Are you looking for creative tips to maximize real estate operations of your multifamily property?

Mike Woodfield is a partner with Obsidian Capital which manages over 1,000 multifamily units.  Mike’s focus is on the operations of the business. He shares creative tips on where to focus and how to best manage operations for multifamily properties. A lot can happen after acquiring multifamily assets, so knowing how to manage CAPEX dollars and unforeseen situations that arise are key in maximizing the property’s net operating income.

If you want more information about what it takes to be successful in this industry, listen to what Mike Woodfield has to share!

Table of Contents:

• Where To Listen To The Podcast
• Managing Multifamily Real Estate Operations
• Paying It Forward
• Real Estate Operations That Makes Sense
• The 4Ps of Real Estate Operations
• Finding a Good Balance in Real Estate Operations
• The Mechanics of Real Estate Operations and Turnovers
• The Real Estate Operations Side of Construction and Development
• There’s Not Enough Meat on the Bone
• How to Reach Mike Woodfield

Managing Multifamily Real Estate Operations

Darin: A little background on Mike Woodfield before we start the show. Mike lives in the Austin Texas area. He's a partner with Obsidian Capital that manages over 1000 units and has over 500 units in development. Mike is focused on operations and shares some areas to focus in on when managing multifamily properties.

So just a little bit on how I know Mike. Last year, I decided to rent a big old bad Harley. Drove down from Dallas to Austin and met with these guys. I've met with Mike and his business partner, Glenn Gonzales. Glenn was actually on the podcast episode 15. He also has a book called Maintenance Man to Millionaire. And I asked Mike if he can come on the show.

Predominantly, I've had syndicators, people that are focused on going out and buying assets. Mike really focuses on the operations of the business. So I wanted to get a different perspective and have a little bit of different discussions. Mike has been gracious enough to come on. With that, Mike, typically the first question I ask is how many properties and how many units you guys currently own?

Mike: Awesome. I appreciate you letting me on here Darin, this is going to be a lot of fun. And I hope that I can bring another perspective to apartment ownership, as far as what we own. We've been net sellers over the past five years, three or four years as the market has gone up and up and up. But we've been in acquisitions mode, we have six properties, right now.

Poor Real Estate Operations

Mike: These existing deals are value-add, totaling roughly around 1100 units. We have another 550 units under development right now. There's at all stages of the process of development. So we're more than busy. We just closed the value add transaction, so we're still doing value add where we can find deals that have little gas left in the tank, if you will. And we closed one in Austin, about a month and a half ago. So we're very active right now.

Darin: Fantastic. So, what was your background before you got involved with multifamily?

Mike: That's a great question. I finished college knowing that I was an entrepreneur.

Darin: It's not a requirement these days. Right? There are people that either leave college or don't go to college. Some of them are extremely successful. You got through.

Mike: I got through probably because my mom threatened my life back then.

Darin: That's funny.

Mike: I had to do it, but I got through. My wife and I just gotten married and we loaded up our Mazda 3 with everything we owned. We headed from Logan, Utah to Atlanta, Georgia, and we lived there for two years. I worked for an investment firm out of Chicago. They basically did what we do with value add apartments, but it was value add business.

So they would find failing businesses that didn't make any sense. They weren't successful other than there's just poor operations. We would go and apply our operational mindset, skill set, and money to these companies, and we would flip them. It was like a three to five year hold, and turn them.

Skill Versus Experience

Mike: So I was on a project down there. I oversaw about 40 employees directly reporting to me, so it's kind of a baptism by fire. We were able to turn that company around and sell it. At that same time, Glenn was building his portfolio up. He had transitioned from property management into syndication.

He and I were having lunch, and he says, "Well I'm kind of looking for someone to mentor to bring up and partner with." And I said, "Well, I don't know anything about apartments. But if you'll take a risk on me and the chance on me, then I'd love to work with you."

And so I was his asset manager for about four or five years, and I saw a lot of things in those four or five years. Had about $300 million in multifamily go through my hands. Just millions of dollars and construction of value-add and then the acquisition and disposition of 27 apartment complexes during that time.

Darin: Great experience. Look, some people think that they can't get into syndication, but you developed a relationship with Glenn, and you were upfront. Hey, I don't have experience, but if you give me a shot. I'm a smart guy, and I could figure it out. And so he did, and you've learned the business.

Mike: Yes, fortunately, it worked out for me. And he ended up wanting to partner with me on some deals, and now we're 50/50 partners. Everything we buy, I get the upside and the downside, if there's any, and half the headache, and half the reward. So we've been successful the past few years as partners and done quite well.

Hungry Bulldogs

Mike: I mean, if someone's looking to get in the industry, it's a phone call or an email away to one of us syndicators, saying, "Hey, look! I really want to try this out." I can give you an example of that. We just closed a deal on Cameron Road in Austin, Texas, and two young guys, Nikko Porter and Brandon Gordon, out of San Antonio. They're hungry bulldogs man, they're out there cold calling owners all day trying to find deals off-market and they found one.

And they brought it to us and said, "Well, we can't close this ourselves. We don't have the balance sheet for it. Would you guys help us?" And that's what we did. We're in the middle of a renovation, and they're learning a ton right now. And they're young dudes.

Darin: That's fantastic.

Mike: It takes some initiation, and it takes some guts, but you can do it, you know?

Darin: Yes, I would add a little bit too. I mean, you made it sound really easy by, hey, just send an email. And maybe it was that easy with Nikko, but I think that you still have to prove yourself. You still have to build a relationship. And you still have to gain the confidence of the other party that you're bringing value to the table.

So, like you said, these guys were hungry. They were pounding the pavement, and they found a deal. And you guys looked at it and you're like, “You know what? It's a good deal. And so it works, let's do it.”

Paying It Forward

Darin: I don't think it's as easy as just saying, find one syndicator and send them an email. But you know, if you commit to it, you can make it happen, regardless of how old you are, or how much money you have.

Mike: I agree and you know most guys in the syndication space. I mean, you get all kinds of personalities. I've met the best and the worst in this industry. But most of us entrepreneurs want to help other entrepreneurs out. If someone approaches me and they're sincere, and they want to work hard, I will absolutely give them the time of day to say, "Hey, look let me help you." Because certainly people have done that for me.

It's all about paying it forward in some way. And I'm sure I'll need that help down the road, something to put forward.

Darin: I completely agree. Entrepreneurs, investors, business, successful people typically want to help other people become successful.

Mike: Sure.

Darin: But you have to take a chance, you have to tell people what you're trying to achieve. You have to ask for help. They're not going to come knocking at your door. You have to go out there and build those relationships. So let's talk operations. You buy a value add deal. What kind of vintage do you guys typically look for? 60s, 70s, 80s, 90s?

Mike: I usually try and stay away from the 60s and early 70s.

Darin: 80s, 90s?

Mike: Yes, they'll kill you. But yes, 80s, 90s. Usually, 80s products are what we buy, late 70s is the value-add we look for. Anything above 120 to 130 units.

From a Real Estate Operations’ Standpoint

Darin: Okay, and you're in Austin. What other markets do you look at? Or, do you just do deals in Austin?

Mike: We focus on central Texas and DFW Fort Worth that Metroplex. We've owned in San Antonio, and in Houston. Right now, we’re looking a lot in the Nashville area and north of Nashville and Kentucky.

Darin: You're going out of Texas.

Mike: Yes, the corridor between Nashville and Louisville is really good. There's still some nice deals that you can get some value-add on. So we own there right now a 258 unit deal. We stick to those markets, we look at the Salt Lake City Market a lot. I'm from there. It's always nice to go back home. I know those markets pretty well. So we're always looking for deals there as well.

Darin: Awesome. So you get a deal under contract, you close. From an operation standpoint, what's the first thing you focus on after taking over a property.

Mike: Something that you should have been doing all along is creating an asset management plan. You call it a business plan, asset management plan, whatever you want to call it. But you basically have to marry your underwriting to a plan that's written out in some way, right? Because the disconnect a lot of times is between the property management and the acquisitions team.

As an asset manager, or as an operations guy, or if you've just bought one deal, and you're everything. You've got to make sure that you bridge the gap between the buying of the property and what was the business plan. What was the offering memorandum, and what is going to be the plan going forward.

Taking Accountability

Mike: I can't tell you how many times I've seen that disconnect happen. And what the property manager thinks should happen and what you intended to happen couldn't be further apart. So create an asset management plan that's detailed. You need to hand that off the day you buy it to the property manager, the regional manager, and you as owners.

If you have a contractor, that guy needs to have that plan as well. Because I even go as far as having everybody sign. I have a signature block at the bottom of the plan. Everybody puts their signature on it.

Darin: All right, good. That brings accountability to each party.

Mike: Yes, you signed it.

Darin: Let's, let's dig into that a little bit. Because the business plan, project management plan, that can mean a lot of different things. So one, do you guys have your own property management company or do you use third party?

Mike: We do both. Glen was in property management for years. He owned management companies and sold them. As we've ramped back up into acquisitions, we've created our own and are doing the stuff in Austin. Local, we're starting there.

We've always known it to be tough to go out into other markets where you don't really have any economies of scale. So we use third party in areas like DFW where we have just one property now. And down in Corpus where we just have one property and in Kentucky where we just have one property.

Darin: Right. Well, that makes sense. So then you hand this property management. Talk about that. You mentioned disconnect, talk about an example where there was a disconnect.

The Cost of Not Following Through

Mike: Oh, sure. Absolutely. So we bought a property in DFW right off of Marvin D. Love highway. It was 356 units. Part of the plan when we started out is we're going to renovate half these units. Leave some meat on the bone for the next guy. We are going to paint the exterior, we're going to replace the pool deck. We're going to change the leasing office and renovate the leasing office. That was the plan.

You know, we were very clear what the plan was, right? Well, there was nothing to refer to, after six months of owning it. And so when it got down to the pool deck, the contractor and the property manager decided what pool deck to put on. It was the ugliest pool deck I've ever seen in my entire life.

Darin: They didn't come back to the ownership group and to get approval before.

Mike: No, they just went forward with it, $27,000. Well, of course, I blow my top. I call both of them and say, "What in the world are you thinking, this is the ugliest thing I've ever seen." And the contractor, fortunately enough, stepped up and said, “That was my fault. I should have consulted you, I didn't.”

A near $30,000 mistake, because there was a disconnect between us and them. And it really falls on me. As the owner, I should have told them this is the stamp concrete, this is what we want. This is the design, this is the concept that we want, as owners.

External Rehab Versus Internal Rehab

Mike: Now you can consult that property manager and say, "Hey, what do you think? What should it look like?" But to let them decide or to not have a plan for them to refer to. The pool deck is going to be this color and it's stamped concrete, you may end up with a wooden pool deck.

Darin: Yes. I mean, the very least, if you guys are picking it you got to come to me for approval before we move forward. So yes, that would be a big mistake. Talk about rehab from the standpoint of some listeners that have not syndicated before.

There's some listeners that have not even passively invested before, and there's some that are looking to scale up. When you look at your rehab, it's obvious to a lot of syndicators but maybe not to others. Do you want to do the external rehab first or focus on the internal and then do the external?

Mike: That's a great question. I guess that depends on how your money can be deployed, and how quickly for your CAPEX projects. My philosophy has always been doing both at the same time. You can have an exterior crew running the exterior items, and you can have an interior crew turning units.

I have a motto and I tell everybody this, vacancy is never the answer. You should avoid vacancy loss with everything you have, even during renovations.

If you're focused too much on the exterior, maybe some units are going vacant or interiors are taking a load too long to turn. So you're not earning money.

Real Estate Operations That Makes Sense

Mike: The exterior may cost you some walk-ins, or some people coming in from out the street because it looks bad. Where it also may cost you as if someone comes in and they're like, "Okay, you're 1500 bucks a month. The interior looks nice, and it's a dump outside."

We really like to go in and clean the exterior up right away. If there's obviously trash, you clean that up, make sure the lawns getting cut consistently, get the trees trimmed, and the canopies raised up. Then immediately start the big CAPEX on the exterior so people see movement. You got to give people a vision.

So if you're going to paint the whole exterior of the building, maybe start with that first, because that'll make a huge difference. Or if they see new roofs going on there okay, they're spending money here, they're going to fix it up. Or a new parking lot changes everything. Restriping it makes things look nice.

Darin: I think that's smart. You know, I've only been in the business for three and a half years. I wasn't really sure of that answer when I got going. But then, the more people I talked to, it made sense. Like, what you're saying is if you have the capital to invest, painting the property and getting things going on the outside.

People that drive by will see that there's movement, see that people are investing in it, and be curious. And you may be more apt to be able to pull a different tenant profile. Somebody that maybe wouldn't have stopped before because it looked rundown.

Free Advice From a Real Estate Operations Expert

Darin: But now they're like, “You know what, I like the location. It really looks like they're putting money into this. Let me take a look and see what they're doing.” And then when they go look at the interior, they're like, "Hey, it matches up. They're doing the interiors. I think this is going to be a nice place to live.”

Mike: Yes. I know this podcast is all free advice, so take it for what it's worth. But let's talk about the things that don't cost money, that aren't capital expenditures that you can do when you immediately buy the property. I mean, if you've ever talked to a property management company, worth their salt, the line is clean is free, right? So you know what clean looks like? Everybody has a different idea of what clean looks like. I'll give you mine.

No cars that are broken down sitting in the parking lot. No cars that have flat tires that have been there for five months, get those towed. Get all the junkers out of the parking lot. No trash. Get trash cans out, make sure the trash is cleaned up. This will cost you money, but you have to make sure the lawn gets cut, you have to make sure that it looks good. You have a good leasing path.

Those are the big ones that you can come in, and they'll change the look of a property. People will notice the difference. The other one is trimming the trees and the bushes around the buildings. If you have these big overgrown bushes covering up half the building, it just looks bad. Or pressure washing.

Increasing Income Versus Decreasing Expenses

Mike: If you're close to the coast, and you have a lot of mold or moss that grows on these buildings, make sure maintenance guys are pressure washing the sidewalks in the buildings. All these things aren't huge CAPEX items, but people notice them.

Darin: Yes, that's great advice. Regardless of whether they have a big budget or a little budget, the first thing that should happen is these no-dollar items. That's huge. So NOI, multifamily is valued off of net operating income. The whole goal of buying value-add is you buy it, and you want to increase that NOI so you increase the valuation of the property.

That can happen by increasing the revenue. It could also happen by decreasing expenses. Talk from an operations standpoint, some levers that you have to either bolt on both sides, to increase income and to decrease expenses.

Mike: That's where you start. That's why we're in this business. And so on the income side, I would say that it's not as simple. People think it's simple, especially in the underwriting as you're just going to renovate and hit your rents. And you're going to increase the value of the property and ride off in the sunset.

Darin: That's the dream, right?

Mike: Now, what's the word that people use, the buzzword? This is not work-life balance. It's just basically a job you can have where you don't have to be hands on.

Darin: Passive.

Mike: Passive or a lifestyle business. That's the word, lifestyle business. I've heard that a lot. This business is tough. It's not as simple as people make it sound. You've got to make sure that your business plan is happening.

Real Estate Operations Is a Simple Equation

Mike: So if you say that I'm going to get $150 more per unit, once it's renovated, you better make sure you get it. And that's not just saying, "Hey, manager, this one is rented for $950, I need you to rent it for $1100." That's going in after they say they rent it for $1100, and making sure that they did do that.

So I'll start very basic. I track every lease at every property during the first year and a half to two years of ownership. So I track renewals, and I track new leases because that really is the bread and butter.

The other income, yes it’s important. You need to make sure you're in budget. But are you doing what you said you would do? And are you getting the increases that you said you would get? Because if you are doing that? And if it is happening, then it's very simple. It's an equation.

Darin: It is a lifestyle investment.

Mike: Yes. It's the NOI divided by the cap rate, and you've got a value you can sell it for. You've increased the value by millions of dollars, maybe. Right? So I would say the first thing to do is make sure you're tracking those rents and make sure you're hitting your underwritten rents. Make sure that's happening.

Darin: So let's dive into that a little bit. So what if it's not?

Mike: Well, there's a number of things that can be going on wrong. And this is the advice I gave two days ago to Nikko and Brandon. So hopefully they're listening at home. Again, is I always go by the four Ps.

Darin: Four Ps. All right, let's do it.

The 4Ps of Real Estate Operations

Mike: People, product, price, promotion. So whenever I go, and I'm assessing a property and I'm looking at what's happening here, what's going awry, or if it is going well, I still look at these things. Are the people good? Do I have the right property manager? Do I have the right sales agent? That's what I call them, lease agent or sales people? Do I have the right maintenance guy whose shop is clean, and the property looks good every time I'm there?

Do I have the right people, do I have the right product? When I go, walk by a vacant unit that they say is rent ready, is it rent ready? Or do they have bugs sitting in the tub, which I'm sure you've seen before. Do they have a refrigerator that's sitting open. The previous render was a smoker and it smells like smoke in there. Is it rent ready? So is my product good? Did the maintenance guy that turned the unit make a good product that you're selling, or is it shabby? Does it got paint drips and all that stuff?

And then the price. Have you done a market study lately? Maybe your market took a dip and your underwritten rents won't work anymore. And if you keep trying to put that round peg through a square hole, you're going to get eaten alive in your vacancy. Because everybody is renting here and you're up here, and there's your vacancy. You need to bring your rents down to market perhaps or if you want to show that you're a little above, I don't know, but you need to come within reason. So are you priced right?

Knowing the Right People

Mike: Then promotion, how is your property being marketed? There was a property years ago that we had put $4 million in CAPEX. It was a 650 unit property in DFW. We'd put nearly $4 million in renovations into this thing. If you Googled it, what came up was the old pictures of the old property.

Darin: No, that stinks.

Mike: Yes, it stinks. So Google is free. Just take the time to go on there. Get some professional photos that cost you 150, 200 bucks, get some professional photos done. Throw them up there, make sure they coincide with your website, make sure apartments.com has them. Make sure it's cohesive.

So you are showing the people the product rather than some pissed off tenant that put up a picture of a water leak. And are you promoting it on the right websites? If you're in a workforce housing situation maybe apartments.com isn't the right place to post. Maybe Craigslist is or Facebook or something like that. So those are the four Ps that I go by.

Darin: I like that. Let me delve into those a little bit more. So people okay, how do you know if you've got the right people?

Mike: That's the hardest part. There's no algorithm, there's no costar to go and pull reports from. It's the hardest thing to do in business. Anybody that argues is crazy. Finding the right people to put on the bus is every business owner’s goal. And, the way I look at the manager, she's the manager of a multimillion-dollar business. That's a 650 unit apartment complex, we sold for almost $50 million. So she managed a $50 million business.

A Critical Component in Real Estate Operations

Mike: If she's not intelligent, and if she doesn't have experience, and she doesn't show up for work every day, ready to tackle it, then your $50 million business is going to go down the hill.

Darin: That on-site person, the onsite management is a critical component.

Mike: Critical. And so how do you know you have the right one? I don't have the answer to that, I can tell you there's ways you can spot a bad one.

Darin: Let's talk about that.

Mike: Yes, usually that's just unannounced site visits. If someone knows you're showing up, they'll get ready for the visit. They'll get the lawn cut, they'll make sure that trash is picked up, they'll make sure there's a few units that are made ready. So when they when you ask to go walk units, they'll direct you to the ones they want you to see. But show up unannounced, it's your property, show up whenever you want.

Darin: That's a great point.

Mike: Show up, walk to the front door and say the boss is here, let's go walk some units. What you do is you look at your vacancy list. And you go look at the unit that's been on the market the longest. Go look at that one. That'll tell all the tales. Because if there's furniture sitting in there from four months ago, you just know that they're not doing their job. So you can find one that's bad, really easy. Finding a good one is tougher, and it just takes probably time for them to show you that they're really good.

The Numbers Don’t Lie

Darin: That's great. I had an instance where it was an announced visit. Told the regional I'm coming and what was important to me. It was a new on-site person. What was important to me is when a tenant walks in the door, they get up from their chair and walk over, and introduce.

I don't know if everybody has that requirement, but I like that. So the person knows I'm coming, knows what time I'm coming. I walked in and the leasing person didn't do it. I'm like, if they don't do it when the owner, the lead GP is coming, then they're not doing it for the tenants walking in.

Mike: That's right.

Darin: That person is no longer there. I left that responsibility to the regional, but they made that call. That was one example, and that was known. So if it's unannounced, they're even more lax, potentially. If you see them pop up right away, and maybe they haven't met you, they don't even know who you are, then that's a good sign.

And if the numbers are really good and keep on progressing month to month, they're doing something right. If the numbers are poor and they're struggling, that's maybe an indication that we need to spend a little bit more time seeing. It may not be the people, but that's something that we're going to take a closer look at, maybe or maybe not.

You talked about product, about bugs in the bathtub. I haven't seen that, but one of my pet peeves is the AC vent. Everything will be clean in the place, and then all of a sudden, you look up at the AC vent, and it's all dusty. Clean that up. It's just first impressions.

Small Details That Make a Difference

Mike: First impressions. Absolutely. If you don't have a clean leasing path, it's the path that they always walk down to show the model unit, or whatever. People are going to see whatever. It could be a ton of leaves blew in the pool the night before, and your maintenance guy didn't clean them out, or whatever it is. They're just like, these guys don't really care too much about their property.

So that is always on the forefront of my mind, making sure that those people get a good first impression. Whether it's online, or it's when they drive by and they're looking for a place, that week, they need to move in. I always make sure that I try and leave a good first impression. That's our focus.

Darin: What about product. Like, when you're looking at the deal, you're underwriting the deal, you're like, I'm going to put X amount per unit. In your example, we're going to renovate half the units, and here's what we're going to do. Well, maybe do you ever have a time where you have to pivot and either put more or less into the rehab, internal rehab? Talk about that.

Mike: Yes, we just did that in a property, 136 units in Dallas. We came in with a little heavier renovation budget. And the manager approached me and said, quite frankly, you don't need to do all this stuff to get these rents. We're already under rented, so why don't we just do a backsplash and paint the cabinets and see what we can do. And we did that. Sure enough, she hit our rents. So we've saved you know, three or four grand a unit, which is awesome.

Darin: That's fantastic.

Finding a Good Balance in Real Estate Operations

Mike: That's money that we kept and fortunately, when COVID hit, were able to use some of that money just to keep all the bills paid and everything. So it really worked out just perfectly.

Darin: That's huge. I had another guy who plays more in the B plus kind of A minus space. He shared, there's other syndicators out there that are putting granite and all this fancy stuff in. And what we found is that if we spend a little bit more money on some of the external amenities, we may not spend as much on the internal unit. So finding that balance is a critical component as well.

Mike: Huge. Yes, absolutely.

Darin: What amenities have you found that are the biggest bang for the buck where the tenants just absolutely love that you spent the money on it?

Mike: I don't like amenities.

Darin: So, you're not a big fan of that?

Mike: I'm not. Here's the thing when it comes to amenities. If you have amenities, and they look bad, it can really hurt you. So when we go in, we make sure the pool is up to date, and it's resurfaced. And we add a new pool deck and new pool furniture because why leave that eyesore there? Do people use pools at apartment complexes? Not really. Hardly ever.

But you may miss one or two people that are driving through and they see a pool that just looks really bad. I'm like, "Oh, that's gross or whatever." So that's one, amenity. Then you know, if you have a gym and the leasing office or something like that, you want to make sure that the equipment is working.

Darin: It's not 50 years old.

A Huge Selling Thing

Mike: Yes, 50 years old and a huge liability. So if there's a gym and a pool, we always make sure to renovate them. Or we may have changed the plan at the gym. Change it into something else like an after school program for kids or something like that. But, those are the amenities.

The one that's really big in Austin is a dog park, they're very inexpensive to put in, and people love them. If you live in an apartment, you're looking for a place to take your dog and get it out and have it running around. So a dog park and an apartment is a huge selling thing.

I would say poor amenities that look bad are never good. And I think amenities that look good, will at least get someone in the door and won't won't push them away. I don't know how much more rent you'll get for them. It depends on what class of tenant you're looking for. But I think that the dog park and things like that kind of speaks to all different asset classes. Everybody loves them.

Darin: That makes sense. Yes, I think that it's like what we're talking about before with external rehab. If you're going up in class, you're going up into the B plus A minus area. Then you're trying to attract a different tenant class that has a higher paying job that can afford to pay. Then maybe some of the external sizzle is attractive. Wow, this is nice. And gets you in the door. But maybe for other people, they're just very cost-conscious. It's not going to be as big a win for them.

The RUBS Side of Real Estate Operations

Darin: So talk about RUBS. Some people know what that is, some people don't. One, what’s that stand for? Two, what's your experience in terms of what percentage properties you find already do it? And if they don't do it, do you typically implement it?

Mike: Yes. So RUBS, or Ratio Utility Billing System, just basically allows a property manager or owner to come back in. Where they're paying for utilities, and to bill them back to the tenants. So yes, we do it and have done it.

Usually, there's a third-party company, there's some major players that take care of that stuff, as far as the billing goes for the utilities. But there's certain allowable percentages that you can actually bill back to the residents and apartments. So in Texas, I think 90% can be bill back. And we bought properties where they were billing back like 160%.

Darin: 160?

Mike: Yes. So they had jacked it way up, and they were paying it. But when in our underwriting, we had to say, "Look, we've got to come back down to 90. That lowers NOI for us, that lowers the value of the property, but we gotta keep it clean."

And yes, if there's a property not doing it, and we're able to do it, we will. We charge for other things like pest control. And then, on some properties, we've tried doing a trash valet type of service. Those are some of the other income line items that you'll see. The RUBS definitely offsets that painful utility bill.

Darin: So a lot of properties used to pay for all the utilities and they would just be built into the rent.

Mike: All bills paid.

Increasing Property Income

Darin: And then some owners started to bill back for utilities, and it's become more and more commonplace. Now, there are still certain pockets that are still all-bills-paid type of little communities. So it's difficult to make that be the only guy on the block that's doing it. But here's the big advantage to doing that.

If you have an all-bills-paid property, the tenant doesn't have any incentive to maintain the electric bill and the heating bill and all that. Their AC is max, they have the windows open in the middle of winter, and the property's paying for it. When you start to bill back, now they're responsible for it, and then you're billing back a percentage, whether that's 80 or 90%.

That ends up giving you the ability to increase the income on your property. Correct me if I'm wrong, but if I'm looking at a property in a market, sub-market, and most of the other properties already doing it, and this guy's not doing it, that's a big opportunity for you to potentially take that property. Turn that around, and increase the revenue of the property.

Mike: It really is. I mean, that's one thing that you always look at. If they're not doing that, that's something you would implement on all new leases going forward. And there's a lot of tricks. A lot of old apartment owners provided cable, and they're paying for every unit.

They're paying 50 bucks a month for cable. And a lot of people don't expect that anymore, especially if you're streaming and downloading. I don't even own a DVD player. I use my Apple TV or whatever. And a lot of people are in that same area as me.

The Mechanics of Real Estate Operations and Turnovers

Mike: I use YouTube TV now and I stream on my TV. So it wouldn't be really enticing for me to have my cable paid for. We had a property where we went in and we canceled the cable contract, and it saved us $4500 a month. Well, that's straight to the NOI, and we didn't lose one resident. There was no pushback. That was a major value that was added.

Darin: That's huge, that one line item.

Mike: Isn't that crazy.

Darin: Yes, $4500 a month. That's huge. Hey, when you buy a property, how do you look at buy or sell? What do you do with staff? Do you keep the staff that was already on it? Or do you bring on new staff when you sell a property? Do you find another place for them? Or do they go with the property? Is it on a case by case basis? How does that work?

Mike: No, I've gone through this a lot in turnover. If they're performing, obviously very poorly, I look at bringing in people I already know. So in Dallas, I have three or four property managers I call that day and say, "Hey, what are you making at your place now? What do you need to make? Let's get you over here." And I already know I can trust them, and they will come. They'll come over for more money.

So if I was to buy a property in Dallas today and the manager was performing really poorly, I probably wouldn't look to give her a second shot on my dime. I'd bring in someone I know.

Know Your Market

Mike: And if there's not anybody I know that's available, I would trust either the third party or a management company to make a good hire, and keep them accountable. So I'm more inclined to start with people I know. But at the same time that can bite you. Let's say you're down in a market like corpus or pick your tertiary market, and you only own one apartment complex there. You go in and you fire all the staff. But what if there's a labor issue in that city and you fired all the people available.

Darin: Right, they don’t know what they're doing. Well, maybe they're not performing to the level that you used to. But they may be the best person.

Mike: Yes, and we've had this happen before, just speaking from experience here. When you get in these tertiary markets sometimes that $20 an hour job isn't that high paying. They could go work at a construction site, or on a plant and make $30 an hour, or 28 bucks an hour running a line. You've got to know your market, and you've got to know what issues you can potentially run into.

If you're just to cut everybody loose, well, you may have some work ahead of you. Especially if the management company managing for you doesn't have any other properties there either. So that's why I say we use third parties because I like to use whoever's an expert in that area.

So I'm happy to admit, Darin, that I'm not the expert in Oklahoma City. If I bought a property there tomorrow, I would look to find and ask some friends that I know that own there.

To Hire or to Fire

Mike: "Hey, who have you heard that is a good property management company?" And I would kind of interview people and then I would find an expert there. Rather than putting my own management company there and setting them up to fail.

Darin: And that guy, he has three or four people that he can call and say, "hey what do you need to come over here?"

Mike: Yes, I picked up a 300 unit property, I can pay you 60,000, to 65,000 a year. Let's go. It all fits into do we fire, do we hire new? Do we keep the staff? The property is performing well, but they're just under-rented. I mean, why would you fire that staff. That's just the direction of the ownership. The ownership is keeping them, where, you know what, we're cash flowing. I built these in the 80s, I'm clipping an amazing coupon here, don't screw it up.

So it's a tired owner. Now, if you come in here like, "We're going to raise these rents up to 200 bucks a month." They may be like, that might be hard. But eventually they'll catch the vision and they'll do it but if they're a good property manager before there'll be a good one for you, probably. That's tough. It's different every time.

Darin: Yes, each deal I can imagine is a different analysis. Hey, talk about technology. So on the operation side, both in your office and out at the properties what kind of technology do you use that may bring efficiencies?

Mike: That's great. So on the syndication side, we use Syndication Pro. It's a gatekeeper for all investor data.

A Game Changer in Real Estate Operations

Mike: It's where we send out all of our deals from email blast to basically keep a Rolodex and online Rolodex of our investors. We use that and that's been a game-changer for us. It's expensive software but when you get enough volume, it just makes sense to kind of bake that in the cake.

Darin: Absolutely.

Mike: So we've used that.

Darin: It also automates the entire document signing.

Mike: PPMs and subscription agreements.

Darin: I mean, that's a huge saver for not only you guys managing the process, but also the investors that are investing in the deal. They don't have to print off the documents and sign them and scan them back in. So that's nice. Then, I've used syndication pro on one deal where I was a co-sponsor.

One thing that was nice about that was it actually has that capability to have a co-sponsor. And then the investors that I have relationships with came into my own little mini-portal. And so that was kind of a nice feature too. All right, so Syndication Pro for the syndication side, what other technology.

Mike: So we use a company called Via Software, they're out of Utah. Make a plug for them.

Darin: What is that for?

Mike: They'd run a text messaging platform. So whenever we send out an investor update, we send it via email through Syndication Pro. And then we also send it via text through Via so you know, they'll get the same update on their phone. We get a much better click, and open rate than we do through email. So we like text messaging a lot. And then if we're blasting out a deal, we send it via text as well.

Email Versus Text

Darin: What's the difference between say click and open rates, email versus text. How big a difference is it?

Mike: On email, I would say we're about 20% open rate on offering memorandums. And on texts, we’re more like 60, 65%, which I think is pretty dramatic.

Darin: That's dramatic. I mean, three times, and it's hard to ignore a text, I think.

Mike: It's very hard to ignore a text.

Darin: You hear it click, and you look over. Email, first of all, it could go into your spam folder. And then secondly when you look at your email, periodically, you quick-scan them, right, voom, voom, voom. But text messages, freaking for some reason, they just grab your attention.

Mike: They absolutely do. We've been successful with that. As far as operationally I think that we're probably behind the times a little bit. Just because I've got so many things dialed in, personally, Excel spreadsheets and tracking methods for what I do, monthly reporting. I've got it all put together and how we like to report to our investors. That stuff's already all built out.

Then on site, we prefer to use ResMan as the software. It's a little bit less expensive than your more robust Yardi and OneSite, but its functionality, it functions very much like an iPhone. It's user-friendly. Maybe not as many functionalities, but from an owner's view, if I want to go pull a balance sheet or I want to get a rent roll, it's just very simple.

Darin: I've used two different systems, ResMan and one other system. And ResMan to me as an owner was much more user-friendly. Just being able to figure out where to pull the reports and that sort of thing.

The Real Estate Operations Side of Construction and Development

Darin: We've talked a lot about the value-add of process. Talk about new construction, new development and operation-side related to that. How does your mind shift into a development deal? What becomes more important to you, from an operational standpoint?

Mike: Yes, I mean, during the build process, it's the same thing. You've got to keep your contractors paid, and you gotta keep them moving. Which you have to do on renovations as well, or else you'll be on a standstill on renovations, on value add deals. So the same thing applies with new construction. You got to make sure you get the draws in and submit them on time to the bank.

Don't let them send your inbox for four or five days before you submit them, then it takes them a week to get to it, and then a week to fund it. It's like, get it on the same day. So keeping them paid is important, and you focus on that. And then quality control, making sure things are getting done. Talking to your architect, make sure that they're building it like you wanted them to build it.

I would say to that point, you're focused on the construction, and then at some point, you need to focus on the lease up. So you get a sign out in front and an email put together and you make sure you have a website reserved. And you know, you're at the starting phase. So you do all that and you start taking leases and trying to sell some units.

Accommodating Price Changes

Darin: A couple of questions on that. One is in the development process, what about commodities? I mean lumber prices shot up, they've come back down 40%. How do you manage the change in commodity prices through the build period?

Mike: We hope and pray, it’s what you do. Because you know during this last build, to be completely honest with you, we locked in a contract in August. We closed our loan, and we had our budget numbers put together. Contractor said, "Yep, we can do that. Let's move forward." And by the time we got to the foundations, he's looking at buying wood, and he's resizing it. It's gone up $700,000.

Darin: That's crazy.

Mike: Yes, really it was crazy. It just happened, and we just had to resize the loan. Personally, me and my partners had to put more money in. So we didn't have to go back to the LP’s and ask for more cash. Because in order to get the deal done, it's moved forward and it's pony up.

Darin: So you were able to get the loan resized, though, so you and your partner didn't have to pay the entire amount.

Mike: Yes. So we went back to the bank and said, "Hey, here's the situation." But the good thing is, banks want you to get the deal done. So they'll work with you and try their best to help you. And the story, we gave them lined up and it made sense. As you know, material costs have skyrocketed. Lumber had gone up four or five times. Aluminum and copper had gone up through the roof. Everything had gone up.

From Upfront Concession to Full Freight

Darin: That makes sense. Let me talk about the lease up phase now. So I'm just going to use a round number. Your business plan is you're going to rent this one particular unit for $1,200. Do you start up in the lease up phase under that number in the beginning to get some people in and get some momentum? And then start raising it each month as you start to get some traction.

Mike: Yes, you could do some sort of concession upfront, which is very typical in lease up. Whether it's the first two months for free, but it's a 14-month agreement, so it kind of burns off. Or I don't like to lower the rent over the course of the time, I would prefer that. We give them an upfront concession and then charge them full freight, because that just looks better.

Darin: It looks better six months from now, a year from now, when you're looking at the rent roll, they're at the full rent.

Mike: That's right.

Darin: And when you get to a point where you're going to stop concessions, you could say, "Look, we're 70% full and everybody is at the same rent."

Mike: In today's market, and where we're doing these developments, I don't think we're going to give concessions on lease up. Because, I don't think we have to. So that's just us benefiting from this great market right now. But the property that's being built next to us is not giving concessions. And they've leased everything up. They're doing three phases, but they lease 30 units up in a month, something like that.

Learning How to Pivot

Darin: But that's another example of pivoting. I mean, you pivot both ways. So one way was, okay, all of a sudden commodity costs go up. You got to pivot, you got to go back to the bank. So, you think, upsize the loan, you got to throw in a little bit extra capital. Then on another deal maybe in the business plan, you did have concessions built in the lease up. And then all of a sudden, you're like, "Man, this is a hot market, we don't need to do that." So then you save that money at that point in time.

Mike: Absolutely. And I would say, but we budget and we underwrite for the worst case of those two things. We've underwritten concessions into our budget and our proforma says that we'll give concessions. I'm not apt to start off on that. I would prefer that we try and lease some of these units and see what our velocity is. If it's such that it meets what we said we would do, why not? Let's just go that path. But I don't like to start out giving the kitchen sink away. Let's start the other way and see what we have to do.

Darin: All right, let's talk about fear. What part of the process are you scared, man? Everybody gets scared at some point in time.

Mike: On the new development stuff? Yes, I mean Glenn and I are learning quickly. Glenn's probably known for a lot longer than me, but I'm learning quickly that in new development, you better have some capital to go do these deals with. When you're putting money down, that's non-refundable on 10 acres, and you don't have an approved site plan yet.

The Risks You Need to Swallow In Real Estate Operations

Mike: That's fear, because you can lose all that money and then have 10 acres that you can't build multifamily on. And so there's some risk there initially, that is very tough to swallow. Once you go through the pre-development risk, and you prove out this will work, the city approves it. And you get the rubber stamps, that allows you to breathe a little.

It takes time, it takes a lot of focus. No one's going to do that work for you, you have to do it yourself. I would say the fear that comes in is like, are we making the right assumptions here? Is this a good deal? And it's really at the beginning. Then once you're building it, it's this excitement, it's like, alright, let's get this thing done. Let's see the vision out and get people in here paying us money to live here.

Darin: Yes, that's awesome. I think that gets lost with limited partners, too. Both on the value-add side syndicated deals, and also new development brings on a whole different aspect. But on syndicated deals, look as the syndicator, you're fronting the day one non-refundable deposits. Plus all the fees associated with the attorneys and the bank loan app fee, and the inspections and appraisals, and all that.

Darin: Yes. And if the deal doesn't close, that's all on you, eat that.

Mike: You eat that.

Darin: If the deal closes, then you're refunded those fees. But there's risk. And then on the new development side, you brought up even more. There, you could be putting money down on land, and it hasn't even been zoned for multifamily yet.

Mike: That's right.

Shovel and Permit Ready

Darin: Now I have talked to some syndicators that have said that land is a little different. People have told me that it's pretty common to get a seller to agree to give you a long period of time to get that to work.

Mike: Right.

Darin: So you don't have as much money out laid, and you kind of lock up the deal. You lose a little bit but not as much as you kind of would have.

Mike: Yes, that's right. Generally, a six-month time period is kind of what you're given. That's if they don't have approved site plans and architectural drawings that are approved by the city. If it's shovel-ready and permit-ready then you're 90-day closing. But if it's still raw land, and maybe it's zoned MF two or multifamily two, you've got a ton of work to do before you can get that thing to entitlement.

Trust me, if it's not to entitlement, you're not going to get a private equity group to bite off and to do it. You just won't, you better know. You better win the lottery or meet someone willing to ride the risk with you. Because those private equity groups look for avoiding risk in the pre-development.

Darin: Alright, one more question on the development side. I've seen more and more syndicators over the last year and a half trading up, going from C to B, or B to A. Then lately, I've had more syndicators talking about "Hey, things have gotten so expensive per unit on the existing properties that maybe it just makes sense to start doing new development.” Have you guys kind of seen the same thing? Is that what's prompted you guys to start doing some more new development.

There’s Not Enough Meat on the Bone

Mike: Yes, that's why we started doing the new development. In Austin, you couldn't buy a C plus product, or a B minus product for less than 180, 190 a door. I mean, that would be a steal right now. You're up to 205, 210 a door. You're buying on super compressed cap rates down in the 3s, and there's just not a ton of meat on the bone. How are you supposed to cash flow when you buy it at that rate, unless you're able to jack the rents up 5 to 600 bucks a month?

There's a lot of risk there. Can you even do that? Naturally, we were pushed that way, I think. We have a lot of connections around where we're at and some people that want to partner with us on some land development deals. So yes, I mean we're able to build and be all in for less per door than some of this 80s product.

Darin: That's crazy. So you're going to build new and your cost per unit will be less than if you're buying an existing property?

Mike: Right.

Darin: Oh, that's huge.

Mike: Isn't that crazy?

Darin: Yes.

Mike: But you had to go through this headache of getting something done. And I promise you anything value-add is a headache. You have no clue. I mean, seriously you know why these development guys are all rich. It's because they push through and they've done it. I mean, it's so hard to do. It takes so much effort and focus and heavy lifting, that you deserve every penny you make.

Goals Under Construction

Mike: It's a lot of work. And resizing that loan, fortunately, we're able to go back and get an appraisal that said, "Oh, rents have gone up in the market significantly. Yes this is palatable." But had it not been the case, we would have been dead in the water.

Darin: Absolutely. You'd have to shell out a lot of money with the hope that you're going to get paid on the back end. That's right. So what's the next big stretch goal for you, my man?

Mike: Oh, geez, I want to lose some weight.

Darin: How many pounds?

Mike: I'm trying to lose 40 pounds.

Darin: By when?

Mike: Well, my wife signed me up for a half Ironman, and that's crazy to me. I'm like, this is insane. But that's the big stretch goal.

Darin: You got to put a date on it.

Mike: October 30th.

Darin: By October 30th?

Mike: Yes, so I got some runway, but you know. That's going to be a challenge for me. I'm working hard on it, though.

Darin: Awesome.

Mike: But as far as business goes, Glenn and I want to get these development deals in Austin. We have three that are active right now. Own the land, we want to get those across the finish line, meaning all of them are under construction. One of them will be coming into the pre-leasing phase in February. And we want to buy another two value-add deals by the end of the year. So those are our goals. We're going to move fast and furious to get it done.

A Sophisticated Redneck

Darin: What do you like to do outside of work?

Mike: I love my kids and my wife. We spent a lot of time together. I think you came down to Glenn's property maybe.

Darin: I did. I brought my college-aged son and we went shooting with Glenn. We went on his ranch and he had every type of gun you could think of. And I hadn't shot guns before so I was a hero for my son because he really had a great time. Glenn is a super nice man.

Mike: He's like a sophisticated redneck, you know? He's awesome.

Darin: Super nice guy.

Mike: He's the best. I love spending time with my kids. And I really like being outdoors. I love being out on the boat or something like that.

Darin: Awesome. Well, I really appreciate you coming out. And sharing, the operation side, we really don't talk about this side as much. So I think you brought a completely different perspective. And I thank you for that. I wish you and Glenn much success going forward. Next time I'm in Austin I will definitely look you guys up. Do the same if you're in Dallas. Listeners, I hope that you enjoy that one. Until next week, signing off.

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