As he watched his clients accumulate massive wealth through multifamily investing, Michael Becker used the knowledge he gained from his experience in banking to acquire over 7,000 units and billions in multifamily assets. He details his journey revealing that his turning point came as he was underwriting a large multifamily loan for a bus driver.
INTRO TO MICHAEL BECKER
-From Dallas, TX. Started out as a banker at Wells Fargo lending to all the commercial asset classes. Started to focus on MF commercial.
-Has done about 7,500 units total.
-Currently managing 5,000 assets worth $650M. Has 900 MF in Austin and 500 MF in Tyler.
-Started buying what his company could afford, 1960s – 1970, flat roof, chiller system
-Transitioned to 1980s properties, now does late 90s – 2000s. Favorite part of the market now is a 2004, (A minus class properties), with rental upside, they were built with white appliances, cheaper finishes. You can upgrade these units with higher end finishes and increase the rents.
REIT FUNDS TYPICALLY WON’T INVEST IN PROPERTIES MORE THAN 20 YEARS OLD
-REIT: Real Estate Investment Trust: A company that owns, operates or finances income-producing real estate. These are large institutional investors.
-Over $20M, cut your buyer pool in half, over $25M, you cut your pool by 75%.
-The $20M – $40M range is the “No-Mans” land where the “Mid-Level”
FUNDING SOURCES FOR THE MID-LEVEL MULTIFAMILY
-When you open escrow, you put earnest money in title. On larger investments, you may have $100,000
-Hard Money day one with no contingencies, if you cannot raise the money, the seller keeps your earnest money.
-Pass-Through, from your checking account to title, to the seller’s checking account. If the sale does not close, you must get the money back directly from the seller.
HOW THE MARKET HAS CHANGED: CAP RATES HAVE COMPRESSED
-With CAP rates, you want to buy at a high CAP rate and sell at a low CAP rate. The lower the CAP rate, the more expensive the property. For example, CAP = NOI/PP, or Net operating income divided by purchase price. Rearranging the equation to get the price of the property is
PP = NOI/CAP, or Price = Net Operating Income divided by CAP rate.
EX 1 Low CAP: NOI = $100,000, CAP Rate of 5 (5% or 0.05) = $100,000/0.05 = $2,000,000 Price
EX 2 High CAP: NOI = $100,000, CAP Rate of 10 (10% or 0.10) = $100,000/0.10 = $1,000,000 Price
***The higher the CAP rate, the lower the price. So, using CAP rates, buy high, sell low. This is the opposite of buying stocks, houses and almost anything else, where you buy low and sell high.
A Class: Generally, built within the last 10 years and have high-end finishes.
B Class: Generally, product built within the last 20 years. Exterior and interior amenity package is dated and less than what is offered by properties in the high end of the market.
C Class: Generally, product built within the last 30 years. Limited, dated exterior and interior amenity package
-In 2013, these were the CAP rates for the different multifamily class properties (A, B, C)
|PROPERTY CLASS||2013 CAP RATE||2019 CAP RATE|
DO NOT FUND REHAB THROUGH THE CASH FLOW
-You need to do all the rehab completed upfront to increase occupancy, etc. If you are trying to rent it while it is being redone, it is more difficult, so depending on cash flow to fund the rehab is a bad idea. When you take over a property, you are disrupting the system, so the cash flow typically goes down before it goes up.
MICHAEL’S FIRST DEAL AS A PRINCIPAL
-Apartment building in Garland, TX, 120 units, built in 1974, Flat roof, boiler room (Steam heating system). Paid $3.8M, Rehab budget around $400,000. Got a 10-year Fannie Mae loan. After 2 years, they got a supplemental loan, which is a loan that is attained after you reposition the asset (Increase the value), increasing the rent thereby increasing the income, which increases the value. They will then loan you up to 70% of the new value of the asset. Pulled 1.2 million out, sold for 6.5 million, did a 1031 exchange on a property in Richardson. Came in at 8 CAP and sold at 6.5 CAP, the guy who bought it from him sold it 2 years later for $10.5M
HOW MICHAEL’S BACKGROUND IN BANKING HELPED HIM IN MULTIFAMILY INVESTING
-He underwrote and managed apartment loans. Administered all the draws, he saw what everyone paid for everything, he saw who all the best vendors, management companies. He knew everyone in the industry. When he transitioned, he had a ton of knowledge.
HE TOOK A LOT LESS ON THE PROMOTE THAN ON THE SPONSORSHIP COMPENSATION
-He wanted to get critical mass overnight. Focused on finding quality deals with good potential.
THE FIRST DEAL STRUCTURE
-5% money for 10% ownership, 1% management fee
-He made a loan to Lifestyles Unlimited. One guy was a bus driver who has $30,000 to his name, he partnered with someone and Michael loaned them $1,000,000 to buy a MF unit. He knew that if a bus driver was able to do this, he could.
DESIRE, MOTIVATION AND DRIVE
-Many dream of doing this, but very few people take action. It requires strong desire, motivation, drive and action. Partnering with the right people, the right relationship with vendors. Having knowledge of all the vendors. The management company is key. You need to have good debt and access to capital. You must network and sacrifice your time. Find people with complimentary skill sets. Focus on what you do well and together, you can do exponentially more.
BIGGEST CHALLENGES TO SCALING: THE LARGER THE DEAL, THE LARGER PURSUIT COSTS
-Scaling Capital: The larger the deal, the price to get in goes up. Raising capital for day one is more difficult. You must have the money to front the pursuit costs.
CASE STUDY 1: VILLAS AT LEBLANC PARK
-Built in 1984 – 168 Units, Paid $11M, selling for $18M+
-Changed the name to The Park at Leblanc. They had to spend $20,000 to update the sign, so they changed the name as well. Using a sign that glows at night is popular.
-Replaced the playground with a dog park
-Extended the back yard on the ground units (8-10 feet)**
-Updated the common areas
-Added covered parking
-EVERY $1 TO NOI ADDS $20 TO VALUE
**Notice the extended back yards. This is one of the best ROI investments you can do. Spend about $1,000 to extend the back yard and charge $50 – $75 per month more in rent. The payback is within 2 years. The units with the back yards have lower vacancy rates.
WITH A 5 CAP DEAL, EVERY $1 YOU ADD TO NOI, ADDS $20 TO VALUE
-The majority income increase with these properties comes from increasing the rent
-Improve the management, upgrade the property, then ask for more rent
-Spend $5,000 per unit on upgrades and get $100 more per month in rent. Spending $5,000 per unit can add $20,000 per unit in value. Kitchens, baths. Upgrade things that add wow value. Secret shop nicer properties that charge higher rent. Make yours look like that property on the tightest budget you can.
UPGRADES THAT ADD VALUE
-Upgrade units, covered parking, dog park, charge pet rent
IN SECONDARY MARKETS, WOW FACTOR IS HUGE
-In smaller markets like El Paso, Columbus adding small wow factors is not common, so if you do that in a property, it attracts renters. You must be pet friendly. Charge pet rent based on what is charged in the market.
IN MULTIFAMILY YOU MAY GET MORE RENT BY JUST ASKING FOR IT
-You may get more rent without any upgrades just by asking for it.
QUESTION: DO LENDERS CONSIDER MIXED USE COMMERCIAL/MF MORE OR LESS RISKY?
-If total non-residential income is below 15% +/-, then Fannie Mae and Freddie Mac will lend on it.
QUESTION: HOW MUCH EQUITY CAN YOU TAKE OUT ON THESE VALUE-ADD DEALS?
-It depends on the economics of the deal. Most agencies limit it to 75%. Also have a 1.25% Debt service constraint, which means that your NOI must be125% of the annual P&I payment. Debt service constraint will cause the loan amount to be lowered until the 1.25% is met. Value constraints: 75% of new value.
QUESTION: DO YOU OWN ANY 100% OF ANY MF ASSETS? THOUGHTS ON SOLO VS SYNDICATION?
-Owning 100% is his goal, but not currently.
-Syndication allows quicker, faster, bigger. Bad part is managing all the personalities involved.
DIFFERENT ROUTES FOR FUNDING
HOW IS THE DEALS STRUCTURED?
-80/20 Split, small acquisition fee, small asset management fee. No preferred return.
-Preferred return: Equity gets 8% of money first before the sponsor gets their split.
-Preferred return “Pref” (or “hurdle rate”) is a minimum threshold return that LPs must receive before the GP can receive its carried interest (or “carry”). The preferred return is usually expressed as a percentage return per year, and in private equity that is usually 8% per year
PEOPLE INVEST IN THE SPONSOR, NOT THE DEAL
-It is about relationship. You must come across as credible. You must know what you are talking about.
USING FAMILY OFFICES, YOU MUST USE PREFERRED RETURNS
QUESTION: HAVE YOU BUILT OR BOUGHT NEW COMPLEXES AND WOULD YOU CONSIDER?
-Michael purchased 3 brand new, 2 were on 1031 exchange. Syndicating a new deal was more difficult than the value-add deals.
-Kenny starts his new construction unit tomorrow (Thursday)
IF YOU WANT TO GET INTO THE LARGE MF MARKET
-Get educated, watch, listen, learn, network
-Gain credibility and get to know the brokers. The larger the deals, the more sophisticated the owners. They will likely not respond to a mail out letter.
-Network with the brokers: They attend state of the market events.
-ULI events (Urban Land Institute)
-NAMC Events (National Association of Minority Contractors)??????????????
-Marcus and Millichap Broker Events
1.What is the maximum age multifamily property in which most large real estate investment funds will invest?
2.How have CAP rates changed in the multifamily market since 2013?
3.How should you NOT fund renovations in multifamily?
4.What is one of the best returns on investment improvements you can do to a multifamily property?
5.What are 3 funding sources for large multifamily projects?
6.To enter the large multifamily investing space, who should you network with?
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