Have you ever wondered what it would be like to have a C-suite executive as your GP? Jack Langenberg has an impressive educational background, studying undergrad at Notre Dame and attending Harvard Business School. He spent the bulk of his career in C-Suite positions including CFO for billion-dollar plus companies. His passion included mergers and acquisitions, valuation, and the integration of new businesses. He has since become a full-time real estate professional and invested in 15 multifamily properties for over 4,000 units as GP LP.
This is your chance to learn from someone that made the transition from C-Suite to real estate investing. Don’t miss out on this incredible opportunity to learn how Jack made the transition.
Table of Contents:
- Where To Listen To The Podcast
- From C-Suite To Full-Time GP LP
- How To Be a Creative GP LP
- Getting Into a Deal as a GP LP
- A People Business
- Capitalizing the Deal
- When a GP LP Underwrites the Class A Property
- Great Information
- A Different Way To Invest
- How to Reach Jack Langenberg
From C-Suite To Full-Time GP LP
Darin Batchelder: Jack Langenberg lives in the DFW Area. He’s highly educated from prestigious schools such as Notre Dame and Harvard Business School. He made the transition from C-suite to full-time real estate investor and shares some great tips. His ongoing focus is on Class A properties and more of a yield play. Many of his investors have interest in pride of ownership type assets.
Jack and I are both part of the same multifamily mentorship group. He ended up partnering with another gentleman, Tom Lafferty, who I had on the show, episode 65. They partnered on a deal and it was very successful and I invested in that deal. I was a key principal in that deal and I was very happy to be part of that. Jack, typically the first question I ask is, how many properties and how many units are you currently invested in?
Jack: Currently, 15 properties and about 4,000 units. I've had six other deals go full cycle over my investments and a timeline with multifamily.
Darin: So the deal that I was in with you is the first deal that I've had to go full cycle. You've had six go full cycle, which is awesome. It means you've probably made some good money too.
Jack: Absolutely. It's why I love the space so much.
Darin: Before we get into the real estate side, can you share a little bit about your background? What did you do before real estate?
The Real Passion
Jack: I was in corporate America for a long time. I graduated from Notre Dame back in 1990 with a degree in business finance and Japanese. Then I ended up going to Harvard Business School as well. Studying lots of companies was something that was part of my education in different industries and how you move through them. But then in my corporate career, I'd been chief financial officer of many companies.
All the way from Fortune 500 down to me being the only employee, lots of different site companies. But my real passion was in global mergers and acquisition. I headed up for Kelly Services, a fortune 500 company. That gave me the opportunity to go all around the world. Look at different types of companies in different industries and buy them, and in other cases, sell them.
Transactions and figuring out if something's a good deal, if the people fit is the right thing. But I also had a responsibility for integrating those companies. And then separate from that, I've run a number of companies as the leader and sold those through private equity. So I love real estate, especially in Texas, because I don't have to jump on a plane. I don't need two interpreters trying to interpret for me and then the seller or the buyer. It's all right here in our own backyard. So I love it.
Darin: So first of all, schooling, Notre Dame, great school and great football. You've got a great team to root for. Then Harvard, that's a nice achievement to have on your resume.
Mergers and Acquisitions
Darin: Also the mergers and acquisitions background, I would imagine helps a lot in this world of real estate and large scale multifamily real estate. In terms of evaluating deals, valuations, and also determining when to sell. Talk about some of that and how that background helps you in the real estate world.
Jack: Knowing when to sell a property is such a key thing once you're an owner. We all create a business plan and we need to do that to communicate to investors, the time horizon and such. Let's model it for five years or 10 years. But it's almost never going to be the case that on the five-year anniversary of a five-year model, you sell. My experience with it is you need to want to have the right type of financing instrument. What kind of debt do you have on the property and when does that mature?
Maybe there's a downturn or a COVID-like event, you square with your bank. But there's so many levers you can pull in terms of figuring out when to sell. One is, if I promise in the business plan, the investors, "Hey, once we accomplish this business plan, we're going to sell." I think that's part of that. And a lot of times we'll take it out to a vote. But there's so many different levers to pull on operating the property. And when you feel like this is a really good time, the market's hot, we accomplished the plan. That's what we did with the Oasis Springs to sell.
Darin: That was a fantastic deal. What were the returns on that deal?
How To Be a Creative GP LP
Jack: We modeled it, our proforma was about 22% IRR and 100% total return over a five-year model. When we were going through COVID, we were like everybody else. The first day they announced that you can't evict people, we were like, "Oh, that's a problem." But that actually forced us to be creative. There's nothing like some kind of event that makes you think through how you do things and what levers you have to pull, like with evictions. The old lever was, they're not paying, go to the courts and evict them.
One of the nice things about the Texas real estate market is that the courts are slightly landlord-friendly. They're not crazy landlord-friendly. You still have to have a case for it. But when we lost the mechanism of eviction, I got creative. I actually put my son on a charity project. His name's Nick, he's at the Air Force Academy now, super proud of him. Two years ago, he was a junior in high school trying to figure out what to do for a service project.
He's asking me, "Dad, I can't go anywhere, we're on lockdown. I need to have something, can you help me think of something?" Right at the same time, I'm dealing with this eviction moratorium. I said, "Nick, how about jump on the internet, Google charities, rent assistance, those types of programs, and make me a list of them?" Within a day or two, he had a list of 20 organizations that actually were relevant to that property that we were invested in together. He thought he was done. No, I need more than this.
No One Has Time
Jack: The property management, the on-site team, all that, they're busy, I'm busy. No one has time to really tink around through Google and figure out exactly how you submit the forms to this charity or that. So I use an analogy form. I said, "Make me a chocolate chip cookie recipe." First, he's looking at me again like, "Dad, what are you talking about?" And I said, "Well, when you make chocolate chip cookies, there's certain steps and there are certain things you need."
I said, "I need that for the rent assistance program. Tell me for each one that you found, call them up. Talk to them and find out exactly what they need. Document what the resident needs to do, what a property management company needs to do." Anyway, so he did that. During COVID, he helped with our property management team. He helped 50 families find rental assistance from anywhere from one to three months. Naturally when he wrote about that in college essays it was pretty cool.
I even made sure he got to meet Jose, our on-site property manager at the time. We went out to Wings and he got some chicken and wings for lunch. Jose asked Nick how he built it and what you need to do. Property management then took off and ran with it. But it was a really cool outcome. That positioned us so well when COVID came out in terms of the sales side of the transaction market. We were well-positioned. I shared that with a bunch of other deal sponsors.
Early Investing Days as a GP LP
Darin: I was appreciative that not only did you do that for the deal that you guys were managing, but once you had success, you actually came out and offered it up to all the other sponsors in the group. I know that I reached out and said, "How could we take advantage of this also?" And hit up our property management company. But I thought that it was awesome that you didn't just keep it to yourself. You ended up sharing it with a lot of other people, and the ripple effect may have been that much greater.
Jack: I really feel like paying it forward is an important thing. When I was early in my investing days, just as an LP, I learned a lot from so many people. You know how it goes? There's a good community, particularly in Texas, of deal sponsors. We have each other's backs and learn from each other, so yes.
Darin: So you've been in a number of different businesses. You've been part of different mergers and acquisitions. You have been in different industries. I also have been in a number of different industries, and the large-scale multifamily space, it's different. People legitimately help one another and share. Part of it comes down to the fact that there's a lot of partnering that goes on, but it's just so different. At first, I was skeptical, are these people really sharing? They have nothing in return.
Jack: What's the catch, right? Is that what you were wondering?
Leading Down a Bad Hole
Darin: Yes. Are they leading me down a bad hole or what? But you just meet so many great people. They have, I would say more people than not, that a high 90s percentage feel the same way you do, pay it forward. Look, a lot of people helped them along the way. A lot of people helped me along the way, and I'm happy to help the next guy. That kind of mentality is fantastic in this industry.
Jack: It's important. Transparency is important and comradery in it. We all improve each other's outcome. In Dallas, even residents have such great places to live. Compared to say 20 years ago, before investing directly with these small groups came about because we all have our own creativity. I like driving around and seeing what other people did to spruce up the outside or the exterior of a building. You'll learn. You're like, "That's really cool." Like what we did with the Oasis Springs with the vertical or the horizontal slats on the balconies. It made it look so much better than the old iron railings. That's not a hard thing to do, but somebody thought of it first.
Darin: Somebody thought of it first. Then you guys took it and ran with it. It improved the lives of all the residents and improved the valuation of the property. So did you retire before you got into real estate? Or were you doing both at the same time? How did that work?
The First Thing You Have To Pass if You’re a GP LP
Jack: So, for a good stretch, I was the chief financial officer of a company with a billion-dollar top line. It was a full-time job. I was investing passively at first for more than five years. And I even did a key principal kind of role here and there. But I learned that the first thing you have to pass, if you're going to invest in somebody's deal is, do you trust them? You got to get to know them, you got to get to know people that have invested with them. There's a lot of people that don't do that and they get into trouble.
There are bad actors in the space, but I learned by investing passively first. Like, that's a good way of doing business, monthly financials. Just transparency about the deal, updates, budget, and the kind of standard blocking and tackling that you want to see. I got involved that way. Then I got involved with the mentoring program that you're talking about. Learned more from other deals sponsors, met Tom Lafferty there, firefighter, University of Texas, Austin, MBA, done deals.
He and I became acquainted through the program and he asked me to help out asset management-wise with that deal. At the time he was a broker, a coach, a deal sponsor, and a firefighter, he had a lot going on. He probably could have handled this other one too, but he gave me the opportunity. I really am appreciative of that. So I did all the asset management. That goes back to my operations days of running companies and restructuring them and figuring things out, on a smaller scale.
You Get To See the Two Sides of a GP LP
Jack: But there's still a lot of moving parts, as you know, with an apartment complex. How do you position it at one thing? What do you do with rehab?
Darin: So five years of LP experience before you get on the GP side. When I talk to people, I highly recommend being an LP in a deal. At least one deal before you go and become a GP because you get to see the other side. From the investor standpoint, so that you can feel, you can see what kind of communication you get. Then you can make some decisions on how you want to manage your investors when you do your first syndication. Did you find that valuable, being an LP first?
Jack: Extremely valuable? Yes. Because some of the people I picked to align with initially, actually most of them are solid sponsors. They're monthly financially transparent. I can call them if I need to. You are passive so most have been there every month. But sometimes you have an idea or a question, but I learned a lot that way. Then after a good five years of doing that, I'm like, "Okay." Now I'm at a point in corporate America, sold the company I was in and like, okay, let's move on and do this full time. That's where I am now, 100% full-time doing this. Can't imagine I'd go back to corporate America. But as soon as you say that, then the jinx happens.
Darin: You get a phone call that's unbelievable. Those opportunities, you never know.
Getting Into a Deal as a GP LP
Jack: I really want to do this full time. The politics in corporate America, there's so many different constituencies and teams and I was at the top level. I had boards that I had to deal with. Here, I've got investors, I've got the property management company, I've got brokers. Every meeting I'm in is where I want to be at, like right now. Monday morning, and I'll be talking with Darin.
Darin: You mentioned the LP side, I'm going to stay with that for a second. You learned that you had to get to know the people. That's another thing that I would highly suggest to listeners: if you're going to get into a deal as an LP, get to know the sponsor. Then you learn, what made me trust that person? When you become a GP, you have that knowledge of, what was it that all these sponsors I've invested with, what made me like them and trust them? I want to present that to other investors that want to invest with me. It's the transparency, it's the communication, it's also understanding how to build that trust and what was it that you liked?
Jack: I really like when people have some relevant background. It could be in a lot of different things. I know people whose main thing was marketing or people who had finance or whatever type of background. But it's about seeing their drive and their passion for it. If it's like, I found this thing. I can make a lot of money. That really doesn't capture my attention. But if you can tell they really educated themselves about the space.
Investing in Other People’s Fields With a GP LP
Jack: Particularly, if they've invested in other people's fields as an LP, that’s helpful. I've seen other people come in and just get right at it. I'm always blown away and energized even by that. But, passion is key, they've got to hopefully have a track record. They have to have a track record of success in something. It doesn't necessarily have to be multifamily. I've sponsored loans for people who, it was their first deal, but I got to know them.
Networking is so important, and there's all these events for that. I'm always handing out my business card and going into coffee or lunch with people. I'd like to get to know them, whether I'm investing with them or I'm trying to get them to invest with me.
Darin: I liked that you said drive and passion. For me, it's weird. I go to church on Sunday and I sit there and there's a lot of people that talk about serving. Talk about going in, cleaning up our neighborhood or cutting the grass. I would sit there and it just doesn't resonate with me. I'm not passionate about doing that. Like with these syndication deals, so I have another business. I trade loan portfolios and all the profit comes to me and my family.
But the syndications provided me with a new passion because it's not only building your wealth. You're building the wealth of all of the investors, and all of those investors have different needs for that money. Some are saving it for college, some are saving it for retirement. For me, it became a little bit of a way for me to serve.
The Oasis Springs Deal
Jack: That resonates with me too. In the Oasis Springs deal, we had people who were retired school teachers. Not just Tom, but there were other firefighters that had worked their whole career. They had their pension and people who trusted us with their investment dollars. I find it extremely rewarding. Also the resident side too. There were several units that had drug dealers living in them, there were foundation problems. Getting that kind of stuff fixed and turned around.
Darin: Is that what the sneakers over the electric lines mean?
Jack: Yes. I have pictures of the drug baggies on the floor when we were doing unit inspections of their empty plastic bags, no product in them. But that was a pretty good sign of the kind of person that was living there before. I was walking the property one Saturday, probably a year into the deal. Sometimes if I'm just going from point A to point B, kid's soccer game, I'm usually alone. But I was walking the property and I saw there was a couple walking their dog. They came up to me and said, "You don't look familiar. Do you live here?"
Some people could be taken aback and others might big time it. Though I'm the owner, and I said, "No, I don't. I'm working with the property management company to make this place better. Do you live here?" They're like, "Yes, that's why I'm so excited that you have such pride of ownership living here that you question who I am." I said, "I think that's great." They're like, "We really appreciate the drug dealers getting kicked out and the surveillance cameras help." I asked them other thoughts that they had about the property.
Driving Around Neighborhoods
Jack: But we go back to what you're saying about serving. So you have your investors. But there's also the community and making something so much better, I love it. It starts when I start driving around neighborhoods. I have to see apartment complexes, even when I'm traveling, I just drive around and look.
Darin: It changes once you get into the business. I know my family, they get annoyed with me. I'm like, "That looks like a great apartment complex." They're like, "Come on!"
Jack: No, you have to see sometimes.
Darin: So you end up going from LP to GP. Talk about a couple of things. One, how did that come about in terms of partnering with Tom? I have a number of people that reach out to me on Instagram. They're like, "Why would somebody want to partner with me as a new person?" Then secondly, what were some of the lessons learned as you asset-managed the property?
Jack: With respect to Tom and I getting connected, we were in the same mentoring program. He was actually coaching a broker. So a very high profile type role in that group, had some successes. Another person in the group introduced us. Tom had this specific need where the inspector was breathing down his neck, a different property owned in the same town. Tom's a great operator. But the inspector, who's no longer in his job by the way, was really hard to deal with. So Tom's like, "I need a new face to deal with that guy."
A People Business
Jack: As you know, it's a people business. We all get enamored with the asset or the condition and all the numbers. But you're really bringing together a lot of different people. Whether it's on the front end or the transaction with the brokers and the seller and the lawyers to property management once you own it.
That was a key learning on what asset management was, relying on my learnings from other things I did in my career. It's the people, it's the teams you build and that's how you get your outcome.
Darin: What were some of the lessons learned while you were managing the property?
Jack: I had several key lessons I learned in the first few months. One is, your on-site property manager and your property management company, some people will do vertical integration. I prefer the professional third party because hiring, maintaining staff, training them, you get more resources that way. And I can focus on other things. But that said, another key learning was active management of the relationship with the property management company. I do weekly calls. Most of them only last 10 minutes, in the beginning, an hour or more. In the first few weeks, months, of owning a property, you got a business plan to execute.
But those weekly calls, and now post-COVID, everyone's used to doing Zooms and everything, they're easy. You can see each other's faces. We have an agenda and I like to train up the on-site, in terms of what information I need to feel comfortable that the property being run well and issues are being identified and addressed. But we have this kind of typical agenda we'll go through on the property's performance.
Tight Communication With the Banks
Jack: But another key learning I had, also keeping in tight communication with the bank. When COVID hit, everyone was talking to their bankers. I think that was important.
Darin: On the weekly calls, I heard this advice from somebody else. Carl Dean, he's been involved with a number of different large operators and on the operation side. I remember him saying, and it stuck with, "There's a lot of bullet points that you could have with the property management company on those weekly calls." You got to do this, this, this and he said, "Bubble it up to the top two or three, focus on that, and then move on to the other stuff as those get accomplished." Because if you give the property management company such a huge long laundry list, they're busy doing their daily job. They may not get to any of it, if they don't have focus. Do you agree with that?
Jack: 100%. One to three things besides the normal management, maybe one. Like when we went to The Freeze, we're just about ready to market Oasis Springs. The Freeze said earlier this year, we had, I don't know, 50 pipe bursts?
Fortunately, we had a property. Our lead maintenance guy, his main certification was in plumbing. That was really fortuitous. But where I'm going with that is, obviously when there's some event or something that happened on the property, that bubbles up to the top of the list.
My top three things really are, how are they doing with the leasing? You know the occupancy because you're getting reports, but how are they doing with lease trade out? Whether it's a renewal, are you getting a $25 to $50 bump on the renewal? What's your percentage of renewal?
A Real Fine Line
Jack: Then beyond that, I'm asking, with new leases, what are the comps telling us? Where are we with new residents? It's amazing how the rental rates move on a weekly basis. You're either becoming more vacant because you're a little bit too high compared to the other competitors around, or you're leaving money on the table. It's a real fine line. But having that dialogue with the property management company and being likeable with them.
They don't need you busting their chops on every single thing, praise goes a long way. When you win their hearts and minds, they really work hard for you. I like incentives too, I came up with all kinds of crazy incentives. That was my big thing in corporate America. I probably designed a couple of hundred incentive plans across a lot of different industries. Simply, like for example, with leasing a renewal, we really weren't getting renewal.
It was easy just to say, "Oh, if you're going to stay, okay, you just pay the same rent." I'm like, "Wait a second. First of all, is there a reason for that?" But when you say to the on-site team and the leasing agent, "For every lease renewal you sign above X, I'll pay you something." I like to move in and out of different bonus plans to keep them interested and exciting, little gamification.
Darin: No, that's great. That's very smart. You said a few times that the on-site staff is so critical. If you're not on-site every day, which you're not, as the owner, as the asset manager, then how do you motivate them to have the property's best interest? And the ownership's best interest and the investor's best interests at heart.
Being a Likeable GP LP
Darin: Doing some of the things that you talked about, one, being likable. People are going to help people that they like more than they're going to help people that they don't like. If you're an owner that just beats down on the property management company, that probably is not going to motivate them. Secondly, you talked about incentives, you did it in all your other businesses. Then you took that experience and you saw the benefits of doing that. You brought that to multifamily. That’s awesome!
Jack: We even did an incentive, back when COVID was starting, it's the Texas COVID stories different from other states. But last summer, people were starting to move a little bit towards the end of the summer. Things were falling out a little bit. People were used to these charity programs paying their rent. I'm like, "How are we going to get people to get back on the normal schedule?" So we started doing the raffles. It's kind of a Vegas theme decoration in the office, our on-site came up with that. We put in place for them, say we're coming upon the month of August last year. There's some time in the middle of July.
It's like, okay, August rents Vegas, or what do we call it? It was really a TV. One of the contractors that actually does on-site services donated it. We had a 50-inch TV and say, here are your conditions. It's like, if you pay your rent on time, which seems weird to be putting incentives, you get five raffle tickets. If you paid it by the 15th, you got one. Jose's like, "What if they paid it early?" I'm like, "How about 10?"
A Different Kind of Incentive
Jack: We come up with this different kind of incentive, even for the residents too. That's kind of fun to do.
Darin: That's funny because you talked about being creative. That’s another way of being creative. We went through an unprecedented time as business owners of real estate where the government actually for a year, you could not evict a tenant for not paying. There's all these TV programs are saying, "Don't pay your rent and all this," and yet you still have to pay the mortgage. The property management company and all the utilities, et cetera. It was amazing to see, yes, there were some people that didn't pay and delinquency went up.
But it was amazing to see how different people and different property managers and different owners incentivize people to pay their rent. That was one of the ways to do some kind of raffle. If you pay your rent, which you're supposed to do, which you signed the lease and you said you were going to do. We'll enter you into this raffle and you might win a 50-inch TV, flat-screen TV, that's pretty awesome.
Jack: The residents loved it. It was really about moving the timing of when they were paying. Because we had come up with a lot of the pay weekly, we'll divide your rent. It's still due on the third, but we'll work with you. Put it in a weekly deal, because a lot of people get paid on Fridays, if your rent's due on payday and work with them that way. There's a right way to engage the community as well too, whether it's like one of the pipes burst, we brought in some food trucks. People couldn't cook and the water was off.
All Kinds of Ways To Be a Creative GP LP
Jack: We brought in some food trucks, even picked up some of the cost of that. But there's all kinds of ways to be creative and get the community to see a different side of what the owner-residents, that kind of relationship can be.
Darin: When you took over the property, I was a KP in the deal, so I saw the reports.
Jack: You were there walking units with me too, I remember.
Darin: When we bought the deal, it was in the 80s occupancy percentage.
Jack: What's interesting is the bank said 92. We knew it wasn't. They weren't paying, at least.
Darin: Then when I got the reports after the first few months, I'm like, "This isn't trending the way we want it to trend." It dropped down into the 70s. Talk about how that fell and how you guys managed through that.
Jack: There was a small degree of fear. Fear's a good motivator, but I really felt confident about the research we'd done on the location. Tom had owned it in that area. So I know if you build it, they will come. There was a reason the property was underperforming. We had three buildings that had foundation problems, we had to take the bricks off the wall. When your bricks are off the wall, you've got blue tarps on the side of it.
That's right by the main entrance. So the Primo residents that you're trying to attract are going to see that and just drive right on by. We had some of those things from the beginning, where we did want to take the occupancy down, get on our CapEx plan.
Capitalizing the Deal
Jack: That did allow us to finish out the remaining units that hadn't been upgraded because if they're vacant, get in there and get the work done. We had capitalized the deal sufficiently. We’ve had plenty of working capital to work through those projects. But there was a bit of fear and that first six months I was like, "Can we keep this going on our plan?" We didn't do distributions the first timeline where we delayed one quarter. But then we didn't miss any, except twice in COVID. We got occupancy up to 92% by January, which was six months into the deal. We never came back down.
Darin: It's crazy. So it went south a little bit and I was like, "Whoa." But then you guys turned it around and it ended up being a fantastic property. I saw other deals that were trading in that sub-market. And I was like, "I knew where we bought it. We're going to do well on this one." Talk about networking. Some people think networking means just getting out there and shaking as many hands and exchanging as many business cards as possible. But I think that it's more than that. It's actually developing relationships. Talk about networking from your standpoint.
Jack: Finding meaningful relationships that help you educate yourself, help you find people that might learn from you. I attend a lot of different types of networking events, brokers put them on. There's like Old Capital Lending. They have a number of events that they have during the year. I find those types of events to be really helpful because you meet people that are at different stages.
Brokers Have To Have Relationships With the GP LP
Jack: People might be at the same stage as you, but people that are further along in it, they're also willing to talk about what they're doing. You can learn from them. The brokers also you to have relationships with them if you're buying properties. Not if you're just an LP, but as a deal sponsor, I have to know the brokers and understand what they're doing.
These networking events really helped to breed some familiarity. They also help you understand where there's overlap in what your goals are and someone else's. And maybe end up working together on something, like Tom and I did.
Darin: People, over and over again, have narrowed down this business to finding deals and finding investors. If you're the type of guy that is good at developing relationships with brokers and finding deals, then that's attractive to other sponsors that maybe are not out there doing that piece. Secondarily on the investor side, a few things happen. One is, some investors think, I thought this in the beginning too, I'm like, "Why are some of the senior syndicators ever going to even want to take my money?" Don't they already have an investor base?
But what happens is, somebody may have taken 500,000 or a million out of the stock market. Invested in multifamily over a year or two, and now they're tapped out, and they may have to wait for those deals to turn over. The syndicators are always looking for new investors to get involved with. Secondly, with deals getting more and more expensive per unit and the prices of deals going up. That also causes syndicators to want to partner with more people, to bring different investors into the deal.
In a Flow State
Darin: Talk about your view, now that you've done your first GP deal, talk about what your strategy is going forward. Are you looking to work exclusively with Tom? Or are you looking to be on your own? Are you looking to partner with other people? What's your strategy?
Jack: My experience with Tom was great. I'd partner with him on another deal. These things are very much in a flow state in terms of who works with who on what deal. If somebody else finds a deal and then approaches say Tom and says, "Will you work on this with me?" You can't say, "Well, you've got to bring in Jack too." We do have to cut the pie into a certain number of pieces. I'd work with Tom again on a deal. I've recently worked with Brad Sumrok on a deal we closed, which we actually sold Oasis Springs on the same day I bought a place called Spring Valley. Another 150 unit deal, early '70s kind of thing, a rehab play all that.
But my strategy now is I've recently launched Crimson Advisors, that's a deal sponsor, multifamily real estate investment company to sponsor deals. I'm shifting my focus a little bit towards Class A properties. That's an interesting space. It's a little bit different than say the old rehab play, I’ve been best and final in one deal already. I've got one one where I'm best in final now. I might make it on this one, but that's my new focus is really on the Class A space.
Darin: So Class A, 90s? 2000s? New development? All the above?
The Value-Add Play
Jack: Very new. Like this one, it's still on the lease up stage. They got their certificate of occupancy earlier this year. I feel like I can land one of those assets. I've been building my investor pool to be able to make that happen.
Darin: What is the attraction to the, A, new construction space, and then 2, I was speaking with an investor the other day. The investor brought to my attention like, "A lot of syndicators are going to new construction, new development." But as an investor, I'm invested in a lot of deals. I don't understand the value-add play, I don't understand the returns for the investor in that type of scenario. Can you talk about those two things?
Jack: I would still go get an old property that needs to be fixed up if the deal was right. The challenge I've found is that with the increased focus on the space on Texas, prices have been bid up. I do believe though that the underlying economics, especially for multifamily in Texas is great. You look at how many companies are moving here. Look how many people are moving here. That's all great for multifamily investing in general, regardless of the asset class.
Personally, I wanted to move up. I got a bit a number of deals even as a passive where the deferred maintenance, or just the age of the property things come up. You have a big CapEx bill to pay, whether it's a chiller going out or pipes under the ground. We do all our due diligence in the beginning, scope the pipes, like a colonoscopy for plumbing, we do all that.
Lower End of the Market
Jack: But I found that with the combination of the pricing going up on older deals, some of these new builds, you can get them for almost the same type of basis as you would if you were buying an older property. I've even been in some new developments too. I don't lead those. That's not my expertise, but I've put some money in with some people that I know and trust. I feel like historically people thought, Class A is off limits for investors like us. Big institutions come in and grab them up.
But there is a lower end of that market where those institutional players are like, "Maybe a little small for us." So they've got to spread, a lot more costs over a deal. Something that's 150 units a new, or 200 units and new may not be big enough. They want 500 units or 750 units for a given deal. So combination of pricing and the deferred maintenance piece, those are the things that got me interested in that space. Also, I'm competitive in a couple of bids. So I feel like I'll probably land one soon.
Darin: Are the returns on those deals similar to the B/C? I'm going to generalize here, but almost every deal I see as 7%, 8% cash on cash, and total return anywhere between 70% and 100%. Maybe a little over 100% on some deals, over a five-year business plan. People are looking to get 70 or double their money. How does that play into these A-class deals? Is it similar or are they having to take a lower return for a lower risk profile?
When a GP LP Underwrites the Class A Property
Jack: I would say that when we underwrite the Class A property, it's more of what you would call a yield play. Where it's more of a steady, more likely cashflow coming out of that type of a deal. But there's so much interest in this space, I really do believe there is an opportunistic valuation on the backend. I don't model that all into my deal. The one I've just been underwriting is probably a 75% return and between a five and a 6% cash on cash return. I feel like it'll turn out way better than that.
Just my instincts from buying and selling companies and things, and knowing where the dynamics of this market are. But they'll pencil at a little bit more type conservative return. But I think overall, an averaging of many deals you'd see probably those Class A returns probably get to those levels of projected pro forma returns more often. Whereas even with the Oasis Springs we were behind on distributions compared to models because of the things that came up. We brought the NOI up 62% from when we bought it.
There was also that underlying good things going on in terms of exit valuation. But there's room in people's portfolios for a safer cash flow stream that's more likely to generate what it's penciled at. There are deals out there that don't work, but there are not too many of them.
GP LP Investors Going Down
Darin: Have you been talking to investors going down, so the 75% return can be comparable to a B/C value-add play but the cash on cash, 5% to 6%, that's lower than typically the seven, 8% you see investors push back on that. And secondly, their projections, like you said, I'm in a lot of different deals as an LP also, and not all of them meet the initial 7/8% cash on cash, but at the end of the day, they typically do pretty well on the backend.
Jack: Obviously through the networking groups that we know, a lot of those people know a lot more about the space there. I want to take the risk on the C asset, maybe being converted into a B. Or just manage a better raise than NOI, doing a big rehab, million-dollar rehab kind of thing. There's definitely that set of investors. My investor group really comes out of my alumni organization. From Notre Dame and from Harvard, this fits a little bit differently into their overall asset class.
We just say, their investment strategy, they're in a number of different asset classes. There may be a pride of ownership component too when you see that brand new property that's got the skyline. That you can see from the rooftop pool or something. There's an element of that as well, but ultimately people want to know the risk adjusted basis, what's my return going to be? That fits the bill for them, but it's really important to me to communicate to a given investor. I've got people in my investor database that might not be interested in that.
The Front Side of the Equation
Jack: I like to really be transparent and have that conversation with people on the front side of the equation. They know this is the kind of deal we're doing, and here's why we're doing it.
Darin: That's very smart. I partnered on a deal early this year in Houston and that was an A Class 2000s build. Now I'm partnering on a deal that is a complete fixer upper, like 40% occupancy. Those are two different discussions with investors. I talked to the fixer upper and they're like, "That last deal was just too clean for me." I'm like, "This fits me more. And I feel like there's more opportunity." There are other people that are like, "This scares me. I like the cleaner." If you have different opportunities that fit different people, and you communicate it and you set expectations properly, that's key.
Jack: I'm sure you're probably in both times, you just said it. I am too. I'm like, "That doesn't mean there isn't a deal I don't like," but it's the specific. Then you jumped to the specifics of what do you know about that team? Are they really good at the rehabs? Do they have a great property management company for the Class A space? Because they're really different. It's a different asset management job.
Darin: Like for me, I've been trading loan portfolios since 2002, large transactions between banks, and it's expectation setting. I would always start with, "Here's what I don't like. But here's what I like and I think it over-compensates for the stuff that I don't like." There's very few deals that I like every single thing about the deal.
A Good Hedge for Inflation
Darin: It may be in a great location, but the returns are lower or whatever the case may be, or the rehab is done. Talk about inflation. You're a highly educated guy. You are in different industries and inflation is something that is a hot topic in today's world. The FED is saying that it's transitory, there's other people that are saying that it may not be. People are looking at, "Where can I park my money?" Real estate is supposed to be a good hedge for inflation. Talk about your view on inflation and what you think is happening and how multifamily plays into that.
Jack: I really believe strongly that multifamily apartment investing is a great inflation hedge, and here's why. You have a hard asset, it's there. It's land, it's a building, that's always going to be worth something. The valuation of the apartment complex, it is very different from say, houses. I used to do a single family back when I had no money. A lot of times, I had 10 single family houses. I personally managed them and saw the light and moved to multifamily. But with multifamily, you have a hard asset to generate cash flow. The cash flows are tied to rent.
What are rents tied to? They're tied to wages. There could be a scenario where we have inflation without wage growth. There's some talk about that, but wages are getting bid up. We know this. You go between here and Midland and there's signs of McDonald's halfway between here and there, in Abileen. They're going to pay $22 an hour and a signing bonus for somebody to work at McDonald's. The wages are going up. That ties into what people can afford in rent.
Why GP LP Buy Into Multifamilies
Jack: There's a lot of recent apartment database information coming about rents. We're seeing rents going up 10, 15% in some markets. Now, it’s a little bit depressed from a year ago. It's a little bit overstated in terms of percentage not going to be sustainable. You're not going to see 15% rent growth every year, but definitely three to five. We're underwriting between three and five on our deals right now after we adjust for where they're shaking out.
But I really feel like multifamily is a great hedge on inflation, I don't buy into it because of that. I buy into it because the assets will appreciate over time with the right type of operating plan and the team running it.
And I used to be exclusively in the stock market with my background, finance guy from Harvard. I moved so much more of my investments into multifamily and I just keep doing it as I find a deal. Every year I say, "Probably I've got enough now." But then even a recent deal a couple of years ago, it was like 87 units in Haltom City. The deal sponsors, they're awesome. They work so hard. None of them had done a deal before, but I knew about what kind of other things they've been doing. That deal's going great in Haltom City. It's not the cosmopolitan area of the world, but there are hardworking people that live there. They want a nice place to live.
Darin: No, I think it's all great information. Another thing is, depending on what type of financing you put on it. If you fixed your financing, then that's a big piece of the expenses and that stays consistent. Then each year rents are going up with inflation, then you have a bigger gap in terms of profitability. I definitely see how it can play into an inflation hedge if wages continue to grow. Whether it's restaurants or retail or whatever stories that you read in the news. People are having a hard time filling all their employee spots. In my mind, that has to push wages higher.
Jack: Yes. Then the Texas dynamic too. We could watch 40 other states and see them start to have a little cooling in their multifamily market which has not happened. But someday in the future, say that happens, they go, "Maybe it's time to slow it down a little bit in Texas." But Texas has got so many people moving to it. So many industries. You got the recall election in California going on now. Newsom’s thrown out his stuff, slamming Texas. I'm like, "All your people are moving there."
That's great for us as multifamily owners and I won't jump into politics. But it's just funny how he's trying to highlight the horrible place that Texas is. It cultivates a very good business climate. That's what people need. Our country's about working in jobs. I want to be in a place where those are, and that's where I want to invest in my apartment complex. There's other markets too. Arizona, Florida, Atlanta, and Georgia are hot. There are a lot of other places.
The Worst Situation Possible
Darin: I saw that and I'm sure you saw it too. Even during COVID, there were some tenants that weren't paying. But if somebody left the property, it was amazing how quick they filled the spot, because there's a ton of competition. There's a ton of people that are moving into the area that are looking for affordable housing. Even in the worst situation possible as an owner, if somebody moved out, there were people lined up to move in.
Jack: Occupancies are all north at 95%, 97%, 98%, pre-leased to 100%. You may recall, we got to 100% of physical occupancy at Oasis Springs for one day, but it was cool to hit that. We used to underwrite at 90% economic vacancy, but if you're there, you're really not a good operator. Now, you have to say, "Wait, we're not going to fill it up 100%. But the gap between maybe your oldest lease and where the market is now, you're always going to have some type of economic vacancy factor. But I've found just with the desire to live and work in Texas, that you're doing the right things. Your property should be full and you should be getting a pretty good rents.
Darin: Talk to the person that has always wanted to invest in real estate, but is scared. How do you help inspire them to take the leap forward?
Jack: I would say meet some general partners, there's a lot on the internet. But it's probably better to meet people through other people you know. My first hurdle was, why would I invest in this asset class versus the stock market or other things? One is, you really don't know the team running a company.
The GP LP Who Are Putting the Deal Together
Jack: You can read about them, the big companies, even smaller ones. But with this space, you can get to know the general partner that's putting the deal together. You can learn about the property management company they're doing. But the first thing is find somebody you trust, but then educate yourself. Most of the sponsors walk through their underwriting in a webinar when they're pitching a deal.
I would say there's probably a compelling case to have multifamily. I’m 100% sure there is a compelling case to be made, to have multifamily as part of your portfolio. Some sponsors will cater right toward new investors. I've had a lot of new investors in my deal. I just like to educate people. So educating oneself to get past that fear factor. Now, I wouldn't say go sponsor a deal, if you haven't ever done it. There's a whole another level of education there, but it's very easy to get plugged into syndication groups and invest.
Darin: I wish that I had known about passive investing in real estate transactions a long time ago. I was making great money and I would've loved to funnel it off to somebody that I trusted, not had all my money in the stock market.
Jack: Through passive investing, I replaced my W2 income, that was a significant watermark when I hit that. I was like, "I'm making both paychecks." It was for a period of time. The work paycheck and the multifamily investing syndications. It's amazing when either coming in monthly or quarterly, depending on the sponsor. But these are starting to add up in terms of income stream.
Getting the Kids To Be Smart About Money
Jack: It's something for people even earlier in their career. I recently got my kids involved in the last deal I did. I'm remarried, we have five kids between us, so busy. They're all teenagers and into college and stuff, but we said, "Hey, here's the latest deal we're sponsoring. We will let each of you into this for $2,000 and we'll cover the taxes. We'll take 2000 out of your savings account and put it into this deal."
Just to get them exposed to it. I feel that strongly about it. You get the kids excited about this. Whether it's multifamily or something else, just to be smart about money. It's never too early to start. One of the kids is 17 and he was one of the most excited about doing it.
Darin: When you talk about seeing apartment complexes when you drive by, I never used to look at that and now I do. I listen to country, I also listened to classic rock. There's this new popular song. The one good thing about country music is that you can hear the lyrics. So I'm listening to the words and it's this guy that's asking either his father or his grandfather for advice. So he gives him advice.
The first thing he says is, "Buy dirt." Buy real estate, buy dirt. You're not making any more of it. You've heard that over and over again, but there's some people that let fear stop them from getting involved. I want to tell the listeners that, look, you need to be accountable for your savings, for your investments.
A Lot of GP LP Made Tons of Money in Real Estate
Darin: You need to learn, educate, and not just hand it all over to Wall Street and just hope for the best. There's a lot of people that have made a lot of money in real estate. So educate yourself and find other people that have done what you want to do.
Jack: I've heard some people object to, "There's this huge sponsor promote fee of 20%. I can't imagine sharing that." If you add up all the middlemen between us and say a stock we own, it's way more than that. Even the management team running the companies, you add up all those different types of compensation. There's a lot of different models on how they make money or how we make money.
Most of us take an asset management fee to keep the day-to-day of the property going and cover all that. But then only after everyone gets all their money back, then there's something there for us to take part in. It's usually 20% or something like that. Those types of fee structures sometimes are misunderstood and scare some of the early investors away.
Darin: At the end of the day, typically the people say you're referring to acquisition fees that they get once the deal closes. Some people object to that. But, if you build up a track record of providing very solid returns to investors, then people start to become willing to do that. In the stock market, I've heard over and over again, assume 7% annualized return. In these multifamily deals, it's like, mid-teens, it's substantially different. Talk about your next stretch goal, talk about your company, where people can find you.
A Different Way To Invest
Jack: My company is Crimson-Advisors.com. What we're about is really helping people find a different way to invest their money through real estate. We've primarily focused on apartment complexes. I've got some older ones in the portfolio, but I'm really shifting the focus a little bit towards the newer stuff. I'd love to have a conversation with somebody who is either new or maybe they've been investing and want to get connected with another group. That would be great to be able to connect and talk through what their goals are.
Darin: What do you like to do outside of work?
Jack: I'm a big skier. That would probably be number one.
Darin: Where do you go? Colorado?
Jack: I'm kind of spoiled. I have a friend who has a place in Vail. I'm a good cook, I'm smoking ribs right now as we're talking. My cousin's in town, so cooking is a big thing. I got divorced six, seven years ago. My kids would come over and I wasn't going to open a can of spaghetti. So I learned to cook anything from brisket to ribs, to salmon. I just like to cook all that. My buddy that's got a place in Vail, he confessed that they really would eat out. I'm like, "I could fix that for you." I'd become indispensable, which is really the key in this business, becoming indispensable.
Darin: Absolutely. You got to provide value where the other person is a little bit fallen down and isn't as strong in. He's got the place and you'll cook for him.
Jack: I'll do the dishes, which is great. I'm like, "All right." My rule is you got to sit there with me with a glass of wine while I'm cooking, because I like to hold court and talk. There might be a time when I got six things cooking. Well, I never have six things cooking, but a couple of things are going on at once. But that, and just travel and hang out. We have to get together and have a beer sometime or go out to dinner.
Darin: I would love that. One, I got to get on your Crimson Advisors database. You probably already have me in there, but make sure you do. I thank you for all your hard work and effort on the Oasis deal. It was nice being a KP. All I did was sign on the loan and you guys did all the work and more than doubled my money. I appreciate that. And a good guy. I didn't realize your education background, plus your mergers and acquisitions background is fantastic and extremely well-suited for this space. I appreciate you sharing everything with everybody. Listeners, I hope that you enjoyed that one. Until next week.