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December 7, 2021

Multifamily Property Management Helpful Nuggets With JC Castillo [EP078]

Do you have multifamily properties to manage? In this episode, JC Castillo shares some fantastic ideas to implement in your multifamily properties. He loves the property management side of the business and recently started a separate company called Velo Residential that focuses on third-party property management. JC learned that you should always be looking for new ways to improve your business. You never know what might lead to something great!

If you’re interested in learning more about these strategies and implementing them into your own multifamily portfolio, then listen to this episode!

Table of Contents:

The Importance of Strong Multifamily Property Management

The Importance of Strong Multifamily Property Management
Photographer: Clay Banks | Source: Unsplash

Darin: JC Castillo lives in California. He's been investing in multifamily in the Dallas-Fort Worth area for the past 15 years. He is a long-term hold investor and believes in the power and importance of strong onsite property management. He comes from an engineering background. He's focused on leveraging technology at all of his properties. He helps many in the Silicon Valley area invest alongside him in the Texas market.

We've met at a few multifamily conferences or events. The last one we connected at was a happy hour with an attorney that we both have worked with. It's been a while, but I see him on social media. I hear about him from other people. Actually, I was meeting with a broker recently for lunch. He brought up JC's name, saying that he started working with him a long time ago. His name just kept coming up and I thought it was about time to bring him on the show. To start with, how many properties and how many units are you currently invested in?

JC: I've been in multifamily as an owner-operator for the last 15 years. We've bought and sold well over a thousand units. We currently have a portfolio of about seven properties, around 950 doors, and all located in Dallas-Fort worth. That's where we've been for the last 15 years.

Darin: But you live in California.

JC: I live in California and invest in Texas.

Darin: Why do you do that? It's no big secret to a lot of people that are in the space. But there are some listeners who are trying to understand it. Purchasing out of state is scary for them.

Discover How To Save Taxes and Build Wealth

How You Build a Team in Multifamily Property Management

JC: That's really the key. Making the decision to buy out of state, deciding to do it, and how you do it, and how you minimize the risk. How you build a team from nothing in a market where you don't actually physically live and aren't located. You're a plane ride away. That's really the magic of it coming together. Certainly, it's something that I've done relatively successfully, but there's some fundamental reasons for that.

Texas in general, back in the mid-2000s when I was first looking to start buying multifamily properties. I just really saw back then, based on the analysis and the data that I was doing. I’ve felt like it was going to be great for long-term steady growth because of the affordability factor with rentals. The pricing on the deals was relatively inexpensive compared to California. The cash flows were a lot better.

Now, back then in the mid-2000s, nobody really thought that equity in the state of Texas was going to be anything interesting for the foreseeable future. Most people thought, if you buy in California, you're going to have equity. If you buy in Texas, you'll have cash flow but no equity. But 15 years later, the equity piece has been there in spades. Some people would argue that, possibly, there's more equity upside in the future with states like Texas, where there's a lot more of a landlord-friendly political system, legal system, et cetera.

Darin: What would you say on that front? I got involved at the end of 2017. I’ve met people who were like, "I was buying at 30, 40 a door, I'm out." I'm like, "I'm in." I bought it for like 80 a door. Now it's, what? 150 a door.

We’re at the Top

Darin: It's crazy how it's run-up. What's your take? You've focused for 15 years on DFW, are you thinking that we're at the top? Do you think there's more legs here in valuation?

JC: I don't like to think of it as being on the top. It's all relative to what time period we're in. If you go back 25, 30 years ago, whatever cycle that market might have been in, people would've said either it's the top or the bottom. But if you went out 30 years from there and you looked at where we're at today, you may say it didn't really matter top or bottom. Time cures everything. I do believe that, relatively speaking, we're at a top point in the cycle.

That's not just in real estate, that's in a lot of different asset classes. We're in a cycle where there's a lot of money being pumped into the economy, which is inflating assets. The idea of being an opportunistic buyer is what I've always believed in. I never really look at the top or the bottom of a market and say, "I'm either buying because it's the bottom of the market, or not buying because it's the top of the market." We never really know.

5 Step Process Ad

What I do know, after these many years, is when I walk and underwrite a potentially great deal. When the numbers work and the deal works and it's in a great location, we're going to make that purchase. We're going to go long-term on that deal. If you put a great property with great strategy for a longer term hold, then you can navigate temporary setbacks in the market if the economy does change.

Being an Opportunistic Buyer

JC: Some of that is not inside of our control as investors. So, being an opportunistic buyer is what I've always embraced. Try not to focus too much on whether we're in a hot market, or a down market, or a sideways market.

Darin: What you said is very smart. You didn't say in these terms, but, everything is cyclical. Things go up and go down. But if you have a long-term focus, a long-term view on it, real estate always finds its way to be valued higher as time goes on. The key is to be able to ride out that storm if a storm comes. Part of that is great property management. Another part of that is the type of debt you put on the property.

If I have people that aren't in the multifamily world who ask me, what do you think the biggest risk is? This comes from my loan trading days, I look at the maturity risk on the debt. If you are coming due in a terrible economy, in a recession, the loan is coming due, then you have no leverage. Cash flow is down perhaps, maybe interest rates are up and cap rates are up, valuations are down at that moment.

They say, "I'm not going to refinance you unless you bring another million or two million of equity to the table." Some people can't do that. Then they get in trouble with the property. But if you have that flexibility with your financing, then you can take that long-term approach. What's your view on that?

JC: If you look historically at some of the major down cycles, 2008, the great recession comes to mind. By the way, I was an owner of multifamily properties before the recession.

The People Who Get Hurt in Multifamily Property Management

JC: So, I went through it personally as an owner. The people that got hurt were the people that were over-leveraged. The people that, any little thing that went wrong, had no room for error on the lending side. Leverage in general seems to be one of the killers when a market crashes. We saw it happen in 2008.

I had always been a big believer in long-term debt, not taking a lot of risk and looking at deals as though I were to hold them for good. For me, the recession did nothing. We might have lost a couple of percentage points on occupancy, but I was still making my cash flows. I didn't leverage up significantly during the preceding to recession. So I had plenty of room to even lose revenue and still be able to make my mortgage.

So, I just rode out the storm, and it passed and really nothing happened. That was a big lesson for me because I did see a lot of people get wiped out. It was mostly way over-leveraged and really thinking and believing that things were just going to keep going up like crazy. They took a little bit of a break but, since then, it's been skyrocketing.

That speaks to thinking about the long-term aspect of these investments. It’s not necessarily being worried about, I've got to flip this deal in two years, otherwise, the model is not going to work. I look at these things in decades, in 20 and 30-year chunks. That's the way that I plan our operations.

Massive Returns in DFW

Photographer: Frank Busch | Source: Unsplash

Darin: There's not too many people that look at it that way. I've got to tell you, I have a lot of syndicators on this show. There's not a lot of people who look at it in terms of decades. If you're looking at a long-term structure like that, there's been massive returns in DFW multifamily. Are you focused on doing cash-out refinances?

JC: No, we're not. Cash-out refinances, they seem like the greatest thing in the world. The only issue is that you take all that cash out and you have to immediately put it to work somewhere. Remember that you're paying 4-5% on that money in the form of additional loan on the property. If you take that additional money and you put it in your bank account and you just let it sit, that's probably the worst thing you could do.

Now, if you're able to go and take that money and go invest it into another deal and start making greater than the cost of the debt. Well, then you're winning. But in my opinion, and just the way we look at it. If we're going to do a cash-out refi, what we may do instead, if the property's been cash flowing for a good, long seven to 10 year period, we may instead sell the property.

We will 1031 exchange it and buy a bigger asset. Restart the depreciation schedule so that we can take advantage of that again. Lever up with a larger asset instead of doing a cash-out refi. That is the way that we approach things. Like I said, it's hard enough to find deals with the money that I've got sitting in the bank account now.

7 Years of Track Record in Multifamily Property Management

JC: Why would I do a cash-out refi, put more money in my bank account that I already can't put to work, if it's already making a percent return on that investment that it's in? It's a proven return. Remember, now it's got seven years of track record. I'd rather keep it there until the time that I'm ready to sell the property.

Darin: On the 1031, do they have a lot of investors in your deals?

JC: Some of them do.

Darin: Is it a pain to do the 1031? I've talked to people and I only know one person as a syndicator that's done it. They said it was a huge hassle, that they wouldn't do it again. It was so much paperwork and there was such coordination.

JC: It's not a huge hassle if you're working with the right, like-minded investment partners. There are a lot of moving parts and it is not a simple transaction. But if you're able to put together an expert team of people that know what they're doing, then it's definitely not as crazy as it may sound. But it is a lot of extra work. Most people that are doing these deals will opt to cash-out and have their investors pay a capital gain. We don't think like that.

We've only ever taken a capital gain on one property that we've sold, in the last 15 years we've been doing this. We have 1031 exchanged every other deal. It has benefited our investors significantly. We feel good about that, our investors feel great about that. But it's a lot of extra work that some people just don't want to do. But believe me, it is worth it.

An Engineer Doing Multifamily Property Management

Darin: We could probably debate this, but the cash-out refinance, to me, is attractive if you can pull it out. You still own that asset and then find another asset to purchase. All of a sudden, you own two assets versus one. It's a non-taxable event. But I understand your point in terms of, if you already have the cash sitting there and you can't find a deal that makes sense. Then why would you want to add to that? I understand that completely. What were you doing before you got into real estate? You said you got into real estate, or multifamily at least, in the mid-2000s.

JC: I am in Silicon Valley, I'm an ex-techie. I was in the semiconductor business. An engineer by degree, and in semiconductors for about 15 years here in Silicon Valley. I’ve worked for a number of different companies here. That is what I did before. A lot of our capital connections and relationships really come from the tech world. We have a ton of Silicon Valley tech money invested with us in our properties in Texas.

Darin: So, you already had a bunch of capital from being in the tech space. You left and decided to invest that capital into multifamily. It's turned out very well. You've helped a lot of people grow their wealth through that.

JC: We've never really advertised, it's always been word of mouth in terms of our investors. We've grown over the years. Our investor base has grown because we've been able to execute. We did what we said we’re going to do. It's been a pretty good run. We want to continue that. At the same time, we are not looking to grow for the sake of growing.

Equity Shareholders

JC: My principal partner and I are majority equity shareholders across the portfolio. We invest personally in our deals. Look at this as a way to create a long-term cash flow and equity source that we can grow over time, slow and steady. Unlike some syndicators that want to grow to 10,000 or 20,000 units, that's not what we're after.

What we're after, every year, is putting a couple of really high quality deals in the hopper. To grow our portfolio and make sure that we're maximizing operations and cash flow. We're taking care of our residents, because really those are the key to our businesses. Every year, it gets a little bit better and better.

Darin: My understanding is that you are an operations guy and you've started a company called Velo Residential. Can you talk to us about why you started that? Did you start it internally? You offer it out to third-parties now, too. When did that start taking place?

JC: Velo Residential is the idea of basically taking what we've built in-house. As a private equity syndication company, we are vertically integrated. So we built out our own property management company a long time back. We manage our own properties and we've been doing that for many years. The way that we built out our company and the things that we've implemented to make the management work are things that I always thought would have a lot of value to other owners.

What we decided to do this year was actually create a separate company. We still have our own internal management company that is strictly for our own properties. But, this year, we created another company called Velo Residential. We have taken those learnings and the IP that we built out.

A Third-Party Company for Owners

JC: We've created a third-party company for owners in Dallas-Fort Worth that want to use Velo Residential. The third-party PM will manage their large scale multifamily properties. That is really the main focus of what I am up to these days. The syndication company that we have is still going strong, but I've got great partners that are really helping on that front. Velo, for me, is what it's all about these days.

Darin: You started it this year, offering it to third-parties. How many properties, how many units do you currently manage?

JC: Under 500 doors. We've onboarded our first four clients over the last couple of months. We just got out of the shoot and we are obviously in growth mode. As per the profile of who I am, we don't want to grow to 10,000 doors overnight even if we could. We really want to take a slow and steady approach to really consistent and solid growth. We’re in the process of finding a few good owners to partner with.

We've got some in the hopper and we want a few more. We want to get to a thousand doors, which we'll do in the next couple months. Really sit tight for just a bit and get our house in order and then grow from there. Me having a background in property management, I know how stressful it can be. Many things can go wrong.

With this thing, you have to be very intentional, slow, and steady. Make sure your foundation is solid before you start to scale. Doing it too fast really impacts the owners and their properties. You don't want to put them in that situation.

Building the Multifamily Property Management Business

Building the Multifamily Property Management Business
Photographer: Szabo Viktor | Source: Unsplash

Darin: With you guys starting this business, it's very consistent with everything that you said about building the syndication, multifamily real estate business. You are very measured. The space has done phenomenal. People are making handover fist and valuations are going through the roof. I've met a lot of people that are going at lightning speed. Your approach is different. It's more about quality, it's more about having a measured pace. It is more about getting the results with the business that you have first, and then growing on top of that.

JC: 100%, yes to everything that you just said. I want to build a successfully focused company that focuses on the owners and profits for those owners. That doesn't mean that I have to get to 10,000 units in two years. I can be phenomenally successful with owners for 2000 units over the next three or four years, if that's what it takes. And I can take a lot of delight and satisfaction from doing that just as easily as growing it to 10,000 doors.

Don't get me wrong. We will become a large company and we have plans on doing that. But we're not going to sacrifice profitability and quality for the sake of growth. We're not in that business. We don't need to be. We're building a long-term company.

Darin: On the real estate side, you say you take a long-term approach. You look at it in terms of decades. I don't think that that always happens on the property management side. There's huge value in doing that. Because all aspects of this business is a word of mouth business, so if you do very well for your first owners, they're going to tell other people.

How Velo Differs From Other Multifamily Property Management Companies

Darin: Then the snowball starts happening. Versus, if they took a chance with you and there's a bunch of hiccups, the valuation suffers accordingly. They're going to be like, "You know what? You may want to let them iron out the kinks before you jump on board."

JC: You nailed it. That's exactly right. It's a mindset that we have as a company, Velo. That's the way we're going to market.

Darin: What differentiates Velo from, say, another property management company?

JC: If I think back to my situation as a syndicator, as a sponsor, as an owner-operator, and I think about all the challenges that I had over the years. It's very simple. Owners are in this business to make profit. Profit is not just good for the owners, it's actually good for the renters and the residents. When you are a profitable owner, you can actually put money back into the property to give them a better experience.

Most owners that I know are all about putting money back into the property, if they can afford to, if it's profitable. That's a good thing for them and a good thing for the residents. Now, most owners, if you talk to them about management companies, are struggling to find management companies that are extremely aligned to maximizing profitability. That's a mindset that we've adopted from day one.

We've said, "The number one objective for the owner is profitability. We are going to model our company around how to build a long-term profitable machine for that property this owner wants to give us." What we understand very well is that, that owner, they may be listening to your show right now, is focused on profitability.

Leaving and Revolving Doors

JC: They are struggling right now to make the numbers work, because they are buying properties at all-time highs. There's a bunch of expenses that are going up like crazy. Right now, the revenue is good because rental increases are happening and it's a great thing. But what happens when rental increases go to more normal rates? Historical normal rates, but possibly expenses keep stepping up a tad. What that comes down to is, profitability revolves around three very important things.

This is what we've learned. Management companies have to be focused on three things to make owners profitable. Number one is, they've got to be focused on the onsite staff. The onsite staff, as an owner, is either making money because you have a great staff, or you're not making money because your staff is unmotivated. Leaving and revolving doors are happening.

What we figured out with onsite staff is, unfortunately, they're asked to do a lot of back-office tasks that don't really have value. Basically, to make the residents happy and make the owners money. Things like answering all the calls that come in for a prospect that's interested in leasing a unit. Well, guess what? 66% of every person that ever calls your property, or emails your property will never actually want to rent your unit.

Imagine if there's a hundred calls coming in a month to your property onsite manager. They're answering every call. Imagine that 66 and two thirds of those calls are a complete waste of their time. That's basically keeping them from kissing hands and shaking babies with your residents. Going over and collecting delinquent rents, leasing new units.

Making the Onsite Staff of Multifamily Property Management Happy

JC: When I talk about the onsite staff, I don't just talk about making them happy as in throwing them a birthday party. What I'm talking about is thinking about their life and their role. It’s how you take all those back-office functions off of their plate. Let them focus on the things that are going to make you more money. At the end of the day, onsite staff, if managed right and given the right tools, can make your property a lot of money.

Darin: How did you solve that 66%?

JC: That's just a stat that we know. We're able to work with our partners to track the number of leads that come in and the number that actually convert into showings. But what we know is, when a prospect calls in to lease your unit at your property, you have probably no more than five minutes with a hot lead to make a connection. If you wait beyond those five minutes, the chances of that prospect actually leasing your unit drop significantly.

The most important thing you want to do is to make a connection with a hot lead within the first couple of minutes. Just take the simple example of, your onsite staff are only at your property for eight to nine hours a day. What happens if that lead calls in at nine o'clock at night? Well, they get a voicemail. Or if they email at nine o'clock at night, they won't hear back until the next day.

When the Lead Gets Cold

JC: Your manager gets into the office, she's getting her coffee, cleaning up the shop, and talking to the maintenance guys. She's not going to start making callbacks to your prospects until probably nine, 10 o'clock in the morning, if she's lucky. Now, almost 12 hours have passed since that time. Remember, if you don't connect within the first five minutes, that lead goes cold. So the real question is, how do you solve that problem?

Well, the way that we've solved it is, we use an artificial intelligence bot as part of our go-to market strategy. Any prospect that calls or emails one of our properties, 24/7, seven days a week, will get a response back within two minutes or less. That response with the AI bot is intelligent. They will be able to have a conversation over text or over email, that will ask the prospect questions. That would basically vet them and also ask them to book a tour with us right away.

Darin: You've gone a little further. Even if you just went one step where you said, "Thank you for…" You sent a text message saying, "Thank you for being interested, we're going to get in touch with you tomorrow." That would be hands-down better than most properties can ever execute on right now.

JC: But imagine this, what if I took it a step further and told you that same scenario? Instead of that, you had a text message that said, "Hey, thanks for calling Amber Creek Apartments. We have one and two-bedroom units available, would you like to book a tour with us?"

Darin: Then give them a calendar.

AI Bot Takes Office in Multifamily Property Management

AI Bot Takes Office in Multifamily Property Management
Photographer: Alex Knight | Source: Unsplash

JC: What if they wrote back and said, "You know what, before I book a tour with you, I've got this little dog named Daisy. She's super cute. I'm only looking for places that are pet friendly." What if that artificial intelligence bot wrote back to that person and said, "We love fur babies. Our pet policy is a $300 non-refundable deposit and $25 per month for your pet. Would you like to book a tour?"

This is the type of stuff that's happening right now in technology. Not only are we interacting with a hot prospect right away, but we've also just removed a bunch of incoming phone calls into your office manager's office. Which is going to drive that person crazy, because 66% of those leads are just looky-loos. You've taken all that off their plate.

They can have the wherewithal to focus on other more important things than answering a phone call and booking a tour. Something that, at the end of the day, the AI bot can do perfectly well. Again, it's all about the onsite staff and thinking about how we can take back office work off their plate. Leverage their talents a lot more to drive the real problems that they need to be solving at the property.

Darin: I would imagine the onsite staff, the leasing manager is thankful.

JC: We don't have leasing managers at our properties, and I'll tell you why. We have eliminated leasing agents at the properties. We've instead implemented a virtual set of humans and AI bots. They handle all of the back office work, inclusive of what a leasing agent would do. So, we're able to save the owners money by not having leasing agents at the properties.

The Value of Shaking Hands

Darin: The old school guy in me is a little skeptical, because people like to do business with people. I see the value in having AI. But I also see the value in shaking hands with somebody.

JC: Well, that's still happening. We have an office manager that's still shaking hands when the prospect comes in for the tour. Showing them around and letting them know about the property and answering any questions. It's just all of the other back-office stuff that goes along with getting that person to the tour. Then following up with that person with the application background check, screening, all that stuff. That stuff is done virtually.

Darin: So, there's still a human touch. Because if I'm a tenant and I walk in, there's something about being with somebody that just makes them feel like this is a good place to live.

JC: There always has to be a human element. That's why you can never replace that human touch. That's why there will always be at least one person, a human body that'll be at that property. But does that need to be more than one human body? Think about it. If you've got a 200 unit property, you've got an office manager and a leasing agent. That's the traditional setup.

That leasing agent is costing you about $50,000 loaded cost, including employer taxes, workers comp, and medical insurance. They're costing you $50,000 a year. Now, if the office manager can be that person that's got the warm body and the touch. You can eliminate and virtualize all of the leasing office functions and more with a person that is virtual or several people in our case, the way we go to market.

A Multifamily Property Management Company With AI Bots and Virtual Humans

JC: That model is not only going to save the owner money. It's going to be more efficient without losing the personal touch. The way that we go to market is, instead of having that leasing agent at the property, we are having a virtual services center comprised of AI bots and virtual humans. They are doing all the work. More of a leasing agent and invoice processing, all this other stuff that traditionally is done by the office staff. We charge for those services in the form of a fixed per unit cost per month. It’s less than the cost of the leasing agent, the loaded cost of the leasing agent at the property.

Darin: So, they have that additional profitability. That's a very interesting approach. I like that. What about number two and number three?

JC: Number one is onsite staff, thinking about them and how you make them happy. How you virtualize and eliminate the back office. Number two is also a very important one. It’s a modern renter experience. This goes back to the idea that, if you're managing a B-class or a C-class asset, the common misconception is that the renters are willing to settle for less on the experience front.

Things like having the ability to pick up your iPhone and take a picture of a broken toilet bowl. Text it to submit a work order, instead of having to log into a portal or call. Sit on hold for 30 minutes to submit a work order, or walk into the office. Things like being able to snap a picture of a work order or a problem. Text it to get recorded as a work order, and have the maintenance guy dispatched.

The Things Renters Find Valuable

JC: Those are things that we offer today even to a C-class property. Most people have an iPhone, even workforce people. It's not like they don't like those experiences. But most people think that that won't work for a C-class property. The renter experience, being paperless, having an online approach, and being able to text the residents instead of having to phone call them when we need something or they need something.

All those things that we do are very valuable to the residents. It makes your products sticky with them when it’s time to renew their lease. The more you can improve the experience, the better your chances of getting that renewal. That’s going to make you a lot of money as an owner.

Darin: Get the renewal, plus they may refer other people to friends and family to come live in the community. It's a very simple thing, but even for myself, I'm not renting in one of these apartment complexes. I'm invested in different multifamily deals. Everyone has a different portal. I don't want to log into every portal to see my information, I want the syndicators to just send me what's going on.

The experience is easier if I'm not forced to log on. I related it to that process. If I had an issue, I would much rather just snap a picture and send it to a number. Instead, I have to log on, remember my password, and upload this. Or I have to go in tomorrow and I typically leave for work before the office opens. All of those little things that are aggravations, you take them away. Then you leave the renter with, wow, that was easy.

The Multifamily Property Management Business Is Not Complicated

JC: That's the idea, make it easy to submit a work order. This business isn't complicated. We've got to collect rents, we've got to service work orders. There's a few other things we've got to do, we've got to lease units. When you focus on the simple things like a work order, how you handle it, and how you execute it, that's important to a renter.

That resident is going to judge you when it’s time to renew based on how you treated them when there was a toilet that didn't work. When there was a leaky faucet, when there was an issue with their unit. They're going to go back to that experience. How they felt, how they were treated, and how easy it was to submit a work order. First and foremost, those things.

Thinking about the residents and what their perspective is and how you can make their life easier. It goes back to the whole idea of profitability. The easier you make it for your residents to do business with you, the higher chance they're going to stay with you longer. You're going to make more money because of it.

Darin: What's number three?

JC: Number three is one that a lot of owners could relate to. We call them KPIs or key performance indicators. One of the things that bothers me as an owner is having to go through 10,000 reports to see how your property's performing. That's why the idea of KPIs is so attractive. We have a very simple set of bar charts that turn red or green based on performance to budget. They will tell you within five minutes whether your properties are hitting their numbers or not.

The Importance of Transparency in Multifamily Property Management

The Importance of Transparency in Multifamily Property Management
Photographer: Shubham Dhage | Source: Unsplash

JC: We send those out twice a week to our owners. You can look at that and know if your properties are either working or not working. Then you can go dive deep to where you're having problems. The idea of having visibility to how your portfolio is performing with a simple set of KPIs that visually tells you if it's green or red, that's something that is really important to be able to problem-solve. Let's face it, none of these properties go perfectly. There's always problems.

Any business is always going to have problems. The real challenge is, do you know what the problems are when they're happening? If you don't know, you can't even start to solve what you don't know is broken. For us, the real key that we built into our management company is that we want to make it easy for the owners to know. For the good or for the bad, where the issues and where the challenges are coming from. That way, we can go and problem-solve those things together and figure out how to solve them fast.

Darin: As an owner, I would highly agree with that. I don't love having to analyze the financials, then dig through. Then come up with the questions I have to ask the property management company. So, it would be nice to have something that's easy. What has been the feedback from the people that are using your system as to the KPIs that you guys have identified?

JC: They've been impressed and they like it. They can basically reply back to an email with the report or with the KPIs.

Making Things Easier and More Efficient

JC: They can say, "I noticed that the projected occupancy for Meadow Creek Apartments is looking like it's going to 92%. How are we doing on leasing activity?" They can start to ask the questions that will get down to what's going wrong. Then we can start to dive deep.

Just being able to see those numbers and see where the potential issues are, from a high-level perspective without having to go and open up lots of reports. Literally just opening up your email and looking at a visual set of charts, which there's only maybe less than 10. That's very powerful because they can do that fast and quickly.

Remember, anybody that's doing these deals, they're offering on properties. They're asset managing existing properties, they're working with investors. There's so many things they're doing. So you don't want to take so much of their time to make them try to do all these fancy detailed reports to figure out if their properties are doing well or not. If they're hitting their numbers, they should be able to just skip it and move on.

Darin: A couple of questions. One is on, process, procedural. Seems like you guys have a lot of things buttoned down. I had one gentleman on. He said that there's a bunch of tenants in the BC world that like to pay with money orders.

JC: We don't take money orders.

Darin: That solves part of the problem.

JC: First of all, money orders can be counterfeited. I don't want to get into all the details of why that's a bad thing. But obviously, that's a bad thing because they're not really paying their rent.

A More Efficient Payment Process

JC: But, with the technology that we have, we enable our residents to either pay with an ACH payment through their bank account or their debit card. Or we give them the option to pay with what we call an electronic cash payment. Literally, every resident at any one of our properties gets a barcode. That barcode, they can take it to any Walgreens, or Walmart, or ACE Express, or 7-Eleven.

The checker at the 7-Eleven scans that barcode and the resident give them the cash, let's say a thousand bucks. Immediately, when that cash hits that register, an automatic payment receipt gets created in our property management software. It says that they paid rent, a thousand dollars, on October 28th for unit 101.

We don't need a money order because they can just go make the cash payment to any of these places. By the way, these places stay open 24/7 as opposed to an office, which is closed. So, if a guy has to go get a money order and he comes at nine o'clock at night, he's going to have to drop it into the drop box at the office.

What if that thing gets lost? Or what if the late fees get posted because the manager didn't get to enter that money order until later in the system? So, there are a lot of reasons why ECPs are way better. But at the end of the day, it prevents us from having to do all this extra leg work.

Darin: In your situation, because in the other scenario, this is the way it works. A tenant could go to Walmart with a money order. Give Walmart the money order and then they create the electronic cash payment.

The Challenge With Money Order

JC: The whole idea of going to a money order is because they've only got cash. So, they wouldn't need to get a money order. They would just take their cash and bypass the need for getting a money order. Just give the cash to the register agent.

Darin: That may be how they do it also. That’s another customer service thing and it helps both the tenant and the owner.

JC: Here's the other person it helps, and this is actually not even considered. By the way, we don't take personal checks or money orders. Every time our managers take a personal check or a money order, they've got to go make a run to the bank to make a bank deposit. Now, if you've got a 200 unit property and you're taking personal checks and money orders, can you imagine how much time is wasted taking that valuable asset?

Then taking it out of the office and having it drive over to make a bank deposit when it's not even necessary. Multiply that by the number of times you've got to go do that. You're talking about a huge amount of savings for that office manager in time lost at the office doing the things that mattered most. And also, what if the manager enters the deposits incorrectly?

If they fat-finger a one besides a zero, then they just entered a money order improperly. When it’s time to reconcile on the back end, we're not going to be able to tie those things out because the numbers are going to be off. We're going to have to do some research. Finally, we'll figure it out after some amount of time, the person entered the wrong number.

How Multifamily Property Management Companies Get Compensated

How Multifamily Property Management Companies Get Compensated
Photographer: Mapbox | Source: Unsplash

JC: All that gets eliminated with ACH payments and ECP payments because the receipts get auto-created when the person makes the payment.

Darin: Plus, somebody shows up and the office manager's not there because they're running to the bank. Then that hurts the customer experience and possibly a lost lease. You’re talking about aligning yourself as an investor. It's focused on profitability, but this is a property management company. Every multifamily property management company that I have seen, they are compensated by a percentage of collections.

So, if it's a percentage of collections, then they are aligned with the owner to grow collections. But they may not be aligned to minimize expenses as much and increase profitability. Is your compensation similar to most property management companies that are based on collections?

JC: No. We're paid on gross income before expenses and therein lies the challenge. Of course, it does. But I would argue that most management companies, and I know this because I've had one for a long time. They're not out to waste your money. What ends up happening is, the efficiency of how the management company is set up can be the main reason why money is wasted.

Let's say that you have a requirement for a resident to come in and give a written work order. Write it and hand it off to the manager before it can be done. There's a lot of reasons why that's not a good thing, but let's just say that that was the rule. What if the manager doesn't get that work order and doesn't enter into the system? Or what if that manager enters into the system, but they enter into the system five days after it was submitted?

Make-Ready Turn

JC: Now, that resident is going to become upset. That resident is going to think that the management company does not care about them. So, that resident is probably not going to renew their lease. Or, at the very least, he’s going to write a nasty Google review. Once that Google review gets posted or that resident does not renew, you as an owner have lost a lot of money. Now your expenses are going up because you've got to make-ready turn.

Make-ready turns are one of the most costly things in terms of controllable expenses that you want to avoid. The higher your resident retention, the better off your expenses are going to be because you're not turning as many units. That's not necessarily a reflection of the management company wanting to spend more money at your property. That is a problem with the way that they're set up. They are set up with not a very efficient way of handling the work order request.

That, in turn, causes a lot of wasted money. But the management company's not necessarily wanting to waste that money. It's just that they didn't think about the process of how to make it more efficient. So, that is where management companies can be seemingly wasting your money. It's really more of a problem with the way that they're set up and going to market.

Darin:  Talk about an issue with property management and how you've solved it, other than these three areas.

JC: One of the big issues out there is an issue that a lot of owners face. It’s when you have a resident and they actually submit a work order.

What a Simple Survey Can Do

JC: Are you actually checking in with the client, the resident that has a work order once it's been completed? Just asking them how it went. We send out automatic surveys to every single work order that gets completed. And we let the residents write back and say whether they were happy or not happy.

By doing that simple thing, checking in and asking them, you’ll find out that, A, something wasn't done right and you can fix it. Or B, you’ll find out that the resident was super happy, you can ask them to give a five-star Google review.

Darin: That's a very smart approach. I've seen it where all of a sudden, I look at the outstanding work order request. There's a request saying, "I submitted a request two weeks ago. Then it got deleted and nobody even showed up." Well, that is terrible. Having that automatic follow-up would've alerted that person, no, nobody showed up. Then you'd get somebody there.

That one person put that comment in. But there may be one or two or three other residents that had the same situation happen. They just didn't bother to do anything about it. That's a lot. What type of properties and owners are you looking for?

JC: We specialize in large-scale apartment properties to manage. It makes a lot more sense for 150 units and bigger, but we’ll manage things about a hundred units and larger. The model that we have really works well for larger-scale properties.

Darin: So, 150 units plus the DFW area. What about ABC class? Where are you focused?

Who’s Looking to Try a Multifamily Property Management Company?

JC: We manage A properties and C properties. We're very well suited for B and C, but the technology works just as well for A.

Darin: If there's anybody out there that is looking to try a new multifamily property management company, definitely reach out to JC. Talk to him about what they could potentially do for you. You also have a podcast called Operate For Profit. When did you start that and what's the focus of that?

JC: We started that podcast about a year and a half ago. It was the precursor to launching Velo Residential. The Operate For Profit podcast is all about helping owners operate for more profit with less stress. That's an important thing if you buy multifamily. Your profitability is directly tied to cash flow and to equity, when you're going to sell your property.

Also, having the right ability to operate for profit can reduce your stress. It's tough enough in this business. But when you're not making money, it creates a huge amount of pressure on the owners. The podcast is all about talking about tips and tricks. Things that we're doing as a management company and as asset managers to optimize these properties for maximum profits.

Darin: What's your big stretch goal? But with a guy like you, you're like, "Well, I don't have a unit count or I don't have a big goal. I just want to grow measured, I want to grow with good quality people." Maybe I answered it for you.

JC: Right now, we just want to find about a thousand units or so of owners who want to work with us. Owners who are committed to growing this thing out.

What Every Multifamily Property Management Company Don’t Say

JC: We want to make them a lot of money, make them profitable, and get their properties under control. We want to make their lives a little easier from the management piece. We’ve come up and see what works from there. That's what we're after right now. We've already got about half of those units spoken for in the books. We're going to round it out and take it from there.

Darin: "I want to make them a lot of money." Every management company doesn't say that. It's supposed to happen that way. What do you like to do outside of work?

JC: I have a wife and a dog, I spend a lot of time with my immediate and extended family. I love old and new cars, I'm a bit of a car guy. Between those two things, which I don't have as much time to do, that's what I love to do.

Darin: Do you fix up old cars?

JC: I collect them, but I'm not a fixer.

Darin: I appreciate you coming on. If somebody wants to reach out and get to know more about you, get to know more about your property management company, what's the best way for them to do that?

JC: Just go to operateforprofit.com. They can get in touch with us. Check out our website with great information on how we can help them make more money.

Darin: Thank you for coming on the show. You've opened my eyes to a bunch of things on the operational front. I love that somebody is focused on trying to make things as efficient as possible and the best customer experience for the tenant. That's so critical. Listeners, I hope that you enjoyed that one.

How to Reach JC Castillo

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Darin Batchelder

Wealth creation through real estate provided me with a new passion to get the word out and let others know that they have an alternative to investing in the stock market.

If I can inspire and educate just one person to take action that results in life changing wealth creation then the work to launch and grow this podcast is well worth the effort.

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