In this episode of The Darin Batchelder Real Estate Investing Show, Darin is joined by Bikran Sandhu to take you through their unique journey of transitioning in-house in the realm of real estate investing. Bikran's adeptness in underwriting asset management and delivering on financial numbers, coupled with his partner's expertise in orchestrating renovations and site management, ensures an enriching discussion. Discover the strategies behind their successful rebranding from Summit Equity to Rise 48 Equity and how they managed to secure over 30 deals in Phoenix. Bikran elaborates on their transition to in-house property management, the challenges and successes they faced through the process, and how fundamental relations with the brokerage community are in this context. Listen and learn!
- [00:04:05] First deal as GP, learned the business plan. Transitioned to syndications, complementary skill sets.
- [00:05:47] Partners handle different roles; expanded successfully; replicated in new markets.
- [00:13:25] Valuing employees is crucial for success.
- [00:20:03] PwC work experience, different managers, long hours. Hated one manager, loved the other. Switched to management consulting.
- [00:26:40] Underwriting deals, analyzing comps, providing feedback. Limited success in acquiring assets.
- [00:34:31] Fixed-rate financing can come with significant prepayment penalties, which can impact deals that rely on appreciation. Floating-rate loans are a better option for long-term value add strategies, as they do not have prepayment penalties.
- [00:39:40] Interest rates, cap costs, and refinancing options.
- [00:46:32] Phoenix rent growth steady but fluctuates yearly.
- [00:51:10] Consistent returns for investors, focusing on underwriting. Varying deal lengths but average 18 months. Exploiting market opportunities, avoiding greed. Offering 1031 exchanges for tax benefits.
- [00:55:09] Real estate: buy now, profit later.
Episode Table of Contents
- Transition to In-House Management
- Switching to Floating Rate Financing
- Building a Strong Company Culture
- Providing Consistent Returns for Investors Through In-House Property Management
- About Bikran Sandhu
Transition to In-House Property Management
Darin and Bikran discuss the journey of their company's property management practices. Initially, they hired a third-party property management company for day-to-day operations and construction management. However, they found this arrangement to be inefficient, leading them to bring these functions in-house in 2020 and 2021, respectively. They hired a director of asset management who successfully reduced the timeline for exterior renovations from 6 months to a remarkable 45 days.
Bikran points out that accurate budgeting for interior renovations had been a challenge due to inconsistencies and incorrect estimates provided by their property manager. To overcome this, they started accurately bidding out these projects themselves in 2021.
Expanding to Dallas Market Through In-House Property Management
Bikran shares their plans to replicate their successful business model in markets outside of Phoenix, particularly in Dallas, Tampa, Utah, and Idaho. Dallas is regarded as an attractive market due to its strong job growth and population expansion. They started targeting deals in Dallas at the beginning of 2023, applying the same framework that they established in Phoenix.
Bikran mentions that they initially reached out to brokers in Phoenix, who introduced them to their counterparts in Dallas. They then met with the Dallas brokers in person to discuss deal criteria and receive input.
Expanding Into New Markets: "Dallas has always been a market we were interested in. We just never liked having to deal with property taxes that may go up by 20, 30 percent in a year. Or insurance that may be ridiculously expensive. But we found some good partners to understand how property taxes work in Dallas. How we can underwrite insurance a little bit more accurately on the front end. And Dallas, from a metric perspective, it has a really strong job growth. Really strong population growth, which are really the two key fundamentals to look at multifamily investing. And we figured, hey, now is the time to attack. So at the end of 2022, beginning 2023, we started hitting the market really hard and started identifying deals we wanted to buy. And that's how we took the framework we established in Phoenix Sandu and moved it over to Dallas and started replicating it out there."— Bikran Sandhu
Switching to Floating Rate Financing
The discussion shifts towards financing strategies, with Bikran explaining their transition from fixed rate to floating rate financing. Previously, they used fixed rate Freddie Mac loans for their real estate deals in Phoenix, which came with significant prepayment penalties.
Bikran highlights that a fixed rate financing approach is more suitable for long-term holds without value-add strategies. Since fixed rate financing doesn't fund capital expenditures (CapEx), they had to raise all the required funds upfront, resulting in low-interest gains while sitting in the property's bank account. In contrast, floating rate financing eliminated prepayment penalties and provided flexibility in executing their value-add strategy.
Fixed Rate Financing vs Floating Rate Financing: "Fixed rate financing is great when you wanna hold a deal for 5 to 7 to 10 years. It's a perfect product for that. But, you know, our company does value add strategy. So that's why we think doing floating rate loans is better for the long term for value add strategies because you're really kinda looking for that appreciation play to unlock the majority of the profits for investors."— Bikran Sandhu
In-House Property Management, Interest Rates, and Cap Expenditures
Bikran delves into the current environment of interest rates and their effect on their financing decisions. He notes that the yield curve is inverted, with the 1-month rate at around 5.05% and the 10-year treasury at 3.7%.
Bikran explains that interest rate cap providers have increased their cap costs in anticipation of having to pay the interest on loans. They mention that they no longer use agency floaters and instead opt for bridge financing, which allows them to avoid escrowing reserves for expired caps. They buy 3-year caps for every deal, aligning with their 3+1+1 bridge term structure. By not having to escrow funds, they are protected from cash flow issues. Bikran suggests that interest rates may start coming down the following year, which would reduce the cost of caps and allow loan proceeds to cover cap expenses.
Interest Rate Caps and Cap Costs: "All these interest rate cap providers, they're basically increasing the price of their cap cost. Because they see that they're gonna have to pay the interest on the loan because the caps you can buy is is gonna be around 2 and a half percent. Whereas the floating rate debt is basing it off of 5%. So they're building that in. Which is causing these cap costs to increase significantly."— Bikran Sandhu
Building a Strong Company Culture
Bikran emphasizes the importance of treating employees well in a service-oriented organization. He mentions that their company has around 90 people on the corporate side and about 150 people on the property management side. Bikran highlights that they offer generous medical benefits, paying 100% of their employees' medical benefits and 50% for their dependents.
Retaining good employees is crucial in a high-turnover industry like property management, and having the function in-house grants them more flexibility in retaining employees. Bikran concludes by stating that their company values building relationships, both with employees and investors, to foster a positive and successful work environment.
The Importance of Workplace Dynamics: "So as long as you work for somebody that makes you feel like you're taken care of and that you're wanted there, that makes a world of a difference."— Bikran Sandhu
Rent Growth and Value-Add Strategy
Turning to the Phoenix real estate market, Bikran discusses rent growth trends in the area. Over the past 20 years, rent growth in Phoenix has averaged 5-6% annually. However, in the past two years, they have witnessed significant rent growth increases of 15-25%. This year, they have seen a decrease of around 4% in rent.
Despite this fluctuation, Phoenix remains a leader in total rent growth compared to other cities. Bikran mentions that their company focuses on value-add properties, renovating them with high-quality finishes to attract and retain tenants. They have been successful in increasing rents, surpassing their projected rents by approximately $29 per unit. When underwriting deals, they assume a conservative rent growth of 3-5%.
Providing Consistent Returns for Investors Through In-House Property Management
Bikran sheds light on their company's approach to providing returns for investors. He states that their goal is to double investors' money in about 5 years, averaging around a 20% annual return. However, if they can provide investors with 20-30% average annual returns over 2-3 years (1.4 to 1.6 equity multiple), they are willing to do so, as long as they can achieve a good return without triggering short-term capital gains taxes.
Bikran shares that the average hold period for their sold deals was around 18 months, with an average equity multiple of 2.1. They prioritize buying, repositioning, and selling properties quickly to deliver higher returns sooner, as this aligns with their investors' preferences. Additionally, they offer 1031 exchanges for investors, allowing them to defer capital gains taxes and depreciation recapture taxes by reinvesting the proceeds into another property.
About Bikran Sandhu
Bikran Sandhu is the CFO/COO and Co-Founder of Rise48 Equity, a company that is making waves in the multifamily real estate market. With over $1.5B of assets under management and a portfolio that includes over 6,500 units and 30+ properties, Bikran brings a wealth of knowledge and experience to our conversation today. A man of many talents, he excels in underwriting, transaction management, asset management, investor relations, and much more.