Listen to hear Venkat Avasarala discuss how he and his business partner formed Raven Multifamily, raised over $80 million in equity and purchased over 3,000 multifamily units through syndication. He is not slowing down one bit! Venkat is looking to add another 3,000 units but on the new multifamily construction side.
Table of Contents:
- Where To Listen To The Podcast
- Looking at the Multifamily Construction Side With Venkat Avasarala
- Learn From the Sharks in Multifamily
- How I Started Single Family Investing
- There’s All-Time High in Multifamily
- Hurting Everybody a Little Bit
- Forecasting the Performance of Multifamily
- The Right Deal of Safety
- Building a New Multifamily Construction Deal
- How to Reach Venkat Avasarala
- Join These Multifamily Conferences In 2021
Looking at the Multifamily Construction Side With Venkat Avasarala
Darin: Venkat grew up and obtained his bachelor's in engineering in India. Then he came to the US to study for his master's degree. He and his business partner formed Raven Multifamily and have acquired over 3000 multifamily units. He’s not slowing down one bit. In fact, he's looking to add another 3000 units, but on the new construction side.
I met Venkat a while back. We were part of the same multifamily mentorship group. I had his partner, Ramana Korada, back in episode five. These guys have been doing great stuff. Venkat, can you share how many properties and how many units you guys are currently invested in?
Venkat: We have done about 15 syndications. Thirteen of them are existing B and C class multifamily, roughly 3000 units. We have two more ground-up construction projects going on and about to start our third construction project soon.
Darin: Coming in after you and seeing you guys were already successful when I came on board three years ago. Hearing you say matter of factly, "Oh, 15 syndications, 3000 units." For the new guy looking to get their first or second deal, that just seems so far out of reach. But for you guys, you blink and all of a sudden, you’re managing a ton of assets. Do you pinch yourself sometimes?
Venkat: The pinching times are over. Now, we're numb. The very first deal, it takes quite a bit of time because you have to build that credibility. You need to have the know how, get your ducks in a row, that kind of thing. People can spot you. The lender, the investors, everybody and even the seller or the brokers.
What Drives You Up to Success
Venkat: Everybody is looking at you and they need to get that confidence that you are the guy that they want to work with. It's a process to get there. That's why the first, or the second deal will be the hardest and after that, it gets a lot easier. From that standpoint, your discipline, your processes, your procedures that you put in place will drive how much success one would achieve in this particular business.
Darin: That makes a lot of sense. I admired what you guys have done. When I got involved, there's a lot of syndicators that I've met. You guys really did a good job of creating a brand. You’ve put together a company called Raven Multifamily, and you were also out in the forefront. More people are doing it now. Out in the forefront in terms of using video and using drones to do flyovers of the property.
Talk about what prompted that and how did you go about doing that, because I feel like you guys were on the forefront. Other people have followed since, but you guys were the first ones that I saw really going after it.
Venkat: There’s a saying, a picture is worth a thousand words. Video is worth a million or two. When I started investing as a passive investor, I invested a couple of deals in Dallas. I was able to just drive by, see where it is before I wrote the check. The third deal I invested was in Oklahoma. It's a 4-hour drive for me, and I didn't go there. Sight unseen, I invested in it. But it bothered me that I didn't get a good understanding of the locality on what's going on there.
Video Is the King
Venkat: It's so much a video can communicate to you that a sponsor wouldn't even bother communicating with words. In my mind, video is the king. We want to give that comfort feel.
Again, we raised about $80 million, me and Ramana. Never took one ad, never spent a dollar on advertising. We believe that if you want to sell a $20 shaver kit, let's take ads on Facebook and everywhere. Let's sell a ton of them, but what we are doing here is investing. This is private placement where we get to choose who we want to work with. It’s more relationship based.
We focused our efforts in building those relationships and effectively communicating the opportunity to investors. Have them use their gut feel. We still tell investors on the phone, "Use your gut feel. You won't be wrong. Majority of the time, you'll make the right decisions. Use your gut feel. Listen to us, come to our webinar, listen to us, ask us tons of questions."
No question is a small question, big question. It's our job to answer your questions, but then use your gut feel. That worked wonders for us. People see that these guys are not using the boilerplate techniques to fear missing out scenarios. You get a bunch of emails, we don't do that. We’ve send one email inviting them to a webinar and that's it.
We don't send a bunch of emails sounding desperate and all that. Again, I'm not bragging. It's just that we give to our investors what we would like to see from other sponsors. That helped us to get us where we are.
How to Stay Focused on Your Goals
Darin: Talk to us about your annual goals. How do you set goals, and how do you stay focused on those goals? You guys keep upping the ante.
Venkat: That's true up until COVID, and then we got into the sidelines like everybody. It's not just us. A lot of people got on the sidelines and we're slowly coming back in. Up until COVID, what we realized is this. When we got started, me and my partner met at a Christmas party in 2015. It’s exactly about five years back.
What we saw is rapidly rising property prices. We saw the writing on the wall, "Hey! It may not be for years to come where we can buy these properties at 40 or 50 or 60 a door. This is a time-bound operation. What is the goal? Both me and Ramana were very passionate about being financially free. We also walked away from IT jobs, and became our own boss.
With that commitment, but at the time we still have our IT jobs. Eight hours of our day is spoken for already. We have very limited time. I remember I was working way into 2 a.m., 3 a.m. just to get things done. We’re very committed to our goal. We met exactly two and a half years from then. July of 2018 is where we were able to walk away from both of our jobs.
We didn't expect that, we thought it was five years, six years, seven years, but we did. We’ve got ahead of ourselves there, and we felt very comfortable walking away from our job, so that was our goal. There are no other annual goals up until that moment.
Learn From the Sharks in Multifamily
Venkat: Now that we are able to walk away from our jobs, we started setting up some soft goals. We want to be very cognizant on what we are getting into. And we don't want to buy a problem, because there's a bunch of them outside.
There's a lot of learning. I wouldn't say a lot of goals, but we focused on learning. How we can learn from that particular gentleman who has owned 10,000 units and watch the sharks if you will. You have to learn from the sharks, because they got to be doing something right which got them there.
We focused more on learning rather than just going after properties. By the time we have already proven quantity, we showed that we are trustworthy people. We say what we do, and we close the properties when we said we would. We’re easy to work with, even if something goes side to side while we are in contract.
Once we had that reputation, we had brokers actually bringing up the property, rather than us chasing them. It was a great relationship that we enjoyed with everybody involved. The lenders, the brokers, the investors, and the whole nine yards.
Darin: That's a huge inspiration to many, because that's a goal for so many people. "Hey, can I do this while I'm still working? Can I build this up and then eventually be able to make the shift to full time? How do I do it when I'm still working?" I get that question a lot, and I point people to other examples like yourself. When I came in, you guys were already rocking and rolling, and you already had the reputation.
Determination and Perseverance Create Momentum
Darin: You sometimes forget that you know what, they've had 15 syndications and raised $80 million. But at some point, they were going after their first deal too. They were both working and having to do it on the side. You had to have the determination, the perseverance to get those first two done, so you can create that momentum.
Venkat: What I would say for this is so I came to the United States from India. I'm originally born and brought up there. I’ve completed my undergrad in electrical engineering over there and came to the United States in 2002 to pursue my master's degree. I came to this country for American dream obviously. Complete my master's, get a job, get a house, the two cars, a dog because that's an American dream.
Darin: White picket fence?
Venkat: There you go, there just to complete the whole set. That's all my expectations were. I have no idea what people talk about financial freedom, retiring early. What is this? The old school, my dad, he worked till his retirement age. He graduated out of engineering college. He’s a civil engineer and he worked for the state. Did the job for 35 years, and there's no other job he had done. That's my mindset.
But then what happens is like looking at where we are. Everybody's talking about, "You know what, we got to be financially free. Don't love your company too much. They may not love you back at some point.” These theories started coming out, the mindsets started coming up. Thanks to this advent of technology, the ideas are spreading like wildfire. You're able to infect these ideas into people's minds.
Financial Freedom Is an Unnatural Pursuit
Venkat: The very first time when it occurred to me back in 2006, 2007 that we got to be financially free. Can’t depend on a job, what we are pursuing is something unnatural. Something very unnatural because that's not how the world is thinking.
If you want something which is not natural, so your effort should be the same. You cannot put just regular efforts, go work on it once in a while. You basically have to pursue it and hustle. What you’re asking is something that 99% of the population in the world or the country doesn't have. You want something extraordinary, so your efforts should be extraordinary as well.
That is what I would say, and you don't have to do it for the rest of your life. We started 2016. By 2018 July, two and a half years, I was juggling both the job and this thing. In those two and a half years, I took a few vacations, 2-week vacations here and there. Other than that, I didn't take my wife to dinner, we didn't go to movies, and didn't watch much TV at all.
Certain sacrifices have been made for a short term pain, for a long-term gain.
Darin: That's a great point. A lot of people want to be financially free, but there's sacrifice. There's determination, there's perseverance, there's grit that has to take place to make it happen. To your point, you don't have to do it forever. It's just you need to make a commitment. You need to maintain focus and go after it for a certain period, until you start building that momentum.
There’s Abundance of Engineers in Multifamily Construction
Darin: This is an interesting thing and I haven't asked anybody this before. We tend to find a lot of engineers in this industry. A lot of engineers, a lot of people on the technology side, why do you think that is?
Venkat: Engineers cannot help themselves, but to dig into things. Try to understand, take it apart and fully understand it, analyze it. These things come naturally to engineers I guess. For me, it's what it is. It's curiosity. My story was in 2007, I was driving to work. I was working here in Plano at a client site who's a large, not multifamily, but a fortune 500 company.
9 a.m. I show up there. Then there's emergency services and all that. It was like, "What's going on here?" As I closed, I parked my car and as I walked over the building, I started to hear cries. People are crying, there’s a commotion. But again remember, this is actually a large fortune 500 company. I remember it's October 2007, and that is when they were doing these layoffs.
They're laying off these people who've been working for the company for 30 years working on some outdated mainframe technology. The reason why they're crying is they don't know anything else except for that piece of software they've been working for 30 years and the world moved on.
Their fear is whether I can land another job at that stage of life. Probably they have kids in college. I never saw that kind of scene. That was the first time I'm exposed to something like that. When I saw that, it made me think, can that happen to me?
How Venkat Started Single Family Investing
Venkat: When you see that, you cannot help but think can that happen to me? I was, what, 27 years old back then, but can this happen to me? Well, it can. In this country, it certainly can because we are a capitalistic society. Unless you work for a state where you have some job guarantee. Outside the state, there's no job guarantee, anything. Anything can happen.
Then I determined, "You know what, I'm not going to let that happen to me.” That is what got me thinking. "Okay, how else can I produce income which will support my lifestyle?" I don't want to turn off my Netflix, increase my thermostat in summer.
Darin: Save your way to wealth.
Venkat: Then it dawned upon me that I should work on something. I still need the job, but I want a cushion. That is how I started single family investing. I invested about 20 properties. It's not scalable and a lot of work. I didn't mind doing it at the time because I didn't have anything else. Once I got exposed to multifamily, I started investing out of my single family. I'm a multifamily guy right now.
What I’d recommend investors is, "Hey, first of all, don't do anything which is out of your comfort zone. Even though you continue to strive increasing your comfort zone so to speak." But don't try to put a 250-unit property under contract when you have absolutely no experience, no partners who have that kind of experience. That's what I'm talking about.
Darin: I don't know if challenge is the right word for that. In my experience, every piece of it is scary. It's out of the comfort zone, until you do it.
Keep Extending Your Comfort Zone to Succeed in Multifamily Construction
Darin: I understand your perspective on not trying to go out and do a 250-unit deal by yourself. You're just not going to be successful. That’s the case if you haven't bought a single family house or a duplex or 100 unit property. There are going to be things that you're going to have to get uncomfortable with in order to do that.
Venkat: I believe being under constant stress is not the way.
Stress comes because you know you didn't do what you're supposed to do to be here on that particular day. Keep extending your comfort zone. That has to happen. If you always want to be in your comfort zone, it just won't work.
You cannot get where you need to be, get these extraordinary benefits that we pray for which is financial freedom. Being your own boss, laid back lifestyle, and that kind of thing. Just continue to incrementally get there, and that's exactly how I did. The very first property I bought was a foreclosure, I bought it for $50,000. I ended up selling for $200,000 several years later.
But the stress I went through in buying that one property, I was sweating up by the morning I got it. In my defense, I was 27 years old and I didn't have a lot of money saved up. Whatever I have, most of that money, I'm putting into that deal, and I was sweating. I was sweating in the morning. It's like, "What's happening? What's the stress?"
Know yourself, challenge yourself, set realistic targets, but keep working on. It's a hustle, but then later in my career, we bought $28 million, $30 million properties.
How People Talk About Their First Multifamily Deals
Venkat: We didn't think much because we know we trust our judgments by the time we believe ourselves. And we know that we got all our ducks in a row. We did all the due diligence and everything.
Darin: There's something that I've heard a lot from a lot of large syndicators. When you start getting to three, five, seven, 10 syndications, you still start understanding how to do it. You build processes and procedures. You're doing much larger deals and you have much less fear.
It's funny when I talk to people about their first deals, whether it was a single family, a duplex, or multifamily. That's the one that people are almost the most afraid of. They're taking that first step into a world that they totally don't know and get educated. But at some point, you were sweating it, but you took action and it benefited you. If you didn't do that one single family deal, you may continue to analyze forever.
That's something that I think a lot of listeners have to take into mind that it's scary man, the first time you do it. The first time you do it, it's going to be scary, but sometime, you're going to have to pull the trigger.
Venkat: You do and you wouldn't believe the second deal I bought. It’s a second house which was another foreclosure. I bought it three months after the first deal. From at that point, it was so easy. I didn't sweat anything at all, but I felt so natural doing that because it's over. The learning process is over. Some people just get stuck in that first step.
A Shift in the Mindset of Syndicators
Venkat: Take risk, but calculated risks, but you gotta take risks. You have to believe in yourself, go get educated, and grow from there.
Darin: I was even scared to make my first passive investment, I wasn't even managing the deal. But I remember when I wired money. I was like, "Holy cow! Will I have to explain to my wife that I wired money to some fake account and lost the money?" I’d done all my due diligence, and I knew the sponsors had talked to other people that had invested with them.
I was still scared that first time. Afterwards, the second and third and fourth time, it was a piece of cake. I've seen a shift in mindset with syndicators, and I want to get your perspective on this. I just got involved in multifamily real estate three years ago. The people I surrounded myself were focused on the B, C, value add, 1960s, 70s, 80s product, and workforce housing.
Coming up to COVID and through COVID and where we are today. I've talked to a lot of syndicators and more and more are looking to trade up. They're looking to get out of the Cs and get into Bs and As. I want to get your perspective. Are you guys focused there also? Why do you think that people are doing that?
Venkat: I'll show you my mindset on what's going on this year, ever since the COVID hit. When we started this business in 2016, the very first property we bought was $35,000 a door, right? Then it's the 50s, 60s, 70s, 80s, 90s and the last property that we bought was $102,000 a door.
Property Management Can Mess Up
Venkat: You see how tremendously it moved, the B and C class from 35,000. These are just two and a half years apart. There was a rapid appreciation that happened between these two timelines. When we were buying at $50,000 a door, there’s a lot of cushion.
That can go wrong, property management can mess up, still, it's okay. There's just enough margin of safety in there where you don't have to sweat too much. But when you pay that $100,000 and all that, what happens is your margin of safety is thin, razor-thin.
If your property management messes up before you know it, well you're tracking sideways now. You're no longer on the proforma. That's one aspect. This is even before COVID, this got nothing to COVID. Hundred and fifty absolutely decreased.
Now, what are we signing up for managing a B and C class property? Who are our tenants? These are the folks who are between households, not the person. Anywhere between $30,000 to $60,000. These jobs usually don't need a college degree and maybe how to do them in person. Affordability was already in strain.
While the property prices increased from 30,000 to 100,000, the rents didn't magically go from $700 to $1400. It didn't. What happened is that with all this, the affordability of the tenants is are at strain. Now we keep asking for more rent every year, and they're already stretched thin. Owners, we are strained because the margin of safety is shrinking.
Even before COVID, it's a tough business as we work towards the COVID. Well, COVID came and showed what's obvious to us. A bunch of people lost their jobs.
There’s All-Time High in Multifamily
Venkat: The majority of the people who lost their jobs are our C class and B minus or B tenants. These are the people who couldn't work from home like you and me. Last time in 2008 when the recession came, we lost eight million jobs, but it was very spread out.
Nobody's shutting down our restaurants or nothing. Everybody felt the recession. Now, if you see only the lower end of the income scale people, they’re the ones who almost hit 90% of this brunt. They continue to do so for years to come.
The last time we lost eight million jobs in 2008, it took us five years to get the map. It was very painful. Now, we lost 25 million jobs and we got 14 million easy jobs back. The remaining 11 million, we don't know when they're going to come back. There will be sustained pain with our tenants who live in a B and C class properties.
If they don't have money, they cannot give it to us and we cannot distribute to our investors. Now you have to be very open about it. We know what's going on, and this pain is going to be there for a while. Do you want to cater to the demographic who's hurting?
Do you want to build your business and you want to take your investor's money? Put that and try to cater to these kinds of people. Or do you want to cater to the people who are doing relatively well? If you look at it, the stock market is all-time high. Bitcoin was $20,000. Real estate is at an all-time high. What does that tell you? There is a lot of liquidity.
Getting All the Properties Beaten Up
Venkat: It's not like 2008. 2008, we didn't have liquidity. That's why they’re selling houses at 30,000, 50,000 a door, these 2000 square feet houses. But now there's plenty of liquidity both in the institutions, government, people, everywhere.
That's a good thing. That is why there is a flight for safety where everybody wants to buy something in a nice area. Class A if at all possible and do things that way. But I have an issue with that. How can we generate this 15 IRR that an average retail investor looks for managing a class A property?
Now, if you want me to underwrite it, I will underwrite it and show it to you. If you ask me to deliver that, that's a whole different ball game. Also, everybody's thinking just the way we are talking right here. This is what everybody's thinking. They're getting all these properties bid up.
Anything with cash flows is a prime target for investors. As I said, there is no scarcity of liquidity here. Everybody got money and fed. Made sure of it, and printed so much money, and injected it into the economy. We're flush with cash, everybody.
Darin: There's more coming.
Venkat: There's more coming, so we don't have to worry about cap rates expansion and all that for a little while. But now you have to worry about seeing on , there's this deal. Let's say in Houston somebody's projecting a 10% cash flow. Is it really going to happen?
You gotta ask yourself these kinds of questions. Everybody's chasing these deals and they're getting bid up. Like we discussed, the margin of safety is already razor-thin. That's even before COVID.
Do What Makes Sense
Venkat: More so in class A properties because the rents aren’t pretty high, just because it's a class A property. There'll be another $200 more than a class B property and class A, but they're much more expensive. My state of mind right now is not to tie up just with multifamily.
Do what makes sense, do what gives you the most margin of safety. And do what gives you more favorable risk to reward ratio. That is what I'm after. I am no longer married to B and C class properties and multifamily properties. Rather, I want to pivot from here and reset our criteria. Before COVID, if you ask me my criteria, I would start something like, "Oh! I'm looking for B and C class properties, 100 units minimum." No, that's not the criteria anymore post COVID if you want to invest.
For success, you got to show me the business plan which allows me to see a favorable risk to reward ratio. What that means is, a single family is super hard. Not saying that I'm going to start goes flipping single family homes, but I want to get involved in that space. Austin, the prices went up 11%. Phoenix, another 10%. They are on fire everywhere, they just cannot build enough of single family.
Even hedge funds like BlackRock are allocating billions of dollars to go and buy this single family. I'm nothing before BlackRock. Not today. Definitely that's one space I want to get involved in, and the second thing is construction.
Darin: Why construction?
Venkat: Let's take two sponsors. One is a cash flow investor. Syndicates operate for cash flow, and the second is a developer. Now let's see how their lives are.
Dealing With the Eviction Moratoriums
Venkat: Let's talk about the syndicator who invests for cash flow and all that. We described how hard it is to land a deal which makes sense. Pay a decent price, deal with all the eviction moratoriums. Deal with the city and deal with the high delinquency.
Right now, it's pretty tough. Not many people openly say, but we're going through a stressful time right now, managing these B and C class properties. We've just talked about how hard it is to make the numbers work for a class A property, even though they are much easier to manage. Now if you want to stick with these B and C class properties, they’re getting expensive every year.
People are paying more and more for this so-called cash flowing property, and they're just killing this cow. If cash flow is a cow, they're just killing it. Paying more and more. Unless you want to invest something with a speculative nature, like where you don't care about cash flow so much. You buy something and you just wait. Project something whether you hit or not, you'll definitely do well probably.
Somebody will come and pay you more than what you pay. If that is okay, be honest, be open to your investors, nothing wrong with that. I have seen several people doing that, buy it for that reason. Don't think that you'll be able to produce this 8%, 10% cash flow. That's not going to happen. Not at this time. That is how that life is, but let's look at developers.
Developers, they're doing the exact same amount of work. Nothing much changed other than lumber prices going up a little bit. Appliances with this trade war are becoming hard to get to.
Developing Multifamily Construction Gives You Satisfaction
Venkat: Other than these few things, 10 years back, what the amount of work they're doing, that is exactly what they're doing. There's nothing changed in their life. I'm talking about the Dallas market here.
They were compensated at seven cap rates 10 years before. If they build a 800-unit building, they produce a million-dollar income. Okay, here's your seven cap rate, let me buy this off you. But right now, people are paying them for four and a half. Their doing the exact same work that they were doing 10 years back, and now their life is a lot better.
They're getting compensated twice as much for the same exact work and at ridiculous cap rates. There’s this insatiable demand from institutions inside the country and outside the country as well for class A property. I want to be on the side where things are getting better for the timing. That's the skill. If you develop, it gives you a lot of satisfaction. Obviously the IRRs are more, but, you cannot produce that cash flow on day one. Also, you don't have the depreciation on day one.
Darin: One thing before COVID hit and in the last year, how syndicators are. Everybody talks about what's going to happen. We're late in the real estate cycle. Nobody knew what was going to cause the recession, but something was going to happen. How were multifamily going to perform?
There's a consensus that I had heard. I bought into it if we go into a downturn. The bottom 20% tenants in A properties are most likely going to flow down to try to save money.
Hurting Everybody a Little Bit
Darin: To go down to the Bs, and then the bottom 20% of the B property tenants are going to flow down to the Cs. Everybody might be hurt a little bit, but that should flow down.
To your point earlier, that's not what happened with COVID. It really impacted the C class and maybe B minus class and for a few different reasons. One, being people that are in higher-paying jobs in As. They were able to work from home like you said, and they also have some savings. If they lose their job, they know paying the rent is important. They need a place to live.
They're most likely going to use some savings to pay, and most of those tenants did not lose their job. But in the C properties, restaurants, hospitality, hourly paying jobs, they either lost their job. Had their hours cut back, and they don't really have the savings. A lot of them are month-to-month, paycheck-to-paycheck.
That's one of the reasons why this was played out a lot differently than a lot of syndicators had thought. There’s another thing that we didn't talk about, and I think it’s one of the reasons why people are moving to A properties. It used to be that there was a good spread between the cap rates on A versus B versus C. If a cap rate was four and a half percent on A, then maybe at 6% on a B.
Then seven on a C. There was a spread. You were buying an older asset that needed more work. Had more maintenance, had a lower tenant profile, but you’re also buying it at a higher return rate. As Dallas markets and actually I talked to syndicators all across the country.
People Have Flooded the Multifamily Market
Darin: To your point, people have just flooded the multifamily market and pushed cap rates down. B and C cap rates are almost on top of As now. Why not have a newer property with lower maintenance if you're getting the same return?
Venkat: See, if your equity is happy with a 10 IRR, let's do it. There are no two ways about it. Let's go buy up all these A class properties and manage them. Relatively don't feel the pain at all. If your equity is looking for higher IRRs, that is the problem. Which they are. Unless you do some magic on a spreadsheet, it's hard to project more than a 10 IRR.
Another sobering fact here is class A, even though it's the same five cap rate in B, C everywhere. But if you look at the rent growth and all that, you will see more rent growth again back in B and C. There are so many people looking for B and C properties than A properties. It's simply a lot more tenants looking for B and C than A.
Another thing, almost all the supply which is coming everywhere is class A. We're not building new class C properties, class B properties. We're only building class A properties. You just cannot build any class C or B property with the way the construction expenses are.
Project five years out and not just make your decisions on the day that you're buying it. It's the same five cap rate C, B, and all that so let's buy an A. What happens five years out, which class rents are expected to grow?
The Pain Will Endure But Multifamily Offers Sobering Effects
Venkat: You got to pay attention. You have to look at the overall return of the deal, but on the B and C side. Even though in the short term, I won't even say short time, it's medium term. Over the next three years or so, the pain will endure. There's no doubt about it.
Another sobering fact is in America, 51% jobs come from, or even I'm just talking about Texas. 51% of the jobs are created by small businesses. Most of these small businesses, now I'm talking about five to 10, five to 50 people kind of thing.
Employees kind of jobs, and most of those, they live paycheck to paycheck if you will. Not so paycheck, but from month to month. They take revenue from this month and pay bills from the last.
Darin: A lot of small businesses basically are buying a job. They're the main component.
Venkat: They are the ones who create the majority of the jobs. But now, they're toast with these continued shutdowns and the impact from the COVID. Once these things go down, they cannot snap up just like that. See, airlines, they shut all the flights, and they got some stimulus money. Boom, they opened the doors, and that's okay for them.
They can snap back up and hire every person that they have laid off just like that. Small businesses can't do that, they're gone. If they file bankruptcy, they will not qualify for any loan for the next seven years. That job creator is out of circulation for the next seven years.
What Happens After the Stimulus Package Runs Out
Venkat: It's a very sobering fact that we have to pay attention to even the B and C, it's not a cake walk. All these jobs are gone, and it takes for a while for them to come back. The easy jobs came back. But the real service level jobs, it's going to take a while for them to come back.
Darin: We're going to have probably another stimulus package. It should be coming out anytime. Then Joe Biden said, "It's just the beginning. He's going to come out with more." But the big question mark is what's going to happen after those run out? There's going to be permanent unemployment, and how does that impact the economy?
How does that impact these different asset classes, including multifamily? One of the things that’s difficult to really factor in is the migration of people from other states to Texas. And to other attractive markets such as Arizona and the Carolinas, Tennessee, Florida. What I'm seeing is we have some tenants that may be struggling.
If they leave the property, we have a line of people that want to move in. Occupancy is not the issue. There are people that are moving into the state that need a place to live. In my mind, what I love about Dallas and Texas in particular is that incoming migration and affordability.
Even though there's been a run-up in the Texas markets. If you look at the coastal markets, we're still extremely attractive in terms of the cost of living. My thought is that there's going to be a squeeze. We're never going to be the same rent as San Francisco.
Forecasting the Performance of Multifamily
Darin: But the gap between the West Coast and the East Coast and Dallas and Austin is going to squeeze over time. Will that help the performance is the big question mark. It's very difficult to forecast the performance.
Venkat: When we talk about multifamily, we talk about population growth, job growth. But where is the wage growth? It's non-existent and if you book a 0.1%, it will make the headline news. "Hey, you know what, we booked a 0.1% of wage growth compared to last year." That's the state.
When we are increasing rents, let's say from $1100 this month to $1200. The same person who's living there can no longer afford it. They won't get that kind of rent bump salary hike to afford our rent height. We are expecting that this person will move away. Some other person will come into Texas or Dallas who makes a little bit more money than the old tenant. Now that person is going to pay us.
Darin: They were paying 2400 in California. Now they come and they're like, "Oh, I'll pay the 1400, that's cheap."
Venkat: As long as we get that in migration, it helps and I think rents will continue to increase. It's my opinion that at some point, it stops. At some point, it stops and it slows down. It may not stop completely. Maybe we'll get the 2% rent growth for over the next five years. Maybe we will see that 6% rent growth that we have seen in 2000.
Darin: At some point, it's got to give. I've been in the loan trading business since 2002. I was living in South Florida, and I told my wife.
We’re Not in the Great Recession
Darin: "Look, at some point, this isn't the great recession in the 2002 to 2008 run up." I said, "Look, it just doesn't make sense. Housing prices in good markets like Florida were going up like 15% a year."
But to your point, incomes were only going up like 3%." At some point, something's got to give. That may very well happen here, or the migration and incoming population may offset that. I don't know the answer to that.
Venkat: Investor's expectations have to be dialed down. The 8%, 10%, 12% cash flow, one of the deals that we still own, we paid $66,000 for that. I recently sent 13% distribution to investors. Those days are gone. If you buy something today, there is no 13%. Your expectations have to be reset.
There’s one trend I'm seeing in particular with Austin and Dallas. People are moving money out of their assets from both the coasts because of the business unfriendliness or whatever. I keep hearing that people just come here just to look at a couple of units. Say, "Okay, you know what, I want to buy this $40 million property. I just want to be out of California."
With this kind of investor behavior, Dallas and Austin will continue to emerge as a safe haven for capital. Not so much for cash flow, but a safe haven for capital. Every next guy is expected to pay slightly more than what this guy paid and without much emphasis on financials and all that. We need to expect that. Dallas provides the stability, the diversification of jobs. It's becoming a safe haven for capital and obviously more.
A Cohesion of Thoughts to Venture Into Multifamily
Darin: That's really interesting, and I haven't talked about that before. Dallas and Texas have always been pitched as you can get good cash flow. Cap rates are attractive here compared to the coastal markets and South Florida or California or northeast. But I haven't had anybody present that to me before.
Maybe the Texas markets start moving to be like some of these other markets. Where people park their capital and there's less cash flow. The cap rates are that much lower, but then they bank on the appreciation down the road.
Venkat: That's not completely bad. It's just that you have to know getting into these kinds of properties that this is not cash flowing property. We will soon be a gateway property, a gateway market. Just like how San Francisco is where people will own for the heck of owning it.
Now here’s the question. Does your investor or your equity partner share the same kind of vision that you’re saving and is going to play along? It should be some cohesion between how you and your equity are thinking If there's a match, let's go ahead.
Another thing we have to pay attention to, which we didn't care about quite a bit. Texas is blessed with no income tax. We all love it. Many people who don't know this think that our property taxes are one of the highest in the country. Texas balances budgets. They don't do deficit spending. They have a $10 billion slush fund. That’s all good physically conservative principles which make Texas what it is.
Where Do You Want to Build Your Multifamily Construction
Venkat: But on the flip side, you do have to understand that you have this huge property tax bill. It’s due every single year, whether your rent goes up or not. Whether your tenants pay you or not and insurance is another thing. It is one of the highest in the country because of these constant weather-related incidents. Hurricanes don't have to hit Dallas in order for Dallas insurance.
The whole Texas is one market. Our insurance goes up. The problem with these two is now, your expense ratio is high. On a C class property, it will be 56%, 60% expense ratio. What will happen now is your break-even occupancy is like 80%, 85%. Unless 80% of the people pay rent, you're not whole, you can't break even. There are other markets like Arizona, Colorado.
There are several other markets where, like Colorado, their property taxes are third lowest in the country. Even though it looks like a 1960s property, it's 200 a door but hits your expense ratio. Your expense ratio and the rents are high as well. Your expense ratio is like 26%, 30%, and you're break-even occupancy will be like 50%.
Now, where do you want to be, especially in this climate? Do you want to buy something where unless 80% of the people pay the bill or pay the rent, you won't break even. Or you want to be in a place where 45% to 50% pays the rent and you're okay?
Darin: Are you looking at Colorado right now?
Venkat: My interest has peaked in those western markets and Las Vegas is good. Arizona, Idaho is a small market, very competitive market, how to land anything in Colorado.
The Right Deal of Safety
Venkat: That’s my immediate concentration area, but I live here. I love Texas. Texas helped us where we get here. All I'm saying is that you got to find that right deal which allows you a margin of safety physically. Where is the margin of safety when 80% to 85% of the people have to pay rent for you to break even?
Darin: It's difficult. One of the things that's helped some people get deals done now is interest rates have dropped dramatically. The deal that I put together a couple years ago, our rate was like 4.91. People are getting rates at plus or minus 3% now. When you have that on 70%, 75% leverage, that definitely helps.
You guys have not done this before. Almost every syndicator I know does a deal. They get a deal under contract and have their investor database. Also, they have 60 days to close, then they go out. In the next four to six weeks, as they're doing the appraisal and they start the financing and all that, they're going out and raising the equity for that deal.
They are pitching the actual deal to invest in. I've invested in nine different syndications passively. One of them was set up as a fund. I’ve invested money into the deal. I invested 100 grand, and I didn't know what assets the sponsor was going to buy.
I just bought into the credibility and the track record of that sponsor. And I was buying into them that they would find the right deal. You guys have now built a stellar reputation. You've raised $80 million in equity. Have you guys ever considered going the fund route versus the deal specific route?
There’s No Distress in Multifamily Construction
Venkat: Like everybody, we were thinking of actually starting a fund as soon as COVID hit. What we thought is, just like everybody, there will be some fire sale. Like, "Oh my god, this property is going to come away." See, in order to set up a fund, there should be a reasonable expectation of the product to come your way.
Again, let's say if you're back in 2008, 2009, we know everywhere, there are distressed fire sales. We don't want to syndicate for every single deal when time is of the essence. Where you have to seize the opportunity if you have funds. Money is sitting there, discretionary funds, you can go get it.
Now, we thought that's the same thing which is going to happen post-COVID. We talked to our lawyer, preliminary discussions, we know back of the napkins and all that, but where are the distressed properties? Not in multifamily. I haven't seen one.
I've seen a couple of syndicators advertising that it's a COVID deal. They got a 5% discount or something like that, but that's not the distress I'm talking about. There's none. Immediately with that, our interest in starting the fund kind of dissipated.
Had I been a hotelier, probably it still makes sense for me to start a fund. Because I think there are some transactions. I think there are reasonably distressed properties in hotels. Not retail but hotels where you can get your hands on some distressed properties. That worked out.
Darin: You think the fund is best suited for distressed opportunities. Now what happens in this scenario when the economy goes into a tailspin? All of a sudden you know that there are going to be distressed deals available.
Money Is Difficult to Raise
Darin. Your investor base is scared also. They don't want to release their money because they have money in the stock market. They’ve got money in different investments and they may be worried that they're going to lose their job. For all those different reasons, it may be more difficult to raise money.
Venkat: No doubt about it. The retail investor, that funds are available to you. Only as long as there’s a reasonable expectation that the economy will be okay. We cannot be on a downward trend. If you think about it, the beauty of the COVID is that the downturn happened like that. If it goes slowly over a year, it's a problem. Investors don't like that. Don't catch the falling knife kind of a saying.
It happened. The downtown happened so quickly that it spared us the problem. Somebody hit us on the face, we're on the floor, we know what we are to get up. That's the kind of situation we all found ourselves in, and we quickly lost 25 million jobs. We made a lot of recoveries, so that kept the retail investor's enthusiasm in the market.
Now if there’s a double depreciation, the retail investor may not invest. I completely agree because they are scared of their job. They want to hang on to their dollars, completely understood and I would do the same. That is when you had to look at New York. We're already talking to several big money players.
Darin: Big money players.
Venkat: There's no shame in that. They're hard to work with, no doubt about it. It's like heads I win, tails you lose kind of thing, but you got to build rapport with them.
Multifamily Construction Is Where You’ll Find the Real Gem
Venkat: That is when you'll find the real gems, the real three-baggers, four-baggers, and all that. What do you do? You got to look at New York.
Darin: You're already playing it for that? That's very smart. Now, you talked about moving towards single family and also multifamily construction. What about other asset classes, are you still focused on multifamily? Will you look at how the industrial has been really hot and hospitality?
I know retail really hasn't gotten hit, but it is getting impacted for sure. Do you see more opportunities coming in? Maybe some of these other asset classes that you may branch off. Are you going to stay in your box, the multifamily market?
Venkat: My criteria is not multifamily or that or this, whichever provides the maximum margin of safety. I see that multifamily construction gets plenty of margin of safety. There’s this crazy demand for class A properties from institutions. They don't cash flow really well after you sell it for the buyer, but they don't care. As long as they make the 3%, the institutions are all over it.
The other day I saw in our Addison and Co-Star, there’s an article so-and-so company bought an Addison class A property. I said, "Okay, who are these guys?" They're Lebanese private equity fund. Where is Lebanon? Where’s Dallas? What are they doing here?
This is how it is, the private equity institutions, pension firms, and all that. They're looking for this class A property. I see a greater margin of safety at the class A construction, not luxury. There is a distinction if you want to build in the CBD in the downtown with all the bells and whistles.
Building a New Multifamily Construction Deal
Venkat: I'm not saying that it won't work. But now, you are obviously increasing the risk profile and the risk to reward ratio is not that favorable. If you build something for $1300 rents in Texas, a 20-minute driving distance from CBD. Or very close to a major highway, that's your class A property. You'll get class A tenants, but it's not luxury at all. It's not low income either.
That’s the sweet spot I want to be in. That is the spot which presents me a greater risk to reward ratio, so that's one aspect. Single family is another thing, and now we have to start. I cannot do everything. I only have 24 hours like everybody.
I'm open to partnering with people who are experts in that area and bring those opportunities to our investors. We'll be co-gp’ing with full operations control and the whole nine yards. It's not just writing them a check, but rather, that gives me an opportunity to learn that business also.
Darin: You're doing a new build multifamily construction deal?
Venkat: Absolutely. One of my partners in one of these construction deals is a 65-year-old veteran. He has 40 years of industry experience, and I got a friend to proceed to learn their business on.
Darin: The learning doesn't stop. He surrounded himself with syndicators. Did his first deal in Oklahoma. He moved back into Dallas and learned from them, but now, look he's got 3000 plus units. He's raised $80 million, and he's still looking to learn from other people that have more experience.
Venkat: It's all cycles. We know that real estate is a cycle. Every asset class is owned by a cycle.
Pivoting to the More Favorable Risks of Multifamily Construction
Venkat: We cannot be just thinking oh, it's the same game every day. No, we have to pivot. We have to always pivot and do what gives us the most margin of safety and a favorable risk to reward ratio.
Right now, that is multifamily construction. Maybe five years from now, it may not be construction. Maybe then we'll go back to our B and C class properties. But today, I see a better favorable risk to reward ratio with construction with this insatiable demand for the new product.
Darin: What do you do outside of work for fun?
Venkat: I'm a history buff. I want to understand what happened from the big bang till now. Then there’s geography, history, biology, and astrophysics. I spend most of my time learning bits and pieces of this thing and putting it all together in my mind. It takes up about 60% of my free time.
The great courses members. I like learning and I do a little bit of gardening. And I have a very small garden at home, then I have two pups. I give the rest of time to them.
Darin: You have a ton of knowledge, a ton of experience, and you guys keep pushing the bar. What is the next big stretch goal for you guys?
Venkat: My personal goal is to do more of this construction loan, master that. Develop relationships and all that. I would like to see myself building about 3000 units.
Darin: On the multifamily construction side? You have over 3000 on the B, C side, now add another 3000 on the new multifamily construction side.
The Realistic Goals of Venkat Avasarala
Venkat: That's my immediate goal. I didn't time-bound it. Again, I want to be very realistic with this COVID. I will time-bound it. It's not just that I don't want to arbitrarily pick a number out of the thin air and put it there. Because I want it to be a stretch goal, but still attainable.
Darin: If listeners want to reach out to you and get to know you better, what's the best way for them to contact you?
Venkat: They can call me at 281-727-9238, that's my cell phone number, or they can email me at email@example.com. While you're at it, please visit our website at ravenmultifamily.com.
Darin: These guys are top-notch. I'm invested in two of their deals. They're just good guys and have blown up the space, and they have big hearts to help other people. I love that and I really appreciate the relationship. Listeners, I hope you enjoyed that one. Venkat, thank you for all your wisdom and until next week, signing off.
How to Reach Venkat Avasarala
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