Ep #240 – Lee Kiser – 5 Things You Should Know Before Investing in Multifamily

Here is some of what you will learn:

Understanding your Tenant Profile
What to look for on your first investment
How to maximize your NOI (Net Operating Income)
How to add value to your property
How to develop your team of professionals
Understanding your “Tuition” in investing in real estate
Overcoming confirmation bias
How to work with competitors
Ways to increase revenue
Understanding Master Leasing and Co-Living
How technology can help you increase revenue
What amenities can add value for your residential customers without additional expense
Finding optimal rent
Mentioned resource:

To learn more about our guest: click here 

Join us at a Multifamily Bootcamp, visit: MultifamilyBootcamp.com

Full Transcript Below:

Lee Kiser – 5 Things You Should Know Before Investing in Multifamily (Ep #240)

Rod Khleif: Welcome to another edition of How to Build Lifetime Cash Flow Through Real Estate Investing. I’m Rod Khleif and I am thrilled you’re here. I know you’re gonna get value from the gentleman were interviewing today.

His name is Lee Kiser. He’s the principal broker and principal of the Kiser Group, which is Chicagoland’s leading mid-market multifamily brokerage. He’s written extensively for Forbes, does a lot of writing. We’re just lucky to have him on the show. Lee, welcome to the show, buddy.

Lee Kiser: Thanks so much. Thanks for having me.

Rod Khleif: Absolutely. Can you maybe speak a little bit to your background and your history? And then we’ll dig into some specific questions. ‘Cause I read some of your articles, you’ve got some great value to add, so we’ll dig in to some of those but tell us how you came to where you are now.

Lee Kiser: Okay, landed in Chicago in the early ‘90s and found my way to this thing called commercial real estate. Didn’t really have prior experience but happened to land, right place, right time for a focus on urban apartment buildings as a specialty in brokerage.

Within seven-eight years had kind of become the tail that wagged the dog at that big national company for urban apartments in Chicago, so in ‘05 hung out our own shingle with a partner, and started Kiser Group. Slowly, we have developed a very consistent branded in Chicago for representing apartment owners.

Rod Khleif: What is your target niche, pricewise, or size-wise, or area-wise, or all the above?

Lee Kiser: Well, really, anything that is considered “Chicagoland”, and that’s mainly a two-hour driving radius from downtown Chicago.

Rod Khleif: Okay.

Lee Kiser: And I would say that our profile is privately owned, or what’s commonly called mid-market apartments. Doesn’t really have to do with size, it has to do more with ownership.

A boutique shop like ours probably doesn’t represent institutions but of quasi-institutional, maybe institutionally fund-backed investors in real estate. We’ve done deals from one hundred and twenty-two and a half million to, we have one under contract for 150,000 right now. So anything that’s multifamily in Chicagoland.

Rod Khleif: Wow. That’s diverse. Okay. Alright, fantastic. Well, like I said I know you’ve written extensively for Forbes, and I’d love to dig in to a couple of the articles that you wrote, and then just add value to my listeners.

One of the articles was titled “Five Things You Should Know Before Investing in Multifamily”. Let’s dig into that.

Lee Kiser: Sure.

Rod Khleif: One of the topics was, “Not confusing where you want to live with your investment strategies and your investment choices”. Can you speak to that a little bit?

Lee Kiser: Sure, and that article was intended for people new to investing in apartments.

Rod Khleif: Right.

Lee Kiser: When I’m dealing with a new buyer for our new investor for our apartments, so many times they walk in the apartment and they’ll say, “I could never live here.” Don’t get it confused with that. What you’re looking for is as it is an investment. Does it serve a niche in the market? Is there a tenant profile that wants that kind of housing? What would they be willing to pay for it?

My advice is don’t make it personal. It’s not like residential real estate where it’s where you want to occupy and live.

Rod Khleif: Yeah. You’re right. This is for new investors, but I’ll tell you, this is great content because this has never come up on the show before. I’m sure there people out there that, even tough you’re just looking for a duplex or four-plex that cringe when they walk in to place but there are people that would consider that a castle.

That really is a mindset shift that you have to make; that I’ve had to make and I’ve had to explain to people in the past, in my previous lives as well. I’m really glad that we’re digging in on this.

What do you think is the key for someone new when they’re looking at multifamily?

Lee Kiser: Well the key is, especially, in your first investment; make sure you find an investment to which you can add value. That’s typically upside and rents.

Rod Khleif: Okay.

Lee Kiser: Find the two bedroom apartment that rents for X. Are there examples in the market where certain tweaks can be made so that that same unit can rent for 1.2 times X? And you’re looking for that upside in revenue, what you can do to the unit or to the building to provide the housing that the market wants and is willing to pay for. How do you drive that value?

The main thing an investor should look for is, where is that upside and rent.

Rod Khleif: Right. Okay. Yeah, that’s commonly called repositioning, and that is the business model. That is the proven success model is to find the upside and rent. Sometimes, there’s an opportunity to decrease expenses as well. Maybe…

Lee Kiser: Well, that’s the other thing that I talked about in the article, “It ain’t all about upside and rents.” It’s about maximizing your NOI.

Rod Khleif: Right.

Lee Kiser: The simplest path towards that is usually raising revenue or raising rents.

Rod Khleif: Right.

Lee Kiser: You’re absolutely spot-on. It’s not all about that, you have to look at, are there better ways to manage this property? Was the previous owner paying 10% to an outside management company? This building’s three blocks from my house I can manage it myself. That 10%, I’m putting back in my pocket.

Rod Khleif: Right.

Lee Kiser: And I can provide my tenants better service despite that savings.

Are there opportunities to reposition some of the mechanicals? Are there grants available from my state? I had a client one time put in solar panels to heat hot water because he could get 3/4 of the expense paid for by the state of Illinois. And the 25%, he can make back over a three-year savings on the gas expense. It’s a no-brainer.

Rod Khleif: Right.

Lee Kiser: There are all kinds of ways to add value to the property. The most important one, again in my opinion, is how do you maximize revenue or raise rents? But you’re spot on. There’s so many other ways to perhaps make the building more efficient, more cost-effective; all added together, increases that NOI.

Rod Khleif : Yeah. People don’t understand the ramifications of just putting in LED lighting, for example, water saver faucets and toilets. Maybe even instituting a utility bill back program of some sort commonly called RUBS, ratio utility billing system. There’s lots of ways, certainly management; being more efficient in the management. Maybe it’s winterizing the property to be more effective if the landlord is paying for any of that. Fantastic.

Lee Kiser: You bring up an interesting point because it’s not really about maximizing revenue, it’s about maximizing NOI, that net operating income. People talk about cap rates, right?

Rod Khleif: Right.

Lee Kiser: And that’s a good measure of the investment grade of a property but a cap rate is a percentage of that NOI against its value. When you’re moving that NOI, 10% at the same cap rate, the concept is you’re driving the value of the building exponentially, and if you can find those opportunities where you’re raising revenue, and decreasing expense, that NOI is going up disproportionally and you’re looking at a situation where you could theoretically, in 12 to 18 months, reposition that property, refinance it, pull all of your invested capital back out.

Rod Khleif: Right.

Lee Kiser: Or sell it, and roll into another property, and continue building your portfolio.

Rod Khleif: Right. It’s all relative to the net income, the net operating income, and that’s the belle of the ball, as far as the number you wanna focus on improving. It’s an exponential difference. For an example on a 25-unit apartment building, if you are able to raise the rents 50 bucks at a six cap, that’s $250,000 increase in value. It’s truly exponential.

Some people are shocked when they hear the ramifications of a small bump…

Lee Kiser: And in theory, you bought that building for $40,000 a unit, you’ve got a million bucks invested in it, which took you $250,000 of a down payment. You’ve just moved the value $250,000, you get it refinance, you put all of that cash back in your pocket, and you don’t have any money into the deal.

Rod Khleif: That is a recipe for success that has been proven and done tens of thousands of times. I think it’s commonly called the BRRR method in the single-family space… Okay, let’s talk about team.

Lee Kiser: Yeah.

Rod Khleif: Let’s talk about team. Speak to that for a minute.

Lee Kiser: Well, it’s also really important, anytime you’re investing in real estate of any kind, but specifically in apartments and most importantly when you’re new to it. Get the right team of professionals. Make sure you find the brokers, lenders, attorneys who have the track record and experience in the given market you’re exploring, who can coach you through the process.

You’re not supposed to know everything yet…


Lee Kiser: A lot of the ideas you’ll formulate on how much upside there is in rent, comes from someone who’s been active in that market for a long time, and can show you numerous examples of clients who have done other properties, and how they were able to reposition and drive value.

Brokers are great at that, of course that’s self-serving. Attorneys are great at that, lenders, appraisers, sometimes building inspectors. Anyone who’s active in the industry, make them a part of your team.

Rod Khleif: Yeah. Develop those relationships. Nurture those relationships. Treat them as lifelong relationships ‘cause they truly are. This is not a business you get into for a year or two. This is a lifetime play. You’ve got to put on your long game hat and play it that way.

Find people you enjoy working with, and every one of those sectors you just talked about, brokers, property managers, local bankers, building inspectors, contractors, real estate attorneys, all those people are people you need to have alliances with. As you say, “Put on your team”, and that’s really what you’re doing, is your creating a support network.

These are the people that are going to know, particularly, if you’re buying out of your backyard. They’re gonna know what the paths of progress are, where there’s a possibility for gentrification play, or where you don’t wanna pick up rent at night, or things of that nature. What businesses are moving in and out?

You wanna lean on all these people to become… Frankly, to become an expert in whatever market or sub-market you’re gonna invest in because…

Lee Kiser: Absolutely.

Rod Khleif: Yeah, you guys have heard me on the show dabblers get crushed.

Lee Kiser: [chuckle]

Rod Khleif: And so do generalists. Okay? You need to be a specialist. You need to hone in on your market area, and nobody better to learn that from than the team members that you just described.

Now, one of the pieces on this last article was, you’ve made the claim, “If it were easy, everyone would do it.” Speak to that a little bit.

Lee Kiser: Yeah. It’s not easy. And especially in your first deal, or your first several deals, you will make mistakes. You will later look back and say, “What was I thinking to spend money on that?”

Rod Khleif: “What the heck was I thinking?”

Lee Kiser: But just know that that’s coming. I like to consider it your tuition for graduate school on investing. You’re simply gonna take these knocks, and know that you would probably have some investments that simply do not work the way you thought that they would, that that is why it’s so important all these other things to look for these things, and to have the right team of professionals advising you.

Don’t ever be afraid to walk away from a transaction. Don’t let pride get in your way, “I’m a …” [overlap talk]

Rod Khleif: Or emotions.

Lee Kiser: “I’m a person of my word. I said I…” Nah, due diligence is simply that. But despite all of that… I’m kinda going off on a tangent…

Rod Khleif: No. No, this is good stuff. Keep going.

Lee Kiser: When you have committed and you are buying the deal, just know that it is not going to be exactly what you thought it would be, going in the door. Learn from the things that work the way you thought they would. Most importantly, learn from the things that don’t go the way that you thought they would cause you can incorporate all that knowledge in your next deal.

Rod Khleif: Yeah, no question. Guys, I talk about this sometimes, you’re all excited, particularly in this hot market, you look at a bunch of deals, you find a deal, you get under contract. At that very moment, you need to put on the hat that says, “Why do I not wanna do this deal?”

Lee Kiser: Absolutely.

Rod Khleif: And have that psychological change because… And it’s tough. It sounds really simplistic, while we’re talking up here, but it’s human nature when we make a decision. Particularly when we’ve spent a lot of time formulating. We look for reasons to shore it up, to bolster it, to substantiate it, and if you do that, you could subconsciously overlook things you should not overlook. Sometimes the best deal is the one you don’t do.

If that first deal is a big one and you make a big mistake that may be the only deal. I don’t wanna scare anybody but the key here is don’t dabble. The key here is study this. Educate yourself. In fact, you’re in Chicago Lee, I’ve got my Chicago event coming up here on August 24th, 25th, and 26th. Anybody listening would love to have you there. It’s total immersion. No fluff. No outside speakers coming in to sell you stuff, just total training.

I think you’re coming, aren’t you, Lee?

Lee Kiser: I’m looking forward to you being here.

Rod Khleif: Alright, awesome. Yeah. So but again, whether it’s me or somebody else, educate yourself; study the market, lean on that team. Take that team out to lunch, to dinner, have a cup of coffee, and pick their brain in and let them talk. Be a listener because you’ll get so many little nuances and important pieces of whatever markets you’re in, that you’ll greatly minimize the chances of, what I call a seminar.

I don’t call them failures or setbacks. I call them seminars, here on the show, Lee. Just for your edification.

Lee Kiser: Right. And one thing you just touched on, that I have not thought off in that light, but I think it’s really that important… Include on your team, someone that you might think is a competitor. Who’s the biggest landlord in the area?… Once you have control of the property, don’t reach out before you do.

Rod Khleif: [chuckle]

Lee Kiser: Once you have it under contract and you’re in to due diligence, reach out to top three or four landlords in the area, and get to know them. These people will be receptive to your outreach. Why? Because a building in their neighborhood is getting ready to change hands. The operations of a building affect all the other buildings in the area.

Rod Khleif: Sure.

Lee Kiser: All ships will rise with the tide. And any seasoned landlord will know this. So the thing that you talked about, just now is so important.

What can we learn from people who’ve been doing it for 20 years already in the same market? They have an incentive to help you because they want to see that building become better to help… [overlap talk]

Rod Khleif: Sure. It’s self-serving.

Lee Kiser: It is.

Rod Khleif: Yeah. Most people will help you anyway, but in this case, you absolutely wanna speak to your closest competitors, and get to know them, and frankly, befriend them.

Most people don’t have a scarcity mindset, and some of those relationships can turn into deals. I had Glen Gonzales on my show. That’s the guy that went from maintenance man to 4,000 units. He’s in my Mastermind.

He talked about a relationship that he set up with the guy, did the right thing 10 years previously. And 1,700 of those 4,000 units, he bought from that guy. That’s the value of those types of relationships. Not only will you get knowledge that you can’t get anywhere else. If you got some salty old dog that’s owned a property for 20 years, they are a wealth of knowledge. You agree, Lee?

Lee Kiser: And they are willing to share it. More sophisticated and evolved markets even have trade associations down to the local level of landlords, who get together once a month, and talk about city regulations that are gonna affect their investment. What’s happening with interest rates and financing.

What was the contractor that you used for your boiler? And they see benefits in a collective discussion of the industry and what’s going on. So seek out… [overlap talk]

Rod Khleif: There’s no question, huge benefit in that. In fact, I’ve created a Facebook group, we’re at about 16,000- 16,500 in members and it’s only been there a few months. It’s just really cranking. If you’re watching this, and you’re not in that Facebook group, it’s MultifamilyCommunity.com, it’s a direct link. You need to be in there, guys, if you’re listening.

Lee Kiser: I’m just writing it down.

Rod Khleif: Alright, good. It’s a great place to peer mentor and grow. We don’t allow any promotion in there so it’s just clean. People helping each other, great way to add value, make connections, find investors if you like, and just grow and learn. ‘Cause that’s really what this business is about. It’s a relationship business.

I stress that in my training, and Lee, you obviously feel exactly the same way when you’re putting a team together, because this is not a solo business. Right?

Lee Kiser: No.

Rod Khleif: This is a team sport.

Lee Kiser: No, it is not.

Rod Khleif: Okay. We digress but that was all good stuff. Let’s talk about… You post some interesting way that are non-traditional, to increase revenue. Because remember, any increase to the NOI increases the value. So anyway you can be creative to increase the NOI, you wanna hear about. Tell us some of your non-traditional ideas.

Lee Kiser: Yeah. And this is more for someone who’s a little bit more seasoned, maybe has a portfolio, and now they’re looking for, “Where are those extra steps that I can start tweaking my NOI or revenue.” These are kind of cutting edge things I see happening in the industry.

Almost all of these, in one way or another are related to technology, and how it’s infiltrating our industry. The first one is, look for extra dollars in your parking lot. There are companies… And I’m avoiding pitches, because I do have my favorites. I won’t mention them.

But there are companies out there who, through technology, can make use of and profit-share with you the revenue from parking spaces that you already have leased out but have occupancy during certain periods of time. For instance, your parking lot, your apartment building is full, but 40% of the cars are gone during the day because people are driving them to work.


Lee Kiser: You can actually get incremental revenue from those spaces. It’s all through apps. It’s all through communities that people join online. They’re going to certain neighborhood; they can see what’s available in the area.

Rod Khleif: Wow.

Lee Kiser: They can actually place… and they revenue share that with the property owner. There’s no cost to the property.

Rod Khleif: That’s interesting.

Lee Kiser: Yeah.

Rod Khleif: I’ve never heard of that. I could see the huge value of that in an urban environment, for sure, where parking is at a premium. Very interesting. Okay.

Lee Kiser: Here in Chicago, that’s become a fast growing business there are three main companies who are doing it.

Rod Khleif: Wow. Fantastic.

Lee Kiser: They even go so far as… If you’ve got an electronic gate, they have a piece of hardware they can attach to it, directly program it into the gate opener. So that with a code on the app, an outside parker can open the gate, go in. It’s charged through credit card upon their entry. It’s all calculated they have to be out by a certain time the money flows through to the landlord.

Rod Khleif: Wow. Fascinating.

Lee Kiser: Yeah.

Rod Khleif: Fascinating.

Lee Kiser: Good stuff.

Rod Khleif: Okay. Now, what other ways can a person increase revenue?

Lee Kiser: Well, in the Forbes article, there were five I did specifically, and you and I talked about these very briefly before we got on the podcast.

Rod Khleif: Right. Master leasing was one. I want you speak to…

[overlap talk]

Lee Kiser: Yeah, master leasing, another was co-living, and they’re kinda hand in hand; opposite sides of the same coin. I’m gonna talk about both of these in the same topic.

Master leasing for short term rentals. There are companies out there on the forefront who are now going into an apartment building and offering the landlord a master lease of X number of units. They’ll do it on a two-year lease. They can usually pay the market rent being asked by the landlord but with the understanding that they will be running a short-term rental business, many times through Airbnb, sometimes through other platforms that are proprietary to that master lessor.

They’re running a business within your business. It can be a win-win. There are also downsides to it but…

Rod Khleif: What are the downsides?

Lee Kiser: The downsides are, depending on the legislative bodies in your municipality. Whether they classify that as a hotel operation.

Rod Khleif: Okay.

Lee Kiser: There are certain liabilities that may come along with it. So anytime you’re talking to someone about master leasing your units, and running a short-term rental, or other kind of business out of it, make sure that the person with whom you are signing that contract accepts full liability for any penalties, anything that the municipality might tag on.

Rod Khleif: Yeah, and I would add to that, do your own homework as well. Don’t rely on them because they could be a flash in the pan as well.

Lee Kiser: Absolutely. To give you an example of things that you can run into, here in Chicago, we have 50 fiefdoms. They’re called Wards and they’re run by the Aldermen. Anybody who’s watched all the shows on Netflix or elsewhere about… It’s real.

Rod Khleif: [chuckle] …Yeah.

Lee Kiser: And there are some companies that are fully credible and licensed, and ready to go but you can’t do it in that Ward because that Alderman doesn’t like it. And they rule, so… I actually have one company that I’m introducing the landlords for this master leasing program but we have identified the neighborhood I can’t introduce them to because we know that Alderman will outlaw it.

Rod Khleif: Interesting.

Lee Kiser: So that’s one, the flip side of that coin, like I talked about is, co-living. This is kind of a short-term rental idea but kinda not. It also is a company that will master lease the whole building, and this is multi-family. But it kind of works more like a hotel operations.

These companies come in and help you develop a renovation schedule for the building, and it’s all around co-living concepts. Meaning, there are literally suites and rooms where people sleep at night but then there’s a common area living room, there’s a common area designer chef’s kitchen, and it’s almost like a single-family home within a building…

Rod Khleif: Sounds like student living, in a way too, sometimes, you’ll see student solutions like that.

Lee Kiser: And you’d be so surprised though how many renters today, even older, want that kind of lifestyle, and that kind of community.

Rod Khleif: Interesting.

Lee Kiser: And the numbers go off the charts for this co-living concept.

Rod Khleif: Wow. Wow. So there are companies that will facilitate that in somebody’s building. Are there certain markets? I mean, is this kind of an urban thing as well or…?

Lee Kiser: Yeah. This is primarily urban.

Rod Khleif: Okay.

Lee Kiser: You go to the hippest markets within an urban setting.

Rod Khleif: Right.

Lee Kiser: Like in Chicago, I know the specific neighborhoods where this would fly.

Rod Khleif: Interesting.

Lee Kiser: They do master lease the entire building, and the landlord is able to get an above market revenue. It really runs like a hotel operation.

Rod Khleif: Sure. It’s very similar to this WeWork kind of a thing for the business community. Where you go in, and you can plop on a couch, there’s free beer and it’s kind of like…

Lee Kiser: [overlap talk]

Rod Khleif: That sort of a feel, it sounds like. Very cool.

Lee Kiser: In a residential application.

Rod Khleif: Very cool. Okay. We talked about short-term rentals…

Lee Kiser: There’s about two others.

Rod Khleif: Go ahead.

Lee Kiser: I’m sorry, I’m jumping over you.

Rod Khleif: No, go ahead.

Lee Kiser: Out-sourcing amenities.

Rod Khleif: Right.

Lee Kiser: Look around in your market for what the leading landlords are doing. One thing that I… Here’s an example. There can be numerous ways of doing this but there’s a company that is now nationwide, that started in Chicago that runs dry cleaning, from the lobby of your building.

It’s all getting done through technology. They put in lockers, you subscribe to the app, there are codes, and there are locks on the lockers. You literally put on your way out of the building in the morning. You drop for dry cleaning in the locker. It’s picked up by this company, and they put it right back in the locker, and send you a text notice that your dry cleaning’s ready.

Suddenly, the building can offer dry cleaning services as an amenity to its tenants.

Rod Khleif: Nice.

Lee Kiser: It’s all done through apps. It’s all done through technology. That is more an amenity so that you can attract tenants to your building.

Rod Khleif: Right. It’s not a revenue generator but it’s more of an allure. It’s more of a, “Hey, wow, you don’t ever have to go to the dry cleaner again. It’s downstairs.”

Lee Kiser: Yes. And there are similar type products for package receiving, for dog walking, for all the things that residential customers. That’s how you need to think of, would you not?

Rod Khleif: Right.

Lee Kiser: That you can enhance without additional expense and it’s amenities but it’s someone else running it for you.

Rod Khleif: Interesting… You’ve got a tech solution, go ahead and tell my listeners what that is, and what it does.

Lee Kiser: Yeah. One of the things that the industry has been trying to do for a long time is help landlords define optimal rent, and there are some rather archaic methodology for that. We’ve created the first true machine learning… I’m not gonna use AI as a term.

Rod Khleif: Okay.

Lee Kiser: It’s true machine learning based on volumes of data that has never, prior to now, been able to assimilated to truly predict optimal rent for any multifamily property, anywhere in the US; down to building amenities, unit finishes and it will populate for you exactly your 20 best rent caps and hone in… And if you want to do add value, you can toggle things on and off to see exactly the incremental rent that you could achieve if you did those.

Rod Khleif: If you make improvements on… Even things like small things inside of a unit. I assume is plugged in to CoStar or something like that but what sorts…

Lee Kiser: [shakes head “No”]

Rod Khleif: No. Okay.

Lee Kiser: No. This is all proprietary data.

Rod Khleif: Okay.

Lee Kiser: We were very careful not to use any other sources.

Rod Khleif: Okay. What are the main things that it looks at?

Lee Kiser: There are 3500 variables that feed this algorithm so it’s hard to isolate any one given thing.

Rod Khleif: Oh, yeah, sounds like.

Lee Kiser: But when you have that many variables and that much data, you can truly hone in on the block census track level data to predict for that specific building.

Rod Khleif: Fascinating. What’s the name? What’s the website?

Lee Kiser: Thank you. I wasn’t gonna mention it without a prompt.

Rod Khleif: No, absolutely.

Lee Kiser: The tech is called Enodo, E-N-O-D-O.

Rod Khleif: Okay.

Lee Kiser: And it’s easily found on any social media, or anywhere on the internet.

Rod Khleif: Okay. Fascinating. No problem… Well listen, you’ve added a ton of value today, Lee. I appreciate you being on the show. I look forward to shaking your hand at my August event. Thanks for your valuable time my friend.

Lee Kiser: I’m grateful for the invitation and the time spent with you. I look forward to meeting you in person.

Rod Khleif: Right, thanks buddy, take care.

Lee Kiser: Okay.


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