Mark Purtell, who joined CTC in 2001, transitioned to Head of Real Estate Acquisitions and Development in 2020 after contributing to the expansion of CTC’s operator network. He oversees real estate underwriting models, portfolio performance, and quarterly reporting. With a focus on multifamily investments in the Chicago market since 2002, Mark holds a B.S. in Finance from the University of Illinois (2001) and Series 4, 7, 24, and 57 licenses.
Preston Hartsell, an Analyst at CTC Capital Management LLC, recently joined from Newport Beach, California. A USC graduate (2022) with a B.S. in Real Estate Development, he previously interned at Essex Property Trust and worked at Northmarq, specializing in underwriting and market analysis for multifamily properties in California.
Here’s some of the topics we covered:
- Mark and Preston’s Background
- The Markets They Most Like To Invest In
- Where Incomes Fall Off In The US
- What Kinds Of Value Add Required To Charge More Rent
- The Importance of a Business Plan
- Having Backup Contingencies For Deals
- Working With Larger Capital Partners
To find out more about partnering or investing in a multifamily deal: Text Partner to 72345 or email Partner@RodKhleif.com
For more about Rod and his real estate investing journey go to www.rodkhleif.com
Full Transcript Below
00:00:00:03 – 00:00:20:27
Rod
Welcome to another edition of Life Time Cash Flow Through Real Estate Investing. I’m Radcliffe and I am thrilled you’re here. And we’re doing something we’ve never done before. We’re in our live studio and we’re actually interviewing two people at the same time. So let’s hope from a technological standpoint, we don’t screw this up. But we’ve got some some really interesting guys in here today, some hitters, and we’re going to be a lot of fun.
00:00:20:27 – 00:00:44:24
Rod
So we’ve got Mark Patel and Preston Hartzell and they are with CTSI Capital Management. And I want to pre frame a couple of things. One, they are not speaking on behalf of CTSI. They’re here in their own benefit and they’re not here to raise investment money. They’re they’ve got some unique strategies around which we’re going to dig into where you, where you come into a deal and and help a general partner make make a deal happen.
00:00:44:24 – 00:00:50:27
Rod
And so we’re going to we’re going to drill down on that. And they’re in their criteria. But we’re going have some fun today. Welcome to the show, guys.
00:00:51:00 – 00:00:52:05
Mark
Thanks for having us also.
00:00:52:08 – 00:00:52:26
Preston
Great to be here.
00:00:52:26 – 00:01:06:19
Rod
Awesome. Well, I know you guys came in from Chicago and I’m sure you’re enjoying the weather here. I don’t know what it’s like up there, but I used to go up there for Christmas. My father lived up there. And there is. That’s an inhuman freaking cold. When it’s cold up there with that wind.
00:01:06:21 – 00:01:11:28
Mark
You know, you get it goes to below zero and then you get the wind chill effects, which looks even colder. So, I.
00:01:11:28 – 00:01:28:24
Rod
Mean, yeah, in downtown Chicago, I mean, it’s beautiful that Miracle Mile and do Christmas shopping. I love that. But. my God, that’s a cold. I don’t know how you guys handle. So why don’t we take a minute and have each of you give us a little bit of your background in this exciting business that we’re in and we’ll start with that.
00:01:28:24 – 00:01:34:29
Rod
So you know why Real estate. When you got started in real estate. And Mark, why don’t you start and then Preston after Mark.
00:01:35:01 – 00:01:57:06
Mark
Sure. So I’ve been with CTSI for my entire working career. I was on the trading side of the company up until about five years ago, in which case I started shifting my focus to real estate and full time. I made that transition in 2020. And at this point, we’re we’re currently deploying out of our fourth fund. All our funds are focused on value of workforce housing.
00:01:57:09 – 00:02:07:01
Mark
And and in all in all, it’s it’s we’re optimistic and the workforce housing sector and and we continue to look for strategies and deals that fit that mold.
00:02:07:05 – 00:02:13:14
Rod
So can you speak a little bit more about CTSI? You said trading desk. So they’re not just real estate, they’re actually in the markets as well.
00:02:13:14 – 00:02:32:24
Mark
So CTSI started about 30 years ago, trading primarily index options. It’s now grown to 800 employees, trading options, stocks, futures all around the globe. Wow. And in the first real estate fund was borne out of the partners of the company trying to diversify some of their wealth outside of trading into real.
00:02:32:24 – 00:02:33:28
Rod
Estate.
00:02:34:01 – 00:02:50:15
Mark
At this point. Now, our fourth one, we’ve we’ve expanded the investor base a little bit and, and we’re continuing at the same focus and same strategy and the belief that there’s just not enough workforce housing units now, nor will there be over the next five or ten years. So that is our core focus and strategy.
00:02:50:22 – 00:03:12:10
Rod
Now that’s that’s definitely a market that’s that’s in frankly, in dire straits. I think there’s, you know, just housing unit shortage alone. I think I read I mean, it goes back and forth between two and 3 million units that are needed that we don’t have. And, you know, with development having slowed down, I think I think that’s a good play.
00:03:12:13 – 00:03:14:17
Rod
PRESTON What about you, buddy?
00:03:14:19 – 00:03:32:02
Preston
So I’m relatively new to city and transplant to Chicago. Originally from Southern California, I majored in real estate development at University of Southern California and realized I wanted to pursue a career there. So now at CTSI, I handle a lot of the underwriting and the due diligence for our investment pipeline.
00:03:32:04 – 00:04:00:14
Rod
Gotcha. Gotcha. So let’s talk about you know, I know that that your model is you’ll go in and correct me if I’m wrong on this, you’ll help an operator and and and bring forth the bulk of the GP’s capital in a deal. So just the you guys don’t understand what I’m talking about here. When you’re raising money for a deal, typically the general partners will put in a percentage of that raise.
00:04:00:14 – 00:04:20:27
Rod
And like in our case, when we raise money, it’s 10% that that we put in as GP’s. And you know that money can be brought in from other GP’s. It doesn’t have to come out of your own pocket and so, you know, you guys come in and you put in like I think you said, upwards of 95% of that GP piece.
00:04:20:28 – 00:04:32:03
Rod
Now you’re still raising the other 90% from, I suppose you know, armchair investors and other passive investors, but you come in on the side.
00:04:32:05 – 00:04:52:29
Mark
That’s correct. And it’s a great way for, for real estate operators to scale up their business Instead of just using your own funds or family and friends, you can partner with a co GP and assemble this GP capital, which now instead of doing a 20 or 30 unit deal, now you can tackle more of institutional type grade product right?
00:04:53:02 – 00:05:21:04
Mark
You know, 20, 30, $50 million deals because you’re essentially putting in a much smaller portion of the GP while still running the deal, still getting acquisition asset management fees on a larger deal and getting a bigger into the back end with larger promote dollars. So that’s that’s the the way to create these structures with these with these deals by using a co GP and there’s there’s there’s plenty of groups out there offering capital.
00:05:21:06 – 00:05:28:22
Mark
You just got to make sure that it works for you and your terms and, and the alignments are a fair outlook on the deal or are true to each other.
00:05:28:28 – 00:05:47:29
Rod
Sure, sure. Well we’ll we’re going to drill down on your criteria because I think it’ll add value to my listeners for criteria in general. And you know, this is your fourth fund, so you’ve been doing this a good bit and you focus on workforce housing, multifamily value add. Would that be an accurate statement?
00:05:48:01 – 00:05:49:22
Mark
It’s spot on, spot on.
00:05:49:25 – 00:06:01:26
Rod
Okay. So let’s talk about the markets that you’re in geographically, submarket markets and submarkets. Do you are you targeting specific geographic areas?
00:06:02:03 – 00:06:25:29
Preston
We are. We really value markets with not a lot of construction. Constantly you’ll see markets with big construction mostly a they’ll go in, they’ll build these big buildings while we’re in the workforce B and C class properties for a year or two. These class-A properties will offer big concessions, so the runners that you’re targeting will go they’ll take the year of concessions in these class class-A markets.
00:06:26:05 – 00:06:49:07
Preston
They’ll come back after a year or two, but you’re losing a year or two of your prime market runners. So that’s one thing we focus on now. Our thing we focus on is higher incomes in markets being value add investors or raising rents, whether it’s through basic renovations, different operational value add we use. But we want to make sure the renters of today can afford the rents of tomorrow.
00:06:49:09 – 00:07:07:21
Preston
Once these rents have been pushed. So we look at median income in the area. But in terms of the actual markets where and when, a lot of secondary and tertiary markets being workforce value added in for some examples, we’re really bullish on the Northeast right now. Like we said before, there’s not a lot of construction up there, especially in the secondary markets.
00:07:07:21 – 00:07:29:01
Preston
Are these Northeast products, incomes are solid up there. We do look at incomes adjusted on state taxes as well. So while some of the state taxes are higher in states like New York and Massachusetts, relative to Florida, Texas, we still like the incomes up there, Midwest to Midwest and Rust Belt. Again, not a lot of construction and the incomes don’t fall off.
00:07:29:01 – 00:07:37:12
Preston
And in some of the suburban markets of the big cities, whereas maybe in states like Mississippi, Georgia, once you get out of these big cities, the incomes fall off dramatically.
00:07:37:14 – 00:08:08:06
Rod
You know, that’s very interesting. You know, we’re focused on the southeast, but but some of the things you said make a lot of sense. There’s not as much volatility in those markets either. You know what? I’m a I won’t say survivor. I’m a I’m a casualty of the 2008 nine crash. And and it was, you know, in during that crash, the northeast and Midwest, you know, they didn’t they didn’t suffer as badly as the rest of the country like the Califor Southern California where you’re from and and of course Florida and Arizona and so on.
00:08:08:06 – 00:08:39:04
Rod
But so okay, so those are the submarkets you like. I didn’t expect that answer, actually. Some kind of surprised to hear that. But I can see why. Yeah. I tell you personally, I struggle with investing in New York and Massachusetts or or California just because of the regulatory environment. But if that you know, if that doesn’t scare you guys, then and it’s working for you, I mean, you’re obviously very successful with what you’re doing, but so so submarkets.
00:08:39:04 – 00:08:47:23
Rod
Now let’s talk about the actual assets themselves. Is there is there like a size criteria, asset class criteria? Talk about the different criteria there.
00:08:47:28 – 00:09:08:00
Mark
Sure. We like to see at least 100 units per project and we like single site deals. The reason being is that you have everything in one property you’re trying to in a portfolio deal, because in our experience when you have a portfolio deal, you ultimately end up hating one of your properties. Like just if you buy for a portfolio, one’s going to be better one and number four is going to be the worst.
00:09:08:02 – 00:09:19:01
Mark
So we like single site 100 plus units for better economies of scale. We also like products that have a good seller story and by that.
00:09:19:03 – 00:09:20:03
Rod
Yeah, give some examples.
00:09:20:08 – 00:09:58:09
Mark
Sure. So we acquired a it was it was 112 unit deal in Colorado and the seller had owned the property for years and there was actually a fire in the building which, which took offline 15 units catches though the fire happened two years before he bought it and the seller had never used insurance money to renovate the units so that, combined with mismanagement, allowed us to go in, buy this property and get these these fire units back online and get better management in place allowed us to raise rents about $400 a unit.
00:09:58:11 – 00:10:00:11
Mark
We cleaned up the property. It looks great.
00:10:00:11 – 00:10:02:27
Rod
Now we’re in Denver. I mean, we’re in Colorado.
00:10:02:29 – 00:10:04:23
Mark
It’s it’s just outside of Denver.
00:10:04:23 – 00:10:07:14
Rod
Just that’s why I’m from Denver. So I’m just curious where.
00:10:07:16 – 00:10:08:06
Mark
Westminster.
00:10:08:10 – 00:10:19:17
Rod
I went to high school in Westminster. Great market, fantastic market actually. And you know, grew up there for 30 years in Westminster. Okay. So 100 units.
00:10:19:19 – 00:10:26:05
Mark
Asset class as A, Class C and B product and and below and B locations. Yeah.
00:10:26:07 – 00:10:48:21
Rod
Same thing. Same thing we do. So, you know, guys, for those of you brand new, there’s A, B, C, and D, A is brand new. The belle of the ball, great amenities, so on and so forth. Not always brand new but really high end property. D is the hood. Stay out of the hood. Ask me how I know I’ve had properties in Aurora, Colorado, where they blocked off the end of the street just to slow down the drug traffic, not stop it, to slow it down.
00:10:48:21 – 00:11:06:04
Rod
Yeah, I could go on and on there but stay out of d guys ask me how I know I give these shirts away at my boot camps to say hashtag ask me how I know because I always said don’t do that. Ask me how I know because I’ve made every frickin mistake you can possibly make. So yeah, Denver’s a great market.
00:11:06:07 – 00:11:24:01
Rod
I used to own 500 houses there at one time. I wish I had those now. They’d be free and clear and I would be bottom line netting at least a million a month. Yeah. Anyway, what it could have, should have. So. Okay, so property and what you said about a and what did you say B and C properties in A and B areas.
00:11:24:01 – 00:11:29:08
Rod
Because you’re looking for an asset, you can bring up one class through your efforts, through your value add efforts, correct?
00:11:29:10 – 00:11:49:02
Mark
Correct. Yeah. And those value add efforts include anything from, you know, improving the playground, right. Going in and renovating the units themselves. Sure. You know, through Kitchen Bath remodels, it’s amazing how you can take a product that’s 1020 years old and make it look like it was built yesterday. Sure. So that’s that’s what we really want to see, a value add catalyst.
00:11:49:07 – 00:12:03:10
Mark
And then we encourage, you know, operators to find deals where there’s a good seller story, you know, give us something you founded off market and true off market, you know, where you go direct to owner, you know, that’s where you’re going to find real hidden value.
00:12:03:13 – 00:12:23:12
Rod
Yeah yeah we we there are a lot of ways to do that and go direct to seller and a lot of my students do that not necessarily as much on the 100 plus unit deals. Those are a little more challenging to get directly to the seller, but you can do it. I’ve definitely had students do it. So Preston, talk about some of the other value add things that you guys will do in your units.
00:12:23:12 – 00:12:27:17
Rod
Just give us some some more detail on some of the things that you do.
00:12:27:19 – 00:12:30:09
Preston
So outside of the kitchen bath remodel.
00:12:30:09 – 00:12:34:09
Rod
I’ll talk what you’re doing, the kitchen bath to just go ahead and speak to it all.
00:12:34:12 – 00:12:44:24
Preston
A big one is a quartz countertop, stainless steel appliances, cabinets are kind of 5050 between painting them and replacing them.
00:12:44:24 – 00:12:46:18
Rod
On new doors.
00:12:46:20 – 00:13:01:16
Preston
Yeah, for the bathroom, new tubs, a lot. I mean, especially in more humid places. A lot of mold in the bathroom areas. Sinks. Yeah, the countertops in the bathrooms as well. New mirrors. Sometimes tile floor are renovation.
00:13:01:16 – 00:13:11:04
Rod
It’s how do you do vinyl? Do you do actual tile or I mean, if you put in quartz countertops in a museum and you’re going, that’s a pretty heavy, heavier lift than a lot.
00:13:11:05 – 00:13:11:24
Preston
Yeah, a lot of.
00:13:11:26 – 00:13:15:27
Rod
Kind of surface the countertop. So you go in and do the quartz.
00:13:16:00 – 00:13:30:05
Preston
To piggyback off of that, we really try to cater the renovation to the renter that goes back to the demographic. Absolutely right. So it could be anywhere from that quartz countertop to Formica, for instance.
00:13:30:08 – 00:13:49:03
Rod
But I like the products. They look really good. They actually look like quartz. I mean, you know, a lot of people can’t tell the difference. We did that in our Nashville asset. So as to floors, you know, we like the vinyl. I don’t know if you guys do that. Some of it can look like wood, some of it looks like tile, but it’s very durable and and seems to last.
00:13:49:03 – 00:13:57:16
Rod
Well, do you have fixtures? You do bathroom and lighting fixtures, things like that? We do do that.
00:13:57:18 – 00:14:11:14
Preston
We do rely heavily on the operator for that. Like we’ve mentioned, we’re mostly equity partners, so we see it all. We go do site visits, we meet with them, we see before and after pictures, but we do rely heavily on the operator and kind of on the back end and.
00:14:11:14 – 00:14:26:07
Rod
What that demographic wants because, you know, I like stainless as well, but believe it or not, in this particular part of Nashville, they like black appliances. So, okay, we’ll go with black, whatever it is. Is there an age that you don’t like to go older than on the assets.
00:14:26:09 – 00:14:29:03
Mark
That we own some property that’s 100 years old?
00:14:29:03 – 00:14:29:21
Rod
No kidding.
00:14:29:21 – 00:14:49:13
Mark
I would say this and we learned this is that the older we get in terms of age of property, the more simple we want the structure of the building to be. So if a high level, if we were to buy a brand new building, sure, it could be a high rise with an elevator, Right. If you’re buying a 50 year old property like garden style, walk up no elevators.
00:14:49:18 – 00:14:56:11
Mark
Right. You know, surface parking. So so because it keeps your maintenance a lot, lot more in check and manageable. Sure.
00:14:56:16 – 00:15:25:16
Rod
Sure. Wow. I’m surprised you do stuff that old, you know, that that I mean, I’ve had antebellum problem properties in Denver, houses in Denver that were over 100 years old. And, you know, you don’t know what you’re getting into when you do those remodels. Sometimes they can it can they can really surprise you. So so when you’re looking at an operator to cope with on the general partnership, what sorts of things are you looking for?
00:15:25:16 – 00:15:38:07
Rod
What sort of a track record, you know, do they need to have gone full cycle on deals? You know, what sorts of things do you look for? By the way? Full cycle means they bought the property and sold it. Okay.
00:15:38:09 – 00:15:41:04
Mark
Yeah. A lot of our operators work with our emerging.
00:15:41:07 – 00:15:43:05
Rod
And emerging markets. So they’re newer.
00:15:43:07 – 00:16:03:02
Mark
They’re newer, They’ve they’ve done some deals maybe with their own money or family and friends money, and they’re at the point where they’re looking to scale up. So as far as a track record, we definitely want to see some type of value creation, be it, Hey, we took rents from 1000 1300 dollars. We haven’t sold or refinanced the property, but we’ve proven value here.
00:16:03:05 – 00:16:23:10
Mark
You know, hey, we’ve got a legitimate appraisal on hand that shows the properties increased by 20%. Okay. That’s that’s, that’s in our opinion that’s that’s a good validation of of a value add. You know, if the operator does have a refinance amount or sale and they’re trackers, that’s great. Obviously, the more the better it shows that you’ve done it.
00:16:23:13 – 00:16:40:24
Mark
Now the thing we’re looking for is operators who are or masters of their market, you know, the operator who flies from cross country to go look at a deal. We always look at the country as a big place. You can find deals in your own backyard or in a neighboring state. You don’t need to travel across the country.
00:16:40:24 – 00:16:59:23
Mark
And what we find is that a lot of operators, if they do one deal and then they buy a property in a neighboring area, that second deal tends to do a lot better than the first one because they’ve got that local knowledge experience, they’ve got their team in place, they know the demographics, they know what the tenant wants and they can execute well.
00:16:59:25 – 00:17:06:21
Mark
So it’s more of a rinse and repeat factor. So we really look for operators who know their market and know it well.
00:17:06:24 – 00:17:28:06
Rod
So let’s say just hypothetically, you’ve got somebody who’s done a 20 unit building and they want to go larger and so they might be someone that you could help. How do you deal with the third party property management component? You know, because you’re going to do a larger asset, they’re likely not to manage it themselves. You’re not looking for people to manage properties that say 100 unit plus themselves.
00:17:28:06 – 00:17:30:18
Rod
I take it I’m certain that’s probably the answer.
00:17:30:20 – 00:17:49:09
Mark
Well, what we find is a lot of operation. They’re merging. Obviously you can’t have a self manager, right? 720 unit buildings. But but so you start using third party property management. But as these operators grow into their business, what they end up doing is they eventually end up self-managing.
00:17:49:11 – 00:17:50:02
Rod
When they get big enough.
00:17:50:02 – 00:18:00:00
Mark
I think you bring it up because at that point you have a lot more control over your your labor, over your cost, over your oversight. So we generally see that trend where people start.
00:18:00:00 – 00:18:19:28
Rod
Sure, ultimately. But if you’re talking when they’re emerging, do you play a role in helping them find a third party property manager? Do you rely on them to handle that? You know, how involved are you? Because, you know, we talked about this before we started recording. You obviously can’t just bring money to deals unless you’re series licensed. You have to be actively involved in the deal.
00:18:19:29 – 00:18:31:16
Rod
You can’t be a money raiser. So do you. Yeah. I asked you, do you go help or participate in the due diligence? For example, play a role in that? Do you play a role in helping guide an operator? I guess is what I’m asking. Yeah.
00:18:31:16 – 00:18:49:26
Mark
Yes, we do. We we definitely go out and encourage operators. You know, we have a series of questions, one of which is who are you going to use for property management. Right. And in that line, same thing is you get a quote for 4.4 and you’re also going to get multiple quotes for property management. And then sometimes, you know, you pay more and you get better results.
00:18:49:26 – 00:19:16:14
Mark
So we definitely go through that evaluation process of who are using what experience they have in the market. You know, show us, show us their track record, show us how they’ve added value to these properties. And so, yeah, we definitely are involved with that. But another aspect too, is working with the operator is the debt focus. You know, one thing we look at with that is we want to make sure that the the term of the debt lines up with the whole time of the property.
00:19:16:17 – 00:19:36:13
Mark
So if it’s a two year fixed flip so, you know, fine, put two or three year debt on it, don’t put ten year agency debt on a project that’s only going to last a couple of years. And the opposite is also true. We don’t like seeing deals where, hey, we’re going to go in, we’re going to bridge debt and then we’re going to refinance in year three and hold on to it for another 12 years.
00:19:36:16 – 00:19:54:26
Mark
There’s a lot of interest rate bets that are implied in there. In our view, a debt is generally it’s an input into the cost structure similar as insurance or taxes. That’s another function. And you need to that’s one of the few options that you have where you can choose the right instrument for that property.
00:19:54:26 – 00:20:18:22
Rod
I tell you, I’m pretty anti bridge right now based on what’s happening in the in the marketplace. And there are a lot of people in big trouble with bridge debt. There’s deals going south. Thankfully, in my community, we’ve only lost one out of 190,000 plus doors in my coaching students. But, you know, I’ve got some struggling. I’ve even got a couple of assets with bridge debt that we’re dealing with.
00:20:18:22 – 00:20:39:00
Rod
It’s it’s unpleasant. But, you know, I know. I know you’re not going to make interest rate predictions. I think the rate will come down. The rate will come down a little bit. I don’t think it as much as people hoping. But I think with the election year, you know, every election year I’ve ever seen things, the people the administration has made moves to make things look better.
00:20:39:00 – 00:21:02:05
Rod
So hopefully that’ll be the case here. But, you know, when you’ve got an operator that has to execute on a particular business plan and it’s a short term two or three year thing like you just said, you’ve got to have a pretty good comfort level with their ability to execute on a larger asset. I mean, can you speak to that a little bit?
00:21:02:07 – 00:21:10:22
Mark
Yeah. So what we find is, is you have a business plan and when you close in a deal, you might as well through that business plan kind of out the window.
00:21:10:22 – 00:21:12:14
Rod
Well, that’s why I’m asking that, because things.
00:21:12:22 – 00:21:45:05
Mark
Because things go things go sideways. Things go better. Sometimes things are worse. So we always look for a healthy contingency in that budget. Now, this is also a function of of how much you put on a property, but it’s also a matter of how much cash you have on hand. Right. So, you know, if if your renovation pace slows down or if you’re not getting those red bumps, you’re expecting right away, you know, if there is a bigger, bigger pile of delinquency and the building than you than you thought when you were in due diligence, you need to plan for the unexpected.
00:21:45:10 – 00:22:07:03
Mark
Right. And one way to cushion that is just raise extra cash. Yeah. The last thing investors want is a capital call, right? So. But they’ll definitely sacrifice a couple points of IRR, the back end to avoid that capital cost. So we’d rather have, you know, a suitable cash reserve in place. And if, hey, if things are going great, you give that money back to the investors and they’ll be happy to take in a couple.
00:22:07:03 – 00:22:28:16
Rod
But we’re doing a deal right now a mile away from an asset we have in San Antonio 296 unit existing asset. We’re buying a 200 unit and we’re raising almost 4 million in CapEx funds and there’s half a million of that is just in case we need it. And then we’ve also got an additional eight months of of expenses as operating reserves.
00:22:28:16 – 00:22:36:24
Rod
You know, just just in case the you know, what hits the you know what? So it you know, I completely agree with that that model.
00:22:36:27 – 00:22:38:05
Preston
I mean, I have something else to add to that.
00:22:38:06 – 00:22:38:24
Rod
Okay.
00:22:38:27 – 00:22:50:07
Preston
Another thing that we’ve done to help keep the cash reserves healthy is we’ve told operators to keep their distributions and not give them back, save it for a rainy day. And it worked out well.
00:22:50:09 – 00:22:56:10
Rod
And we sort of wanted you to elaborate. So, so so not give distributions while they’re doing the value add or what are you saying.
00:22:56:15 – 00:23:02:20
Preston
Correct. They were renovating units, they were getting rents, the debt was all good and they wanted to kick back cash to the investors.
00:23:02:20 – 00:23:07:23
Rod
And in advance of having the numbers that really justified it, correct, you’re saying? Yeah.
00:23:07:23 – 00:23:16:19
Preston
And we really wanted to keep keep the cash at the property level right. For a rainy day fund. A lot of our returns come at the back end anyway. So we’re not.
00:23:16:26 – 00:23:36:17
Rod
But those are those returns are accumulating. So so it’s not like the money is going out the window. They’re just not getting it right then and there. As long as I think, you know, you’re going to certainly piss off investors if you don’t communicate that and, you know, returns may be less than projected year 1 to 3, maybe whatever, depending on the length of the the the the value add played.
00:23:36:17 – 00:23:55:18
Rod
But no, I agree with that completely. You why are you putting distributions out there if you’re taking it out of operating reserves to do it, you know, while you’re in the value add phase. Right. That’s what you’re saying. Yes. Correct. Absolutely. Yeah, I agree. So you’re okay with deals with bridge debt right now? Short term plays is as long as you feel like the operator can execute, you still do that, right?
00:23:55:18 – 00:24:08:09
Mark
It’s the key is execution. And then and that means all the way through from the business plan to sale. Right. You know, but at the same point, too, we still like to have, you know, if the business plan is going to take three years, you’ll get at least four years of bridge debt.
00:24:08:16 – 00:24:27:10
Rod
thank you. I’m really glad you said that. Okay. I feel better. So so let me ask you this. You know, in your projections these days with the economy where it’s at, I mean, things have stalled out a lot. What sort of rent, bump percentages are you comfortable seeing in a pro forma. Let me ask you that, Preston.
00:24:27:12 – 00:24:31:03
Preston
I think this is just going to go back to what the renters can afford based on the need.
00:24:31:03 – 00:24:56:18
Rod
I agree with that. Now. I agree with the median income and I assume you want to see that income be three times whatever your ultimate rent will be. Is that a good factor? Yeah. Okay. So but but still in your pro formas, what’s sort of just organic rent growth, Do you do you allow or will you be comfortable with and when you’re doing your analysis.
00:24:56:18 – 00:25:07:21
Rod
So guys, of course we can look at the market and see what rents would be in, you know, in your competitors and gauge that. But but you also typically throw in some organic rent growth. What do you what do you typically do there?
00:25:07:21 – 00:25:26:03
Preston
Preston We found that real estate is very cyclical. And the fact that there might be 3 to 5 years of flat rent growth and then it’ll bump up 10% and over time that might average out to about 3%. That’s what a lot of the operators using their underwriting models. But we’ve really found that rents are flat for a while.
00:25:26:03 – 00:25:37:19
Preston
And then there’s some major bump like this recent COVID bump. whether that was just inflation rising or stipends being given out, you saw 10 to 20% rent and 30.
00:25:37:21 – 00:25:40:02
Rod
Two here in the Tampa MSA was absolutely.
00:25:40:02 – 00:25:50:05
Preston
And then if you if you really average that out, that’ll be 3% year over year after that 30%, it’ll sometimes be negative like in a lot of the Texas market’s a negative and that’s how it averages out to 3%.
00:25:50:05 – 00:26:23:11
Rod
Interesting perspective actually. That’s very interesting. Yeah, I’ve got a lot of assets in Texas right now and definitely things are slowing down a little bit. I still feel like we’re okay with 2 to 3% rent bumps. I mean, organically, but just because the markets are so strong. But your comment about absorption is definitely a very valid point. We’ve got an asset in Nashville that’s that’s that’s been impacted by the huge number of of units coming online there.
00:26:23:13 – 00:26:46:19
Rod
I mean, it’s it’s a home run but it has it has affected that that that one. So that’s that’s very valid as well you know when you’re assessing an asset talk about what sort of you know terms you want, you know the debt terms, the capital stack, you know, any, you know, speak to speak to terms in general in that regard.
00:26:46:21 – 00:26:55:14
Mark
The for the debt just kind of goes back to a function of what’s the purpose of the debt, Right. Is it a long term hold? Fine. Then we’re going to look for agency.
00:26:55:14 – 00:26:56:04
Rod
Debt, right?
00:26:56:04 – 00:26:57:03
Mark
You know, because Yeah.
00:26:57:04 – 00:26:59:26
Rod
And you’ll get involved in long term holds.
00:26:59:29 – 00:27:01:15
Mark
Long term been up to ten years or.
00:27:01:15 – 00:27:02:12
Rod
Ten years, guys. Yeah.
00:27:02:12 – 00:27:37:20
Mark
Okay. Yeah. The last deal we closed is a ten year hold It has tenure agency done on a nice fixed rate and then the deal before that has shorter term bridge debt on it. Once again it’s an input function. So bridge debt typically more expensive. Right. But it’s a lot more flexible. There’s there’s no prepayment penalty oftentimes. And and you get your cost going in and out or higher sometimes in agency debt, whereas agency that has yield maintenance, if you want to sell that ten year hold in year two and rates have changed, you’re going to pay for it.
00:27:37:22 – 00:27:43:17
Mark
So that’s that’s where the cost benefit analysis of what debt you’re using on each.
00:27:43:17 – 00:27:47:28
Rod
Deal that you guys don’t come in as KPIs at all. It’s just in the GP capacity, correct.
00:27:47:28 – 00:28:07:12
Mark
We will sign we will sign a non-recourse that you will. Yes. Well and that’s that’s been is definitely something that we feel adds value to that operator who might not have the qualifications to qualify for debt. Yeah we we generally don’t sign on recourse debt. Right. But, but non-recourse. Yeah no problem.
00:28:07:12 – 00:28:25:25
Rod
So those of you that have no idea what we’re talking about, a couple of key principles is the person that signs on debt. And so they’re saying that that they actually will sign on debt which is which is I’m surprised to hear that actually, I didn’t think you were going to answer that way. And you know, where it is is is not necessarily signing on debt.
00:28:25:27 – 00:28:58:09
Rod
So and then, of course, recourse debt is where they can come after you If the if the property goes into foreclosure and it doesn’t bring what’s owed on it, they come after you for the difference. Non-recourse. They can’t. No, they won’t. They’ll just take the property. So for those of you that are brand new, so, you know, I have a lot of aspiring multifamily investors that listen, some that have done some houses, done some smaller assets from Plex’s on up to ten, 20 units.
00:28:58:11 – 00:29:04:13
Rod
They know they want to go bigger. They know they want to do this. What could you say to give them some encouragement?
00:29:04:15 – 00:29:07:10
Mark
But you said first take massive action.
00:29:07:12 – 00:29:10:14
Rod
Thank you for that. You’ve listened to me before. I love it. Thank you.
00:29:10:15 – 00:29:14:24
Mark
Yeah, yeah. And we say on our site, Go bigger, faster, sooner.
00:29:14:26 – 00:29:15:13
Rod
I like it.
00:29:15:16 – 00:29:20:21
Mark
You know, it’s not much more work to run 100 or 200 year deal compared to a ten or 20.
00:29:20:22 – 00:29:36:06
Rod
And I want I want to put an exclamation mark on what he just said. I know that sounds crazy, but it’s not much more work to do, 100 unit, 200 unit deal than it is to do a ten year. You’re doing the ten unit deal. I want to make sure you heard that because it’s absolutely a fact. And I know it’s scary, but but it is.
00:29:36:09 – 00:29:49:12
Rod
But I will say this, though. You know, on the flip side, it’s a lot more money to raise. So do you how do you evaluate someone’s ability to raise the money for a deal? Is that come into play in your in your conversations? I’m guessing it does.
00:29:49:15 – 00:30:01:04
Mark
It absolutely does. And and, you know, it’s a conversation that we have with every operator, right. And we look for for a plan, you know, of great ideas. Here’s here’s ten options I’m going to pursue.
00:30:01:06 – 00:30:01:15
Rod
Okay.
00:30:01:18 – 00:30:24:07
Mark
Here’s here’s I’m going to talk with a placement agent. I’m going to talk with, you know, high net worth individuals I have a list of in my Rolodex that I’m reaching out to. I have a track record that I can lean on and go back to those investors. Nothing’s a sure thing, right? We get it. When you sign a deal up, it doesn’t mean it’s going to close, but you can try to line up as many pieces you can in advance to get that equity line up.
00:30:24:08 – 00:30:31:26
Rod
Do you help at all with that in any way? Source, private equity or anything else to help in that piece of the capital stack?
00:30:32:02 – 00:30:43:16
Mark
And we don’t we feel that our niche in value add to the project and the operator is much more on that official is the code tend not to. So bringing in an LP capital.
00:30:43:19 – 00:31:06:12
Rod
Okay okay so in in in your division that’s CTSI. What are the components is is it just you guys in this division or are there other are other players in your team as it relates to you know, this this initiative and because I’m sure I mean, CTSI obviously does lots of other things, I’m just curious what the team makeup is.
00:31:06:15 – 00:31:27:14
Preston
So for day to day, it’s me, Mark and Joe Herriman also works with us. Okay. So when operators call us whether to pitch us a deal or whether to give us a quarterly update, they’re talking to us. We’re we’re very hands on with our with our one, our investors to our operators. And three, just even brokers pitching us a deal.
00:31:27:17 – 00:31:33:14
Preston
So one that makes us busy. But two, we have good personal relationships with a lot of our operators and brokers at the same time.
00:31:33:14 – 00:31:39:05
Rod
When you say investors, who are the investors that you’re that you’re communicating with, where do they come into play in all this?
00:31:39:05 – 00:31:45:10
Preston
So all of our capital has been sourced internally through partners, employees, some of the founders.
00:31:45:10 – 00:32:12:16
Rod
That’s that’s correct. Wow. So it’s almost like a family office, as it were in that regard. Yes. Yeah. Okay. What’s the biggest challenge you encounter in this model? You’ve been doing it a while. Talk about talk about talk about challenges that that come up. And I’m sure there’s 100 ways to answer that question, but maybe some some larger ones that that you encounter effectuating the model that you guys do.
00:32:12:18 – 00:32:26:00
Preston
I think one thing is some operators just do not need Koji Capital, whether they’re established, whether they have a fund, whether they’re a high net worth individual themselves, right? So trying to maneuver ourself into deals isn’t, isn’t always what the operator is looking.
00:32:26:00 – 00:32:26:19
Rod
For, right.
00:32:26:23 – 00:32:37:12
Preston
Not to say we would miss out on a deal because they don’t need Koji Capital. We see ourselves as real estate investors first, right? But there’s just not always a need for us and that’s unfortunate sometimes got it.
00:32:37:13 – 00:32:59:20
Rod
Okay talk about I call them seminars. You know, I had a $50 million seminar in 2008 $9 50 million. Talk about a setback in your history, a deal that went south and why why it might have gone south or maybe didn’t completely go south, but there was a big hiccup. Talk about that.
00:32:59:22 – 00:33:18:27
Mark
One of the functions of being an investor is an LP or even a coach is is made major decision. Right? Right. And and one thing that we find is if you’re coming with a koji P and you have much larger LP, you know, a single check writer who’s writing or 90% of the equity they control the outcome of that deal.
00:33:18:27 – 00:33:40:14
Mark
So they’re going to tell you when it’s time to refinance. They’re going to tell you it’s time to sell, right? So we’ve had situations where, you know, we’re sitting here, you know, blue in the face saying we should sell this property in larger pieces. Let’s hold on to it a little longer. So it’s a trade off that we have to deal with in the market when working with larger capital partners.
00:33:40:14 – 00:33:58:00
Mark
And every operator has that. That too, is that you’re ultimately beholden to who has made your decision. So you’re we try to structure those as much as possible so that we’re somewhat guarded as to what their limitations are. But it’s a day if you’re writing a check for 90% of the deal.
00:33:58:02 – 00:34:16:06
Rod
Your deal, you’re going to have some rights. Yeah. Now we purchased an asset in Lexington. We’ve since gone full cycle on, but the seller did not want to sell and his private equity was making him sell. So, I mean, I remember having that conversation with him. So, no, you’re absolutely right. So what we’re talking about, guys, you know, when you’re raising the money, sometimes you go after some big money.
00:34:16:09 – 00:34:34:11
Rod
And that big money when they put that money in is going to exert some control. And, and it varies depending on the level of control. And it could be private, private private equity. It could be a family office, high net worth individual. And if they’re sophisticated, they’re going to exert some some, some, some control if they put that money in.
00:34:34:11 – 00:34:48:29
Rod
And so that that’s that’s been frustrating on occasion. Got it. Okay. As a as as a division in CTC, what do you what are you most proud of? What do you consider your most professional success in that regard?
00:34:49:01 – 00:35:10:02
Mark
It’s really creating the process. Okay. Analyzing deals, being able to respond efficiently and reaching out to operators, building an operator network that that continually gives us information and we give them information back to them. So where where the success really is is that the process yields results.
00:35:10:04 – 00:35:29:19
Rod
So so what you’re saying is, as this process that you’ve developed over the years has become in an in its own right a resource, Is that what you’re is that what I’m hearing. Correct. So so all these have deals you’ve evaluated or whatever, they’re all cumulative and you’re able to rely on these operators you built relationships with and vendors and so on.
00:35:29:22 – 00:35:38:21
Rod
You’re able to rely on that ecosystem to help guide future decisions. And it’s a resource that I want to make sure I’m hearing you correctly.
00:35:38:21 – 00:35:49:25
Mark
Yeah, it’s the the act of doing is your education, which allows you to have better success in the future. The next time you see a similar situation or similar deal, you know how to respond.
00:35:49:26 – 00:36:13:00
Rod
No, I like that. That’s we feel the same way. You know, when we’re evaluating deals, they all go into our database and we, you know, we accumulate them even though we have no interest in them whatsoever. They we’re growing and learning just by doing. And I completely agree. Great answer in. Your deal analysis. Have you developed your own software to do that, to use our guest or do you use some other really expensive platform?
00:36:13:06 – 00:36:16:16
Rod
How do you analyze deals? What’s that look like.
00:36:16:19 – 00:36:43:08
Preston
In terms of a lot of the cash flow analysis? Mark has been great and one analyzing cash flows and into analyzing deals against other. I’ve written two algorithms, one to score and then pinned properties against each other in some markets or markets, depending on how big they are as well as I’ve written an algorithm to pin submarkets against each other and score them based on different vacancy for some of the properties.
00:36:43:08 – 00:36:56:26
Preston
A big one is the current rents versus average rents in the market. That goes back to being a value add investor from construction in the market, different incomes and stuff. So those algorithms help us on a big picture scale. I wouldn’t say they’re super actionable.
00:36:56:26 – 00:36:58:04
Rod
They’re macro for sure.
00:36:58:04 – 00:37:11:13
Preston
Correct. But like I said, the actionability is not quite there because we go through an operator, we can’t I can’t run this algorithm and pick ten properties and we don’t go make our eyes on them. But it’s good to see if one pops up or in the area.
00:37:11:17 – 00:37:20:16
Rod
I’m assuming you’re reviewing the pro forma from the from the operator. Correct. Making suggestions, giving your input and or thoughts or. Yes.
00:37:20:16 – 00:37:35:12
Preston
No, absolutely. We look at their model, but in terms of once we get past the original underwriting of the submarket in the market, we really stress test the properties almost as a credit analyst, push every lever to see where it goes wrong. It still pushes out a positive IRR talks.
00:37:35:13 – 00:37:52:10
Rod
Let’s talk about stress testing for a minute because that’s that’s absolutely a huge component of this. What are some of the stress tests that you do to evaluate a deal And basically what you’re doing is stressing it, okay, you know what? What could go wrong? What happens if if this doesn’t happen? So talk about some of those things.
00:37:52:10 – 00:37:54:11
Rod
Just to educate my listeners.
00:37:54:13 – 00:38:06:17
Mark
So early on, we delve into a general model to see what really creates value. And what we found is it comes down to three things your rents, its sale.
00:38:06:24 – 00:38:07:10
Rod
Time.
00:38:07:12 – 00:38:08:21
Mark
Your x cap.
00:38:08:23 – 00:38:09:09
Rod
Chain.
00:38:09:11 – 00:38:22:00
Mark
And your rent growth. Okay, So by moving those three levers, you can make a terrible deal look great and a great deal look terrible. Now, unfortunately, you don’t necessarily know where the cap is going to be.
00:38:22:02 – 00:38:26:06
Rod
All three of those are guesses. So, you know, you’ve got to make an educated guess.
00:38:26:11 – 00:38:49:08
Mark
You do. But what things that are less important are this vacancy year to year. You know, some of your operating expenses like taxes and insurance. Yes, they can hurt your cash flow at times, but they’re ultimately not going to drive the maximum value return out of a deal. Okay. So one thing that we look at or analyzing deals is we want to see an immediate value add.
00:38:49:10 – 00:39:14:01
Mark
You know, deal risk and close down the reds for $600. We talk to the operator a week after close. You said we we just have a side of the front yard and we’re already walk ins paying $300 more a unit. So that’s an example of immediate value add proving that rent is is is where it should be. And that’s the that’s the something that we have control over in the modeling.
00:39:14:03 – 00:39:24:12
Mark
Whereas what we don’t like to see is, is the person’s point. We don’t want to see super aggressive rent growth, right? Because it’s not predictable, sustainable.
00:39:24:12 – 00:39:48:08
Rod
So that’s why I asked you about your organic modeling. You know, I was just curious about that. So it sounds like you’re not aggressive at all. So effectively, you guys have funds because you’re on your fourth fund. And I know I have a lot of students. Well, I shouldn’t say a lot, but probably ten that have approached me to either do a fund or already doing a fund and, you know, call it a fund of funds or, you know, just a fund in general, an opportunity fund.
00:39:48:09 – 00:40:04:14
Rod
We have an opportunity fund actually right now ourselves. And we’ve only put this one asset and San Antonio into it. But, you know, what are your thoughts on on starting a fund versus going, you know, doing a asset specific syndication.
00:40:04:16 – 00:40:24:20
Mark
For for investors starting out? I strongly suggest you start with the property. Yeah. Do a single property an investor can go over. They can touch it. They can even run a unit there if they want. Right? When you create a fund, your legal costs are a lot more right. And you’re also selling a potential investment to investors very, very solid.
00:40:24:20 – 00:40:57:19
Mark
The funds warehouse investments, which is buying a property before the fund closes and then transferring ownership. So an investor is basically saying over a check based on a stack of legal box. So it’s it’s there’s a lot more faith in that invest and that much harder. It’s much harder. Yeah and and so for starting operator I would say go do a bunch of deals that that you raise your investor capital you perform well on them you execute you generate returns and let your investors tell other investors about you.
00:40:57:21 – 00:41:10:11
Mark
And when you reach that critical mass where you think, hey, look, we can I can be a lot more nimble with the capital stack if I have a fund or by the way, I’ve got a whole bunch of people asking me to start a fund, then it’s probably the right time to take spoils for adoption.
00:41:10:11 – 00:41:23:26
Rod
I agree completely. I agree completely. In fact, I shut down one of my warriors that became a warrior and said, Hey, I’ve got a fund started. I said, How many deals have you done? None. I said, You’re not going to raise any money. You’re kidding yourself. And, you know, it was painful for him because he’d spent some money on it already.
00:41:23:26 – 00:41:45:23
Rod
But now that’s good advice. So. So we’re going to wrap this up at this point. But you just made a comment. You know, I’ve got a pretty, pretty extensive library downstairs. And you and you guys got here early, so you had a chance to look it over and you said you’ve read a lot of those books. And I’ve got a pretty extensive business and self-actualization and mindset library down there, you know, Do you do you let me ask you this.
00:41:45:23 – 00:42:06:07
Rod
Do you you’re obviously a reader by making that comment when when you’re is there a gift? Is there a book that you gift more often to people that you really love that? Or can you maybe speak to some of your favorite books that would that would help my audience either in this business or in life in general.
00:42:06:09 – 00:42:08:16
Mark
One book I really like is never split the difference.
00:42:08:16 – 00:42:28:02
Rod
But yeah, I’ve had I’ve had him on my podcast and Chris Voss is amazing, actually came and spoke to my master mind as well. I hosted a mastermind, Scott I don’t know, 3040 billion represented by the members and, and he came and spoke to that as well. Yeah he’s that’s a great book. Never split the difference in fantastic book on negotiation what else.
00:42:28:04 – 00:42:32:09
Mark
That one of the original ones is thinking grow rich by polian Hell.
00:42:32:11 – 00:42:57:09
Rod
It’s so funny. I literally just did the I do own your power clips about motivation. I literally just did a clip on Burning Desire. You got to have burning desire to get anything you want and I have given away and I’m not exaggerating here. If I look at the boot camps, I’ve done probably close to 4000 copies of that book, True Story, and it’s a book you should read several times a year, in my opinion.
00:42:57:11 – 00:43:00:28
Mark
Yeah, it’s excellent. Yeah. So it’s the it’s the first one that created the.
00:43:00:28 – 00:43:23:08
Rod
Whole it’s it started that whole motivation, self-actualization process. And I actually do a, a segment on it at my life boot camps and a thousand people in Orlando in September and I talk about the book and I actually I gave away a free copy and I’ve given away thousands of copies of that book. Well, listen, guys, I really appreciate you coming all the way down here from cold, windy Chicago.
00:43:23:08 – 00:43:33:28
Rod
And it’s been a real pleasure to meet you both. And I think you’ve got a hell of a model here. And those are you listening. You know, if you know, if if you want to check them out, how do they reach you?
00:43:34:00 – 00:43:45:07
Mark
Go to our website, KTRK Capital Management. Okay. You can also call us. We answer 3128638079. Okay. That that’ll get to us. Okay.
00:43:45:09 – 00:44:08:19
Rod
Super. You know, I think you’ve got a hell of a model for aspiring investors that need help with the, the actual piece of the race. And so, you know, it’s it’s obviously been a success for you guys. And I think, you know, also, frankly, having you guys looking over their shoulder is a is a benefit as well. So, you know, I’m happy to have you, you know, put a plug in for it.
00:44:08:19 – 00:44:12:08
Rod
So. Well, I appreciate you coming down, guys, And it was a pleasure to meet you both.
00:44:12:10 – 00:44:13:16
Mark
Hey, thanks for having us.
00:44:13:19 – 00:44:15:08
Rod
Thank you. Nice.
