Ep #355 – Sarah May – From Aerospace Engineer to Multifamily Syndicator
Here is some of what you will learn:
Creating a business plan for your property
Value add improvements
The value of networking with brokers
RUBS for utility billing
Stress testing properties
Reversion Cap Rate
The value of building a team
Finding your investor DNA
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Full Transcript Below:
Sarah May – From Aerospace Engineer to Multifamily Syndicator (Ep355)
Intro: Hi! I’m Rod Khleif. Each and every week I record an interview with a thought leader that I know you’re gonna get a ton of value from. Now here on YouTube are the video versions of my podcast, Lifetime Cash Flow through Real Estate Investing. Now to make sure you get the latest information please subscribe and hit the notification bell. Let’s get started.
Rod: Welcome to another edition of “How to Build Lifetime Cash Flow through Real Estate Investing”. I’m Rod Khleif and I’m thrilled you’re here. And I know you’re gonna get tremendous value from the young lady we’re interviewing today. Her name is Sarah May and I’m just always so excited when we get a woman on here that’s making things happen in this business. So Sarah was in corporate aerospace. Has left that to be a full-time real estate investor. She now has 300 units as a GP in Colorado and then as a limited partners in another 600 and I’m just closed on a deal in Colorado Springs which I know well have been many times so we’re gonna dig into all of that. Welcome to the show Sarah
Sarah: Thanks Rod. Thanks so much for having me
Rod: Absolutely. Super excited to dig in on how you made this happen and you know and hopefully inspire other women to get into this business more women to get into this exciting business. So let’s start by having you tell my listeners a little bit about you know how you got started, why real estate from aerospace, that’s quite a shift and you know just give us a little more your story
Sarah: Sure. So I actually got interested in real estate way back in college when I was getting that aerospace engineering degree and you know it took me a while to actually go for it but I studied and learn and educate myself on real estate while I was working in Corporate America for about ten years and you know during that time kind of started small and did what I could on my own. So save up the downpayment by a small multi-family usually a two to five unit type size, try to do that a few times a times a year and just scaling organically but slowly. And then
Rod: In Denver? Where were you at the time?
Sarah: In Denver yeah pretty much all our properties. And after doing that for five or six years started thinking of how to make it more of a business you know we’ve had some when I say we I mean me and my husband have had some success on the small scale and wanted to go bigger and so learned about syndication and how to partner with other people who wanted to own real estate to do bigger deals and get better returns and I’ve been doing that as my primary focus for the last three years and you know like Rod said we have 300 units but I actively operate and manage as a syndicator and as well as passive investments. I know how to look at deals from the passive side as well and the great thing about real estate is it is you know a little bit of a flexible schedule. I have two young sons and I’m able to spend quite a bit of time with them too so it’s a great business
Rod: Love it. So did you start passively?
Sarah: I did. I think I was in three passive deals before
Rod: Right and guys that’s not an uncommon path is to start passively. In fact a lot of people start that way for a lot of different reasons you learn the business. It actually goes on your resume’s experience. And it’s a great play, a great way to get kind of some behind-the-scenes training and really see how things work in the business. So you know we talk about that regularly on the show. Now I know I met you in Denver in advance of my Denver event because I did a meet up with Adam Adams out there and got to meet you there and that’s how we met. And so I you know I’ve been pushing to have you on the show and I’m just thrilled that you’re here. So you did this with a family with two sons and you started with small properties what was your first larger deal as a GP?
Sarah: Sure so the first larger deal we did, we bought about a little over two years ago. And there were four GPS on the deal me and my husband are the primary asset managers being boots on the ground, local of the property. It’s a hundred units in Aurora, Colorado and it’s you know kind of fit the formula that we were looking for Class B- 100 units value-adds story management’s you know managing it a little better story and that deals done really really great. We’ve been able to deliver the returns to our investors and as well as see them you know the community improved and it’s been a great deal
Rod: Well crazy hearing about an Aurora property on the show just because I have owned hundreds of properties in Aurora. So anyway talk about the business plan on that specific deal because I know you know guys, like any business you have to create a business plan for your property you have to you know tell a story and you have to you know have a have a reason to take down a property and speak to what you’re gonna do with it so talk about you know the business plan on that one if you don’t mind or you can pick the one you just put under contract if that’s easier for you it doesn’t matter
Sarah: So our business plan with that Aurora deal was primarily focused on renovating and raising rents. So we knew that thirty percent of the units were townhomes and those were just three hundred dollars a unit per month under market. So that was a huge bump to our income that we knew right away we could get and then across the portfolio by renovating you know putting six or seven thousand into each unit we could get eighty to a hundred dollars or you know all hundred units at the property. So on average I think it was around so to say 200 to 250 that we could get with the increase in market rents the increase in renovation as well as just bringing rents up to market and getting rid of the loss to lease at the property. So that was the primary aspect of our business plan was just raising rent to market levels. So we also wanted to do some things to improve the property so we you know got new signs out of the property did some landscaping work and we also want to do some green improvements to cut our energy usage. So that all new LED fixtures exterior and interior and all the unit and we cut our electricity bills
Rod: Did you utilize a green program with Fannie or Freddie or Fannie rather?
Sarah: Just switched it to the more stringent requirements yeah. We didn’t want to invest a bunch of energy
Rod: Okay by the way guys what I’m talking about here is the agency debt you can get you can capitalize on what’s called a green program and if you hit targets in energy savings. You actually get some basis points off your loan which can be a big deal you know I remember there’s a hundred basis points and every one percent in interest. So you know it can be as much as 20 or 30 basis points savings which in a big multi-million dollar loan is a big deal. So but anyway please continue so you made some green improvements
Sarah: Yeah and so you know now over two years later we’ve been able to increase the net operating income of the property. So we’ve raised the rental income. We’ve raised the other income by adding carports and things like that
Rod: You did?
Sarah: We did yeah so that’s you know 30 bucks a month per spot by adding carports and then we’ve been able to manage the expenses of the property pretty well and have you know stayed the same or just have slight one or two percent increases per year. So our net operating income as the property is increased about 23 to 25 percent and a couple years that we’ve owned it and you know what that corresponds to as an increase in value since these large multifamily properties are evaluated based on your net operating income. So all things being equal you know we’ve raised the net operating income by 25 percent, our value of our property should go up 25 percent assuming the same operate at the market as when we bought it
Rod: Right right right. Let me ask you this. Are you using third-party property managers there?
Sarah: Yes we are. We’re using a third-party company and you know they keep property nice and clean they collect the rent deal with delinquency, maintenance issues, everything else. So it’s it’s great to have a third-party manager that’s not one of my strengths so it’s great to pay someone to do a good job there
Rod: Okay I love it so I know that that you just took down a hundred and eighty nine units in Colorado Springs. I’ve stayed at the Broadmoor hotel there been a Pikes Peak many times love it so it’s kind of cool to visualize the area. Tell us about that deal
Sarah: Yeah so that one’s an exciting deal. It was an off-market deal so we were able to
Rod: How’d you find it?
Sarah: It had essentially networking with brokers really was the bottom line. I had coffee with the two listing brokers, who were going to be the listing brokers and just you know told them again what we were looking for and they said they had an opportunity that might be coming up and if you wanna make an offer we can probably give you a property tour. So just went along that route and saw the property submitted an offer that was in the range what the seller would accept and are negotiating from there
Rod: Fantastic fantastic. Now so any nuances about the business plan on that specific deal that could be different or it’s pretty much the same renovate units get rents up and increase the NOI?
Sarah: One thing that’s different about our business plan on that property is they’re not currently having tenants pay the utility bills. A lot of properties you have a RUBS system is what it calls it what they call it a ratio utility billing system that the property management company will put in place. And what that does is it just divides up the property’s utility expense and then bills it to the residents to essentially pay for their share of the utility usage and this new property in Colorado Springs they aren’t currently doing that and they are charging a small flat fee for utilities but it’s really the tenants think of it more as being wrapped up into rent and they don’t even think they’re paying anything for utilities. So by changing over from almost they no utility billing you overtime filling up to a hundred percent or near 100% of the actual expense of the property it’s just going to be a huge driver to net operating income
Rod: Interesting so you know and guys the reason that’s a big deal obviously, maybe it’s not obvious, but if a resident thinks that utilities are included. They don’t care if the window stays open when it’s hot or cold outside. They don’t care if the water stays running. None of that matters. So not only when you bill back are you you know go straight to the bottom line but secondarily if the tenant knows they’re responsible you know they’re gonna be much more conscious of it. Now so there, isn’t going to be all utilities? is it mostly water? is it what are you gonna build back?
Sarah: It’s pretty use master metered for pretty much everything. So it’s going to be water sewer trash electric there’s not much gas but gas will be included. And other thing our property manager recommended that we do is charge what they call a CAM fee or a common area maintenance fee and there’s you know there’s quite a few common spaces there’s a club room and the lobby in the center, indoor pool. And so by charge you’re just the nominal fee I think it’s ten or fifteen dollars a month per unit. Some of those expenses for maintaining those areas get covered as well and so we’ll be adding that in with the bill that the residents get charged each month and so that would be another additional revenue source at the property
Rod: Nice. Now guys with RUBS or any bill back system, you want to be careful if you are the ground breaker in that community with your competitors to institute that program. And I don’t know what the case is for you on this one Sara but if you’re the first one you’re gonna have some vacancy if you’re not then then then the market is already pre-framed to have to pay for utilities. So keep that in mind guys when you’re looking at these. Now is your skillset the analytics or the investor relations or what would you say your superpower is Sarah?
Sarah: You know originally I would say analytics being an engineer. I love the numbers and write put a spreadsheet in front of me and I can have fun for hours sort of deal. But I really love the investor relations too. I mean I go to all kinds of networking events and meet people and hear their stories and you know ultimately one of our missions of our business is to help people owned real estate who otherwise wouldn’t and like being able to give them sort of a hassle-free solution. So you know I like really like both of them but probably the analytical is the one I swing towards a little bit more
Rod: Sure is it just you or there other people on your team? is your husband involved?
Sarah: Yeah so my husband Alex he works with me and in the business you know I’m maybe the primary weight person for a lot of this. But he works part-time, had a nine-to-five job right now
Sarah: So you know usually I’m the one. We’re able to get stuff done
Rod: Sure so how do you feel about where we are in the market cycle right now?
Sarah: You know I get this question a lot and I think my answer is as an investor I just want to take things slow and steady. Nobody really knows if we’re at the peak of the market or if we still have another five years left before things start tapering downward. So for me you know I’m not in a huge rush to collect thousands of doors right now. The deals I do want to do are the ones that are safe and conservative, that have lots of cash flow. So if you know occupancy drops in a recession you can still have adequate cash flow to cover your expenses and your debt payment. So you know I’m still I still consider myself a buyer even in this market but it just has to be the right deal.
Rod: How do you stress test a deal Sarah?
Sarah: you know usually lens on occupancy, you know what’s the total loss that you can withstand each month and cover your expenses. So I like to stress test it that way. Another way is on the reversion cap rate you know right now in Colorado properties are selling at five caps but historically maybe it’s closer to you know a six or seven cap rate. So if I did have to sell at a non-optimal time in the future and wear the cap rates are higher you know how high could the cap rate be and still at least break even or you have a small profit. So those are two ways I stress test deals. The other way you know just anything that I would look at would need to be in a strong market. So the criteria I look at with markets are strong population growth, that people are moving into town they’re not you know walking away; strong job growth so new employers are coming jobs are being created it’s just a sign of a healthy economy; and then the third one is business and landlord friendly so state you know there’s not tons of rent control laws for instance that would be a non landlord friendly state. For me I like lower property tax states although that’s a little bit of a difference but you know landlord and business and business friendly states ideally in a larger metro hundred thousand people or more so feels like that I’d say still so can fit the box even though people are predicting we’re near the top of the market
Rod: Or already crested you know it’s interesting I got real sticker shock when I came down here on the property taxes I was used to Denver property taxes. No my God you know because we have no state income tax here. So it was a real eye-opener for me. Now you know let me ask you this starting out in this career of yours in real estate, did you have any aha moments like
Sarah: Yeah I think the biggest one is just you have to form a team around you and he can’t go at it alone. And I probably learned that call it five years ago when I was self managing all of our smaller rental properties and you know there’s always something when you’re managing properties and we didn’t even have a lot. It was 20 units or so self managing them and I only had a tenant situation where it just was like we cannot personally be involved with this person. We need the hire a property manager the takeover remove ourselves from the equation and then you know eventually get them out of the unit and we did that and it was like such peace of mind and weight off of our shoulders. It was amazing and from then on we just switched all of our properties over to property management and you know just I’d say that specific story just made me realize that I can’t go out of the loan it’s a team sport you know work with good people they’ll make your life easier and it’s more fun along the way
Rod: Yep yep yep. What would you say is the most challenging part of your role in what you’re doing down?
Sarah: Oh to pick one I think it’s just the I don’t know the right expression but in engineering we called it herding cats. So there’s just a lot of moving pieces to everything that you do
Rod: Pushing a rope?
Sarah: Yeah exactly there’s just a lot of details, things to keep track of, people to communicate with and you know what I try to pride myself on communications and being detail-oriented and asset management of things. So there’s just you know whether it’s a rehab project or a finance question or an investor question or need to get out investor reports like there’s always something to do but at the same time that’s almost what I love about it too is that you’re never doing the same thing ten hours a day every day is different and there’s new and exciting challenges to look forward to
Rod: What’s your favorite? You told me the challenging part which is the, you know the extremely high level of details got it, herding cats a great expression. What’s your favorite part? is that the analysis? is it finding a deal?
Sarah: You know the deal that is fun for a while but it does get tiring after a while took us a year to find our last deal. I think my favorite part is just seeing the transformation after you have a deal and then getting to see your business plan played out you know we’ve kind of seen that at our first property and now our second property we’ve only owned it a little over a month I guess almost two months now but we’re already you know doing a full exterior paint, we’re changing policies, we’re making the community more vibrant and holding a 4th of July party and it’s just you know these little things that you can do that make such a difference and give you know the people who live there a little pride in their you know their unit and that they live with the property making it more enjoyable for the people who work there too and then obviously the investors that partner with us doing good job for them as well
Rod: So you own, the fact that you live I mean sure backyard you live in Denver it really speaks to the importance of lifestyle for you because you could certainly do the, I’m in the property management if since you’ve got staff at both of those properties but it’s like you know you don’t want those phone calls that the you know that the problems are happening all the time you let someone else deal with the detail like I totally get it. So if you could go back and tell your 20 year old self something of course that’s just a year but for you of course if you could go back and tell your young self something about this business what might you do differently with what you know now?
Sarah: Well you know the easy answer is buy everything. I would have told myself back then I think I’ve started buying right after the crash that would have been a great time to buy as much real estate as humanly possible but you know that’s the easy answer. I think the other answer would be surround myself with good people. I always was kind of the academic go at it alone you know do everything myself type person and having that realization that you get a lot more done a lot faster when you partner with people you know I would have tried to get my younger self to understand that and find good people to work with
Rod: Good. Solid advice solid advice. So you know I’m sure that you do some mentoring as well because I could just see that in your personality that you know that you recognize you’ve got two hands one to pull yourself up and want to help other people you know underneath you or next to you. What words of wisdom do you typically share with aspiring multifamily investors you know what sorts of things do you tell them? I mean you’ve already shared some of them obviously that this is a team sport there’s no question that this is a team sport. What else what other advice might you give them you know I just want people to know that it’s possible and you don’t have to start with a hundred unit multifamily apartment building to do well in this business you know start with a duplex even live in half of it if you need to but you can start where you are and find creative ways to get your feet wet. Also I think it’s valuable sometimes those early years that I had and the self-managing. It’s painful but you do learn a lot. So you know put yourself out there, try as much as you can, learn as much as you can. And you know the other piece of advice I’d like to give people is find your investor DNA is what I like to call it there’s so many ways that you can get involved in real estate and make money in real estate but ultimately you have to enjoy it too. So figure out one, something that you enjoy doing and then two, something that will make you money the way you need it to be made. So whether that’s if you need money right now maybe you want to be a wholesaler or a house flipper if you want to do more long-term less work investing then you want to be you know buy and hold rentals but you know know your investor DNA look at a lot of different opportunities for how you can make money in real estate and then take one or two and really specialize in those. Learn as much as you can about them and then at that point pull the trigger and take action and you won’t not regret it
Rod: Yeah yeah yeah sound advice. So do you have any quotes hanging on your wall or quotes that’s that jump out at you?
Sarah: You know I think the one I always think of a lot is whether you think you can or you keep thinking you can’t, you’re right. And if you believe in yourself and what you’re capable of there’s really no stopping you you know the real variable is just time and how long it takes you but if you believe you can do it you will do it. So think positively, have a good mindset, and you’ll get there
Rod: Love it I just literally said that quote on our coaching call before we did our call here literally the exact same one I just shared with my team with my coaching clients and we were talking about the importance of learning how to influence, I mean sales bottom line its sales but the importance of learning how to sell yourself and sell in general. And that was ended the whole conversation about you know how to influence and build rapport and how important it is with that quote which is one of my favorites as well love it. Well listen Sarah, I really appreciate you being on the show. You’ve added a lot of value and it’s just so wonderful to see what you’ve done in your career so far you know let me ask you, well I actually let me follow up with a couple last minute last questions here. Tell me about a mistake tell me about you know I hate to call them failures. I call them seminars but tell me about a seminar tell me about something that really kicked your butt and what happened and what you did
Sarah: Well I’ll give one example I think could be a an example for indicators of how to structure their capital raised a little bit. The first deal we did we you know me and my partners spent a lot of time putting together this webinar with all the information on our business and we had the webinar and it was perceived with tons of enthusiasm lots of people wanting to invest it went really well but we didn’t have the subscription documents ready in time and so we were forced people to wait about a week before those documents were ready and in that course of a week you know a lot of other syndicators we had all announced deals. So we you know we lost some of that momentum that we would have had if we had had those documents ready at the time we had the webinar which essentially kicked off our capital race. So that was a learning experience you know you want to do as much work upfront as you can on the capital raise of these deals just makes things go a lot smoother and you’re ready
Rod: Yeah no no that makes sense that makes sense. Well listen Sara thank you so much for being on the show greatly appreciate it. It was my absolute pleasure to meet you in Denver and I’m sure we’ll stay in touch. Good luck and all you do
Sarah: Thanks I really appreciate it great be on the show
Rod: All right take care
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