Multi Family Real Estate Investing

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Hey, it’s Mike Hambright, welcome back for another FlipNerd V.I.P. interview show. Today I have with me Ryan Heddleston who is a V.P. of Brokerage Services for M.B.P. Capital. It’s a multi family brokerage and property management firm that operates in a couple of different states. We’re going to talk about multi-family investing and how he got started and maybe some tips on how you can invest in multi-family if you’re interested. Before we get started today, let’s take a moment to recognize our featured sponsors.

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Hey, Ryan welcome to the show.

Ryan Heddleston: Hey, Mike. Thanks for having me.

Mike Hambright: Yeah, yeah, glad you’re on. So, for those that don’t know, we run in some of the same circles. We used to see each other much more often than we do now but we really haven’t talked together in a while and in fact, I think mostly the circles we ran in were more in the single family space before you converted over to multi-family. Why don’t you introduce yourself and tell us a little bit about your background and what you’re doing now?

Ryan Heddleston: Yeah, sure. I grew up in Pittsburgh, Pennsylvania, started in real estate investing there doing one to ten unit buildings in inner city Pittsburgh, and really learned the hard knocks way of real estate investing, buying these older buildings, rehabbing them, putting in Section 8 tenants and building my portfolio that way. I moved to Dallas about eight years ago, my wife is from the area so she brought me down here, which was a fortunate thing. Started doing the same thing, buying single family, got up to about 50 units between Dallas and Pittsburgh and then about five or six years ago determined that I wanted to move up into the bigger properties, managing a bunch of single family houses and stuff that was scattered all over the place was something I could do but it was hard to do well and I figured there was a much more efficient way of having a rental portfolio and so that’s why I made the transition.

Mike Hambright: Okay. Yes, there’s a lot of folks, we’ll talk a bit about starting with single family and moving into multi-family which a lot of folks, I think, follow that same path.

Ryan Heddleston: Yes, it’s been great. I definitely wish I did it earlier to be honest.

Mike Hambright: So, tell us a little bit about, you were doing this on your own, I think on your own, and then you found your way to M.B.P. Capital. Why don’t you tell us a little bit about that and then tell us more about M.B.P. Capital?

Ryan. Sure, well, M.B.P. was started by Mike Phillips, that’s his initials. We partnered up about three or four years ago and collectively we’ve done over 170 transactions, over a million dollars, like I said, B and C working class properties in B.F.W. and Denver. Denver is where our corporate headquarters is located and now we’re a third party management business, is just under 3,000 units.

Mike Hambright: Okay. And so talk a little bit about, because I think about it myself, and all my rental properties are single family and I’m fortunate to have a great property manager so I don’t really have to do much but things happen. I had a fire a couple of weeks back that I’m dealing with now, things happen. You can never get totally passive, not with single family. But talk a little bit about some of the pros and cons of single family rentals versus multi-family.

Ryan Heddleston: Sure. And they’re both great businesses, it’s really a matter of how you operate those businesses and how effective you are in it. But from my perspective on the multi-family side especially something that is 100 units or greater, you are able to have a dedicated staff. Full time manager, full time maintenance person and they are really more of a self sustaining businesses. Whereas the single family, you have to have a remote staff that travels around and logistically can be challenging.

You also have economies of scale, you’ve got one or a couple of roofs depending on how many buildings you have on the site, as opposed to if you have 50 single family houses you’ve got 50 roofs.

Buying power, when you’re doing rehabs. The ability to buy a hundred shower curtain rods or something along those lines, flooring, appliances, you just have a lot more ability to push that price down because of that. And we’re doing about six million dollars of capital expenditure projects right now and being able to use that to get greater and greater pricing power.

And the biggest thing for me, and really the reason why I made the transition, is the ability to increase value of the properties beyond just what you do from a physical standpoint to the building. Rehabbing houses, you are able to obviously to rebuild the whole house, put in flooring and make it great but the value of that house is really limited to what the house next door is worth as well. Whereas on the multi-family side, it’s really a function of what the cash flow is, the net operating income and how you can creatively increase that net operating income to increase the value, and the ability to do that is exponential.

Mike Hambright: Yeah, so things like improving vacancy rates and raising rents, there’s a lot more leverage you can pull to add value.

Ryan Heddleston: Absolutely, there’s so many different ways. We just took over the management of a property in Farmers Branch, it was 255 units. The property was mismanaged, payroll was way too high, the rental rates were low, occupancy was good but the real big thing that was being lost was the property across the street that we manage was billing back for water, sewer, trash and pests so all of those things weren’t being captured so there’s a huge opportunity to shed those costs, bill back those things to the residents and pretty significantly increase the net operating income, and by extension the value.

Mike Hambright: Right, right, of course not that every seller thinks this way but even for a multi-family, they are selling at a multiple of their net operating income, right? So if the property is not performing well they are limited by what they could even sell it for. They could be in denial and say I want to sell it for two times that but it’s pretty clear what the typical going rate is based on a multiple of their net operating income, right?

Ryan Heddleston: Yes. Absolutely and that’s the real fun part for us, is finding those ways to increase the value that the current ownership isn’t taking advantage of. Management is a tough business, especially in the B and C housing and there’s a lot of people that do it but there’s not that many that do it well and so being able to take advantage of those inefficiencies and then take it over and increase the revenue, decrease the expenses. That’s the real fun part.

Mike Hambright: Talk a little bit about having on-site management at a property because I’m sure recruiting anybody for any job is always a challenge but it’s one of those things where, and by focusing on few geographies I’m sure this makes it easier for you. But I face this in my business, as a small business I can’t afford to have redundancy, if somebody leaves or is sick or whatever, I may not have a back up to that role and I just have to deal with it. But talk a little bit about the challenges of finding on-site managers, how you find them and how hard it is to overcome issues when that person leaves or you want them to leave.

Ryan Heddleston: Properly staffing, especially for that workforce housing can be challenging. I think as a company we’re cultivating a staff that really cares about what they are doing, takes pride in the properties. We also incentivize our managers with bonuses based on net operating income, based on collections, based on occupancy. So we try to get them to buy into what we’re doing and what the ownership’s goal is and that’s one of the things that we’ve found has worked really well. The other thing is the managers that we have on our properties all have to speak Spanish, regardless if it’s the profile of the tenant basis is Spanish speaking or not because typically the maintenance staff are Spanish speaking, at least in the D.F.W. area.

Mike Hambright: So these on-site managers, are they actually living on the property as well or are they just there during typical business hours?

Ryan Heddleston: No, sometimes they do live there but it’s definitely not a requirement. It’s nice to have on-site maintenance live there in case of an emergency but we have enough communities where there’s always overlap and really we prefer them not live on-site, the managers. Just because we don’t want them getting too friendly with the staff and making sure that they understand that they work for us, they work for the owner and need to collect the money on the first because they are going to be aggressively collecting it if they don’t make it during those first couple of days of the month.

Mike Hambright: And talk about, so you don’t want them throwing parties with the residents and stuff like that? Come over to the manager’s apartment, he’s throwing a Super Bowl party tonight?

Ryan Heddleston: You know, we want them to be jovial but they’re running a business. They’re in charge of whatever community that they’re the manager of and one of the things that you have to be in these communities is consistent. And tough, especially paying rent on time, in full. We have a very stringent collections policy. The rent is due on the first, it’s late on the fourth. On the fourth we post a three day notice to vacate. If the resident doesn’t come in to pay in full or enter into a payment plan we’re filing eviction on the eighth. And you have to be that way and if you are lenient and the word gets around then you’re manager’s spending more time collecting money than they are doing the other functions that they need to be doing on a regular basis, marketing and you know.

Mike Hambright: It’s tough, I mean my rentals are generally in the C and B class, mostly I’ve gravitated more towards C’s but it’s unfortunate. You give somebody a little bit of leniency and unfortunately they start taking advantage of that. You give them an inch and they need a foot the next time. It’s interesting. I’m waiting on my inheritance. It’s like okay, well.

Ryan Heddleston: If I had a penny for every excuse when I wasn’t paid.

Mike Hambright: As a landlord, you always have a lot of stories to share with people for sure.

Ryan Heddleston: Absolutely, absolutely.

Mike Hambright: Talk about some of the technology you guys use. Technology has just changed the real estate investing space over the last few years in a lot of ways and it’s almost scary to think of where it could be in five or ten years. In terms specifically of collecting payments, maintenance requests, all those things, talk a little bit about what you guys are doing or what you aspire to do if you are in the process of improving there.

Ryan Heddleston: Sure. We spent a lot of time figuring out which property management solution we were going to use. The one that we ended up choosing has been great and it has allowed us to really streamline a bunch of our processes and really be efficient. For example, any of our residents at any of our properties are able to go into their resident portal, make payments online, request repairs that kind of thing, they can see their lease, know when it expires and so on. A lot of people have that, but one thing that we also have is a 24 hour call center.

So if our manager is out on property showing a unit to a prospective tenant, somebody calls they don’t get a busy signal, they don’t get a voicemail, they always get a live person. So that person at the call center who gets the call, they can tell that resident, because they see all the same information that the manager does, which units are available how much they lease for, what is the security deposit, what are the screening criteria, how much is the application fee, all those things and take all of their information, direct them to the web page where they can actually fill out an application online and if they are accepted, they can fill out a lease on line. But they can take that person’s information, put it into the system, the second that the manager gets back to their desk that person that called in, all of their information is there and that manager can follow up with them to make an appointment, to get them on-site which is really the most important thing.

Mike Hambright: Okay.

Ryan Heddleston: Because your conversion rate increases dramatically when you actually get the prospective tenant on property.

Mike Hambright: And from a business standpoint, is that in-house or you out-source that to some sort of call center?

Ryan Heddleston: It runs through our software, it’s called Property Solutions. It’s all part of the integrated system.

Mike. I understand, okay, cool. So what would you say to folks that are, you’ve got two different kinds of folks, you have folks that maybe have some rental properties in the single family space and like you they’re saying, “Well I could probably get some economies of scale.” or “I can maybe apply capital at a much faster rate”. Clearly the challenge with single family homes, if you have a lot of money to invest, if you really want to get after it, it’s hard to go buy a portfolio of houses, I mean you have to do them one at a time, which is the way I’ve done it and it’s a grind, I mean I understand. So that’s another reason why a lot of folks buy bigger properties, because they can apply a lot of capital quickly. So, you’ve got folks that have a few houses and they aspire to get bigger, maybe some advice for those folks as well as people that maybe have a lot of capital to deploy and want to just go straight into multi-family whether they’ve ever owned any rental properties at all.

Ryan Heddleston: Sure, sure.

Mike Hambright: And then maybe mix in a little bit about how they would work with you and M.B.P. Capital.

Ryan Heddleston: Sure, it’s definitely in this space something where you, to be an active player or to be a majority owner of a deal, you do have to have significant net worth and liquidity, money to put down into a deal. You’re going to be looking at anything between, especially starting out, 25% to 30% down and then on top of that, whoever the lender is that’s going to be giving the money to buy the property, they want to make sure that there’s what’s called post equity liquidity.

So if someone has $500,000 to put down on a multi-family property they’re not just going to allow that person to put the entire, if they wanted to, put that entire amount of money down and have nothing left over because what the banks have learned is that if you have depleted all of your capital into the property and something goes wrong, you’re usually not going to be able to be successful and handing the keys back to them, which is not what they want. So the big thing is liquidity, how much cash you have. On the financing end it’s so much more important and so much more focused on than on the residential side. So, that’s kind of from the finance perspective that’s really the big difference.

Mike Hambright: And for folks that don’t have a lot, maybe don’t have a lot of capital for several hundred units at a time but they want to be part of a syndicate, I know people pool their funds together and they could have, I don’t know how large some of the syndicates could even be, maybe you could share that but how they find out about how they could become part of a bigger investment and they just own a smaller piece of it.

Ryan Heddleston: Sure. We’ve put together syndications of 10 to 12 people, we really don’t try to get any larger than that because it just gets logistically challenging and we typically focus more on higher net worth people and smaller groups. But being able to network with other people in those circles and join in to deals is something that we’ve definitely done but we really do focus on a smaller group of individuals that know each other, families, investment groups that put these deals together.

Mike Hambright: And would you say right now, what’s the challenge is it finding capital and investors to invest? Or my guess it’s going to be the latter here which is finding good deals, which is always the case in real estate investing. But talk a little bit about what’s going on over the past few years and the challenge with finding deals.

Ryan Heddleston: Sure. You’re absolutely right. There’s a lot of capital out there, there’s a lot of people looking for the deals and the deals are the hardest thing to come by. Access to the deals, and really the difference is knowing how to do the analysis, knowing where to find the upside in the particular deals. The example that I talked about earlier, billing the residents back for water and sewer, that’s a huge thing that you need to be able to look at a deal and know how to capture it. Being out there actively in the market, like we are, having relationships with the brokers which in the multi-family world, the larger properties, it’s really a small circle of guys that are doing the majority of the listings. So having those relationships is something that we have and just being active in the market, and also we’re out there looking for off market deals for our clients, talking directly with sellers.

Mike Hambright: Again, I don’t invest in multi-family, I’m very interested and intrigued by it.

Ryan Heddleston: We’re going to have change that, Mike!

Mike Hambright: I know, maybe we do because one at a time is getting tough. I believe a few years back, it was much more likely that people were picking up deals from hedge funds, people that were buying massive portfolios of single family, multi-family, commercial properties all sorts of stuff and people were able to buy from huge private equity funds or hedge funds that were just scooping up tons of stuff that they didn’t even really know what was in it until they started to pick it apart. Is that still going on or are you having to buy pretty much more directly from direct sellers at this point?

Ryan Heddleston: It’s competitive out there but there’s still good deals. The REITs and the institutional buyers are really buying the A products or the B+ products, the stuff that we typically don’t focus on because the returns aren’t there but the B and C, the 1960 to 1990 construction properties there are still good opportunities out there. It’s definitely more competitive, CAP rates have compressed significantly over the last few years but it’s knowing how to analyze the deals and knowing the opportunities that’s the big caveat.

Mike Hambright: Where do you see things going from that regard over the next few years?

Ryan Heddleston: At least in Dallas, Fort Worth as you know the population growth, the local economy, the outside demand specifically from California, at least in the multi-family side. There’s substantial growth that’s happening here and the market is hot but it hasn’t reached a point where people are buying things and lenders are lending money on deals that don’t make sense. They’re basing it on proformas that are unrealistic which was the problem years ago, things were getting a little out of control on the lending side.

Mike Hambright: Right. So you’re saying it’s not quite there yet. That’s when I want to come back, when it gets out of hand and then it’s time to come in and scoop it up.

Ryan Heddleston: Sure, sure, yeah. Understanding the market cycle is key too. There’s still good opportunities out there but it’s not all from a macro level. It’s really being able to find those opportunities, find where those inefficiencies are and take advantage of them and increase the net operating income and by extension the value.

Mike Hambright: So, we’ve been seeing a lot of pressure in the single family side, really in markets all across the country, from, I mean it’s a number of reasons, but obviously the hedge funds have had a bit impact. Do you see them playing much in the multi-family space?

Ryan Heddleston: A little not as much as you might imagine, I can’t exactly tell you why that is. There’s more of a demand from small investment groups and family offices than I think for the assets that we’re acquiring.

Mike Hambright: What’s odd is that, anybody that has watched what the hedge funds are doing, they typically say that the biggest miss they made was their inability to manage properties as rentals, all across the country and the challenge is there’s really very few national property managers. You kind of have to find somebody new in every market. Even some of the bigger property management companies in town, in any town are husband and wife teams, maybe they’ve managed several hundred or even a thousand units but they’re ultimately a lot of risk in the fact that all their eggs are in one basket with a family that’s running it or something. And arguably multi-family would be so much easier to manage as a rental property, it’s easier to scale and things like that, so it seems a little odd that they wouldn’t play more in that space.

Ryan Heddleston: I think you and I knew, once the hedge funds really started getting involved in the single family stuff that that was always problematic and how do you efficiently manage a big portfolio that’s scattered all over the place? So it’s no surprise that there’s been some issues there. But it goes back to having the units all in one place, offering it just as a mini business with a staff that’s on site.

Mike Hambright: Well if folks want to get ahold of you, Ryan, or want to get ahold of M.B.P. Capital and they’re interesting in learning more to invest why don’t you tell everyone how to do that?

Ryan Heddleston: Sure, sure. You can go to mbpcapital.com you can email me directly at [email protected]. I’d love to help people go from single family investing into multi-family and in taking advantage of what it has to offer.

Mike Hambright: Awesome, awesome. Well Ryan, thanks for your time today appreciate you joining.

Ryan Heddleston: All right, thank you Mike.

Mike Hambright: Okay, good to talk to you.

Ryan Heddleston: Bye.

Mike Hambright: Bye. Thanks for joining us on today’s FlipNerd.com’s podcast. To listen to more of our shows and hear from incredible guests please access all of our podcasts in the iTunes store. You can also watch the video versions of our shows by visiting us at FlipNerd.com.