Multi-Family Investing

Mike: Welcome to the FlipNerd.com podcast. This is your host, Mike Hambright and on this show I will introduce you to VIPs in the real estate investing industry as well as other interesting entrepreneurs whose stories and experiences can help you take your business to the next level. We have three new shows each week which are available in the iTunes store or by visiting FlipNerd.com. So without further ado, let’s get started.
Hey, it’s Mike Hambright with the FlipNerd VIP show. Today, I’m joined by Brad Sumrok who is a successful multi-family apartment investor and he teaches and mentors others how to replace their jobs with income from apartment investing. Brad’s a great guy; he’s got a lot of good information to share. Before we get though, let’s take a moment to recognize our featured sponsors.

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Mike: Hey Brad, thanks for being on the show.

Brad: Hey, I’m glad to be here.

Mike: Yeah, good to see you again.

Brad: Excited.

Mike: Good to see you again.

Brad: Good seeing you.

Mike: Yeah, so for those that don’t know, we primarily operate in the same markets. We’re both in the Dallas/Ft. Worth area and so we run in a lot of the same circles and have been talking about having Brad on the show for a while, so I’m glad you’re here.

Brad: I’m glad to be here too.

Mike: Yeah, good, good. Well, you have a really interesting story. There’s a lot of folks that I know that are in multi-family. Pretty much, I would say, almost everybody I know in multi- family started in single-family investing and had a lot of experience with that and just wanted to take it to another level, and they got into multi-family.
And I know there’s this kind of myth, there’s probably a bunch of myths that you’ll dispel today, but one of which is that you have to start in single-family or that you’re better off if you do or whatever. I know you would disagree with that, but I guess in the context of sharing some of that information, why don’t you share your background and introduce yourself.

Brad: Yeah, exactly. So, glad to be here, Brad Sumrok, multi-family investor. I’m a principal in over 1400 apartment units that I’ve done over about ten years.

Mike: That’s great.

Brad: Well, 11 years. I started in 2003. 2012, I was awarded the National Apartment Association Owner of the Year.

Mike: Wow.

Brad: And that was a very exciting honor.

Mike: Sure.

Brad: I started as, like you said, as a multi-family investor and it is a myth that you have to start in single family. My very first investment ever was in 2003 and it was the 32-unit apartment complex.

Mike: Okay. And I guess, why did you decide to go right into multi- family? A lot of folks are starting with some restriction whether it’s their time or money and they tend to think “I’ll get a cheapo rental house and kind of sit my tale in the water,” and you dove right into a complex.

Brad: Yeah, so what I teach now is there are three reasons why that are very clear. And one is cash flow, the other is capital gains, and the other is leverage. But back in 2003, I wasn’t able to articulate it that way and the short story is I took a seminar and on day one they talked about single-family rentals. And I thought, “Wow! It would be really cool to go out and do 20 or 30 houses in a year.” And then on day two they talked about multi-family and I thought, “Why would I want to do 20 or 30 houses in a year and look at all of these deals and look at 2,000 deals and make 200 offers and get 20 houses, when I could buy one building with all the units under one roof that has a manager and a maintenance person.”

Mike: Yeah.

Brad: And I had a full-time job. I’m a hands-on investor, don’t get me wrong, but having a full-time job I was able to buy an apartment complex, have immediate economy as a scale, keep my job which I did for three years until I replaced my income from my job with my income from my apartments and that’s how I was able to retire in three years.

Mike: Yeah, that’s awesome. So, a lot of folks, me included, came from the corporate world and for one way or another found our way into real estate investing, but tell us a little bit about your story. What were you doing and how bad was your butt burning to get out of it?

Brad: My story is not rags to riches. I didn’t live under a bridge when I was 17, but my story is what I call rat race to retirement. And that’s actually the name of my weekend training event because it really reflects my personal story. I have 17 years of corporate America. I have an engineering degree and an MBA, and I was taught that studying hard and getting good grades, and having high education, formal education was the path to a happy, successful, secure life.
And after 17 years in the corporate world, the last five years after my MBA, I was laid off once, I was fired one, and I found myself at the age of 35. And truthfully, I was making six figures, but I had no security, I was anxious, and I actually felt desperate because I didn’t know what was next for me.
And so it was actually reading the “Rich Dad Poor Dad” book with the cash flow quadrant where he talks about ESBI, Employee, Self- Employed, Business Owner, Investor, and I realized no one ever taught me this.

Mike: Right.

Brad: If somebody would have told me to become a business owner and investor, maybe I would have done that instead of becoming an engineer.

Mike: Yeah.

Brad: So, it wasn’t until I was 35 that I had that ah-ha moment of my life.

Mike: Yeah, it’s interesting. I’ve talked about this with a number of folks lately is generally the . . . And I have son that’s about to turn seven, so I think a lot about this. But typically speaking, the American education system is very much a factory to prepare you to be an employee for somebody else. Right? Even at the graduate school level.

Brad: Yes.

Mike: Even very much that I have an MBA from a top 20 program as well and there’s very little focus on entrepreneurs or real estate, or franchising restaurants, or small businesses even though that’s where most people work ultimately, I thought.

Brad: Absolutely, I couldn’t agree more.

Mike: Yeah.

Brad: And again, I’m not saying don’t go to college if there’s anyone out there listening . . .

Mike: Sure, sure.

Brad: . . . that’s going to college or parents. My recommendation would be, yeah, get that college degree, but continue learning. The education does not stop. Now that you’ve gotten your college degree and you have a job, now you have to go out and learn how to become independent of that job.

Mike: Yeah.

Brad: And so you need, well, I don’t want to say you need, but I suggest further education to learn about entrepreneurship business owner because to me, retirement is when your investment income covers your living expenses.

Mike: Yeah.

Brad: Or replaces your earned income and then you can truly live life on your own terms.

Mike: Yeah, and even aside from that it sounds like we have some similar experiences where you were downsized or let go, or differ- . . . There’s no such thing as a safe job anymore. And so to not be building some cash flowing assets is a bit of a shame.

Brad: To me, people ask me all the time too, “Hey, isn’t it risky investing in apartments?” And I say, “Well, to me, risk is having a job and depending on my employer for my financial security. So my suggestion is learn the skills, invest in specialized education as opposed to formal education, and learn how to create investment income and business income.” Some people say, “Well, why apartments?” Because obviously, look, you could make money in many different types of real estate investing.

Mike: Sure.

Brad: But with apartments, you could really get the cash flow while you own the property, you have a capital gain component when you exit the property, and you’re able to leverage other people’s money, other people’s time, other people’s experience. And so those are what I call Brad’s three rules to retire early is cash flow, capital gains, and leverage. And multi-family offers that, to me, better than just about any other real estate asset class.

Mike: So talk a little bit about . . . There’s a lot of folks, me included, that are primarily single-family investors. I’m always interested in multi-family because of some of the very same things you’ve said, some scale, ability to apply potentially a lot of money at once instead of buying one house at a time. But talk about your general comparison of why folks should consider that even if they don’t have experience in single-family.

Brad: Okay, so number one multi-family is valued by the income it produces compared to single-family, is valued by comparative market analysis or the comps. So, if you know what you’re doing in apartments, which is what I teach and what I’ve learned to do, you could buy the property and increase the income. So you’re not just waiting for the market to go up or the market to go down which truthfully is how single-family properties are valued.

Mike: Right.

Brad: And so we’re able to go in and actually increase the value by increasing income. And how do you increase income? Well, you could increase the rent. You could increase the occupancy. You could optimize the expenses to be aligned with where they should be.

Mike: Right.

Brad: And so there are all different ways to increase the income. So that gives the investor more control over their future as opposed to just buying a single-family home and trying to time the market. Okay?

Mike: Yeah.

Brad: So, I love that. And then the other thing is, is that multi- family offers immediate economies of scale and actually the bigger you go, the better economies of scale to a point and the easier it gets. So, it’s actually easier to do a 60-unit apartment complex than say a six-plex.

Mike: Sure.

Brad: Because with 60 units, now you have a full-time manager, a full- time maintenance person, and it’s easier to find companies to run those types of properties, and find qualified and full-time staff to do it.

Mike: Absolutely.

Brad: So, it’s easier.

Mike: Yeah. So, I know that it’s a myth that most people assume I’m never going to have the money to go buy a 200-unit building or maybe even close to that. And I know that you participate in a lot of syndications where you teach people how to do syndications where you pool different investors together and they only have to come up with a portion of the investment. Talk a little bit about syndications and why they make sense, and the information you normally share about how to do that.

Brad: Yeah, this is funny because the first time I was already doing apartments before I ever heard of the term syndication. And I was like, what is that? So, a syndication is a complex word for a really simple idea which is group of people putting their money together to buy a property. Okay? So I call it group purchasing because it makes it simpler and that’s really what syndication is.
And so with a group purchase you get a bunch of people together and so if you don’t have the money yourself, you meet other investors that want to put their money into a deal that if done correctly is going to make a double-digit return and double your money in five years or less. And so one or more of those people would be the deal sponsors in the group and those are the people that do all the work, find the deals, evaluate the deals, put the group together, raise the money, oversee the asset once it’s closed, but most of the people in the group are going to be what I call passive investors. And they’re simply looking to put their money into a deal and again, make a nice, i.e., double- digit return on their investment by doing virtually nothing.

Mike: Yeah.

Brad: So, there is a . . . go ahead.

Mike: So, in a syndication, talk a little bit about some of the challenges that could come up with who does what, somebody wants to sell what the others don’t. Just talk a little bit about some of those challenges that may occur in a syndication.

Brad: Yeah, so if you structure it correctly, you could minimize a lot of challenges. Okay? I’ll tell you how we do it is the deal sponsor has day to day control of running the business. Okay? So if we want to paint the doors red, we don’t go to the partners or to the members and vote on what color we want to paint the doors. Okay? There are a few things, a few key things that will require a majority vote, but for me, I don’t recommend even for selling the property, I would structure it so we need a unanimous vote. What if there is 1 person out of 20 that doesn’t want to sell?

Mike: Right.

Brad: And so you structure it so that there are key things, i.e., like selling the property would be one of those key things, but the way I do it is a simple majority is required to sell the property. A simple majority might be required to refinance the property. A simple majority might be required to replace the leadership of the LLC or things like that.

Mike: Yeah.

Brad: Everything else, it’s got to be run by . . . somebody has to have day to day authority up to a certain dollar amount perhaps and maybe that’s another way to structure it, like say, “Hey, anything under a certain dollar amount I can make this decision without having to go to the members. Anything over a certain dollar amount we may need a vote. Okay?” So, I teach that, Mike, in a lot of detail in my training seminars.

Mike: Sure, sure.

Brad: Yeah.

Mike: You’ve been doing this for a long time and there are lots of ups and downs, and I know right now the market is pretty hot in terms of compression of maybe required returns for multi-family. That’s what I hear at least, so it makes sense because there’s just a lot of capital in the market that’s looking for a safe place to invest. So talk a little bit about what’s going on right now and some of the trends that you see coming up over the few years to come.

Brad: Well, a couple things. I could tell you what’s going right now and again, I’ve been doing this 11 years. Someone asked me the other day, “Why multi-family now?” And I said, “I liked the first half. I like everything about the question except the now part, so I’d rather just say why multi-family because if you invest a little bit in your education of multi-family you could make money in an up market and you could make money in a down market.” So right now we’re in an up market which means there’s more money out there chasing deals and on average prices are going higher. What does that mean for me and my students?
Okay, we look at a lot of deals. We don’t make offers on every deal. We don’t get every deal that we make an offer on, but we have our criteria defined and we stick to our guns. Okay? And all I can say is that our criteria is to get a double-digit cash on cash return and double your money in five years. And I have spreadsheets that we could calculate this and as of June 30th we will have closed seven deals this year, and that’s going to be 1,000 some units with millions of dollars of investors’ capital.

Mike: Right.

Brad: So there are a lot of people getting into these deals and this is just me and my program.

Mike: Sure.

Brad: And so we’re out there buying deals and the deals make sense. Now, every deal doesn’t make sense and there’s a lot of deals that we look at that we just don’t move on, so you really want to know the fundamentals. You want to know the foundations of multi-family investing. You want to understand how to properly evaluate if this is a good investment and that’s what I teach.

Mike: Okay, and would you say just comparing what I do on the single- family side, I prefer distressed properties because I am very comfortable at bringing them back to the performing levels, the market levels, what would you say when you evaluate deals? Do you prefer to look for, I say distressed, it could be more opportunity to improve the operations once you can improve cash flow from, do you tend to look for those specifically or do you like to buy stuff that’s just operating perfectly and you’re essentially just buying cash flow or you look at . . .

Brad: Both!

Mike: . . . anything and everything? Yeah.

Brad: Well, okay, so there’s what I look at and there’s what I teach students to look at.

Mike: Sure.

Brad: Because depending on where you are with your experience level, see if you have depending on the property and the buyer, non- recourse financing could be available which means you don’t have personal liability. So, I like to buy deals and you can get that as a first-time buyer, but it’s easier to get when you have a track record. Okay?

Mike: Sure.

Brad: So, my criteria is if the deal will qualify for non-recourse, then I like to set that as a criteria. And so there are certain requirements in terms of income produced and the age and the location of the property. Okay? So, I can’t buy like a complete fixer upper that’s in a complete state of disrepair and get non- recourse financing.

Mike: Right.

Brad: However, I always look for a value-add component because if you remember, I said, “There are the three things that, to me, will enable you to have an early and sustainable retirement, and that’s cash flow while you own the property and the capital gain component and leverage.” So, I’ve gone back to the capital gain side.
Look, I’ve heard, I’ve never owned trailer homes. Okay? But I’ve heard trailer homes are a great investment for cash flow, but from what I also know about trailer homes is they’re not valued by NOI. So, you can’t buy a trailer home park and drive up the value. You buy it as cheap as you can for the cash flow and then your exit strategy is to try to sell it to somebody higher than what you paid for it, but there’s no consistent valuation model. In multi-family, the capital gain is a big component.

Mike: Sure.

Brad: So, I always look for a property that’s producing a current income and has an upside or what I call a value-add component.

Mike: Yeah, yeah.

Brad: Yeah.

Mike: So Brad, I’d be interested to know how you kind of transition from being a real estate investor on your own to teaching what you do. And I’ve done the same thing, but I always like to hear people’s stories as to kind of how that made sense and how they got into that.

Brad: Yeah, it’s real simple, so when I started I had a mentor and that mentor was an organization called Lifestyles Unlimited.

Mike: Yeah.

Brad: The owner of the company walked me through my first deal. Okay? And when I retired from my job, he said, “Hey.” He didn’t hire many people. This was back in 2003 and he was doing all the mentoring himself and now they have a big organization, and a team of people, and a lot of junior mentors. At the time, it was him and maybe one or two other people doing the mentoring.
And so he said, “Hey, would you like to come on and help me out?” So, the long story short is, I became a mentor for Lifestyles and I started there in Houston, and I ultimately moved to Dallas, and I ultimately ran the Dallas multi-family program, since 2008 through 2012. So I’ve been mentoring people, Mike, for like basically since 2005.

Mike: Yeah.

Brad: And then in 2012 I decided to just go out on my own. I decided to build my own dream and do it the way that I wanted to do it, and I have all the respect in the world for Lifestyles and Del Walmsley, but my dream was to create my own personal brand . . .

Mike: Sure.

Brad: . . . and do it my way. And so I’m living my life exactly how I want to be living it.

Mike: Yeah, yeah, that’s great.

Brad: Yeah.

Mike: So, what do you recommend for folks that have an interest that are trying to get started? How do they get out of the gate?

Brad: Well, the first thing I suggest to anyone that wants to invest in real estate or invest in anything for that matter is the first step is invest in your education. We’re so big a society on college degrees and formal education, and we’ve talked about that. It’s almost like nobody even questions should I go to college or not. It’s almost like if you want to be successful, you have to have a degree. Well, why don’t we have the same approach too? If you want to be a successful investor, you should have some basic education. Okay? So that could this interview, it could be a webinar, it could be a two-day weekend intensive training which I offer, it could be an expo, but invest in your education. Okay?

Mike: Yeah.

Brad: And I would say education mitigates risk, so I firmly believe in that. Investigate different real estate asset classes, see which one may work best for you, consider multi-family, and ultimately I would love to have everybody come to my multi- family training class.

Mike: Sure, sure.

Brad: Yeah.

Mike: As a bit of a shameless plug, but I know you actually have one coming up here shortly. So while we’re talking about it, why don’t you tell us how people can learn more and the dates, I guess the details on it.

Brad: Yeah, it’s real simple. I just launched a new website. It’s BradSumrok.com. It’s got all of the information on it. My next intensive apartment training is July 19th and 20th. The next one after that is November 15th and 16th. And you know what? This interview maybe out there on YouTube or whatever for years.

Mike: Yeah.

Brad: You go to BradSumrok.com. It’s going to have all the latest schedules, the event dates. I speak, Mike, all over the country. I’m in Austin, San Antonio, Arlington, Texas, San Jose, Vegas, over the next six months, so if you want to see where I’m at, go to my website.

Mike: Okay, okay, great, thanks Brad. Talk a little bit about how you did this while you still had a job. That’s probably another myth or a concern. People don’t have time. I know there was a time in my life. I had always been interested in real estate investing, had never done anything until about six years ago. But early on, I’d say out of college, didn’t have the money to do it. Then I probably had the money, but I didn’t have the time.
People tend to find some limitations or sometimes they’re very real, but talk a little bit about the demands on somebody that may still be in their job, have an interest in this, and kind of overcoming that obstacle that they think time is the issue.

Brad: Yeah, so the number one message is you can be a multi-family investor part-time. I was a multi-family investor part-time. I had a full-time job for three years and I was able to buy not one, but two apartment complexes. I bought a 32-unit and a 30- unit. My life actually got easier when I bought the second property because now I had 62 units, Mike, and I was able to go out and hire a more professional and full-time manager, and maintenance person. Whereas before, I had a part-time less qualified person on my 32-unit. So, you buy the right size property that is something that, you know, my criteria was 30 minutes away from home or work. That’s not my criteria anymore by the way, but when I first . . .

Mike: Yeah.

Brad: . . . started I believed that to be important. So I just defined my target. I wanted to buy a property that did not require tons of rehab because, look, if you’re being a G.C., then you got to go to the property every day or you’ve got to hire someone to go to the property every day . . .

Mike: Right.

Brad: . . . which cuts into your return. So I bought a nice, clean rehab property that cash flowed and had some upside component which is exactly what I teach.

Mike: Yeah.

Brad: So, by buying the right kind of property I was able to spend initially maybe five hours a week and it turned into five hours a month, truthfully.

Mike: Yeah.

Brad: And so what I tell people is I say, “Hey, look, if you got five to ten hours a week or just say five hours a week, you can do this.” And even now that I have 1400 units, I have professional management companies that have all of their systems in place, accounting software, property management software. I don’t spend more time now. I actually spend the same or less time and I have many more properties.

Mike: Sure, sure.

Brad: Yeah.

Mike: Great. Well, Brad, hey thanks for joining today. I know you’re a busy guy. I definitely appreciate you being on.

Brad: You’re welcome.

Mike: Yeah.

Brad: Yeah, okay.

Mike: Anything else you want to add?

Brad: Well, I just want to say that there is no other asset class that I’ve found and again, I’m sure you could make money in a lot of different types of real estate. There’s no other asset class that I’ve found that provides the cash flow opportunity, the upside opportunity, and the leverage opportunity than apartment investing. So, I encourage the listeners to have another look at it.

Mike: Absolutely, absolutely. Well, thanks Brad. Again, I appreciate your time and I look forward to, I’m sure we’ll cross paths here soon one way or another.

Brad: Yeah, I’ll be looking forward to seeing you.

Mike: All right, have a great day Brad.

Brad: All right.

Mike: All right.
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