw people get in trouble on the loan side when their loan came due in a terrible economy. So you go into recession, and your loan comes due, your cash flow is down, cap rates go up. Your property's now not worth what you paid for it, so they ask for more equity. If you don't have the equity, then they take your property. So what's your take?
Michael: It's certainly a risk. I think the greatest risk is probably the sponsor. You invest with a crook, someone that wants to steal your money, or you invest with someone that's incompetent. Crook would be worse than incompetent so make sure you understand who you get in business with.
The Guy Who You’ll Go Apartment Investing With
Michael: Secondarily, a lot of these people look at the deal, look at the proforma and the returns they're going to get. But they don't think about the depth of the sponsor's experience. The depth of the sponsor's ability to feed some of these deals. That's certainly a risk.
You know Mike Hardage, we had him come on the Old Capital podcast a month ago. He was talking about how he had this disaster of a deal down in Port Arthur, Texas. It was fire and a hurricane and flood and had a bad loan on it, had a bad partner. Mike's reasonably well healed and through that all, he was just writing checks.
At the end of the day he got all his investors money back and then they all broke even. That was like you hearing the horror story of that deal. If Mike wasn't there, that would've been a lot worse than just getting your money back over four years. To testament, if he put a deal out, I would seriously consider getting in with a guy like that.
I've seen him get tested in a difficult time. If you're investing with your sponsors, they have two nickels up together and throw one of them in the deal. Now who's going to be there to write that check? In my experience, through the down turn. Some of these syndicated deals when we had recourse loans on at the bank.
The sponsor would put zero to little money in these deals but he'd sign the loan personal guarantee on a mortgage. The passive investor put all the money on it but they wouldn't sign the note. Then when stuff hits the fan, you have an office building.
Taking Maturity Risks Into a Deeper Context
Michael: Half of it goes vacant, sponsors go like I'm not going to throw good money after bad. I don't have any recourse so I'm not going to put any money in it. We, as a bank, were kind of stuck holding the bag. That would be one thought on that. The other thought about the debt. I'm not necessarily opposed to taking short-term bridge loans.
When I look at it, you think about the maturity risk because it's a real thing. A lot of these people that have loans with me had a loan maturity in 2009. When the capital markets were frozen and they were screwed. They had an 80% loan to value, the properties worth 10 million bucks. In the current time, when your loan matures in 2009, maybe it's worth 8 million bucks, you got an $8 million loan.
The bank playbook is like remargin my loan, pay me down to 80% and then you have the whole cash call issue. That got these guys in trouble and had to go sell at a bad time because the banker couldn't extend their mortgage. If you take a bridge loan, don't do 85% leverage.
I've seen a lot of these guys through 2009. We sold a deal to somebody and they put an 83 or 84% bridge loan on it with a debt fund. It was absolutely leveraged into that perfect hill and they have to get 100, $120 rent bumps.
We were selling it because we we’re hitting the ceiling and I couldn't push past it. I was like, let's go ahead and sell it. They bought it and put this bridge loan on it and closed in the latter part of 2019.
Lower Your Apartment Investing Risk With Your Leverage
Michael: I was just like, "How the hell are they going to get out of this thing?" Because I'm sure they've had some pain. I don't know that to be true but they had to have had some pain because I'm sure they had elevated collection issues.
Then their lender, especially you get with this type of lender, your fully leveraged, they have these lockboxed. They start bringing in the lockbox, just stripping all your cash. Then you're having a hard time operating, or they refuse to fund your capital draws.
So you go out and spend 100,000 bucks and then you can't pay all your vendors. We've done some bridge loans and we'll typically just lower the leverage. We'll get 65% or something like that and just lower the leverage.
So then if there is a hiccup, I got a little better margin of error. If I want to get higher leverage, we'll tend to put a 10-year loan on it.
If you take a little more leverage risk, maybe have a little less maturity risk. And if you take a little bit of maturity risk, take a little bit of lower risk with your leverage. Lower your risk with your leverage.
Darin: Most people that I've seen don't do that and don't think that way. If they go bridge, they're like, "That's great because now they'll throw in my rehab cost too and I could get 85% leverage." For the listener's benefit, the advantage of doing a shorter-duration loan is that your prepayment penalty is going to be substantially lower.
Learning From Someone Else's Nickel
Darin: If you do a longer-term loan, then a lot of people get stuck. They could sell the property for a profit but a lot of their profit is going to be eaten up by prepayment penalties. If you do a shorter-duration loan, then you have a smaller prepayment penalty. But you mitigate that risk by having lower leverage.
The other piece that can come into play is where you are in the economic cycle. If you think that you're near the end of the real estate cycle and you could be hitting a recession, then there's probably more risk with that. Or if you're coming out of a downturn and you're coming on into a growth phase, you may have a lower risk by doing a bridge loan and being able to turn the property around in a shorter time frame.
Michael: A lot of these lessons I learned on someone else's nickel. I was the Grim Reaper on the opposite end of the deal. For sure, to your prepayment penalty. I had a conversation on one of our deals today because I got a really good offer but we still have a very large prepay penalty. It was like, "No. We're not going to sell."
We made a mistake when we put this 12-year loan on it and we're going to ride this sucker out. Because I'm not going to give $7 million of our profit away. I'm just going to kind of play prevent defense here or our kill-the-clock. Then we'll get paid in the future. I'm not going to take it on the chin today. I've made that mistake tens of millions of dollars over in my career. That's been one of the single biggest mistakes.
Nothing In The World Is Free
Michael: I'm not opposed to fixed rates anymore. We do a lot of floating. Some are fixed rates but we're starting to get very allergic to yield maintenance. Trying to find an alternative way and watch those debt funds. They're starting to come back a little bit. It's great because you get a little leverage and you juice your IRR.
You can track some capital that way but nothing in this world's free. There's a certain level of underlying risk. If everything goes to plan, that's great and you're going to make more money. If it doesn't, you're going to get yourself in a spot where you can be in trouble pretty darn quick.
Darin: Where do you find most of your equity investors? You mentioned you you're doing all these K-1s, you've got 700 individual investors. I've also seen on a number of your deals that you selectively pick one large partner that also helps raise capital.
I'm guessing that you have your bucket and you're bringing from your database. Then you partner with somebody strategic and then they have their bucket. They bring in a piece as well. Is that kind of how it works with you?
Michael: A couple of things. There are three ways we look at it. One, we started out. We'll joint-venture with a one-off high net worth individual, typically out of California. Got a little connection out in Minnesota that's got a couple of guys out that way as well. The story typically is: I sold a building in California, I want to come to Texas. I want to do a 1031, I don't know anybody.
Falling Into the Apartment Investing Niche
Michael: Help me get a home on my 1031. So we'll form a joint venture, formally, through a Tenant in Common agreement or a TIC. Then they put the bulk of the money up. We put a little bit of money up, and then the compensation gets shifted from carried interest. Your typical carried interest structure where you promote the deal.
Where you get a percentage of the profits of the deal by doing the sweat equity. That gets converted into a fee income-based model where you get an acquisition fee. You have a disposition fee and typically got a higher asset management fee. Because that's what is required to become compliant with the 1031 rules of the TIC.
That's a smaller part of our business but we have that little niche. I have five, six guys that have done that on dozen deals over the years. I'm in the middle of one of those right now. We got a really good niche we fell into. The other way we do is we typically have a pretty big database of our own, a couple of thousand people in the database. Many hundreds that have actually invested with us that are on my list.
That started out with just kind of friends and family, and talking. People I knew professionally and then started the podcast. We'll get a couple or three people a week off the shows that'll reach out every week. That's helpful to build up the list over time, and referrals. Especially if you do well for somebody, they're always telling their buddy about all the good deals they do.
The Kind of Deals You Always Talk About
Michael: They're not going to talk about the bad deals, they always talk about the good deals. You have a couple of good deals, you'll tend to get some referrals that way. Then, once in a while, we partnered with two separate people over a handful of deals. We're going to do a really large deal where we'll fund the deal. Then we partner with someone that's got a really big database.
We'll joint-venture the deal, split up the compensation, then bring some capital in. We've done it that way. It's been a way to scale up. I would have not just taken institutional money, I just made it a choice to avoid that for many reasons. Control, being the biggest one. I don't want some 25-year-old MBA telling me what I can and can't do.
I want to be the captain of my own ship and control the deal. That would have been a little faster way to scale up because you get a program put in place and they give you 90% of the money. You just got to worry about 10% of the money, you repeat it but nothing in this world's free. There's non-monetary costs, all that stuff.
Darin: You accomplished so much. I applaud you because I've talked to so many people who know you. You've made yourself available to help other people. Although you've had a ton of success, the reputation that I hear is that your head hasn't ballooned.
You love to help people. That's awesome, that's one of the things I love about this space. People above are typically willing to help the next guy come up. You're looking to get to the next level. What's the next big stretch goal for you?
Stretching Modest Goals
Michael: I don't know if we have a stretch goal, I haven't thought about it that way. We want to do 250 to 300 million in transactions this year, a 2021 goal. We got our first deal done Tuesday, a couple of days ago as we record this. I got another one closing in the end of the month. We'll get about 45 out of the gate close to February of 2021. It'll be a good start to the year and then go from there.
We're working on a big exchange for one of our kind of repeat 1031 guys. Hoping to go buy a big, pretty, new thing somewhere in Dallas or Austin. That's what we're looking at right now. We're in the process of signing a new lease, expanded my office space, taking on a couple of new people. Trying to grow and expand and do more.
Launching the show and trying to build up our own database, even bigger. Maybe we get away from joint-venturing. Some from time to time with some of the partners we just mentioned that really just do everything in-house, really grow and scale. Along the way we got some really good partners that have a lot of synergies with us, so there are no complaints, really, on my end.
The future's up and I want to keep going, the market brand, we're going to expand into other markets. We're actively thinking that San Antonio's finally a good time to enter. I know a lot of people who go to San Antonio and sometimes it's where promotes go to die, at least in the last few years. It’s a good time to enter the market. Supply is way down and the fundamentals aren't quite out of whack.
The Fundamentals Of Apartment Investing In the Class A Space
Michael: It's not nearly as dynamic as Dallas or Austin. Certainly Austin, which is its step sister. An hour and a half up I35. Austin is certainly the sexier of the two but you get a material pricing break if you go to San Antonio. The fundamentals, as we're talking right now, it's finally attractive for us to consider going there.
Particularly on the more Class A space. I don't know if I want to go play in the workforce housing space down there, per se in San Antonio, but that's on my horizon. If that doesn't work out well, we probably do need to find a third market at this point.
It'd be slow and measured with what we do and it's probably time to get another market as we continue to grow in scale. It's exciting. I don't know if you ever heard of a gentleman named Jason Hartman, a very popular podcast I listen to. It was a poem from the 70s called The Reluctant Investors Lament.
It's basically about some guy in the 70s talking about all the deals he couldn't buy. He missed them because he thought everything was overpriced back then. That was 45, 50 years ago. Everyone thinks everything is overpriced but if you could buy on fundamentals. Make these deals make sense. You're buying in a growth market, like the markets that we're in right now.
Many of the markets across the country, fit that bill. You're prudent and strategic, you buy what is a relative value at the current market. These things tend to work themselves out. We're in a space where the government is encouraging it. The Fed is saying they're going to keep interest rates lower for longer.
Stuck In The Super Cycle For Decades
Michael: If you ever try to short a stock in the last 12 months, you could see how hard it is to fight the Fed. We're in a supercycle and we have been in it for a decade. We have a decade or two ahead of us in the Dallas, Fort Worth, and Austin markets in particular, that I focus on.
Darin: Wow, that's huge to hear.
Michael: My entire networth’s in this stuff. I either have cash, I got apartments, I don't do a whole lot in-between. Maybe I'll go down with the ship here at some point in time but I'm certainly a true believer of it. We're going to do more. So excited about it and glad you have a show that flies the flag. It's great for the average person.
It gives at least some level of exposure into this space and get the money out of Wall Street. Get with real stuff that actually has fundamental business principles behind it. Like an apartment does versus trying to go buy some bitcoin or Tesla stock or something like that.
Darin: Exactly. Outside of work, what do you do for fun?
Michael: I used to like to travel when that was a thing. There's a lot of places I want to go to, so looking forward to it. As a kid, we weren't poor but it was relatively modest. I was in an airplane once or twice before I turned 20 years old. So always in the car going somewhere versus flying. I didn't get to go to Europe until recently.
Expand Your Horizons
Michael: So I'm a little upset that COVID took out a Europe trip and a Hawaii trip last year that we had kind of planned. It ruined both of them. I’m looking forward to going. Actually, got to go to Hawaii for Spring Break with the family, so I'm going to suck it up and go out there. I'm looking forward to go to Europe. Travel and explore the world, expand my horizons a little bit.
Growing up in Carrollton, Texas and having your blue-collar parents, you didn't have the biggest worldly view. I’m trying to make sure that I can provide that to my kids and experience it myself. I'm tired of sitting at home, I'm ready to go.
Darin: We're all itching to get out there. Michael, I appreciate you coming on. If people want to reach out to you, what's the best way for them to do so?
Michael: There's the show you referenced earlier, which I appreciate the nice words about. It’s The Multifamily Investing Show with Michael Becker. YouTube is probably the best place. It's also on iTunes or Stitcher. The URL is www.multifamilyinvestingshow.com.
The company I run is SPI Advisory, so you can go to our website, which is www.spiadvisory.com. There's a contact form there. You fill that out, we're always happy to send out information if you're interested in learning about what we do.
Darin: Listeners, this guy, I was listening to him before I got into this space. He is a wealth of information. He's been through 50 deals, he has a ton of experience. I look forward to learning more from him. Reach out to him, check out his show, and I hope you guys enjoy that one. Until next week, signing off.