Play To Your Strengths For Massive Success

Full Transcript Below

Intro
Hi. My name is Rod Khleif, and I’m the host of “The Lifetime Cash Flow Through Real Estate Investing” podcast. And every week, I interview Multifamily Rock Stars and we talk about how they built incredible wealth for themselves and their families through multifamily properties. So hit the “Like” and “Subscribe” buttons to get notified every Monday when a new episode comes out. Let’s get to it.

Rod
Welcome to another edition of How to Build a Lifetime Cash Flow Through Real Estate Investing. I’m Rod Khleif, and I’m thrilled you’re here. And I know you guys are going to get tremendous value from the two gentlemen I’m interviewing today. It’s Ryan Webster and Warren Dresner, and they’re with Equity Yield Group. It’s equityyieldgroup.com. And, you know, they’re in a couple of thousand doors. And some really interesting things I read on their bio’s, like their first deal was $26 million. So I’m really excited to get into this interview and drill into a lot of these topics that these guys are obviously very well versed in. So welcome to the show, guys.

Warren
Thanks for having us.

Rod
Yeah, absolutely. So I don’t know, maybe each of you could just take a minute or a couple of minutes, as it were, and talk about, you know, why multifamily, how you got in the business. Just give us a little background, if you would. So, Warren, you want to start?

Warren
Sure. So my background is in finance and insurance. Spent about 20 years in the corporate world. I’m from Australia originally, but my job took me to the UK and Europe and brought me to the US. I started investing in real estate in 2010, and it was all single-family and it was really driven by tax benefits. That was the primary motivator. Slowly over time, I became more interested in passive income and building up passive income. And around 2019, I started investing as an LP, as a passive investor in real estate syndications in multifamily. Soon after that, I met Ryan. We joined forces and we started to be more active in the space. So it’s kind of developed from single-family, tax benefits, passive income, and then more to operations.

Rod
Very interesting. Yeah. You guys have that, what do they call that gearing, negative gearing, or something in Australia?

Warren
In Australia, yeah.

Rod
Yeah.

Warren
There are a lot of differences. Negative gearing. They’ve also got all the lending, is variable rate as well.

Rod
No kidding. Okay.

Warren
No fixed interest rates. So it’s interesting.

Rod
We won’t go down the political rabbit hole with Australia right now. Anyway, we won’t digress. Ryan, please tell us a little about you, buddy.

Ryan
Yeah, absolutely. So I’ve been in real estate in one form or another for most of my career prior to getting into multifamily acquisitions. I own and operate a construction development company here in the Midwest for around ten years. Did a lot of single-family developments, small commercial, strip malls, small multi, and then transition into kind of a different model. And the buy and hold as opposed to the build and sell which comes with a little less stress, a little less, you know, executional risk, and some tax benefits that, you know, you don’t get with the build and sell model.

Rod
Right. So where are you at in the Midwest, if I may ask?

Ryan
Cedar Rapids, Iowa.

Rod
Okay. I spent a lot of time in Denver, and I’m just curious where you were. Yeah, so, you guys joined forces in, did I hear ’19 or ’20 or when did you guys join forces?

Warren
It’s been 2020.

Rod
2020. Okay. And your first deal together was a $26 million acquisition using institutional money. Well, talk about that deal. How did that come together? I mean, obviously, you both had a background in real estate. So, it wasn’t like your first deal, deal of all time. It was just, you know, your first big multifamily. But where is it located? And this was in 2020? Is that when you bought it?

Warren
Yeah, it actually closed early ’21, but we got it under LOI towards the end of 2020. So we were both looking for deals. We probably underwrote 150, 180 deals before we found this one. So it wasn’t the first one we’d been looking at.

Rod
Right.

Warren
We were working together underwriting, touring properties. We’ve gotten close many times before. This particular one was interesting. It’s in Sarasota, Florida, which I think [inaudible]

Rod
Really.

Warren
Where you’re based.

Rod
That’s where I live.

Warren
[inaudible] part of the world.

Ryan
So it’s a 2016-built property located in Sarasota, Florida, which, you know, as far as markets go, is a great growing market in Florida. And you think, you know, 2016 build a Class-A property. You know, it looks nice, but there was some opportunity in the unit interiors. The developer got pretty cheap on the finishes, so it was a nice community. Well amenitized, exteriors look great, but, you know, the interiors, you know, instead of being five years old, they look 20 years old, 25 years old. So there was some value-add component to it, even though it was a 2016 build, which was nice.

Rod
How many units?

Ryan
148.

Rod
Nice. Okay, well, boy, did you guys time that one well. I mean, we have one asset here in Sarasota, but it’s income-restricted. It’s an age-restricted community. But I have a friend that lives in an apartment complex here. She is in a two-bedroom, and they raised her rent by $1,200. So she went from, I think it was $1800 to $3,000.

Ryan
Wow.

Rod
Like, holy shit. I mean, just insane. I mean, this Tampa, MSA. As you know, is one of the fastest-growing. I mean, you guys have certainly capitalized on that, I’m sure. But what an awesome first deal. So since then, you’ve closed on 130,000,000 in multifamily assets. Yes?

Ryan
Yes. Most of which are in Sarasota, Bradenton area.

Rod
No kidding.

Ryan
And most recently, back in December, we’re closing the property behind me, which is in Bradenton, Florida.

Rod
Beautiful. Yeah. That’s a beautiful asset for those of you guys that can’t see its four-story buildings. That’s a fairly new build. Yeah?

Ryan
Yeah. So we bought it directly from the developer. We put it under contract. You know, it was only 70% occupied. It was 99% occupied when we closed.

Rod
Very nice. That’s a beautiful asset. Is that on the Manatee River?

Ryan
It is.

Rod
Oh, wow. Look at that. Gorgeous. Well, good for you. I mean, you guys are definitely in the right market. We’re very bullish on Florida as well. I was looking at assets in Jacksonville a couple of weeks ago and really loved this market for a lot of reasons. You know, the political environment and of course, and, you know, there’s just so many people moving here. It’s crazy. So let’s talk about how you underwrite your deals and how you stress test your deals and really what you look for when you’re looking at an asset. Let’s go there. I don’t know who, which of you wants to talk about that.

Warren
You go for it, Ryan.

Ryan
Okay. Yeah. You know, first, it does start with the market for us. We are investing in real estate, but more than that, being commercial real estate, we’re investing in a business that happens to be attached to an inside of some real estate. So we start with the fundamentals of the market and dig in there and select an area that we want to be investing in and then, you know, look for good opportunities within that area. And as far as, you know, the deal specifics, it’s really about creating a road map between, you know, the existing performance of the asset and, you know, what we think the asset could perform at in the future.

Rod
Sure.

Ryan
And that’s driven, you know, fundamentals do drive rent growth when you have, you know, limited supply of housing in the area, you have a growing population, putting demand pressure on the area, but then you have to get a little more granular that and look at the exact product type against the competitive product in the area and really assess. Is there a Delta between what rents are now and what the competitors are today? We don’t like to just jump and forecast. Well, things are going to grow. I know we’re on par with the competitors today, but the whole comps that’s going to move and that’s going to drive growth. Yeah. You see some of that in the stronger markets, but we don’t like to hinge the whole business plan on this organic growth.

Rod
Right. Well, I got to tell you, I do believe you’re going to be able to capitalize on the organic growth as well in the market that you’re in for sure. So you’re going to get both. Fantastic. So what do you do to stress test?

Ryan
Absolutely. Again, in the underwriting, you’re taking some known data from about the existing property performance, and then you got to make some estimates about future performance. And that’s where the stress testing comes in around, well, how accurate are your estimates, and what happens if you miss on one of those data points? A lot of that comes into, you know, reversion cap rate and what we’re going to sell the property for. So, you know, we’ll move the cap rate up and down and see if we can still generate a return range that’s acceptable, you know, return profile that we’re targeting. And another big thing right now is the debt. With the volatile debt market, a lot of deals, especially in these bigger markets, cap rates have compressed. They’re very tight cap rates going in. And the fixed-rate debt just doesn’t size on a lot of these deals.

Rod
Right.

Ryan
Which is okay, you can use variable rate debt, and we do frequently and a lot of people do. But you have to understand how variable rate debt works and you have to model appropriately as to what your debt service is going to be if you’re planning on a refinance, what your leverage is going to be on the refinance in terms of the debt service constraints in the future.

Rod
Right. Which are difficult to forecast. But yeah. So on your exit cap, you know, what sort of adjustment do you typically make per year, for example?

Ryan
It depends on the class of the asset, but we’re looking at anywhere from ten to 20 basis points, escalator per whole year. But we’re also looking at, you know, sales comps, price per unit. We like to exit at a price per unit. That’s been seen in the market already. We don’t like to be exiting, you know, at a price that hasn’t been realized yet. So that gives us a little bit of comfortability, knowing that we’re not trying to prove the new ceiling of what is a purchase price in the market.

Rod
Got you. Now, I know on that first deal you used institutional money. Can you speak to that a little bit, how that came about, and maybe give us a little more insight on the structure. You know, how you put that together?

Ryan
Yeah, absolutely. So coming from, you know, the development construction side, a lot of those deals, the capital stack is highly leveraged, where you’ll have, you know, equity preferred equity or Mezzanine debt, where the common equity slug is typically only bringing 5% to 10% on a development project. So it was a capital stack structure that I was familiar with from my prior career. On this particular deal, we went in with a floating rate, Freddy loan, for the senior, and then we had a preferred equity through Electric Capital that brought the total leverage up to 88% on that deal, and their return was capped at 14%.

Rod
Nice.

Warren
A lot of it comes down to the fact that we’ve always been very intentional about our strategy. We knew that we were targeting these newer builds in strong markets. It was going to have a high, sticker price. So we had to have a strategy to be able to raise a lot of equity. So very early on in the piece, we started building relationships with some of these institutional groups. And so, it’s not that we found this deal, and then after scrambling to find the equity, we already have the conversations going, and I think that made a big difference in making it work in the end.

Rod
Nice. I got distracted for just a moment when you were talking, who is the institutional player you brought in? You said the name.

Ryan
Electric Capital.

Rod
Okay. Have you also worked with, for example, family offices or they’re a Private Equity Group? Correct? Electric Capital?

Ryan
Yeah, Electric Capital. They’re a subsidiary of American Landmark, an American Landmarks [inaudible].

Rod
Okay, got you. Okay.

Warren
We haven’t done a deal with a family office yet. We’ve talked to a number– we’re pretty agnostic. We want to build these relationships and see which one makes the most sense for each deal. So we’ve got [inaudible], we’ve done JV Equity, we’ve done Mezzanine Debt. We haven’t actually done a deal with a specific family office at this stage.

Rod
Got you. Interesting. So are you guys vertically integrated or do you hire third-party property management down here?

Ryan
We have a third-party property manager that we use, ResProp, and we like them quite a bit. And one of the things that resonate with us is–so they came about as vertical integration of a Vesta. So they used to own about a billion dollars worth of a real estate. Midway through building that portfolio, they decided they were going to vertically integrate. They built out the property management company, ResProp, to manage their own portfolio. Since then, they’ve disposed of about 99% of that portfolio and are now focused almost exclusively on third-party management. But what really works for us with them is they were owners. Once they owned and operated real estate, they had, you know, an asset management team. So they really understand our needs as owner-operators.

Rod
Let’s talk about asset management for a minute because, you know, obviously, you’re still communicating with them on a weekly basis, most likely, and keeping track of your asset. So, you know, talk about maybe how that communication happens and how you measure your KPIs on your assets and maybe some of the things you look for, you know, that will certainly add some value. Can you speak to asset management a little bit?

Ryan
Yeah, absolutely. Like I said, it’s really about KPIs and measuring, you know, projections versus actual performance. So, you know, we meet with the property manager on a weekly call and, you know, having conversations throughout the week with the operation team on various topics. But it’s really about, you know, comparing realized performance to what our projections were when we laid out the proforma business plan and making sure that we’re outperforming or very least are on par. So we track really, you know, everything lease, lease trade outs on renewals, leases on new leases, occupancy, and then, you know, line item by line item, the operating expenses.

Rod
Openwork orders, you know, things like that as well, I’m sure. And by the way, guys, those of you listening, I just completed a book on asset management that I’ll be giving you for free. Those of you listening, I just don’t have it set up in a text campaign yet, which I’ll get together, and it will be one of the books that I give. But I’m really proud of this. We just finished it. But– you talk to them weekly. You’re looking for anomalies, you’re measuring all those things. Are you happy with what you’re seeing on these trade outs in your market here? I know you are.

Ryan
Yeah, absolutely. We’re exceeding projections, you know, on all of our own assets, again, which is why we invest where we invest it. It’s a lot easier to have the tailwinds pushing the business plan along instead of facing headwinds.

Rod
Absolutely. So tell me a little bit about the team dynamic between the two of you. You know, do you both kind of do the same things, or have you fallen into individual roles now that you’ve taken down a good chunk of assets? Can you speak to that a little bit?

Ryan
Warren, I’ll let you jump on that one.

Warren
I think naturally, we gravitate to where our strengths are?

Rod
Right.

Warren
When it comes to big decisions, though, we’re both very much involved. So Ryan might underwrite a deal. I might underwrite a different deal. If it starts to look interesting, we bring the other one in and start to talk about it. Ryan’s got that construction background. So when it comes to asset management, a big component of that is construction management. So Ryan is a lot more involved in that side of the business than I am. But the other aspect is this business is about teamwork. We need a bigger team to be operating these properties and taking them down. So the property manager is a key component of that team. But we also partner with other syndicators and other groups.

Rod
Oh, do you?

Warren
Yeah, absolutely. I mean, it makes it more fun when you partner with other people.

Rod
Sure.

Warren
But that’s probably a side of the business that I gravitate more towards, trying to build those teams and interact with partners and make sure that we’ve got the right partners and the right team for each job. So, yeah, the big decisions, we definitely look at them together, but we naturally gravitate towards where the strengths are, and then when we’re both weak, that’s where we look for a partner.

Rod
Are you both working with investors or do you do more of that one? How does that work?

Warren
Yeah, we both do interact with investors. Though I tend to be focused more on the marketing side of the business.

Rod
Marketing. Okay. Marketing to prospective investors, so on and so forth. Got it. Okay. And, so, you know, talk a little bit about one of the bullet points in your bio as a conversation point that I like is the importance of transparency and regular communication between, you know, teams and investors. Both. Can you speak to that a little bit?

Warren
It’s just something that’s always been important to both of us, actually. I mentioned at the beginning, I’ve been a passive investor in a number of syndications, and so many of them have poor communication. The investors are left in the dark. You don’t know what’s going on. When you do finally hear from the sponsor, they’re very brief and they don’t actually tell you the full details. So again, we were very intentional about this from the beginning. We want to be transparent. Every month we send out an update. We send it on the same day every month so that investors know it’s going to come out. We share the full financials that the property manager provides us. It’s just so much easier to build trust that way. We’re not [inaudible 00:19:04] everything. Obviously, there’s a lot going on day-to-day, and we don’t share every single detail, but anything material, we try to show that transparency.

Rod
Good or bad, right? Yeah.

Warren
Absolutely. Yeah. I mean, when it comes to bad news, it’s important to share it and set expectations early, because if investors find that out much further down the line, I think it’s– you’re in a position that you can’t come back from.

Rod
Right. Agreed. No, I agree, completely. You know, we talked about institutional money, and there are positives and negatives, for sure. Speak to that a little bit. Obviously, the positives are access to bigger chunks of cash but talk about the potential, you know, negatives.

Ryan
Yeah, absolutely. And then this is something that, you know, a lot of people may or may not realize about institutional equity. But, you know, the kind of potential downside to taking a large slug of equity from a social partner is there a lot closer to debt than they are to common equity, in that there are some caveats that come with it and, you know, there are some strings attached to that money. And as you get into negotiating the operating agreement with this equity partner, you have to have, you know, first, a keen understanding of who it is you’re working with and what is it going to be like working with them if things don’t go to plan and you have to pivot. Are they going to be a problem solver? Are they going to work with you to get through any potential issues, or are they going to pull the ripcord and leave you high and dry?

Rod
Yes. They exert control. And that’s the thing I wanted to make sure we chatted about in that– you know, they can be a godsend, but they can also, you know if things do go south a little bit, you know, for example, we bought an asset in Lexington that the guy didn’t want to sell, but he had private equity involved, and they dictated that he needed to sell because they needed to be out of that asset for their reasons. So you really want competent legal counsel involved in helping you through, you know, that process?

Ryan
Yeah. And more than that, you got to know what are your goals for your company and this asset and this investment and what are your targets and what will be the obstacles to those targets and make sure that you’re at the indicative terms, negotiating those up front as to where control lies. When will it shift? What are the triggers that would cause it to shift and make sure that you know, those all align with your business plan and it’s not going to be an issue down the road.

Rod
Yeah. Now, I saw that you know, obviously, you’re in my backyard here, which is awesome. But you’re also looking at Texas and the Carolinas. Is that accurate?

Ryan
Yes.

Rod
Do you have assets there now or you’re just getting started to spotlight it?

Ryan
No, we don’t own anything there currently. You know, we do bet on a number of assets there, but again, being in strong markets, it’s a very competitive environment. And as you branch into a new market, it is a challenge getting your foot in the door.

Rod
Right. Yeah. We’ve got assets, both those markets, and they’re just absolutely fantastic markets. So, it’s great that you’re doing that. I wish I had more here, though. I got to tell you, I hate being jealous, but I’m jealous. I’m definitely jealous of the fact that you’ve got some Class-A, really good-looking stuff here. Well, listen, guys, I really appreciate you being on the show. I’m, you know, very impressed with what you’ve put together. Let me ask you this. Are you considering a vertical integration at any point, or do you just want to go full blast on acquisitions and asset management?

Ryan
At this time, you know, we’re not really considering vertical integration. When we cross that road, you know, the first thing we’ll probably bring in-house is the construction team.

Rod
Right.

Ryan
But again, you know, I had a vertically integrated company on the construction side, and with that, you know, scale of operations, comes a lot more work. And I don’t want to pull focus away from, you know, asset management and acquisitions, especially when we have a great third-party team right now.

Rod
Yeah. Now, that makes sense. Yeah. I kind of put you on the spot because they might listen to this episode. Sorry about that. After I asked them, I’m like, shit, why did you ask that stupid question?

Ryan
Well, that’s all right. Keep the pressure on them. Make them, you know, run the business.

Rod
That’s true. Absolutely true. So let me ask you this guys. I mean, you guys are rock stars in the business, and I have a lot of listeners that are aspiring multifamily investors. They know they want to get into this. Maybe their analytical caught on analysis paralysis. You know, maybe they’ve done a little passive investing, maybe not. But they really are thinking active. Most of the people listening to my show are more active. You know, what suggestions would you have for someone that hasn’t pulled the trigger yet? What advice might you give them?

Ryan
You know you got to have the plan first, and you’ve got to have the team. So when you do pull the trigger and you do take action, you’re able to pick up the ball and run with it, and you don’t stumble out of the gate. You know, I think being on the active side, it is, you know, a great opportunity and there are great things happening, but, you know, it does come with a lot of work and a lot of responsibility. Alongside of that, outside of, you know, being on the passive side.

Rod
Right.

Ryan
But again, it’s a team sport. You have to have a team that works well together and understands each party’s rules and responsibilities. So when you do get in front of it, you can take it and run with the ball.

Rod
Yeah. When you guys were [inaudible]. Go ahead, please.

Warren
My advice would be, network. I think you’ve got to surround yourself with people who are actually doing it. Otherwise, you’ll always sit on the side of things. I think that was really helpful for me in the beginning and see it time and time again. Once you surround yourself with people, one or two steps ahead of you, stuff just happens.

Rod
Yeah. No, I couldn’t agree more. You know, you guys don’t know this. I actually mentor students and we’ve got, I don’t know, close to 1000, I think, around the country and I’m really proud of something. You know, they own, I think pushing 60,000 doors now. I’ve been teaching for a little over four years, so really proud of that. But that team dynamic in that group where they get together and they can share notes and congratulate each other and they’re not around people that are afraid of what they’re doing and negative as well. It’s just an incredible dynamic that speaks to what you just said, Warren. It’s just very, very powerful. So let me ask you guys, I’d like each of you to answer this question. As you were just getting going in this business or at any point, really, any point in your real estate career, did you have any epiphanies? Were there any like, aha moments like okay, now I get it. Anything like that comes to mind when I ask that question.

Warren
I’m not sure if it was a single moment or something that happened over time, but I think you kind of touched on it a second ago, Rod. Mindset is everything. For some reason, it’s very easy to doubt yourself. It’s very easy to think that you’re never going to be able to win a deal. But as soon as you can wipe away those negative thoughts and just be certain that you’re going to make a success of it, stuff tends to happen. And I think we were very surprised. We had a really successful 2021, much more successful than we ever imagined. But I think that momentum all just started with that first deal and having a positive mindset.

Rod
Yeah, they hear that on this show all the time because that’s really my biggest stick. How about you, Ryan?

Ryan
Yes, you know, that is true. It is about mindset, especially in real estate. You know, it takes grit. It’s very hard to get started. You spend a lot of time getting your teeth kicked in and picking yourself up off the mat. But to have the positive mindset to get up and do it again the next day, you know, that’s really what it takes.

Rod
Do you feel like your GC role in a previous life or in your current still, still using it, helps you significantly in what you’re doing now?

Ryan
Yeah, you know, I think it does give us a leg up in, you know, accurately assessing, you know, the cost for projects and then the potential for cost overruns. I see a lot of people that don’t have the relevant construction knowledge to really understand the execution risk and the potential to blow a renovation budget and ruin the return on cost metrics.

Rod
Yeah, for sure. So, you know, what’s the driver? Let me ask a different question. How does each of you define the success? What’s your definition of the word success? Warren, you first.

Warren
Tough question. I think both of us are after freedom. Time freedom, time to spend with our families. I mean, I’ve lived through this for 20 plus years where I traded time for money, so I really want that time freedom. I think success is when I can have a successful business but equally have a successful family life and do everything I want to be doing, not be tied to a desk or tied to a job.

Rod
Great answer. How about you, Ryan?

Ryan
Yeah, I mean, for me, success is pretty simple, and it’s just, you know, a measurement of what you set out to do and what you achieved. And if there’s a delta between that, but, you know, the real distinction is if there is a delta, you can get up the next day and push a little farther. You know, be a little better than you were yesterday.

Rod
Okay. So it’s a continual improvement. Okay, fair enough. I think that’s a pretty good place to stop. I really appreciate you guys coming on the show and sharing your knowledge, and it’s great–you know, next time you’re in, Sarasota, please let me know because, you know, this is my stomping ground. So very much a pleasure to meet you both and good luck in all you do, my friends.

Ryan
Thank you.

Warren
Thanks, Rod.

Rod
All right. Take care, guys. Thanks.

Outro
Rod, I know a lot of our listeners are wanting to take their multifamily investing business to the next level. Now, I know you’ve been hard at work helping our Warrior students do just that using our “ACT” methodology, which Is Awareness, Close, and Transform. Can you explain to the listeners how they can get our help?

Rod
You bet. Guys, we’ve been going nonstop for three years, building an amazing community of like-minded people. And our coaching students, which we call our Warriors, have had extraordinary results. They’ve purchased thousands and thousands of units, and last year, we did over 1000 units with our students. And we’re looking to grow this group and take it to the next level. We’re looking for people who want to follow a proven framework that’s really step by step and then leverage our systems and network to raise equity, to find and close deals, and to build partnerships nationwide. Now, our Warrior Community is finding success in any market cycle. So if you’re interested in finding out more about how you can become more of our incredible network and take advantage of the incredible opportunities that are coming very soon, apply to work with us at “MentorWithRod.com” or text “CRUSH” to “72345”, and we’ll set up a call so you can check us out and we can check you out. That’s “MentorWithRod.com” or text “CRUSH” to “72345”.