Listen to hear Ben Suttles discuss how he went from tragedy to triumph after hurricane Harvey. He and his business partner formed Disrupt Equity which now has over $100 million in assets under management. These guys are just getting started. They have a goal to purchase 10 deals for 2,000 units in the year 2021!
Table of Contents:
- Where To Listen To The Podcast
- Knowing Triumph With Ben Suttles
- Proper Mindset Is King to Achieve Triumph
- Fine-Tuning Yourself Leads to Triumph
- Will a Floater Help Your Triumph?
- Talk About Fear Before Triumph
- How to Reach Ben Suttles
- Join These Multifamily Conferences In 2021
Knowing Triumph With Ben Suttles
Darin: Ben Suttles lives in the Houston area, he comes from a sales and development background in the tech space. He started investing in real estate in 2013, and he and his business partner now have over 100 million of assets under management. This guy has lofty goals. They want to purchase 10 deals for over 2000 units in the year 2021.
So, before we get started, just a little bit on how I know Ben. I actually had Ben's business partner on episode 11, Feras Moussa. The two of them formed a company called, Disrupt Equity. I first came in contact with the two of them a couple of years back.
They were both in the Houston area, they both came up to the Dallas area, which is where I live. I attended a meetup group that they were putting on, and it was a very well-attended meetup group and they were there speaking. I think it might have been with Kenny Wolfe's group. You guys were speaking at that, and you guys talked about a couple of properties that you guys did very well on. I met some great people at that event, and so, from that point on, we connected on social media, and I've been watching these guys. They're players in space, and they're people that I want to look up to, and I want to learn from.
And so, I hope that you guys learn from him today. Before we get started, Ben, can you just share with us how many properties, and how many units you guys currently have?
Not a Ben & Feras Show Only
Ben: Yes, we currently have seven properties in Texas. We have four in Texas, three in Georgia. We've also sold three, one in Georgia, and two in Texas. Currently, we have about 1500 units. The target for next year, which was supposed to be our 2020 goal, is now our 2021 goal, which is another 2000 units. We're hoping to buy 10 properties next year. It's going to be a wild ride, but we're bullish that we could pull it off.
Darin: This is something that we talk about a lot, when you go from single-family to multifamily, the biggest word I hear people talk about is scale. In single-family, you get to 10, 15 single-family properties, and it just starts to be very hard to manage. And so, people start to look at multifamily as a way to go up. But buying 10 properties in a year, and doubling the number of units or more – that is some serious scale, so talk to me about that.
Ben: You have to have the right team to pull this off.
I can't say that it's the Ben and Feras show, we have asset managers, we have analysts, we have our own property management company now. We also have insurance, and financing in-house too. Also, we vertically integrated over the last couple of years and brought on a team of people that help us pull that off. Because if it was just me, or if it was just Feras, that would be a very daunting task to do.
But over the last few years, as we've gotten into the business, and matured in the business, we've just cultivated a lot of broker relationships. They know what we're looking for to add and we get a fair amount of deal flow.
Building the Right Team for Triumph
Ben: We're looking at 20 deals a week. Making five or 10 offers a month, if not more. And it's all about numbers, you could almost back into. If you're going to buy 10 deals, how many deals do you need to look at? I'd probably need to look at 500 to 1000 deals this year.
We are going to just completely open up our funnel in the markets that we're in as well as a couple of new markets that we're going to be in. We're in Georgia and Texas right now. We like Florida, we like Phoenix, we like North and South Carolina. What we're doing right now, what we've been doing in the last quarter, is just cultivating those broker relationships. Whenever they have that, it gets aggregated into our funnel. And then from there, it goes into an underwriting process.
We've got, not only analysts here in Houston, where we're headquartered, but we also have VAs that do a lot of our day to day, either data input. They don't do the analysis piece, I feel like that's something that I always want to keep a pulse on. But they'll do the data entry, and then it goes through a kind of a betting process and an analysis process, and then it percolates up to me and Feras. We have two, or three meetings a week where all we're doing, and all we're talking about are deals that we're looking at.
Analysis, where do we make an offer at? When are calls for offers? And then, making sure that we're doing that, because ultimately, we let our foot off the pedal this year, because of COVID. But we see a ton of opportunity.
The Importance of a Working Team
Ben: Now that the vaccine's coming out, we got past the election, or who knows, it's still a little bit contested, but I think we all know who the winner's going to be. I guess the uncertainty that was keeping us out of the market for a while is no longer there. And interest rates are still low, and we have a ton of equity that's sitting on the sidelines. We need good deals that we can deploy that capital into. We essentially said we'll open up the floodgates. Still stick to our box, right? I'm not just going to go buy a deal, just to buy a deal.
Because it just opens yourself up to a lot of problems, but if you have these teams in place, and you have your funnel, and your deal flow coming in. I'm not going to name names, because you probably know them, but there's a guy that we know that is under contract for five deals right now. There are deals out there, you just have to have the initiative, you have to have the contacts, and you have to have the equity, and the team to back you up, to actually, pull it off.
Darin: That's a great, great point. Talk about the deals, and you have analysts. The deal flow comes into them, they analyze the deals, they take the data from the OM, and the T12 and they put it into your underwriting. And then, once or twice a week, you guys end up having a meeting with deals that passed their first test, is that how it works? They kick out a bunch of deals, and then, they only present the ones that they think may be of interest to you guys?
Delegation Is a Way to Triumph
Ben: Anybody's that's incorporated, or anybody that's been in sales. I come from a sales and business development background. So I look at it like, this is just another pipeline that we have to fill with potential opportunities, instead of sales that we're going to make, right?
We're buying things, in this example. But the way that it works from our standpoint is, obviously, OMs and T12s flow in, our VAs will do the data entry. They will also pull CoStar reports, and other reports, client statistics and they all put this into Asana.
Asana is our project management tool that we're currently using for our pipeline, but we're moving to another one, which will be a little bit more robust.
And they do their piece, then it moves to our stateside analysts. All of the heavy lifting, all the things that take people a long time to actually do analysis, which is the data input, taking things from the T12, and putting it into the analyzer, and all these other things, and pulling reports. That's already done. Now, all of our analysts are verifying and then making the assumptions that go along in our box. What are we going to do for rent growth in these areas? What are we going to do as far as expenses? Where are we popping taxes at? And insurance? Verifying numbers, at that point, right?
Because they don't do any of the analysis, all the VAs do is the data entry. Then the analysts do the analysis. And then, they put it into a box where it's either, this is junk, we're not even going to look at this, because it doesn't fit our returns.
Systemizing the Deal Flow Process
Ben: Or it does, and we need to look at this, or it's really good, and you need to look at this right now. Because what was happening was, this is a good deal, but we found out it was a great deal, and then we tried to make an offer, and it's already gone. It's too late because even on off-market deals, as much as I'd like to say that these guys are only sending it to me, and everybody always says that, I'm the only one that looks at these.
Darin: Right. I've heard of that before.
Ben: That's not true. You're always at least, three to five buying groups that they might like, but you are not the only person. We know that there are three or five other people that are doing the same analysis as us, and if they're faster than us, they're going to wrap it up quicker. We've lost deals in the past, and we said, no, not again. We have an escalation point. At that point, where if it goes into this tranche of returns, then you need to escalate it to us, and we're going to talk about it that week. It systematizes the deal flow process.
And really, I have to give kudos where kudos is due. I'm the sales guy, Feras is the process and the IT guy. He put a lot of this in place, but it has made our process a lot more, I guess, efficient. That's how we're going to pull off that scale in 2021. But also to pull that off you have to have the deal flow. The deal is one part of the equation, the other part of the equation that you have to have is you have to have equity.
Bringing Equity to Triumph
Ben: And it's always that cart before the horse. Should you have the deal or should you have the money? I always say, you can't have just one, right? Because we talked about this a little bit earlier. If you don't have anything to deploy somebody's capital into, they're going to the next deal. They're going to go to the next syndicator. And they're going to the next guy or girl that has a deal in front of them.
I always tell people that. The people that usually invest are us. We have a core group of 20 or 30 investors that always invest with us. And then, it's usually the people within the last 90 days that I've talked to, or the team has talked to, that then ultimately, end up investing in our deal. You need to be constantly marketing for money. And you need to have deals that you can show in front of them because I'm going to tell you, they're not going to sit on the sidelines.
They're going to be reaching out to other sponsors and looking to deploy capital. I tell that story because I want people to understand that you have to have both. You need to be marketing yourself, you need to get out there, even if you're a shy guy or gal, you need to find your superpower. And you need to bring equity in to bring triumph. Whether that be social media, I see a lot of people that are great on social media, and then you'll talk to them, and they're about as shy as they get, it's crazy.
Darin: That's funny.
Proper Mindset Is King to Achieve Triumph
Ben: They've created this avatar for themselves, and they've done an incredible job raising capital through some of these forums. Having both things humming at the same time, that is how you're able to scale.
Darin: You talked about the team a lot. You built a team. But the two pieces that I think, from your discussion, on top of that is process and mindset. If you go back to when you first started doing this, could you ever imagine that you were going to be saying that "I'm going to buy 2000 units in one year?"
It probably wasn't in your mind then. But as you continue to learn, and grow, and get one deal after another, and build your knowledge base, then all of a sudden your mind expands to the next larger goal. We all start with our first deal, right? And then we move on from there.
Ben: I'll tell you a quick story. And this is about mindset. When I got into this business, I knew that I'd eventually get there, but I thought it was going to take me a lot longer. And it's since taken me six years, but I'm still happy for what I've built so far. But after I did that first deal, I knew I could scale because of the mystery of the process, and raising capital, and finding deals that now goes away. You're like "I've done it. Wow!" Now, you still have to operate, which is a whole, another part.
Let's just talk about acquisitions. Then you're like, "I can rinse and repeat this. All I got to do is just have enough deal flow coming in, and enough money coming in, that I can buy any amount of deals."
Investment Is Building Relationship
Ben: As long as they hit my box. The point of all that is, my mindset shifted right after that first deal because I knew that it was possible. I knew when I got in the business, Mike Becker, was somebody that I looked up to. I still look up to, to this day. And Kenny Wolfe, these guys, younger guys, that I looked up to, and they're both smart as a whip. But they just went out and made it happen.
And you're just saying, "yes, they're smart, but I'm just as smart and as capable as they are, and so, I just need to mimic what they're doing." And they put themselves out there. They hustled and they worked hard, and they made the right connections, and a lot of that is all it is. It's a numbers business and it's a relationship business.
The numbers, you can either learn or you could farm out to somebody good with numbers. But ultimately, you're never going to be able to do this business from behind a desk. You've got to get out there and put yourself out there because you have to build relationships with brokers.
And you're going to have to build relationships with investors because ultimately, people are investing in us a lot more so than the deal.
They're saying, "Okay, I like the area, I like the deal, but I like you guys more, and I know you guys can pull it off.” And you're never going to make everybody happy, but at the end of the day, the people that have stuck with us, these 20 or 30 core investors, have seen what we've been able to produce. And that's why they continue to reinvest with us.
Ben: Your mindset changes and evolves as you get more.
Darin: Yes, that's huge. You said something there too. Listeners, you have to listen to what Ben said and you have to take action. You actually have to get out and meet a lot of other like-minded people. Whether you want to do your first passive deal, or whether you want to do your fifth, or tenth passive deal, or you want to start actively going after deals. Once you surround yourself with a bunch of people that have already done it, what happens is, is exactly what Ben said. You look around the room, and you're like, "They did it with triumph. I can do it."
But if you just sit at home, you're going to think about all the things that you don't know about and it's going to overwhelm you. You're going to say that's for somebody else. Get around other people, and you realize, they're just other people that figured it out, and then you could follow in their path.
Ben: Have the guts to go out and do it, make it happen. There are so many people that you look at just great entrepreneurs and great business people throughout the years. They took the risk, they took that first step to go out and do something great, or revolutionize an industry, or create an invention. But you look back, and none of them is 200 IQ or anything, they're just people that had a good idea and had a good team behind them. In most cases, they just had the guts to go out and make it happen.
Get Involved to Get Triumph
Ben: I think that's the most important thing and you brought up a good point because a lot of passive investors are the ones that think "I can just do it, I don't need to network." And I always tell them, "you do.” COVID has pushed a lot of things online. That maybe was less online before that, and I think that will somewhat continue. But guess what, vaccine rolls out, things start opening back up, these networking events are going to happen.
If you're a passive investor and you want to have enough deal flow coming in to find those deals that you like, then you're going to have to get in front. Because you know there's 20, 30, 40 people only, on these deals. It's a tight-knit group, it's not like a stock, where it's just a liquid market. You can buy and sell and you're never going to have the problem of scarcity buying a stock. Whereas getting into a syndication deal, if you're not moving quick enough, or you don't know that person, and you just missed out on that Austin, Texas deal that you really think was sexy, and you always wanted to invest in Austin. It's because you didn't know the person that was looking at deals in Austin. Passive, you need to get out there too, and make it happen.
Darin: That's a great point. Look, I'm 50 years old, and for the first 47 years, I did not have one person present me with an opportunity to invest in one of these deals. And then, I got involved and started networking. Now, I get deal after deal after deal in my email box.
Knowing Your Investors
Darin: But if you're a passive investor, they are not going to show up in your email box unless you get out and meet other syndicators. You have to start getting on their investor database.
Even if you're not ready to pull the trigger, if you were to start getting those emails, and then start registering for some of those webinars, you're going to learn. Then when you are ready and you have the funds and you've mentally prepared yourself, then you'll be ready to take action.
You talked about people. Look, I still invest that way. I first look at the people that are involved in the deal, and there are several different things that I think about. One is, do I genuinely like these people? Do I want to do business with these people? Whether I'm doing a passive investment, or I'm partnering with other people as general partners, is this a group of people that I know, like, and trust?
And then secondly, okay, what's the experience level? What have they done, and how does that help build my confidence? You guys have had a track record, and that first tranche of investors, that 20 or 30, they've had a positive experience with you. Now, you've built in this deep-rooted trust with them, that probably helps you, even if you have a little bit of a side hiccup. They give you more leeway because they've seen what you can do.
Ben: And I want to just bring it up too, you're right. I came from the sales world. I've always told people that "I'm hocking the same stuff that the next guy is hocking.” But people bought from me because they liked me.
Real Estate Is a Relationship Business
Ben: It's the same thing with an investment opportunity, you have to build real relationships with people. It can't just be this very surface-level stuff, right? I mean, I know about my investors. Their kids are going to college, where they're going on vacation, we talk, we chat, we go out to dinner. This is not just some, I send him an email blast stuff.
Because of that, yes, there is going to be some patience but we also like to have investors have a little bit of track record as to how many deals they've invested with too. Because the people that you're going to get the most questions from is the guy or girl that has his first deal. They're putting less than the minimum, maybe 25K, which is fine, I'm not hating on anybody. But most of the time, they either don't understand the process or that might be a bulk of their retirement amounts, and you end up getting jammed up just answering a lot of questions.
We prefer to have people that we like, know and trust too on the investor side or people that are more experienced passive investors because they tend to understand that there are ebbs and flows in deals. And that timelines sometimes, especially this year, can be delayed. Because who knew in January that COVID was going to shut the whole economy down.
You just have to consider that too. But at the end of the day, it's a relationship business, and you got to go out there, passives and syndicators alike. It's just going to be this, behind the keyboard stuff, and you're never going to be able to really scale or do much with the business that way.
How COVID Affected the Triumph of Real Estate
Darin: You bring up the situation, COVID, and I don't want the show to be a long-winded piece on it. But I talked to a lot of syndicators and was like "look, we're at the tail end of the real estate cycle, we're going to go into a recession at some point, don't know what's going to prompt it." Talk about how resilient multifamily should be in that downturn. But here we are, I never, ever, ever would've imagined that we would be owning an asset class. Where the government tells you that "hey, the renters, they don't have to pay, and you can't do anything about it."
Now, it's been going on nine months. So to see the performance that, yes, there are late payments, there are no payments, there are people taking advantage of the system. But in general, the asset class has held up remarkably well.
Ben: Say we could evict people and we just slowed, this is why, at least, I got into multifamily. It was pretty resilient back in eight, nine, and ten. Now, did asset prices go down? Did rents go down a little bit? Yes, absolutely. Everywhere, across the board that happened. But COVID is something different. Nobody could plan for this and I would say, for the most part, we dodged a bullet. But I would say, not to get political about it, but if the politicians would get their act together and offer a little bit of a relief. Because at the end of the day, not only do people that are landlords, we don't just have a mortgage to pay.
I love these people that are like "give rent and loan forgiveness." My loan is only half of the expenses that I have every month. It's not the whole thing.
The Dynamic Shift of Real Estate
Ben: I've had employees that have families too. If people weren't paying their rent, they can't feed their families either. It's a trickle-down effect. But overall, with all the chips against us, it's done pretty well. I know people that are in hospitality. And I know people that are in office and retail. Some of them are getting killed.
At the end of the day, I think it all proved our thesis, which was it's the hierarchy of needs. You've got water, food, and shelter, are the three most important things that somebody needs. I think people prioritize that, and especially, prioritize it once the unemployment insurance was beefed up a little bit. Because really, collections were about as good as they could've been in April, May, and June, right? And that was mainly due to that $300 or $600 a week more. It was a significant amount of money. And people were paying on time. But then that goes away, and some people start creaking. Because the other thing that's different from eight, nine, and ten is that the restaurants, and the bars, and a lot of the retail are closed down.
From eight, nine, and ten, people that are around those things were open. Some of them might've been slowed down but you were still going out to eat. People still were definitely going to the bar and they were still shopping. And people tend to say, well, that's why I wanted to be in B&A but hindsight's 20/20.
Everybody was trying to insulate their portfolio from another eight, nine, and ten type recession and that's what happened. We had a forced recession due to a pandemic that has created a dynamic shift that nobody could ever have accounted for.
Ben Suttles Before His Triumph
Ben: But I'd say still, multifamily is behind industrial, one of the best asset classes this year for sure.
Darin: Absolutely. You got involved in real estate investing in 2013, what did you do beforehand?
Ben: Sales, IT, business development.
Darin: Like for large software companies?
Ben: No, we sold hardware. I sold to Fortune 500 companies. And I sold to the government, think FBI, those types of guys. We sold a lot of biometric, security, and I.D. equipment. I had to do a lot of presentations. And I had to do a lot of networking. I had to do a lot of traveling. And I had passed out business cards, I went to conferences all the time. I always tell people, I'm doing the same thing that I was doing then, I'm just selling investment opportunities now.
Darin: And you're an owner.
Ben: And I'm an owner too. But I'm able to segway the skills that I've built in the 15 years I was in IT into commercial real estate. I enjoy stuff like this, and it's a way for me to kind of give back too. Just impart some wisdom that maybe I've learned the hard way over my seven years in the business.
Darin: Yes, absolutely. Some people come into this business from all different angles and leveraging the experience you have up to that point in time is critical. You can't take it, maybe, not all of it's going to carry forward. But a lot of those experiences and a lot of those relationships are going to help you in this business as well.
Fine-Tuning Yourself Leads to Triumph
Darin: You talked about those seven deals that you guys did. There are different challenges and different deals, and then you learn from that, and you can look at another deal, and be like, this is another one of those.
Ben: And then you fine-tune. I always tell people, "passive investors close your ears". My first deal, I didn't know what I was doing. And I'm not saying that people doing their first deal don't know what they're doing, but you don't know what you don't know, right? Any guru that says they could teach you 100% about the process is lying to you. Now, a lot of the training that's out there is focused on finding deals, raising equity, and underwriting.
They never tell you what you have to do on day one. "What do I do now? I got the deal to close, now what do I do?" Because there are specific things that are very, very important that need to happen in a certain sequence.
And luckily, I was partnered with a gentleman, that it wasn't his first rodeo, and that's why you always have to rely a lot on your partners, especially, when you're starting. But I always say each deal that I've done, good or bad, I'm learning, and I'm fine-tuning, and I'm making sure that I don't make that same mistake twice. You're going to make mistakes. It's how you pivot and make sure you don't make those mistakes a second time. Because not everybody is perfect. A lot of people were perceived as being rock stars in the last 10 years, but really, they were just riding an appreciation wave.
Networking & Triumph
Ben: I think this decade is going to be the decade of the operator. You have to know how to operate asset management and property manage your properties because you're going to have to extract value in creative ways and be very, very tight upper management, that's the only way you're going to make a profit in this decade.
You're still going to get appreciation, don't get me wrong, but it certainly is not going to be like it was back in the last decade. I've learned all that. And I've actually done seven deals now, but I had done 10 deals recently or I've done 10 deals throughout my career. Each one has been unique and I've learned a lot along with the way the right things and the wrong things to do.
Darin: It's a good point, and thinking about that. Property management, running the deal, and managing the deal. Networking isn't just about getting the investors and getting the deal done. But when you're out there networking as a syndicator, you're meeting all kinds of other syndicators and you're building relationships with them. So you've got the learning of your seven deals, but you also, can pick up the phone and call somebody, and be like, "Hey, man, I think you went through something like this before, I'm going through it right now, how'd you handle it?" This industry is amazing about helping each other.
Ben: We're all business owners. We have a very entrepreneurial mindset, I would say, amongst us multifamily and commercial owners in general. But I 100% agree. There are two guys I could think of, I won't name the names, but if I get jammed up or if I have a question "how do you handle this? Or how did you handle this?"
Leveraging From People's Experience to Achieve Triumph
Ben: I'd pick up the phone, I don't know everything. I wish I could say that I did, but the business is changing.
Darin: But that's smart.
Ben: It's changing, right?
Darin: Look, you could have an ego. "I don't want to call and ask somebody" but that's just dumb because you're just trying to maximize the valuation on your investment for you and all your limited partners. That's huge. Now, one of the things that will be interesting to see, I think, moving forward is the migration. The migration from a population from California, New York, Chicago, other densely populated areas, into markets such as Texas, Arizona, the Carolina's, Florida. That shift in population, I don't know how to put a number on that, but yes, there's definitely going to be a management component to it.
But I think, there's also going to be an influx of people in these high growth markets that will make up for some of the potential downfalls that would've been had this migration not happened.
Ben: Yes, you're right. And then you bring up a good point. I kind of touched on this earlier and I think the two need to coexist, right? In real estate, it trends upward in almost all cases if you look at it over a long enough period. And really, we didn't see asset values go down at all more than maybe 5%, and that was in May. When people were just struggling, trying to get a deal across the finish line. I'm just going to use Texas because we live in Texas. It's already happened in the last 10 or 15 years, and yes, this is accelerating that. Now, you have more demand for your rental product.
Balancing Act to Triumph
Ben: But I agree that's going to create appreciation. But what's also happening is things are going up in price. Taxes are killing deals, insurance is killing deals. And just being on the front line, both on the property management, as well as on the ownership side, the cost of everything, labor included, is going up.
And then you have asset values that are going up so you're buying at lower cap rates. You're going to be a little bit tired of a play. And I think, on a total returns standpoint, you're probably, going to be alright. I think most of these deals from a total return standpoint are going to be fine.
Cash flow is going to be a little bit tighter to extract. But I think, once again, on a total return standpoint which takes into consideration what the appreciation is going to be, and how much you could sell it in the future. I think all these deals are going to be money, right? But you bring up a good point, there's a balancing act, and I think, even within Texas, there are better markets than not.
Darin: Yes, I agree. I have a philosophy. And none of us has the crystal ball, right? But I think that there's going to be another stimulus package coming out. I think that when that runs out, that we're going to have some true permanent unemployment, and we're going to have more bankruptcies that come to fruition and it's going to get a little bit harder.
But the piece that I don't know is, okay, does the influx of people into Texas make up for that? Because I see with our property, we have tenants that are either struggling or taking advantage of the system.
Collection & Delinquency
Darin: There's probably a combination of both. But every time we have a unit come available, somebody is waiting to come in. We're 95 to 100% occupied always. It's more about collections right now for us. If that trend continues, then that could help make up for some of the challenges that I think are going to come but, who knows?
Ben: Yes, I think nobody has a crystal ball and I think time will tell. And I do agree with you. I think a stimulus package is definitely going to happen. Who knows how quickly, especially with the holidays and the way that the politicians like to take months, and months off at a time. When that's going to happen, but I would say, definitely, Q1. That's probably going to help people for another quarter or two. But Q3, Q4 could potentially, if things don't get back on track, or maybe the vaccine gets off track, or something else happens, Q3, Q4 could be interesting, right?
But you brought up a good point too. Occupancy has been pretty full but it's all about collections and delinquency. Are tenants actually paying the rent? I think, in some cases, they're not. And unless those people get a lifeline from a stimulus package, they're going to prioritize those other two things ahead of shelter which are food and water.
If you had a decision between, "Am I going to put food on my table for my children? Or am I going to pay this landlord my rent?" What kind of decision do you think they're going to make?
Darin: Absolutely. And if all of a sudden more evictions start happening at the end of the year, then that helps the cash flow perspective but it certainly increases the cost.
Triumph Goes Well With Appropriate Property Management
Darin: If you increase the turnover on these units, you've got to repaint the interior, clean it up. There are extra costs associated with that versus just renewing a paying tenant for another year.
Ben: And I'll bring that up because I'm on the front lines of the property management side. Those folks that have been living there for free, they're also not calling maintenance to figure anything out. Because guess what, they don't want to let anybody in their unit. Those units are rough and they're usually not in the best of moods either so they're probably going to damage some stuff too. That turn that price should have cost you three to five, is probably going to cost you five to seven now. And then if you have that within a month or two versus spread out over 12 months.
What I'm suggesting to my clients and what we're doing is probably, into Q1, Q2, you need to have some money set aside to be able to turn those units. Because otherwise, they're going to sit vacant for quite some time. Until you do have the money to actually turn that. Because you can imagine if you've got 25 evictions, 5k a piece, $125 000. Some people aren't going to just have $125 000 set aside, especially, the smaller owners.
You just have to consider that will eventually happen. It might happen over a month or two, and those turns are going to be more expensive than you anticipated them. That could put some hurting on some people. That could potentially blow up some sales too. Because if you're in Escrow, and all of a sudden you have to evict these people, or maybe they skipped because they're going to get evicted.
Will a Floater Help Your Triumph?
Ben: Or even worse, the seller doesn't disclose all this stuff, just says, "Hey, don't worry about it, we're not going to evict you." And then you buy the property, and then all of a sudden, you've got 25 people that you were supposed to have evicted or in the process of being evicted. Now, your occupancy drops by whatever percentage. Just be aware of that too in the acquisition process.
Darin: That's a great point. I don't know if you have an answer here, I'm going to bring up a topic that I've heard from a bunch of syndicators as of late. Most people like to do agency debt non-recourse if they can, if the deal allows for it, but there's this discussion now, "go with a floater with a cap or go with long-term fixed-rate debt."
Both agency products, both have a long term. Even on the floater, the term could be 10 years. But it's a floater, you buy a cap so it can't go above a certain amount. The benefit to doing that and the reason why people are starting to talk about doing the floaters is that after a year, the prepayment penalty is only 1% versus either yield maintenance or a step down with 5% or 4% prepayment penalty on it. What's your view on that?
Ben: I've seen yield maintenance be as high as 15% to 20%. We're in a fanny jail right now, which is what we call it where there are two deals that we have in our portfolio that I could exit at a very good return to our investors. But you start baking in the prepayment penalty, and it just nukes pretty much all of your profit.
Strive to Triumph Over Loans
Ben: You need to consider that. I like the floater and that's because I've had too many situations where that doesn't allow me to be flexible when I want to exit. You feel like you're locked in at least for that first three to five years until that yield maintenance gets to a little bit more of a manageable amount. And maybe, the value has gone up a little bit more just to offset that. It does depend on the deal though.
Darin: I know that's always going to be the case.
Ben: I'm going to tell you why though. It's not because of the asset itself. It's 200 units versus 100 units. It depends on your business plan. Maybe it's a deal that you are fairly confident with in the first three to five years. You're going to put enough value in that property, that you probably, will exit. But you want to do a more semi-permanent thing versus, says, a Bridge loan. Because it's going to get a better interest rate and because the floater does have a better interest too, right?
Darin: The difference between the bridge loans and the floater or the fix, just call it agency long term debt. The thing that I like about that is that where I saw people get hurt from my loan trading days is, if the loan comes due, in a bad economy, you have no leverage. The financial institution that you're working with is going to pin you.
And it's not just because they want to take advantage of you, but they can because they have all the leverage, but they've shifted gears. All their staff is working on troubled debt.
The Bridge Loan
Darin: They don't want to write a lot of new loans so they make it very difficult. They'll come back to you and say, "look, your property was worth X, but now it's worth X, less two million so, you got to bring two million to the table or else, we're not going to re-fi it."
Ben: It puts you in a tough spot. Because we're in the syndication world. Probably, some of your listeners are not syndicators. Maybe they're long term owners, maybe they want to buy their deal. I think that gets played into it too. How long are you going to hold on to that property to dictate in a lot of ways? What debt would you put on it?
As well as the condition of the asset. I always tell people, if you're doing a heavy value add, or a semi-heavy value add, you should look at bridge. And I know there's a lot of stigma around bridge. Some of the bridge guys have pulled out of the market this year so it's been a little bit harder to find quality bridge lenders. But if you're going to flip out of it in a year or two, into either, you're going to just sell it, or you're going to go into a perm because you've increased the value, why wouldn't you do a bridge?
Don't put Fannie Mae, 12-year-old note on that deal, if you're going to increase the value a lot, right? Because you're just going to get nuked on the prepayment penalty if you ever go to try to seal the deal. I always look at debt as a tool. You have to have the right tool, for the right problem. You can't just get caught up in one type of debt versus another.
Triumph in Paying Your Loan
Ben: That's how I look at it, I know that probably didn't really answer your question. I think it depends on the opportunity.
Darin: No, I think you did. I would add to what you said though that you could have a great value add story. That bridge would be a good product for it. But if you feel like we're at the tail-end of the real estate cycle or that a recession could be coming up, then I think you have to play that into consideration as well.
Because the bridge lenders are always like, "all right, man, it's three, one on one, three-year fix, and then two, one-year extensions. All right, what would prevent you from giving me a one-year extension? We always give you an extension." Now, all of a sudden, you're in year three and you're in a terrible economy. That's when they say, "no, we're not going to extend it. We're just going to take your property if you can't come up with the extra equity."
Ben: And I agree with you, but I'll also take the other side of the argument and say, why is it taking you three years to actually, get your business plan too, right? We've had a bridge deal. We're getting in and out in 18 months. We have three years just in case something crazy happens, but it shouldn't take an additional 12 months to flip out of it. They give you three years because really, you should have enough time to get in there and do what you need to do.
Darin: That's a good point. That's a good point if you get it done.
Be Wise When Considering Exit Tests
Ben: You have to read the fine language down at the bottom. Because there will be exit tests and stuff that they'll pull onto you where they say, "well, you didn't meet your exit test so, therefore, we're not going to grant you an extension. Or if we do, it's going to cost you an insane amount of money to do it."
Take that into consideration. Where there are risks on both sides, and I don't say that people think that permanent debt is risk-free. I say that's a fallacy because that doesn't allow you to have multiple exit strategies.
Darin: Yes, your flexibility gets taken away from you, for sure.
Ben: And in my book, that's a risk, too. Because if I have some guy that comes along is like, "I'll give you a $100,000 a door to buy your property and I bought it at 60. But guess what, 30%, 40%, 50% of my profit just gets nuked by a prepayment penalty. I'm going to think twice about selling it. And then maybe the next year's asset values go down. Now, I've missed out on the opportunity to sell it to this guy. And even if I want to sell it too now, they will only buy it for 80. That's a risk.
Darin: And talking about the floater fixed, I mean, that's a big advantage right now, that everybody's talking about with the floater so, we'll see, if rates jump at some point.
Ben: And it will all inevitably happen. Everybody's complaining about fixed, permanent debt now and why didn't we know about this floater before? In five years, the interest rates probably would've crept up and they're going to say "why did somebody try to sell me this floater?"
Talk About Fear Before Triumph
Darin: Talk about fear, talk about a time when you were scared and you pushed through and made a decision to move forward anyway?
Ben: We had some fear this year too. I think a lot of people did, right? Into March, going into April, the world was collapsing, people were going on lockdown, I didn't know what to think. But I think everybody felt that too. I'll give you one that was personal to me. Hurricane Harvey blew in, and you'd heard this story, this is the one that you'd heard at the meetup.
I had a property in Beaumont. Beaumont is 90 miles east of Houston for people that are listening. It's a blue-collar community, I think. There are 450 000 people in the MSA so it's not huge but good working folks. And it was a great little property, 92 units. We had just gotten done with our value add, our capex plan, they had put about 600k into the property, been sitting on it for three months, paying out distributions, it was a great little deal. And then Hurricane Harvey hits in August of 2017, I think.
And it flooded the property. It was a 92 unit property, and we took 33 units offline because they were destroyed. Now, luckily, we had flood insurance, but at the time, this is what happens. I'm here in Houston. Houston also got nailed by Harvey. My parent's home had flooded. And my house had been flooded. My best friend's house had flooded and then I got a text from my property manager. And by the way, your property is flooded. You could imagine, it was like getting kicked in the pants I almost collapsed. I didn't know what to do.
Hurricane Harvey Aftermath
Darin: Was that your first property? The Beaumont property?
Ben: That was my first deal. I didn't know what to do. Of course, I called my business partner who was obviously a little bit more in tune. He's like, "We got to get an insurance claim in. Everybody and their mom are going to be getting it. We got to move fast, got to move fast." And to this day, I'll thank him for doing that.
I call up our insurance broker, who's our friend and business partner to this day, his name is Dan with Strategic Insurance Group. This guy jumped into the fire for me. I was like, "Dan, I have all these things. My world is collapsing. Help me, please." And you can't do this with your Allstate agent. He doesn't care. This guy actually, cared. He was on the phone for eight hours, with FEMA, setting up all of our claims and getting all the inspectors lined up and essentially put everything on a silver platter for me. To this day, I'll be forever grateful because at that point my world was falling apart. I didn't know what to do and I thought I was going to lose everything.
Because, if we didn't have flood insurance on that deal, I would not be here talking to you right now. I would've lost everything in that flood.
Darin: Have you done all your other deals with Dan?
Ben: Yes. I won't do it with another. Not only is he the best in the business, but at this point, I would say, he saved me. There were people that up until probably last year were still doing the rehab from Harvey.
The Significance of Insurance
Ben: These are people that either didn't get their claim in or didn't have flood insurance and he was the one who talked. We didn't have to have flood insurance on this deal. Yes, it was in Beaumont. It was close to the coast but it wasn't in a floodplain and that's what people that are outside of Houston and Beaumont and the areas that got hit. Like, why didn't everybody have flood insurance? Not everywhere down here is a flood zone and so why would you pay for insurance that's not needed, right?
Darin: Then why did you?
Ben: Because Dan talked me into it and it was on a 92 unit property with an $8000 expense. And it paid out two million dollars on an $8000 expense. To this day, I'm forever grateful for him but at the end of the day, that could've gone wildly wrong. And it was still one of those things that, yes, he went through the claim process, but then you have to solicit bids from general contractors. You had to go through the whole FEMA process. You're dealing with the government folks. It was horrible.
But we got those claims in so quickly ahead of a lot of other people that we were remediating. Beginning of September, we were remediating within a week just because we had good general contractor contacts and he was just floating to us. We got our first payment by September, and we were updating the property by October, and we were fully leased up by March.
And then, obviously, looking at it in hindsight, there are people, like I said, up until last year, and they're probably might even be people right now that are still updating the property from Harvey.
Focus to Overcome Tragedy and Achieve Triumph
Ben: We got it done in six months so I feel very grateful. That could've turned out a lot worse but that was probably what I was scared of the most in this business because you just didn't know what to do. I had no idea what I was doing.
Darin: Wow, thanks, you had somebody.
Ben: I had a couple of people that knew what to do. They say "hey, we're going to get through this. This is what we got to do." And they guided me down that path, and I'll be forever grateful for them.
Darin: How bad was your home? I saw some homes in Harvey, where it was up to 6 feet high.
Ben: Yes, we had eight feet. We lost everything. It was a bad experience, I'm telling you. And it's a longer story than this. I wrote a chapter in a book about it. It was a very bad time in my life.
Darin: Dude, every time I've seen you, you're like this upbeat, happy-go-lucky kind of guy.
Ben: I'm just happy to be living because it could've been a lot worse for me that day.
Darin: Because of that experience, it could push you into depression. Some people, they get all the cards dealt against them and you can go retreat and run into a hole but instead, one, you had some people to help you out, and two, it sounds like you just focused on what actions you could take that was positive.
Ben: Yes, and you have to compartmentalize a little bit too. Because there are just so many things that are happening, and if you let one thing distract you, you're just going to lose focus.
The Power of Ecosystem
Ben: Luckily, you have to have the right team. And I'll drill that in, if anybody is listening, and they take anything away, they have the right team. This is a team sport. And that team doesn't necessarily mean employees that you have, that could just be your partners, that could be the vendors that you use. Surround yourself with winners that know what they're doing and have experience in this market because so many bad things can happen. You have to mitigate that risk in every possible way.
Darin: I'll talk about that. Take that to another level, is when I first got into the business. I joined a multifamily mentorship group. I'm still part of that group and some people have contacted me on Instagram and say, "hey, Darin, did you find value in that?" And I'm like, the biggest value that I gained was the network. I met so many great people, and those people told me who I use for property management, here's who I use for an attorney, here's who I use for rehab.
Ben: The power of the ecosystem, right?
Darin: Yes. And then those partners, they have skin in the game because it's not just your deal. If I was calling as a one-off then all right, if they fail Darin's deal, well what's going to blowback on us? But if we know that he's networked with all these other people, we know he's going to talk to all those people so we want him to say good things about us.
Ben: Absolutely. It's a niche community as it is. Even amongst us owners and syndicators, everybody knows everybody. And everybody's had their challenges. There's nobody that's going to be a rock star at every single deal.
The Ultimate Conference
Ben: But vendors, definitely, and we were a part of the same group. We won't name any names but I'm sure maybe your listeners might know. That's where I got my start too. Your investors, you need potential vendors, and you're asking for referrals and as a passive investor, that's important too. That's where you can build up your database of potential syndicators. And get on people's emails. I see value in the ecosystem for sure.
Darin: Absolutely. Talking about that, let's segway. You guys are actually putting on a conference in Houston. Talk about that conference. When is it? What's it called? And what's the goal of the conference? Who should go?
Ben: This will be the fourth one that we did. We had to cancel the last two. We're going to be in San Francisco and Boston. This last year, we had the last one in Houston, the beginning of this year, February. And we're going to have the next one in Houston on February 27th at the Westin City Center which is right up the road from us. Check us out, mfinvestornetwork.com.
The point of the conference is not to sell anything. We're an anti-sell conference. We're not up there to pitch you any kind of training, or mentoring, or sell you a product, or service. We have vendors and their sponsors and they'll do their two-minute pitch and then they'll have their booths in the back. You can talk to them about their products, and services and all of them are great. But what we're there to do is to provide value through education and networking. Get people up there on panels that could tell real-world stories of how this stuff is getting done.
Mayor Sylvester Turner Is at the Conference Too!
Ben: From syndicators to brokers to how do you do 1031s, how do you use your IRA to invest in syndications to if I want to use a Title company, who do I use? Legal. All of those things are going to be there and it's a one-day event and we're big on networking so we try to include a lot of opportunities that people can mingle, and get to know each other.
We're going to be COVID safe. You'll be provided masks, you're socially distanced but we got back out there. Once again it's not so we could sell anything to you, we just want to get back to some kind of normalcy in the market and allow people to get back to business.
We're going to try to give it a shot, February 27th, check us out. Try the coupon code, DISRUPT, you should be able to get something off at check-out there. But yes, we'd love to have everybody come out there. We had 400 people there this February, and we also had the mayor of Houston in the talks, Mr. Sylvester Turner. We were pretty proud that he graced us with his presence. I got a picture with him, I got to chat with him a little bit.
Darin: That's awesome. I was not able to make it to the one in 2020 but I hope to make it to 2021. But I've talked to a lot of people that went. It was just a breath of fresh air because they said, just to your point, that it didn't feel like a sales pitch, that they came, and met a lot of great people. And they saw a lot of familiar faces and they met a lot of new faces.
Abundance Mindset Is a Way to Triumph
Darin: You didn't say this, but I think you're giving value to other people by bringing people together. And then if people have a positive experience, they're going to remember, "Ben, and Feras helped me out. They helped me connect with other people in the business.” And it's going to cement you guys in their mind as being strong players and people that they value.
Ben: And we do. It's not just a pitch. We do have an abundance mindset. I feel like there are enough deals, there's enough money out there, that we can all coexist and have fun and make some money and provide for our families. I'll open it up, and we have a lot of other syndicators that come there. This is because they know that there's a lot of passive investors that come. Some people would cringe at that, but I say, why not? Because some of those other syndicators, they end up being my partners on deals too.
It's not this thing where we have to keep everything close to the chest. Let's all grow together. It's Multifamily Investor Network, is the name of it. But that was the reason why me and Feras and Kenny Wolfe, who's our JV partner on it, put it together because that was a little bit different in the market. And it's a loss later for us, we don't make any money on it, because we're not selling anything.
Darin: The two websites they can go to to learn more about that. Can you repeat them?
Ben: Yes, go to mfinvestornetwork.com. Check us out there, we're still lining up some speakers. We'll have Mr. Neal Bawa back out there. We're getting some other great people lined up and we're still trying to get the mayor.
Ben Outside Real Estate
Ben: And we'll have some good panelists too. I think people like the panelists because it's real-world people that are doing things. You can ask questions. We always have a Q and A session. We're still flushing that out a little bit right now, but check us out. Keep updated, we have a Facebook page too if they want to check it out.
Darin: I was going to ask you, what's your big stretch goal but you already said it earlier on. I mean, 2021, is going to be a huge year, 2000 units so, that's huge. What do you do outside of business for fun?
Ben: I like to play golf, I like to fish, I like to hang out with my daughter. Pre-COVID, I like to go to the occasional concert. I love baseball, I love football, I love going and doing those things that have been put on hold. But I'm hoping next year, we can get back to doing that because we enjoy that as well.
Darin: Golf. I'm 85/95.
Ben: That's where I think I'm at too. I'm not Tiger Woods, by any means. I do like to get out there. And I like to have a good time, drink a couple of beers. That and fishing is my way where I can combine fun and be out in the open air and get out of the office a little bit, and be amongst the guys.
Darin: Awesome. Well, Ben, I appreciate you coming on, if people want to reach out to you, what's the best way for them to connect with you?
Ben: Via email is probably the best one. email@example.com is the best way to get in touch with me. And then you can check us out at www.disruptequity.com, as well, on our website.