Ep #599 – Multifamily Asset Management 101

Sandhya Seshadri is an experienced general partner in all aspects of multifamily from broker relationships, underwriting, analysis and raising capital to close syndication deals. Her background gives her a unique view of what it takes to be a successful asset manager.

Here’s some of the topics we covered:

  • What skill set can you bring to the table
  • Leveraging the experience of your team
  • The value of info from property management companies
  • The basics of good property management
  • Your properties’ business plan
  • How to implement value-add projects
  • Renewal strategies
  • Leveraging Bridge Debt vs Agency Debt
  • Leveraging the learning from passive investments

For more information on our guest, please visit:
http://multifamily4you.com

 

Full Transcript Below:

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 you’re gonna get tremendous value from the dynamic, fun, energetic woman that I’m interviewing today. Her name is Sandhya Seshadri. And I pronounced it right that time. And she is a hitter in the multifamily space. She’s an LP and over 3500 doors. She’s done numerous projects as a GP. She’s KP on deals and just a real delight to talk to. So I’m really excited to have her on the show. Welcome.

Sandhya
Thank you so much for having me on your show Rod. I have been such a huge fan of your “Lifetime Cash Flow podcast”, and it’s such an honor to be here. Thank you.

Rod
Oh, that’s very kind of you to say. And I know, you know, we were just talking before we started recording that. We met at a conference in Houston. And I actually remember you and that’s–you absolutely made an impression because you know, I meet thousands of people a year and I don’t remember what I had for breakfast. So that’s quite a statement but so let’s start with how– because this is our first time on the show. Let’s start with having you tell us a little bit about your history. I know you started at Texas Instrument. And you know, just give me– I didn’t do a great job with your bio, so do a better job for me, please.

Sandhya
Thank you. I moved here from India, like a lot of immigrants and my parents, I grew up in a very middle class family. My parents were highly educated, but because of the exchange rate, their monthly income was about $60 a month. That’s six zero. And I dreamt of moving to the United States for College. And the only way I could do that was by getting very high test scores to win a full ride. And I came to Dallas to Southern Methodist University. I got my degrees in Electrical Engineering and immediately was employed by Texas Instruments. And it was a great company. And they paid for me to go back and get my MBA. Which is where I got my business knowledge in addition to my technical skills. Because very quickly as I worked in the company, I realized that as technical and intelligent as a lot of my peers were, we were being told what to do by all the marketing and sales types. And I really wanted to understand how they arrived at those decisions to pick projects, et cetera. So I got my financial background from starting to run businesses there rather than just being in a technical role. And that led me to the stock market. So I spent two decades also investing in the stock market to build my portfolio, because I realized that as wonderful as my W2 job was starting salary of $36,000. I felt like a million bucks. I realized very quickly also that I also had to multiply my money faster and the stock market was the easy and obvious way.

Rod
So what made you decide on real estate?

Sandhya
So real estate was always fascinating in the sense that, you know, 90% of millionaires become millionaires by real estate. But I was not a handy person to do single family rentals, and you know I didn’t want to deal with the four Ts. The tenants, toilets, trash and termites. I didn’t want to be called on you know, Thanksgiving dinner time to go fix a leaky toilet. But when I heard from a friend about apartment investing where you buy a large multifamily and it leads you to affording a property management company full time who will do all the work for you in terms of the day to day work. Like you can employ full time maintenance and full time leasing staff so that you are more of an asset manager. Monitoring the financials, being more hands on in the beginning phase to you know, implement your business plan. That really appealed to me because that’s very similar to project management and running a business which is what I did in a corporate world. So then I attended “We Can Seminars’ ‘ network with a lot of people and started investing passively because I had a lot of retirement money when I quit the corporate world to go into the stock market full time. And so I took that retirement money and invested passively in a number of different deals to network and get to know the business a little bit. But without taking on all the risk myself. And that’s where I met my future partners. And for my first deal, especially, I didn’t want to do all of it by myself. Multi family is a team sport, and I really wanted to learn it and do it right. When I was raising money from other investors, I really wanted to do it right by them. So I partnered with more experienced people and offered to roll up my sleeves and do much of the grunt work while they make the decisions. And that’s what led me to having my first syndication two years ago in August of 2019. So–

Rod
Love it.

Sandhya
That was $86 and $6.75 million.

Rod
Love it.

Sandhya
And the right size to afford full time staff.

Rod
Yeah. No, that’s right at the squeaky point minimum size to be able to do that. Unless you’re in a very high rent area. Now you know, you said a couple of things that I’d like to hammer home for my listeners. One is you know, obviously this is a team sport, and most people start the way you did. You know, well, many start in the LP world you know, as a limited partner to learn a business like you did. But even leaving that aside, most people do start aligning with an experienced operator that’s done deals before. And I think that’s one of the reasons my warrior program has been such a success. My students are approaching 460 units owned, and I’ve been teaching a little over three and a half years, which I’m incredibly proud of. But they do a lot of deals together, so they have that camaraderie. And I know, you know, you’re in an environment like that as well. And it’s just– it’s so helpful to be able to lean on other people. So you know, I want to circle back to something because you talked about this first deal that you did, and that first deal is always the hardest. It’s the scariest. It’s the most stressful. So maybe you could talk about that a little bit and help my listeners who haven’t done one yet, but want to do one and maybe give some insight.

Sandhya
I think the biggest thing is to figure out what is your area of expertise or what you want to do and offer that to an experience sponsor. And answer the question, Why should this experience sponsor partner with you? What do you have to offer to them? Because you need them more badly than they need you.

Rod
Yeah.

Sandhya
And so in my case, I live in Dallas. I’ve lived here over three decades, so I really know my local market very well. And both my partners were located out of state, but they wanted to get into the Dallas market. So this was their first deal in Texas and in Dallas. And so with them being away, I knew that I could beat a hands on person helping them, saving them some trips. Something goes wrong tomorrow, or the vendor is showing up tomorrow. I could be the boots on the ground for them. And at that time, I was full time in the stock market. I was no longer in the corporate world. And so once I dropped off kids at school, it was a perfect fit for me. You know, I’m there nine to three. I’m available to be on site of the property. I could go three, four times a week if necessary. So that’s what I offered. And I could leverage their resume, so that when I tried to go raise capital. I could use their resume to say, yeah, I don’t have the experience, but I have the time and the motivation to work hard. But guess what? You have these experience sponsors who’ll be making all the decisions. So I’m not you know, a rookie here trying to fly solo you know.

Rod
You use the we word. We have X number of units, and we’re partnering together on this deal. And I love it. And, you know, it’s funny, we’ve got an asset in San Antonio right now that we’re raising money for. And that’s exactly the same situation. One of my students brought it to us. He’s the boots on the ground. He lives there, and it’s a phenomenal deal. And so he’s there every week checking it out as well. And I love what you said about see what you can bring to a team or to an operator. Because guys, there’s so many ways that you can add value. And so you’ve got to look at what you’re good at. Like in your case, since it’s project management, which is a huge you know, plus because the bulk of the work is done after you purchase the property. And it’s the asset management, which we’re gonna dig into in a minute. But you know, maybe you’re the person that’s a great communicator, and you develop relationships with brokers, or you’re maybe an investor relations. You build investor relationships. Or maybe you’re super analytical, and you do the analysis, or you’re a little bit of all of them. But that’s what you said about adding value, and that’s how you should approach this, guys, is to look to see how you can add value to a team or to a person and align that way. And, of course, you lived in Dallas. In fact, I want to be in Dallas. I’m leaving flying out tomorrow. We’ve got three assets there we’d be looking at. And I’m doing a conference there this week. But anyway, that’s such a common and effective way to get yourself in the door here with this business. So– anyway, so let me ask you this. Anything else about that first deal that I cut you off a little bit. And anything else about that first deal that you’d want to say. You know, I see it with my students all the time. You know, it takes the longest. It’s the hardest. And then once they’ve got it done, it’s like, the next thing I know, they have four or five of them. You know, it seems like they’re like dominoes after that. Would you feel the same way? Or what do you have to say about that?

Sandhya
Yes. Brokers take you much more seriously. Once you have that first deal, and you can talk intelligently about the underwriting, about the business plan, about the asset management aspects of it. You become– you know, learn a lot from your local property management company as well in the process. And so I as my first deal, I wanted to learn everything I could. There wasn’t one aspect that I said, I’m not going to ever do it. So I wanted to learn all the parts of it. So I underwrote the property independent of my partners. I did my com studies independent of my partners. I realized that they were also bidding on the same property. And I said, instead of us competing, why don’t I join you? And this is how I can help you. And that’s how they added me to their team. It’s how I look at it.

Rod
Amazing.

Sandhya
And so this is the way that you find your first deals by adding value. But beyond that, for me, before I can go and raise money from investors. I really need to be able to talk about this intelligently. Right? So the education is so important. Like the kind of program you offer, you have to be strong in your underwriting. You have to be able to explain the business plan because I was raising money from a different set of investors than my partners. So I have to be able to talk about it intelligently. Even though we did a webinar together, et cetera, you have to be able to answer a question. So I think the more education you get, the more confidence it builds. And then you can leverage the resume of your partners to say, yes, we will execute this not just because I’m eager and helpful, but because I’ve got a wise person helping me along. I’m a co pilot now. I will be my own, you know, pilot one day.

Rod
Yeah. Now you have something you said to trigger something I say all the time, which is you build your competence first. Which then will equate your confidence, which then equates to your ability to influence. And really, it’s that trajectory. And one other thing I want to hammer home because you’re really dropping some great info here is the value of the property–your third party property management company. I can tell you when we go into a new market, and we’re in six MSAs or seven right now. And I think we get more information from interviewing third party property management companies and just about anything else we do there. And I’ve got guys, I’ve got a resource that I give. It’s a free book on the questions you should ask a third party property management company. I’m just looking for it here so I can see what the code for it is. But, yeah, how to hire a third party property management company. It’s got every possible question you can think of. And if you want it, just text the word “MANAGEMENT” to “72345”. I’ll get it to you. But, you know, learning about how they market there, how they– you know, what they do in the interview process? How– what their ongoing training looks like? And so on and so forth. So I just want to hammer that home because you really are partners with them, would you agree Sandhya?

Sandhya
They are your partners. Without them, you cannot execute your business plan. It’s very important that they’re on board on all of your numbers and your business plan for that market, like you might be. I’m gonna charge $50 for covered parking and 25 for reserved parking. And they’re gonna tell you guess what. Your property is large. There’s ample parking space. Nobody else in this demographic market does it.

Rod
Right.

Sandhya
So I don’t waste your time. That’s not gonna work. And there you go. That might be a nice $10,000 that’s going to be shaved off of your you know–

Rod
Right.

Sandhya
First years. So it’s very important that they’re aligned with you before you even submit an LOI on a property. That’s a letter of intent.

Rod
Right. And they can review you know, your expense line items to see if they’re in line with that local market because they do change market by market. And well, this is a great segue into asset management, which I know is your superpower because of your project management experience. And so let’s talk a little bit about what that means. Let’s talk about what it means and what it’s comprised of. And maybe you give some tips for some of the KPIs that you study on a consistent basis with your assets. I know that was a lot but–

Sandhya
So at a high level for any kind of asset management business management, the first thing you want to know is what is your top line revenue number? What is your expense number? So you have certain targets you want to hit every month. So your top line revenue, your expenses. And so your net operating income, because revenue minus expenses is your net operating income. And the value of your property is based on your net operating income divided by the cap rate. So another thing you want to agree on with your property management companies, what expenses are considered operational expenses? Which occur every month, like your pest control, your trash, you know those kind of utilities, et cetera, versus what is a one time expense that should go what we call below the line. And what’s a capital expense, because the way your accounting is done definitely influences the price of your property when you’re eventually getting ready to sell it. The second part of it is besides the financials, is the business plan itself. Are you on your property management company in complete agreement on your business plan? Do they agree to the rent increases your planning and the method you are going to deploy to achieve that. Right? Everyone says I’m gonna do these fancy interior upgrades. I’m going to spend 5 to 7K per door and achieve this interior upgrade. Well, if you’re 95% occupied when it’s your opportunity to go in there and do this upgrade? And does your submarkets support granite countertops, what kind of property is it? What is your rent? What is your median household income to support that highest strength that you’re planning there? Right? So maybe you don’t quite need to make it into a palace, but you need to make it into a nice, clean, comfortable place. So that’s got to be a complete agreement. Minds are aligned completely with you and your property management company so that, you know, even before takeover. Okay, day one, this is what we’re going to do, the first two weeks this is what we’re gonna do. These are the Capex projects we’re going to do right away. These are some that we’re going to postpone after doing. Like parking, for example. Right. Reserved and covered parking is not something I would do right away because you need to do a survey of your renters and see if that’s something they want to pay for. Versus you know, laundry or WiFi are examples of other income. You can do right away because those are expenses that are already part of your tenants budget. Everyone has to spend money on laundry. So if it’s a coin laundry machine, it’s $3 per load. So instead, if you install washers and dryers in their units, hey, they’ll be willing to pay the $50 for it, which is pretty reasonable. And the same with something like WiFi. Everyone watches Netflix these days. Right? So if they’re spending monthly Internet service of a certain number, and you already know what the local spectrum or whoever charges for it, and you’re able to install your own equipment and offer it at a lower price or a free promo. Okay, first month free, and then try before you buy a concept. Those are all reasonable expenses that are already part of the household’s budget. So those should be easier to do right away versus something like a covered and reserve parking. I’d wait and do a survey before I implement that.

Rod
Yeah. So concierge trash, you know, valley trash. Yeah. In fact, all three of those things are things are doing it at San Antonio asset. Now, we do need to survey on the parking though, and a– but the you know, the laundry the all of that is kind of funny. I was just checking off the boxes as you’re saying those things. By the way guys, her website is “multifamily4you.com”. Multifamily the number four you com. But let’s keep going here. So on asset management, you’re aligned with the property manager. So besides the high level income, gross income versus gross expenses and NOI, what are the sorts of things do you take a look at on a whatever basis you speak with your management company if it’s weekly, monthly, what it is, could you speak to that a little bit, please?

Sandhya
Yes. It’s one of the things we track also in terms of KPI is the availability report. So it tells you what your occupancy is, your vacancies, how many renewals are coming up? And today we’re speaking in August of 2021. So we’re coming to the sort of the end of what we call the peak leasing season. So if I have a lot of renewals coming up in September, October and November kind of time frames. You want to be careful about bumping rents on those things. So that’s a strategy you want to discuss with your property management company as to renewals during peak versus off peak periods and how you want to address that. You want to take this opportunity to actually get some units vacant so that you can go in and do full upgrades. Or when the renewals come up, do you want to stagger them a little bit so that most of these come off lease during a peak leasing season. Or you don’t have you know, 16 renewals all coming up within a month time. So your team doesn’t have the time to go in and do all the matrix is quickly enough. So you have what is called time that is down when the unit is not available to be leased. Right. So your turn time, your upgrade time, and therefore the loss to leads from all of that.

Rod
Let me enter. Hold on. 1 second. Let me– what she just meant was guys, what you might do is you might do a 13 month lease, a 14 month lease, a 15 month lease to make sure that they expire during peak lease time. Sorry, I just want to hammer that peace home. Please continue.

Sandhya
That’s a very important thing to remember is to do 30. You could even do shorter leases like ten months so that the lease expires in July instead of September, etc. And whether or not you want to retain that tenant. So one of the things I do is we go through the rent roll and I have my property management company start to color code all these residents as green, yellow, red, the ones who are always the problem. Tenants who give them a hard time, don’t pay on time, etc, versus the ones who are really nice and friendly. And we want to try to retain them by offering them some kind of an amenity. So the other thing we do is in terms of incentives and bonuses to our leasing staff, we try to give them something more a bigger reward for retention of the good tenants than just for getting new leases signed at pro forma our rent. And by proforma we mean the rent numbers that we have in our underwriting to achieve our business plan numbers. So renewals are very important because it promotes retention in your community and it’s a less expense for you. So offer a freebie when a good tenant comes up for renewal, such as, would you like a new fan? Would you like a new refrigerator, whatever it is. As an incentive and we let them pick. And then we say we have a little thank you gift for them as well when they renew with us. If there’s a tenant that we really want to retain because we truly appreciate them. They are our customers. And without them we wouldn’t be in business. And just like a restaurant receiving it’s customers and doing a good job of customer service, it’s the same thing. You know, you take care of them. You maintain your property well. You make sure your maintenance is aligned on your priorities, which it’s a leaky toilet. It’s a leak somewhere. That’s always the highest priority. Right? So that’s another conversation to have with your property management company is how or– a weekly one of the things we track are work orders. What kind of work orders we have? What are the maintenance problems? What are the complaints we read on Yelp or anywhere on the property even before we took over and how we want to address them.

Rod
Yeah. That’s such an important thing. You know, so you want to ask how many open work orders we have? What’s the aging on them? How long have they been sitting there? You know, and why? And address that because if you could be doing a great job leasing, but they’re going right out the back door if they’re unhappy. If you’re not taking care of their air conditioning or their plumbing or whatever. Yeah. Love it. Starting out in your career in this business. Were there any like, Aha moments like where the light bulb went off? Just– I know I don’t prepare you for in these questions, but any like epiphanies that you had as part of this journey of yours, any– you know, does anything come to mind when I asked that?

Sandhya
Yes. And so just like any other newbie, I tried to underwrite deals and come up to the Whisper prize, and I probably underwrote you know over 100 deals in my first few months in the business. And I realized that there was always a gap. It was always half a million to a million off from Whisper. And I just didn’t sort of cross the barrier to say, how do I do this? How is somebody else able to pay? And that’s where I realized I need a partner who’s got the experience. And I also need a property management company who can give me some creative ideas to find value in these deals. And those were like, my two biggest–

Rod
And those were huge.

Sandhya
Reason. Yeah. Those two things basically broke that barrier. So in my most recent deal that we just acquired three weeks ago in July. We were all on a bus tour, several of us, and there’s about 200 people looking at this property listed for sale by a very major popular broker in the Dallas area. So I knew they would get a bunch of offers in there. So right away, I knew okay, if the Whisper price is, let’s say 17 and a half million, I knew I’d have to go at least 18 and a half to have any shot at winning it. So initially, even in my initial underwriting, I priced it at 19 million and said, what does it take for me to go to 19 million and still provide a return for which my investors would be interested? How high do I have to go on my rents or other income? Or what can I creatively do to quickly get to that number in the first 12 months? And one of the things that resulted from it was my realization that no matter how low the interest rates were, an agency debt loan is based on the T12. So agencies give you a loan based on the last 12 months of revenue that those financials versus a bridge lender is going to lend based on the future projections as well. So I knew I could get better leverage from a bridge lender than the best terms from Fannie or Freddie. And–

Rod
Yeah.

Sandhya
It was definitely a risk I decided to take on to be more competitive.

Rod
Yeah.

Sandhya
And that was the difference because with the agency debt, I could only get about 70% return to my investors, versus with bridge, I got higher leverage, nearly 80%. And so I could return a better amount to my investors.

Rod
Yeah. The higher the leverage, the better the return. But of course, the higher the risk as well. So what kind of a term did you get on that bridge debt?

Sandhya
We were able to get three years, which is the standard for any bridge loan and two extensions.

Rod
Okay.

Sandhya
And we were able to get– we bought a rate cap for two years, but after 18 months, I’m free to refinance it. And that was the flexibility I needed because we were stuck with a lot of deals that were acquired back in 2019, 2018 time frame that had a very high yield maintenance penalty from the typical Fannie loans. And so now they’re stuck with 5% plus interest rate that no one wants to assume. And we didn’t want to be in that position. So we wanted to take over this property you know, do implement our business plan in the first 18 to 24 months, and decide at that point if we wanted to refi or we wanted to exit and return money back to our investors.

Rod
Yeah.

Sandhya
And that flexibility was available from a Bridge loan. The other thing we had looked at was a Freddie floater, but that wasn’t as competitive in terms of the LTV or the LTC I should say.

Rod
Right. Loan to cost.

Sandhya
The loan to cost percentage that they could lend us was very low on a Freddie versus a bridge loan?

Rod
I see. Okay. So I want to ask you the question that I regularly ask you know, people on the show just to see if your answer is along the same lines or if it’s a little different. If you could go back in time and tell your younger self something, you know, maybe even before you got started in real estate. But about real estate, is there anything you might do differently?

Sandhya
I wish I– Yeah. I wish I had started an apartment investing earlier, but also I wish I had trusted my instincts more and been more confident of my background and how useful it is here. Because my map skills are great. My asset management is strong. I can be at a high level, but I can also drill down to details. I wish I had been more confident of myself right from the beginning and not sold myself short.

Rod
Great answer.

Sandhya
That’s the biggest one.

Rod
Great answer. In fact, you know what? I just literally just didn’t own your power clip on Self Confidence. Literally this morning, I do these clips you may not know this on my podcast. I do clip motivational clips every week, and I literally just did one on Self confidence.

Sandhya
Yeah. That’s great.

Rod
So what was the wisdom? I have so many listeners that you know, fear failure or have the self confidence issues that know they want, they need to do something. They love real estate or they believe they love real estate, which is a key piece guys. You love it or you learn to love it. Or go, for God’s sake, go do something else because life’s too short. You agree with me on that one Sandhya?

Sandhya
Totally.

Rod
Yeah.

Sandhya
Absolutely.

Rod
What words of wisdom would you give someone that’s on the fence that knows they need to take action? What would you say to them?

Sandhya
Don’t chase after a shiny object. Don’t worry about what everyone else is doing. Do what is your comfort zone. There are people doing a new deal every month. I’m not comfortable with that because I know how much work it takes to take over and manage a property and return money carefully back to my investors. So I go at a pace that works for me. So don’t worry about what others are doing. Do what is comfortable to you. And for me, that meant doing my first deal with people with more experience than me. So trust your instinct. Write out all your fears and concerns and say how you address every one of them. It’s just like basic risk mitigation you do with any project in the corporate world. You write out the risks and you say, what am I going to do to minimize these risks so that I can go in with confidence. Look myself in the eye and look at every investor in the eye and tell them that this project is going to be a huge success. Right? What does it take for that to happen? And in my case, it was experienced sponsors knowing my market. Having a PM company that knows what they’re doing, et cetera, to run my own property. But first starting out passively and doing a few passive investments with retirement funds because that’s money I can’t put into my own deal anyway. So I learned from those passive investments, took the best of each of those sponsors, and now I have all these people available on a phone call away to help me when I do run into any problem that I’ve seen in one of those projects.

Rod
Sure.

Sandhya
The connections are invaluable.

Rod
You know, Sandhya, since you said that, let me ask you a question. Have you had any early failures or you know, I call them seminars that maybe have contributed to future success or gave you, you know, a good lesson? Can anything come to mind when I ask that question?

Sandhya
Yes. I was very much taken in by someone who was great on social media and with whom I badly wanted to have a connection because they were local to my area and they had a skill that I did not have, which is construction management. So I trusted them and invested in their deal passively. And unfortunately, that’s my worst performing deal. So right now, what I’m telling myself and other friends is that construction management is one thing. But it’s not the same as the high level asset management. Which in our Covid era that we’ve all been apart of in the past 18 months is a focus on delinquencies. If you’re an asset manager or if you’re a passive investor talking to an asset manager, you need to know what is their plan to address delinquencies? Are they familiar with the local quirks and how friendly they are with respect to evictions? How else? What are the local resources available to help these tenants get back on their feet to pay that rent? Because if you can collect the rent and you’re delinquent, you shouldn’t be spending money on your other capital projects. You should be holding onto it, which is what we did through the March through June of 2020. Right. So that’s an important lesson learn is not just trust, but also verify, but asking for a reference from a passive investor–

Rod
Yeah.

Sandhya
In those deals.

Rod
Yep. Good. Well listen, I really appreciate you coming on the show. You’ve added a ton of value. It’s a real treat to see you and have you here, and you know, I’m sure that we’ll see you at an event in the very near future. But thank you for coming on and sharing your wisdom Sandhya.

Sandhya
Thank you so much, Rod. It’s been such an honor and pleasure. I appreciate you.