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Multifamily Q&A: How to Start, Scale, and Succeed in Apartment Investing

Multifamily Q&A: How to Start, Scale, and Succeed in Apartment Investing

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Is multifamily real estate investing as complicated as investors make it out to be? If you’re Andrew Cushman of Vantage Point Acquisitions, you’d probably argue that although multifamily has a bit more complexity than single-family rentals, it’s still, by all means, profitable for the everyday investor.

In the early 2000s, Andrew didn’t know anything about pro formas, apartment underwriting, or the best type of mulch to use on large-scale landscaping. Now, more than a decade later, Andrew has been able to lead his team in acquiring, syndicating, and repositioning over 2,500 multifamily units. He’s here with David Greene to answer live questions surrounding anything and everything related to multifamily investing. He gives stellar takes on the current state of the market, how rising interest rates will affect multifamily investing over the next few years, and the best way to increase your ROI (return on investment) on a multifamily acquisition.

You don’t need to be a large-scale apartment investor to take away some golden nuggets from this episode. Even if you’ve never thought of investing in multifamily, Andrew frames multifamily in a way that’ll have you wondering, “could I buy that apartment down the street?”

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Read the Transcript Here

David Greene:
This is the BiggerPockets Podcast, show 607.

Andrew Cushman:
That’s one of the beautiful things about multifamily. In single family, you buy a house and the average price in that market goes down 30%. Well, yours probably went down 30% too. In multifamily, you’re valued on the net operating income so if you’re a really good operator, you can still increase the value of your property in a flat or down market, even if everyone else is struggling. That’s one of the really cool things. That’s part of why, again, with caveat, it’s somewhat okay to pay a little bit for future performance, because it is something that’s in your control.

David Greene:
What’s going on, everyone? This is David Greene, and I am your host of the BiggerPockets Real Estate Podcast. At BiggerPockets, we want to teach you how to build financial freedom through real estate. We do that through formats like this podcast, where we bring in experts on specific topics like my good friend, Andrew Cushman, who is here with me today.
Andrew and I will be co-hosting this one. We invest in properties together. Andrew’s the best multifamily investor that I know. I call him Hawkeye from the Avengers because when this guy lets an arrow go, he never misses.
In today’s episode, we do a deep dive into multifamily apartment investing with a specific bend towards how to make it work in this hot environment while interest rates are rising. Andrew and I tackle several difficult questions and I think it came out really good. Andrew, how are you today?

Andrew Cushman:
I’m doing really well. Yeah, that was a whole lot of fun. We talked about a lot of stuff. Is it okay to ever pay proforma value for a multifamily apartment? We talked about, how do you find deals in today’s hot market? The low-hanging fruit’s gone, so how do you get up to that one that’s hanging on the branch way up there that no one can get to? Then we talked about some ways to add value that maybe some people haven’t thought of before.

David Greene:
Yeah, this was very unique. I thought you gave some answers that I have never heard anybody else say, and the guests asked some really good questions. Make sure you check this one out and listen all the way to the end, because Andrew gives some fantastic advice of how you can add value to multifamily property that I can almost guarantee you’ve never heard anybody say before. It’s very creative and very insightful.

Andrew Cushman:
We’re going to talk about pine straw and I won’t explain what that is. You need to go to the end and listen.

David Greene:
That is the word of the day. When you hear pine straw, make sure you pay attention. Today’s quick tip consider going to BPCON. Open registration’s started and you can go to biggerpockets.com/events to get your ticket. I will be there. Andrew might be there. My co-host, Rob Abasolo, will be there. A lot of BiggerPockets personalities will be there as well as a lot of members. Probably, some of the people that you heard on today’s show.
I’ve never, ever, ever seen a sad face at a BPCON in my entire life. It’s just a lot of people having a really good time, learning a lot of fun stuff, and having a great time. You always learn something at an event, but it’s often like a bran muffin. Just who really wants to be eating that? This tastes really good. This is fun and entertaining at the same time, so do not miss out.
These events will sell out. Get your ticket there. Events like these are also a way that you can meet other people that will help you in your business. Too many people underestimate the value of helping somebody else and then learning from them in that process.

Andrew Cushman:
Yeah. We’re actually looking for someone to help us right now. If you’re listening to this podcast, you’re probably someone who has a general interest in real estate. That’s a base requirement, but we need someone on our team who would make an awesome investor relations manager. If you’ve got strong organizational and system skills, you’re detail-oriented, you’re a strong communicator, then reach out to us.
Just go to vpacq.com. There’s a “we’re hiring” tab on there. Fill out the application and we look to, hopefully, add another BP community member to our team. We just hired a BP community member this week and we’re looking to do that again. There’s no better people out there than the BP community.

David Greene:
That is right. If you like what you hear from today’s show and you want to invest with Andrew and I, you can go to investwithdavidgreene.com. Register there. Accredited investors only please, but we are still raising money for an apartment deal that we are buying and it’s a really good one.
All right. Without any further ado, let’s get to our first caller. Whitney Boling, welcome to the BiggerPockets Podcast. How are you today?

Whitney Boling:
Hey. Doing good, David. How are you, man?

David Greene:
I’m pretty good. I’m excited. I got my buddy, Andrew, here with me today and he’s my … I’m putting together the investing Avengers, so Andrew’s like Hawkeye. He’s the sniper He just does not miss on anything that he does, so you’ll get some really good advice today. What’s on your mind? What do you got for us?

Whitney Boling:
Awesome, yeah. Thanks for having me on. I’m an investor out of Phoenix. Been listening to the show a long time. Got some single family rentals going right now, some condos, some single family homes, but ultimately, looking to try to make the transition into a multifamily right now.
Being in Phoenix, I’ve built up a decent equity position. I feel like the timing is right, but I just wanted to try to see, in making that transition, what are some of the top five things that don’t stick out in researching single family that might stick out when you’re looking at multifamily?

David Greene:
That’s really good. Andrew, you want to start there?

Andrew Cushman:
Yeah. Top five things. I could probably list off about 50, but I’ll try to narrow it down to the five that come to mind first. One is learning. Committing the time to learn how to underwrite a multifamily. It’s definitely a lot different than a single family where you’re looking, you might start with an ARV, after repair value, and then work backwards to determine, “Okay. What can I pay for it? What’s my mortgage going to be, and my expenses.” Then, “Is my rent going to cover that?”
You can do that pretty simply on a small Excel spreadsheet or even sometimes on the back of a napkin once you get good at it in single family. Multifamily gets a little bit more complicated, especially as you move into the bigger stuff where you’ve got 80 units, 100 units, 200 units, and you have things like ongoing vacancy factor.
You’re going to renovate, in many cases, and raise rents but it’s not 100% of the time. You buy a house, you fix it up, you re-rent it, boom, you’re done. Well, if you’ve got 100 units, you’re not going to renovate all 100 units the first day you move in. You have to plan on, “Well, how do I schedule that? How do I account for the fact that maybe I’m going to do eight units a month for the next 12 or 14 months?”
Then just all the other factors that go into underwriting. What do you do with … How do cap rates affect things? “How do I determine a going in cap rate and then what do I put for an exit cap rate? How do I underwrite the cost of debt?” You get into things like not only management companies, which you typically have with a single family, but then also actually having staff that are dedicated to the property.
One of the biggest things is just learning how to underwrite. Every operator that I know does it a little bit differently, so the key is to either purchase, or develop, or borrow a template for underwriting multifamily, and then get to learn that, and then maybe develop your own down the road. That’s what I did. This was not something I was going to figure out on my own from scratch. I’m not the creative guy, so I literally hired a mentor, got his underwriting spreadsheet, and then have built it out far greater over the last 11 year.
The number one thing is, learn how to properly underwrite. There’s courses, there’s books. Find a mentor. Partner with somebody who’s already in the business. You’ve got to learn how to underwrite properly. Or if that’s totally not your thing, partner with somebody who’s already got that nailed. Underwriting is number one.
The second big thing I would say is really important to commit to learning about, as you move into multifamily, is the debt is far different than what you’re used to dealing with in single family. In a single family, you might just go get FHA, 30-year amortized loan, boom, you’re done. Everything’s good, don’t worry about it.
In multifamily, and I should define multifamily. We’re talking commercial-size multifamily, five units and up. In commercial-size multifamily, the loans, number one, they’re typically nonrecourse, unless you get a bank loan, so that’s a benefit. Recourse meaning they’re not going to come after you. You really need to understand recourse versus nonrecourse. Then they also have things called bad boy carve-outs, which means if you commit fraud, then they can come after you no matter what.
You have to commit to learning all the different types and terms of debt, and then not only that, but just how does it work in terms of your property? Again, if you get a single family house, many cases, you’ll slap a 30-year loan on there and you’re good for as long as you want to hold it. In the commercial world, your loan is typically only good for five, seven, or 10 years. There are exceptions to that, but in most case, you have to pick. Is this going to be a five-year loan, seven-year, 10-year? Maybe 25, if you’re going bank, or HUD, or something like that. The second big thing to commit to learning is definitely how multifamily commercial debt works. It’s very different than the single family world.
A third thing, and this piggybacks or parallels with that is matching that debt with your business plan. One of the biggest mistakes that we see people making, even experienced people, is not properly matching your debt with your business plan. If you buy a house and you put a residential mortgage on it, or a duplex, even a fourplex, you can basically sell that and pay it off anytime, no problem, in most circumstances. In the commercial world, you can’t necessarily do that.
We have what’s called prepayment penalties, which most people understand what that means, meaning if you pay off the loan too early, if you said, “This is a 10-year loan” and two years in, you’re like, “Hey, I want to pay this off,” the lender says, “Great, but you’re also going to owe me 10, 15% of the loan balance as a penalty,” which is huge. We also have yield maintenance, which is effectively the same thing. Meaning the lender wants to protect their yield, and if you pay off the loan early, they’re going to make you pay them extra interest in advance.
If you plan on holding a property for three years, you probably don’t want to put 10-year fixed debt on it, because when you go pay it off, you’re going to have a huge penalty, so the third key thing to commit to learning and understanding is how debt affects your business plan. It definitely has a lot more strategy and thought to it than you typically have in the single family world.
A fourth thing is … We just talked about debt and the loan. Typically, your lender’s your biggest partner in any deal. The other half of that is, where is the equity piece going to come from? Commit to learning the equity side. Now, if you’re just putting in your own money into deals, it’s pretty simple.
You might be putting in 30% or 35, or 40% of whatever the total cost is, but if you’re taking money from outside sources, which of course, is syndication, or raising money from investors, or partnering with other people, commit to learning the legalities and the rules around doing that. It’s actually not that complicated. Most BiggerPockets listeners could probably pick it up in a day and have a really good handle on it.
It’s one of the those things where if you do it wrong, you can get into a whole lot of trouble, and there’s lots of people out there doing it wrong right now. Everyone’s getting away with it because the market’s been fantastic, but the minute something shifts, and deals start to go bad, and someone complains to the SEC, if you didn’t follow those rules, you can be in a world of hurt.
Once they find out that you did one deal wrong, what they typically do is they will ask you to open your kimono on every single deal you’ve ever done, and they don’t limit it. They say, “All right. If we’re looking into Andrew or Whitney, we’re going to look at everything they’ve ever done,” so the fourth thing would be, if you’re taking outside money, make sure you’re doing it right.
Again, this isn’t something, you don’t need to become a syndication attorney or an SEC attorney. You just hire one that knows what they’re doing to keep you protected. David, before I jump into number five, is there anything that you would put in the top five that maybe I’ve missed or that you would add to that?

David Greene:
The only thing that I would have added, and I don’t think I can sum it up as concisely as you were, so I won’t get into it, but the idea would be, with residential real estate, we have rules of thumb that we tend to follow. When you see something that is close to the 1% rule, you’re like, “Ooh, I should probably look at that.” Or when you see a property with more square footage at the same price as other homes in the area, or that’s listed lower, comparable sales is a much easier way to establish a baseline of value, so when something falls outside of the norm of what you’re used to seeing, it catches your attention, you look into it.
Anytime you’re changing asset classes, one of the first things you want to do is try to figure out what that baseline is for that asset class and what’s falling outside of the norm so you can key in and then implement everything that Andrew’s saying. We just take for granted how many deals are out there, and that you do not have the resources to analyze all of them.
Part of being good at this, like what Andrew hasn’t said, but I know him so I see him crushing it, is his criteria are so incredibly defined that he subconsciously gets rid of 98% of what comes his way. He doesn’t even look at it. All of the efforts he’s giving are on 2% of deals that could actually work. If you don’t learn how to do that, you’re going to be like me at jiu-jitsu. You burn all our energy in the first 90 seconds, and then you get your butt kicked for the rest of it because you haven’t learned how to be efficient. It’s an important part of business.

Andrew Cushman:
Actually, that was the next thing I was going to say, so thanks, David. That’s perfect, and is define exactly what you’re looking for, and then learn how to go find it. We talked about that in some of the previous episodes of how to screen markets. Then once you screen for the market, how do you screen those deals and just take 100 and whittle it down to two that are worth your time? That would be the fifth thing. Great question.

Whitney Boling:
Yeah, that’s great, Andrew. I appreciate it, man.

Andrew Cushman:
Whitney, do you have any follow-up questions or any clarity you wanted on anything?

Whitney Boling:
I think just in terms of the loan piece of it. That’s where the biggest hurdle is for me, and trying to understand the structure behind the five or seven-year loan. I just am not exactly clear on how that works.

Andrew Cushman:
When they say a five, or let’s just say a seven-year loan, and you could maybe do that with a bank or agency, so Fannie Mae, Freddie Mac. Could be a bridge loan. Most bridge loans are five years, but the principle is the same. Typically, what that’ll look like is, let’s say you’ve got a seven-year loan. You might have two years of interest only, so you’re not paying the principal down, you’re just paying the interest. Then the remaining five years, you’re going to be paying interest and principal.
What they do is they’ll amortize it over 25 or 30 years, so in that sense, it’s very much like a residential loan in terms of the amortization, except you just can’t keep it for 30 years like you can with a residential loan. When you get to year seven, you have to pay off that loan. You can do it through either refinance, sell the property, or if you’ve come into a lot of cash, you just pay it off. You have to pay it off in whatever year that loan comes to term. That could be, again, year five, year seven, something along those lines, so that’s how they’re structured.
Then something else that’s negotiable, and when I say negotiable, it’s not just like, “Oh, I want this,” and they’ll say, “Okay, fine.” You often will pay for these things, meaning you can pay a higher rate or you can pay a higher fee in exchange for some of the things I’m about to talk about.
We’re actually in the process of doing this on a deal right now where we are paying a slighter higher rate on a seven-year loan in exchange for the ability to pay it off early in year three without having a big prepayment penalty or yield maintenance. Well, you say, “Okay. Well, Andrew, why would you do that? Because it increases your rate a little bit.” We are in a place in the market where the fundamentals of multifamily are rock solid, however, we do have increasing rates. The debt markets, it’s not inconceivable that everything that’s going on in the world right now that something could spook the debt markets over the next couple of years, or the economy could go into recession.
There are risks out there that really weren’t as prevalent just a couple years ago, and so we want to have, and this gets back to, I think it was point number two or point number three about matching your debt with your business model. We’re paying a little bit higher rate to be able to exit early just in case there’s some market force that dictates, “Hey, it’s best for us to get out now, rather than hold for seven years.” Or vice-versa. That’s why we’re not getting a three-year loan.
We don’t want to be forced to get out in three years. Many bridge loans, it’s a 25-year amortization, but you have to pay it off in three years. What if in three years we’re in another March of 2020 or fall of 2008 and the debt markets are just locked up and not available? You don’t want to be in that situation. That’s how you lose money in commercial real estate is being forced to sell or refinance at a time when you really can’t or shouldn’t, and so you take the debut structure and work it to your advantage.
That’s generally how it works is you may amortize for a long period of time, but you then, you can pick a menu of … They literally will give you, in many cases, a matrix. Says, “All right, if you want a five-year term, here’s your rate and other terms, one-year IO. If you want seven-years, we’ll give you two years of IO, and your interest rate’s a little bit higher. If you want 10 years, we’ll give you four years of IO and the pre-payment penalty burn goes away in five years,” and whatever the other terms are.
That’s how they structure it and, literally, it’s like a menu. Whereas, with a residential mortgage, correct me if I’m wrong, David. It’s been a while since I’ve been in residential. It’s basically like, “Hey, here’s your rate. It’s 30 years. This is what we’re going to give you. Maybe you can pay a point to lower the rate a little bit, but that’s it.”
Then also, another thing you can do in multifamily that can be really beneficial, especially if you don’t have as much equity or cash available, is you can do lender-funded renovations. If you’re buying a property and you’re going to do $800,000 in renovations, many cases, the lender will not only give you, let’s say 75% of the purchase price, they’ll give you 75% of that renovation budget, and then you do the work. The contractor invoices you. You send that to the lender. They release the funds. That’s another piece of the structure to factor in. Any other follow-up questions or, hopefully, that helped a little bit.

Whitney Boling:
Yeah, that definitely helps. I just want to try to understand, with the rising interest rates and things moving rapidly, I don’t want to be stuck in a situation where I can’t refinance or I’m stuck with a higher interest.

Andrew Cushman:
You know what? To me, that is the biggest risk to the multifamily market right now, and to a lot of deals that have been done over the last two, three years. I think it was 2021, 70% of deals were done with bridge loans, at 75 to 80% LTV.
Well, when they go to refinance or sell a couple of years from now, if rates are still significantly higher, many of those loans aren’t going to be able to refinance out because the debt coverage ratio won’t be there. What I mean by that is the net operating income won’t be enough to cover the new debt load at a much higher interest rate, and those deals are going to run into problems.
Real quick, how you mitigate that is, number one, go in with lower leverage. Our last couple of deals, we just went in at 60 and 65% LTV, just to make sure we had that extra room. That’s the biggest way to mitigate it. Number two, a whole nother discussion, but there’s fixed-rate and there’s floating-rate with multifamily debt.
Floating rate, actually, typically is cheaper. However, what we’ve been doing recently, and for the foreseeable future, is we will get fixed-rate debt but then make sure that we can either get a supplemental loan, which is the equivalent of getting a second mortgage and pulling out cash, or going back to our previous discussion, we can pay it off early.
That way, we’re eliminating the risk of rates going way up on us. We know, “Hey, we can ride this thing out for seven or 10 years, but if everything goes to plan and it works out really well, we can still pull cash out and give that back to investors.” That’s how you work with the structure of multifamily debt to still do deals in an uncertain environment, but not increase your risk. It’s all about, there’s so many creative ways to do debt, and equity in multifamily deals. You just have to adjust it as the market adjusts, and that’s just some of the ways to do that.

Whitney Boling:
Yeah, that’s exactly what I was looking for, so I appreciate it, Andrew.

Andrew Cushman:
Oh, awesome. Thank you.

David Greene:
All right. Thank you for that, Whitney. Before we get on to our next caller, I want to make a comment about people that have invested in somebody else’s syndication with rates going up because there is risk. Now, one of the things that Andrew and I have noticed is a lot of deals have been put together by more amateur, they haven’t done as much, and they just shoot from the hip.
They’re raising more money than they should be. They’re paying more money than they should for the property. They’re not experienced with the management, so their operating costs and ratio is higher than it would be with the more experienced operator.
While we’ve had just the best bull market we’ve ever seen, you get away with playing sloppy, but rising rates is one thing that is very impactful on multifamily housing because your debt plays such a big role in making the numbers work. If you invested with someone who wasn’t that great at doing this or wasn’t that experienced, the odds of you being okay are higher if you got in the right area.
If you went in an area where rents have been going up and demand has been going up, you should see an increased NOI, even if the operator didn’t do a great job and so therefore, you can afford the higher debt service that comes with the higher interest rate. If you chased after really high returns and you didn’t get into a great area and you didn’t get in with a great operator, your money might not be that safe.
Moving forward, one of the things that I’m telling people is, don’t chase the highest return possible. When they say, “Hey, we can get you a 20% IRR,” and you say, “Well, that’s better than a 16% IRR. I’m going with them.” A lot of people got away with that for a long time. This is not the time to be doing that as the Fed is continuing to increase rates and people are moving at a faster rate across the country. After COVID, that jump-started this entire idea of, “I want to live where I want to live. I don’t want to live where I’m stuck.”
What could have been a great deal in New York five years ago is now not looking like a great deal. Rents aren’t going up. It’s hard to get people to want to live there. People are leaving that area. Now interest rates are coming, so in my opinion, when you’re going to be investing in someone else’s syndication or with a partner, safety should take priority over top-end return.
In a bull market, you can be a little riskier, chase after those big returns. In a bear market or a potential bear market, you want to put a higher weight towards safety, as opposed to just pure maximum profit you could get on your money. Thank you for that, Whitney. Appreciate you, man. All right, Pete, if we get you in here.

Pete:
Hey, guys. How are you doing?

David Greene:
Good. Thanks for being here. What question do you have for us?

Pete:
Long-time listener, first-time caller, so appreciate you guys doing this. I’m a real estate-friendly financial advisor up in the Seattle area. I’ve done about 14 BRRRRs over the years with varying levels of success, as I’m sure we can all attest to. I’ve been trying to transition into the multifamily space for about a year and a half or two years now.
What I’m consistently seeing is that it seems like, against the adage, making money going in, it seems like the pricing is based more on the proforma numbers or proforma NOI, so to speak, rather than on the current numbers.
I’m trying to figure out if this is just symptomatic of the hot market and how I should be thinking about this because I don’t want to give up that value-add opportunity, but I also don’t want to sit on the sidelines forever.

Andrew Cushman:
That’s a really good one. That is definitely something that is a constant struggle and I would say it’s always something to consider but it is, as you alluded to, it is very much a symptom that has been aggravated by the current market.
When you hear the stories of an apartment complex traded for two and a half cap in a place like Atlanta or Dallas, which are great markets, but historically, not two and a half cap markets. A two and a half percent cap rate, that’s LA, that’s San Francisco, that’s New York. When you hear that a property traded at a two and a half cap in Atlanta and you’re like, “What the heck are they thinking?” This is exactly it. What it is is it’s somebody paying today for tomorrow’s performance.
You’ll see the brokers will advertise. They’ll actually put it in print. I think this is going to start going away soon, but they’ll put it in print, “Hey, this is a two and a half cap, but you can get it up to a four cap if you do all this work,” and that’s the value-add. The answer to this, to me, is double-sided.
One, is this gets to don’t get overlay caught up on going in cap rate. Because some of the best deals that we’ve done historically, yeah, our going in cap rate was between zero and two, and in some cases, it was even negative. The property was losing money when we bought it, but there was enough value-add there to make up for it.
On the other hand, Pete, like you said, you do not want to pay the seller for all the work that you’re going to do, and so the answer lies somewhere in the middle. If you’re looking at marketed deals, odds are there’s going to be someone out there who’ll pay that seller for all the work that the buyer’s going to have to do, and you’re probably not going to get that.
If you can … What we found is when we work with either, some cases, directly with sellers or in most cases, it’s a broker bringing us an off-market deal where there’s not this competitive bidding environment that gets everyone hyped up and like, “I’m going to win this, and I’ve got to win this. My investors haven’t seen a deal. I have to get something.” That leads to exactly what you’re talking about.
What you are aiming for is an environment where you can … This I like a one out of 100 type of thing right now, but it is still out there, whereas, you work with a seller where you can have a reasonable and non-hyped conversation and negotiation over the deal. We closed one last month where it was very similar to this, where a broker just connected us directly with the owner of the property. He had built it and developed it himself. He did have one off-market offer. Just someone had literally called him, and flown down, and looked at the property, and gave him an offer.
He was getting ready to sign that and the broker connected us. Said, “Well, look. You should really let this one other group at least come visit,” and so I went down. Literally, was there within an hour. Toured the guy, got the deal, and made him an offer, and eventually got the deal under contract and closed. It was one of those situations, I don’t remember what the going in cap rate is, but the going in cap rate, it was low. It’s probably somewhere, I think it was right around four, and this is for a 2011 construction property in a larger tertiary market in Georgia.
On the surface, that might not make sense. “Why would you pay a four cap for that?” Well, this guy, his daughter was running this large, almost 200-unit property all by herself. Not doing a bad job, but just way too much work for one person. No website, no marketing, no nothing, so when you’re in that situation, you know how you keep it full? You don’t raise the rents. You don’t want turnover because you don’t have time for that, and so they hadn’t raised rents since 2019.
We actually own another property about a mile away in that market, so we know for absolute certain, like, “Holy cow. The rents on this are incredibly low.” We took our market knowledge, and we went and looked at every other property in the market, and we said, “All right. This property as it is today should be renting for $200 more than it is. Without doing any work, it should automatically be 200.”
We look at that and say, “All right. We’ll pay somewhere, we’ll pay, call it a four cap because we know this market and we have very high confidence that we can get it up to where it should be.” Then at that point, it’s like a six, or a seven, or something really high. The seller, all he wanted was just a reasonable offer on where his property was today.
Would I like to buy it a five cap going in? Yeah, of course, we would but it had such a clear value-add that we are willing to pay just a little bit more. To me, that’s where the workable middle ground lies. In today’s market, very few sellers are just going to give you a killer deal on a property. This property, I think we were buying, it was like 126 a unit or something like that. We have a very, very clear path to like 160 to 180 a unit in a very quick, near future so we can pay him 115 and we know we can very easily get it significantly above that, that deal works.
The key to what you’re asking about, “Hey, I don’t want to pay today for tomorrow’s performance,” number one, and we talked about this with the last caller, is really knowing your market and your property, and diving into the data so that when you say, “You know what? I can pay just a little bit more for this now because I will be able to get it to much higher value.” You do that study, you do that analysis, you can go into it with the confidence of a four-year-old in a Batman shirt. Just like, “Going to do this. I’ve got this nailed.” That’s really how we look at that. Any follow-up questions? Or hope that helps.

Pete:
Yeah, so on that one, in terms of the underwriting, it sounds like you’re talking about a happy medium between the underwriting of what the cap is today or the NOI is today versus the proforma numbers, so you’re trying to find the medium between that, but if they’re starting out at the proforma numbers for their asking price, usually, the expectation is you need to come down from that a little bit. If they’re not ready to do that, I guess, they’re not ready to do that and maybe you need to move on.

Andrew Cushman:
Exactly. Yeah-

Pete:
Which gets into your point too about the source of these leads. If you’re going to go to the market, you’re probably going to see somebody trying to value it based on proforma income numbers, but if you can get directly to the seller …

Andrew Cushman:
Yeah. You said that more concisely than I did. That’s really what it comes down to is, you’re absolutely right. You cannot pay today for 100% of the work you’re going to do. It’s got to be somewhere well below that, and you have to have high confidence that you’re going to get there.
Now, five, 10 years ago, you could pay for the absolute dead bottom of what it is today and then it’s all on you. It’s just got to be a reasonable spot in the middle. Also, I would say it’s common to say in single family you make your money when you buy. In multifamily, that’s really not true. In multifamily, you make your money through operations. That’s how you make your money, by …
Again, we’re assuming you bought the right asset, the right market, all that stuff we’ve talked about in other episodes, but you make your money in solid operations and increasing that operating income by increasing collections, decreasing expenses, all those things that go into it. That’s one of the beautiful things about multifamily. In single family, you buy a house and the average price in that market goes down 30%, well yours probably went down 30% too.
In multifamily, your valued on a net operating income, so if you’re a really good operator, you can still increase the value of your property in a flat or down market, even if everyone else is struggling. That’s one of the really cool things, and that’s part of why, again, with caveat, it’s somewhat okay to pay a little bit for future performance because it is something that’s in your control.

Pete:
Makes sense.

David Greene:
I like your question, Pete. I’m going to provide the same answer Andrew gave from a single family perspective so that people who are used to that investing asset class, which is a little more common, can understand the principle we’re trying to make here.
When we say you make your money when you buy, it’s based off of an understanding that you cannot rely on appreciation, which is a single family concept, like other homes selling for more in the area pushes up the value of this home, and so it drags it all up. Commercial properties, multifamily properties are not quite, they’re not as simple as appreciation.
If someone buys an apartment complex across the street from you and pays more, it doesn’t automatically make yours the same value. It depends on what rents you’re getting, how well you’re operating at the net operating income or just the profit at the end of the day is how you base it. There’s certain times where you make your money when you buy is more important than in others.
Part of it could be the time, like the market in general. 2010, prices aren’t going anywhere fast. It’s very important that you get in under market value if you want to get what we call a deal. 2013, prices are kind of starting to move forward. You still want to be below market value, but maybe it doesn’t have to be at 80% or 70% of value. If you’re at 90% of value, it’s still a pretty good opportunity.
Then you have 2022 or 2020. Rampant inflation, a very irresponsible fiscal policy by our country fueling fires everywhere, where we’ve literally had buyers that two years ago, had a house appraise at 550, and they had it under contract at 560, and they walked away and said, “I’m not going to overpay,” and two years later, it’s worth 780. That principle doesn’t age well. It ages like milk, not like wine.
I like what you’re saying, and that is how we should be looking at it, but we can’t be so rigid that we don’t understand the overall macro principles that are at play and how they affect how we operate by these principles. To Andrew’s point, if I had a chance to buy a single family home in Gary, Indiana, that I did not think would be appreciating much at all and I could get it at 95% of ARV, I would have to wait 10, 15 years before that started to make a lot of sense for me.
If I’m buying it in South Florida in a suburb outside of Miami that’s the next big thing to go off, I could pay 105, 110% of ARV, but in nine months it might have appreciated much more than that. In single family investing, the time you wait is equivalent to commercial investing, the effort you put. Those are the two resources that we measure.
There’s only so much you can do to make a house worth more in a single family sense. You have to wait, but in multifamily investing, the effort you put into it can have a significant impact on increasing the value, so what you’re looking for is, “How do I get maximum NOI for minimum effort?” Any deal will work if you just stare at it all day long, and constantly talk to people, and market the crap out of it, and just study all day long. You could turn it into a job, but that’s what we’re trying to avoid.
That’s what Andrew’s getting into is, it’s okay to pay over what it is worth, in quotes, if you see a very clear path to value-add that is not a lot of effort. That’s easier money than if you’re paying more than it would be worth on paper and it’s going to be like walking through sand or mud to try to get there. Does that make sense?

Pete:
Yeah. It does, absolutely. I appreciate the insight. On that same note, real quick, Andrew, do you see, or David, do you see anything changing with rising rates?

Andrew Cushman:
Yeah, that’s, I do, definitely. One, already, we’re starting to see overblown seller expectations get reined in a little bit. David, I think we see this in the single family too is, you’ll hear media say, “Oh, prices are coming down.” No, no, no, no. That’s not happening.
It’s just crazy, “Hey, I’m going to sell for 20% more than the guy down the street who did last month.” That’s what’s starting to go away is seller just saying, “Okay. Well, the property next to me traded at a four cap, so I should get a four cap too.” Instead of saying, “Well, now I’m going to get a three cap because that’s one month later.” That is starting to go away. The buyer pool is thinning out a little bit, whereas, six months ago, we might have had …
We actually have two properties listed for sale right now. Where six months ago, we might have had 30 buyers, now we’ve got 10. It’s still a good buyer pool. It’s just not the feeding frenzy that it was. That’s what’s happened so far. Going forward, I see, I’m hoping for things like hard money going away. Five years ago, you had 30 days to do your inspections and then you had a financing contingency. Meaning if your loan blew up at the last minute, oh, well. Seller has to give you the money back and you’re out.
Then, as you probably know, Pete, since you’ve been listening to BP and checking out deals, now it’s like, “All right. If it’s a million dollar property, we want $100,000 nonrefundable deposit day one.” That money is the seller’s, almost no matter what. As the market shifts to a more balanced buyer-seller market, I think that will start to go away. Candidly, I hope that goes away. That’s one of the things I’m looking forward to as this market shifts.
Then the third thing is, well, I don’t see, in most good markets, significant valuation declines for multifamily. For that to happen, there’s going to have to be a whole lot of motivated sellers and that’s tough to see right now because most sellers, if they don’t get their price, they’re just going to hold. Most multifamily are making so much money that it’s like, “Well, if I don’t get my price, I’m just going to keep it.”
That’s how our portfolio is. It’s 35% LTV and rolling off all kinds of cashflow. If we can’t get a good price, we’re just going to keep it., so I don’t foresee a huge decline in pricing, especially with inflation going up, and replacement cost going up, and all of that.
I do see the market shifting to be a little bit more balanced between buyers and sellers, which for those of you who have been out there for the last five years going, “Ah, I can’t get a deal,” I think it’s going to start getting a little bit easier. Not easy, just easier.
The final thing I want to add in terms of what I think might be changing is, a lot of people took out really high-leveraged bridge loans in the last couple years. 70% of transactions were done that way, and if rates go up too far and stay that way for a couple years, there actually might be some motivated sellers who can’t get out of their bridge loan that’s due next year or the year after, and that’s where savvy investors, like all of us, can come in and get a deal and not pay for future performance. Those are some of the things that we’re seeing now and I think it’s going to lead to.

Pete:
Sounds good. I appreciate that. I could pick your brains all day and ask you a bunch of questions, but I’ll stop there. Appreciate it, guys. Thank you very much.

Andrew Cushman:
All right. Take care, Pete.

David Greene:
Thank you, Pete. Matt, the author of the BiggerPockets book on raising money. What’s that? Raising Private Capital? Is that the name of it? Oh, there it is right there.

Matt:
Raising Private Capital. Thank you.

David Greene:
Wonderful.

Matt:
I love that Andrew talked about raising money from investors for quite a while, and I’m sitting here like, “Of course, he’s going to mention my book because we’re friends. He knows my book. It’s a BiggerPockets book,” whatever. He didn’t mention my book and that’s okay, and that’s okay. I still love you, Andrew.

Andrew Cushman:
[inaudible 00:41:50]

Matt:
My book is Raising Private Capital. If you want to hear more about raising equity from investors, check out the Amazon bestseller, BiggerPockets book, Raising Private Capital.

Andrew Cushman:
Well, hey, at least we know you’re not going to ask the question about how to raise capital.

Matt:
I will not. Wouldn’t that be great? “I’m looking to get started in raising money, Andrew. I want to talk to you about that.” No, man. I want to talk … As you may know, I’m leading the BiggerPockets multifamily bootcamp, and it’s been going great. We just concluded our first one. We got another one coming up, which we can mention here.
I get a lot of recurring questions, guys, and I wanted to bring those questions here to you guys to discuss, bootcamp questions that come up on a regular basis, and just get your take on … Because I have my answers to these things, but I’d love to hear what you guys think to these recurring questions that a lot of folks that are looking to get into or expand into multifamily have. What do you guys think?

Andrew Cushman:
Let’s do it.

David Greene:
Let’s do it.

Matt:
Okay. Both of you have already heard these questions, but I’d love to know what you think. Number one, “I’m a new investor and I’m having a problem finding deals. Then, I’m going to the deal tree and the deal tree is not yielding fruit right there, right in my hand. I’m not able to just pluck a deal right there off of the tree. Good deals are hard to find.” Aka, “How do I find good deals? What are your tips to finding good deals in the multifamily market?”

Andrew Cushman:
If you’re looking for deals in the deal tree these days, you’re going to have to get a six-foot tall step ladder, one of those extendable fruit pickers, and aim for the very, very top of the tree. Then you might be able to get something, so-

Matt:
Cut the tree down, right?

Andrew Cushman:
Yeah, or just cut the tree down. There you go. Like that story The Giving Tree. You pick the fruit and then you just cut the whole thing down.

Matt:
That’s the worst tree ever.

Andrew Cushman:
Oh, that’s a sad story. It’s a sad story.

Matt:
That dude is a jerk to that tree, but anyway …

Andrew Cushman:
Yeah, we talked about in the … Number one, I think the fruit on the tree’s going to start regrowing a little bit lower in the future, so that’s the good news for everybody, but it doesn’t mean it’s going to be really easy.
How to find deals, number one, I see a lot of people make the mistake of like, “Oh, I’m looking at a deal in Indiana, and I’m looking at one in Boston, and I’ve got this one down in Florida.” They’re just all over the place. Just anything that shows up in their email inbox is something they’re going to look at.
Number one, pick a geography and stick to it. When you pick that geography, pick one that has the right tailwinds for multifamily. Population growth, job growth, strong median income, all those things that we talked about back in, I think it was episode 571, of how you pick a market and submarket.
The first thing is be very firm and decide on, “This is where I’m going to look for deals.” The second thing is, decide exactly what kind of deal you’re looking for. Are you looking for 20 units or are you looking for 200? Are you looking for 1960s value-add or are you looking for 2010 construction that you just paint it and call it good?
Nail down exactly what you’re looking for. That does two things. Number one, that helps you quickly process everything that comes into your inbox. At this point, I literally probably get 50 properties emailed to me every single day. Some of them are repeats, but literally, 50 or more a day. I can delete 49 of those because they’re the wrong areas, they’re the wrong size, they’re the wrong age, they’re tax credit, all these things that we don’t do. I can get it down to one, “Ooh, this is the one that we need to look at,” so clearly define what you’re looking for, that you can do that, so you’re only spending time on deals that fit your investment goals and your investment criteria. That’s what Brandon talks about in his crystal clear criteria.
Now, once you have your crystal clear criteria, this other benefit of that is you make sure that all of your relationships understand your crystal clear criteria so that all the brokers you work with, all the, maybe if you’re dealing with wholesalers or any source of deal that you work with, make sure that they understand that criteria.
If you’re looking for a 20-unit property in Dallas or Fort Worth that was built between 1990 and 2010, and you keep looking at those, and every time a broker has one of those, you talk to that broker, and you give them feedback, so that after six months or whatever, that broker talks to a guy who’s owned it for 10 years and he’s like, “Yeah, I might consider selling it.” That broker goes, “Oh, Matt is the guy for this deal.”
He calls you, says, “Hey, I’m going to send you this off-market deal. Let’s see if we can just put it together. I think it’s a great fit for you. This guy might sell if you give him the right number.” That’s how you get the off-market deals that are really good deals and that you’re not necessarily overpaying or getting into bidding wars.
That’s really the key to doing it in these markets, is knowing clearly where you’re looking, what you’re looking for, and then building the relationships to not only bring you those deals, but so that keeping those relationships fresh and active so that when that deal pops up, whoever sees it thinks of you first. That is how we get 90% of our deals.

Matt:
That’s brilliant. Thank you.

David Greene:
I think that is great advice. I would say that’s better than the advice I’m going to give, but because … Sorry. Because Andrew took the best donut in the box, I’m going to try to be like, well, this one’s kind of crumbling falling apart, but it’s better than-

Andrew Cushman:
I got the chocolate sprinkles one.

David Greene:
That’s it, man. I got the plain, like there’s no glaze or there’s no topping. It’s just like the boring donut that I don’t even know why they make. It’s just the bread, but for some reason, they make them, and even a more weird reason people buy them. That’s what I am. I’m that donut that has no topping.
Here’s the advice that I was going to give. Andrew’s advice is better. It is safer and it is going to build you wealth better. If you can get the better deal by just working harder to get it, yes. There’s also a scenario, like where I’m saying, your strategy has to adapt to the market itself.
When you’re in a situation where prices are just solid, rigid, they’re not going to move because demand has gone down, or you’re in a market where it’s like that, you have to be extra careful when you buy. When you’re in a market where a reasonable person would expect that demand is going to continue to increase and maybe supply is constrained. The deal that Andrew and I are buying together right now, they can’t build there. It’s incredibly difficult to get any real estate. It’s landlocked and there’s a buttload, that’s a technical term, of Americans that are moving into this city.
As we see demand increasing, we see supply is restrained, it would be almost an act of God in order to see that not happening. In those situations, it’s not always about the price. It’s about, like Andrew said earlier, the management. In today’s market, you need to ask yourself, where do you have a competitive advantage? Do you have a contactor that you know that can do the job for 80,000 and you’re being bid 150,000 by everyone else? Well, your competition’s probably getting $150,000 bid, so if you can get someone you know that you trust that can do that work, you can pay more than somebody else and still get a good deal.
Now, in this case of the deal we’re putting together in Fort Walton, we have management that is already there that is already managing other properties and we believe we can do it much more efficiently than other people, so that deal makes a lot more sense for us than it would be for someone else.
Long story short, yes, beat the bushes, turn over the rocks. Find the deals before they hit the market, but even if it is on-market, if you have some kind of a competitive advantage that allows you to operate it cheaper, or better, or add value in ways other people don’t see, that’s a good plan B.

Matt:
That’s awesome. I want to … Here’s what I tell people, and I’m going to sum up both what you guys said with here’s my icing on the top of the cake that you guys just baked right there, is that, yes, pick a market. Drill down, have your crystal clear criteria. Have your unfair advantages, the contractor that can do it for cheaper, whatever.
You obtain those things, you drill into those markets, you build those relationships by going to the market in person. I cannot tell you how many people I’ve talked to in the bootcamp and in my travels, and people say, “Man, I really want to buy a deal in Columbus, Ohio. I love that market. I’ve done my research and my homework. That’s my jam. I want to buy a deal there.”
I’ll say, “Okay, great. How many times have you been to Columbus?” “Oh, I’ve never been there.” It’s like, “Well, I’ll bet you’ll never do a deal there because you’ve never …” That is the bottom line. If you’re going to choose a market, the way you’re going to build an unfair advantage, the way you’re going to meet that contractor that can do the job for 80 grand instead of 150 is go to that market, go to the local rehab, meet them on BiggerPockets, meet the broker that’s going to truly send you off the market stuff.
Whatever it is. Build an unfair advantage by traveling to that market and networking yourself in person. Look at people dead in the eye, and buying them a cup of coffee, and sitting down and chatting with them face-to-face. Anyway, so that’s what I tell people on finding deals. You guys know that as well, so good stuff.
That is far and away the most common question I get from those that are trying to get into or expand into multifamily is finding deals. It’s a tough market, I get. All three of us still, we don’t connect on every pitch that we swing at either. That’s just the nature of the game right now. Another way to find good deals is by you look at a lot of deals. You know?

Andrew Cushman:
Yep, yeah. It’s not easy at all, but it is absolutely worth it.

David Greene:
That’s a good point. What I’ve been telling the agents on my team when we talk about this is that things are either going to be easy on the front-end and hard on the back-end, or the other way around. There is no situation where both ever happen.

Andrew Cushman:
Yep.

David Greene:
What we see right now is that just about everybody buying real estate is making money. A lot of that’s not because they’re so great. It’s because inflationary pressure’s pushing things upward, so then everyone runs to that market and they go, “Oh my gosh. Everyone’s making money in real estate. Let me do it.” That’s why a lot of people are listening to a podcast like this. The market is awesome.
Well, inherently in that scenario means it’s going to be harder to get into it. There’s other people that ran there and that’s why it’s good. When you see the opposite, like 2010 when it was very easy to get in, you heard a lot of people that didn’t want to do it because the back-end looked like it was going to be rough.
You just have to accept that this is the way life works. If it’s easy when you first get there, it’s going to be difficult. I tell the agents it’s like working with buyers. It’s not hard to find a buyer that’s willing to work with us right now. Everybody, all the buyers want to work with us, but there’s no houses to sell them, so you get the buyer client, it was easy. Then the job is super hard to put them in a contract.
It’s very difficult to get sellers, and so no one wants to do it. They’re like, “Oh, but sellers, they’re so demanding. They want me to interview against other agents. They call me every day, and it’s easier with buyers.” Well, yeah, but you get a listing, it’s almost guaranteed to sell. It’s easy on the back-end, so that’s just something in life that I have learned.
Don’t forget that because everyone hears talk of real estate is exploding, but their expectations when they get to the party is that it’s easy to get in the door. It’s not. That’s why it’s doing well, so like you guys just said, you got to look at more deals. You have to look for advantages that other people don’t have. You have to have a knowledge base that other people … Literally because multifamily investing has been making people so much money, but that’s why you want to do it, so just expect it’s going to be hard when you get there.

Andrew Cushman:
Yeah.

David Greene:
You know what it is? It’s like saying, “Man, those guys at the CrossFit gym are in such good shape. I want to look like that.” Then you get there and you’re like, “Whoa, this is so hard. What’s the easy workout? Can I do that one?” Then if you go do the easy workout one, you don’t have the benefits of the CrossFit workout, right? You look the same.

Andrew Cushman:
You’re not going to look like the guys at CrossFit gym.

David Greene:
Yes.

Andrew Cushman:
Right.

Matt:
There you go. Andrew, it’s hard work, as you said, and it is but it’s worth it. That’s how you get the shredded body. That’s how you get the awesome portfolio. That’s how you get the lifestyle that real estate can yield is through a ton of hard work, and yeah, it’s hard. Most of it’s fun. Sometimes, you got to pluck out thorns. As we were saying, Andrew, sometimes it gets tough but it’s actually fun sometimes too.
Guys, interesting time to bring this up. Speaking of CrossFit gyms, and thank you for that analogy, David. BiggerPockets and I have put together a phenomenal bootcamp that’s going to make you into the shredded real estate investor that you want to be, the shredded, multifamily investor. It is the BiggerPockets multifamily bootcamp.
You guys can access that by going to biggerpockets.com/events, biggerpockets.com/events. Seats are limited. I believe that the registration closes down on May 15th on that, so check that out now. It’s something you guys can join in on. It is a 12-week program that’s participated in by hundreds of other real estate investors you can network with, you can form small subgroups, accountability groups.
There are folks that have gotten together and done deals together from the last bootcamp, so if you want to meet people that are like-minded that have drank the BiggerPockets Kool-Aid, as you have, that are willing to get out there and do the capital W work that Andrew talked about, the BiggerPockets bootcamp is a great way to meet people, get the tools from myself and my team that’s going to make you successful, and as David said, join the CrossFit gym of multifamily real estate investing that is the BiggerPockets multifamily bootcamp. See you there, guys.

Andrew Cushman:
Our first question today was the five things to commit to learning. You’ll learn all those things at Matt’s bootcamp with BP.

David Greene:
Hello, Jake. I am so glad you could join us on the podcast. How are you, my friend?

Jake Harris:
I am fantastic, David, Andrew.

Andrew Cushman:
Good to see you, man.

David Greene:
Jake has had to wade through the swamp of scheduling craziness, then a bunch of technical difficulties that he had to fight his way through as well. He’s also buying really good properties at a really hard time, and Jake is smarter than just about everybody that he comes across.
He’s got that Elon Musk thing where it’s very hard to communicate with people that are not him because he has to figure out to get a 3D perspective into a 2D brain. He often has this problem when he talks with me. Yet, in spite of all that, we’ve got him here on the podcast. Jake Harris, thank you for joining us.

Jake Harris:
Well, thank you for having me. It’s a fun, pleasurable, nice Friday.

David Greene:
I just realized, you look like you definitely could be my brother. We have the same head and beard thing happening right now.

Jake Harris:
I think we go to the same barber, at least.

David Greene:
That’s probably true. What do you have for us? How can we help you today?

Jake Harris:
I develop some multifamily, and the construction, we’re doing real heavy value-add multifamily deals, and we’re seeing a significant challenge coming in. A lot of projects are blowing up from interest rates. We have supply chain issues, material that’s just not available for many, many months. Andrew, you’d mentioned earlier some questions about your competitive advantage of operations or really forced appreciation items that you have when you’re moving into a market.
What I’m looking at is, the interest rates are making it so that some buyers will no longer be able to buy houses, and they’re going to be renters for longer time periods. Supply will not be coming online because they’re getting blown up from longer time periods, permitting issues, supply chain, all that, so there’s not going to be new supply and there’s now a big swath of new renters that were trying to be homeowners that have now been pushed back into that renter bucket.
What are some of those operations that you’ve seen or the technical details of the operations and forced appreciation on that multifamily value-add that you’ve seen that’s been most successful, given somebody like me that’s trying to get into that space? I’ve never really done the value-add to your thing. I’ve always just built the project.

Andrew Cushman:
All right. Good questions. You bring up a lot of things that are 100% true and I think, if forgotten, is it’s very easy for a lot of us to be like, “Oh my gosh. Interest rates are going up. The sky’s going to fall. Everything’s going down. Cap rates are going up. It’s the end of the world. We got to get out and go back, and I’m going to go work as a Walmart greeter.” That’s not the case because there’s other factors.
Like you said, Jake, as interest rates go up, that makes it that much more difficult for people to purchase a house. What are they going to do? They’re going to go rent apartments. Or they might rent a house, but either way, they’re going to add to the demand of rentals. Then, again, something else that you said. It is getting harder and more expensive to build new apartments.
Same as you, I’ve seen development deals either blow up or get delayed by years because of the supply chain issues, and because of rates going up. That’s taking off the supply side so that increases the demand for rent. Well, it doesn’t increase the demand, but the existing demand is harder to satisfy. Therefore, rent goes up. Then the properties that do still manage to get completed, they have to charge that much higher rent just to get the property to pencil out, and so as new properties come online with sky-high rents, it has a tendency to drag the entire rest of the market up with it.
Yeah, there’s the negative effect of, okay, higher interest rates make it harder as a buyer to maybe underwrite an apartment complex, but it also creates all those other positive factors that you just brought up. That leads to, “Well, okay. Either if I’m not able to, or I don’t have the education yet to take on the risk of development, what do I do?” Okay, well, yeah, that’s the value-add aspect.
What we’re finding, the greatest value-add opportunities right now … I’ll try to go in order of decreasing risk to increasing risk. What I mean by that is execution risk. The context of the question is, is operations. What is under your control? How do you adjust your operations to create value? The risk is, “Well, are you able to execute that?”
The lowest risk, in my opinion, one of the lowest risk value-add strategies, and the one that actually is quite abundant these days, we’re finding it’s not easy but it’s out there. We’re finding amazing opportunities in this, is that many property owners, for a variety of different reasons, have not kept up with the dramatic rent increases of the last 18 to 24 months.
I mentioned, a couple of questions ago, a deal that we had closed last month where the owner of it, it’s a beautiful property. Built, it’s only 10 years old. High-level finishes. It’s a great, great asset, but they had not moved rents at all, not a dollar in three years. That is what, basically, we call loss to lease value-add, meaning the real market rent for a two bedroom at that property should be $1,100, but they’re leasing it at 800, so they are losing $300 a month to that lease.
Once you do the analysis to confirm that that’s the case, that is your lowest risk, highest return value-add strategy is coming in with good management, good marketing, all the things that go into pulling renters to your property and just leasing it for what it’s worth. Bringing the property up to current market rents, like I said, we call that … Some people call it a management play but it’s also just taking advantage of loss to lease. That is, by far, our best return risk ratio value-add that we find, and it is very abundant right now.
It’s more abundant now than it has been in the last eight years, in my opinion, because there are quite a few owners who just did not keep up with the big ramp-up in rents that we had the last few years. An additional benefit of that and another thing that makes it a low-risk activity is you’re not counting on market appreciation to create value. You’re just saying, “Hey, I’m just going to get it up to where it is today.”
If rent growth were to go to zero and flatline for the next three years, your value-add strategy still works because all you’re counting on is just getting it up to where it is now. Again, it’s very low-risk. It’s very typically not capital intensive. You’re talking about a website. You’re talking about marketing. You’re talking about proper staff to handle leasing and all that. It’s very low capital intensive, so that’s another benefit of that.
The second one that we’re finding is very effective in today’s market is adding simple amenities such as dog parks, playgrounds, grilling stations, outdoor gazebos. If we buy a property with a pool, we’ll go in and put beautiful new pool furniture.
Stuff where if you got 100-unit or even a 20-unit property, if you rehab one unit, your return on that investment is from that one unit. If you have a 20-unit property and you add nice landscaping or a nice dog park, the return is times 20 because that affects all 20 families that are living in your property. That’s the next thing that we’re finding is the lowest capital expenditure, and the highest impact, and the lowest risk is, I would call simple amenities. Again, the dog park, the grilling stations, gazebos, all that.
Then also, in the exterior is, just make sure your property looks nice. Seal and stripe the parking lot. What that is, is that’s when they come in, they put the black tar on it. Then they let it dry, and then they paint the white stripes. It’s not that expensive but has a huge visual impact on the property. When a potential resident comes in, they go, “Wow. They take care of this place. Look how fresh and clean this looks.”
Landscaping is, in our experience, one of the best returns on investment also. Also, I think it’s one of the most ignored aspects of property, especially multifamily. We spend a lot on landscape, and we get a huge return on that. It’s hard to quantify exactly, is it $37 per azalea bush, or whatever? No one cares how the inside of your units look if the outside looks crappy, because they’re never going to see the inside because the outside looks crappy. Landscaping and some simple exterior improvements are, I’d say, number two.
Then number three is light to moderate interior value-add, especially if you’re buying properties that are 10, 20, 30 years older. We find we’re getting huge returns on simple things like tile backsplashes. If you do it with your own labor, it might only cost $300. If you have a vendor do it, it might cost 1,000, and you can get 50, $100 rent increases a month. That pays for itself in a year.
If you’re in the South, in the Sunbelt like a lot of listeners are, ceiling fans. Add ceiling fans to the bedrooms, and if you can, the living room. That is huge in places like Florida, and South Texas, and along the Gulf Coast. Think of things that people touch and see every day. Lighting fixtures, doorknobs. Again, those high-traffic, high-touch things that really aren’t that expensive to replace.
We’ll go into a property … That one that I talked about was built in 2011. They had very simple faucets in the kitchen. Beautiful kitchen. Granite countertops, nice cabinets, real wood, cherry wood, all this stuff, and then just like a faucet that belongs in a bathroom. We’re putting in the nice gooseneck faucets where you can pull the little sprayer out and spray the kids to get them out of the way, or wash dishes easily, all that kind of stuff. A couple hundred dollars installed, but a huge impact.
Those are the, I’d say, probably the top three things that come to mind in terms of executing a business plan and operations. I’ll pause there in case you have any follow-up or any additional comments. There’s also just ongoing operations things, but those are the first three big things that come to mind.

Jake Harris:
Yeah, that’s great advice. Obviously, I don’t think I’ve thought about that, the landscape being something that return on investment to every single unit. The percentage of increase versus … Actually, maybe some of those, just raising the rents. You can raise the rents a lot more just by doing some of that landscape.
With that, if you’re doing, maybe the question is, is like are you looking into xeriscape or things that have lower expenses on some of your landscape when you do that? Meaning, less water, or mowing, or expenses and trying to drop some of those ratios as well? Or do you get into that technical detail of that when you’re coming in and enacting a landscape plan?

Andrew Cushman:
We do. Most of our markets, xeriscaping doesn’t really apply because we’re in the Southeast where it rains a lot most years. What we do do is we’ll go … It’s funny. If anyone’s who’s owned property in the Southeast is probably familiar with this, where it’s called pine straw. It’s where your landscapers come in, and they rake up all your pine needles.
They charge you to do that. They take it offsite, they package it up, and then they sell those pine needles back to you as pine straw, and they put that down in all the flowerbeds and, basically, it’s like a cheap mulch. That’s really common in places like Georgia, the Carolinas, and Florida, but there’s a cost to that. It’s like four and a half or $5 a bail for that pine straw. If you’ve got a large property, that adds up to thousands of dollars a year.
One of the things we’ve been doing, and had a lot of success with that goes along with what you’re talking about, Jake, of not only does it have a one time impact of improving the look of the property, but it has an ongoing impact on your NOI, which is there’s a big multiple applied to NOI, is we look at things like, okay, there’s these flowerbeds, and we have to pay for pine straw or mulch twice a year. If we pay a little more upfront and change that over to stone, or lava rock, or something similar, then that ongoing expense goes away.
It saves on watering. You do it once and it’s good for five years. You want to make sure you don’t put something in a high-traffic area where kids are going to throw it through windows, but other than stuff like that, yeah, absolutely. We look at, can we eliminate irrigation? Because irrigation leaks. It costs when you irrigate. There’s problems, there’s maintenance costs on that, so yeah, absolutely, when you’re looking at your upgrades and your operations, you’re considering not only the one time cost but the ongoing, and so yeah, that’s a great example that you brought up.

Jake Harris:
One of the things, and I’m going to maybe add onto a little bit more dynamic of question. In some of our projects, we are charging for internet, bulk, bringing in fiber, doing some things like that. Then we’re getting batch or wholesale rates that we’re then charging to tenants.
With some of these value-add projects that you have, or call it the … Is that a possibility? Are you doing that as well versus some of the new construction? Because we have open, empty walls, it’s pretty easy to do that versus a value-add, “Hey, how can I get more internet charges, or chargeback?” If that’s five bucks, 10 bucks a month and times 12 months, times how many units, that’s a very good toggle of NOI, and at a five cap, it represents hundreds of thousands or millions of dollars in very incremental ways.

Andrew Cushman:
It’s funny you bring that … I literally signed one of those agreements about 20 minutes before we started this podcast, to do that very thing. The short answer is, “Yeah, absolutely.” Like you mentioned, it’s a little easier when you’re building a thing to put whatever you want in the walls. We do try to avoid stuff where you got to go in and cut open lots of walls. That can get really, really expensive.
As an example, the agreement that I signed today, it’s for a company where they will come in at their expense, and they will lay fiber-optic throughout the entire property at no cost to us. In fact, actually, they pay us a fee for the right to do that. Then that gives our property incredible internet speeds.
Then it’s up to that provider to market to the residents. It’s not exclusive. The residents aren’t forced to use it. I tend not to like stuff where we’re forcing the resident to do something and take away their choice. Because I know, as a resident, I don’t like that, so we prefer not to do that with our residents. It gives that provider the exclusive right to market to our residents, so they still have the choice but only one person’s going to be directly marketing to them.
Then it’s set up on a revenue share agreement. For every dollar that comes in, we get X percentage of that, and so every quarter, we get a check from the internet provider who laid the fiber-optics, and like you said, that goes straight to the NOI. Then you apply a four, or a five, or whatever cap rate to that, you just increased the value of your property quite a bit.
Another one we’ve had pretty good success with is washer/dryer leasing. If you look at surveys of tenants and renters over the years, consistently, the top amenity that everybody wants is in-unit washer/dryer connections so they don’t have to walk through the heat, or the rain, or the freezing cold to go to the laundry room, and then find out someone took all eight units and left their crap in there since this morning, and it’s just sitting there.
Everyone wants their own washer/dryer connections, but some people don’t want to drag around the actual units. What we’ll do is we will lease them for maybe $35 a month, and then have that company come put them in. Then we give residents the option to lease them from us for maybe $55 a month, so there’s a $20 margin there, and like you said, times 100 units, or 200 units, or even 20, that adds a lot of value to your property because that goes straight on the NOI.
Some of the benefits of structuring that way is if the unit breaks, it’s not our problem. The company that leased it, they come fix it. If the tenant moves out and the next tenant doesn’t want a washer/dryer, we don’t have to move those things or figure out what to do with them. The leasing company comes and does that. That’s a very easy, beneficial arrangement.
On some of our properties that only have one story, we actually will buy the units ourselves, and then just lease them, and it pays off in sometimes less than a year, so that’s a pretty good return on investment. Yeah, those are two that we definitely, that we do regularly, and there’s other along those lines that you can do.

Jake Harris:
Awesome. Yeah, those are some nice … I haven’t thought about that. Washers and dryers. Little nuggets like that, an extra $20 a month, times 50 units, times 12 months, times at a four cap, boom. Look at that.

Andrew Cushman:
Well, and another really easy one that’s like almost zero dollars, preferred parking. Just have your maintenance guy go out with a couple of stencils and some paint, and number a few parking spots that are right in front of units and say, “Hey, $15 a month, you get your own preferred parking spot.” That’s almost like free revenue. Now, I don’t recommend doing the entire property that way because it can be a nightmare to manage, but if you do a select handful, it’s almost like free extra income.

Jake Harris:
Awesome.

David Greene:
Jake, thank you very much for joining us. Also, I should mention I know Jake from a group I belong to, GoBundance. If you want to get to know me, Jake, and Andrew, who are actually all in that group, you should check out GoBundance because it’s a good time and there’s a lot of smart people there. As you can see, if you join, you’ll become better looking like Jake, just by joining right there.
Thank you very much, Jake, for being here. Andrew, also, thanks to you, my man. This doesn’t feel like a podcast when we do it with you. It feels more like a masterclass. This is what people usually pay money to get taught, and you come on and you don’t hold anything back. You give a lot of actionable stuff, so everybody that’s out there, send Andrew some love. Andrew, if people want to get ahold of you, what is the best place to find you, and how can they help you and your business?

Andrew Cushman:
Yeah, first, of course, connect with me on BiggerPockets. LinkedIn, I’m on there as well. Then the easiest way to get a direct connection is just if you search Vantage Point Acquisitions, you should easily find our website. It’s vpacq.com. There’s a number of ways to connect with us on there.
Anybody who happened to listen to our episode number 571, I mentioned that we were hiring an analyst, and that person came from the BiggerPockets community. We’re adding another BiggerPockets member to our team. They are phenomenal, and we’re super excited about that.
We’re going to do that again. We are actually now looking for a full-time investor relations manager, so if you’ve got strong organization and system skills, you’re detail-oriented, you’re a strong communicator, and you have a general interest in real estate, which I’m guessing you do if you made it this far into the podcast, please go to our website. Click on the little thing, I think it’s says, “We’re hiring” tab and apply there. We hope we can add another awesome BP community member to our team.

David Greene:
That would be great. There’s a lot of talent out there in BP that wants to get deeper into real estate, so if that’s you and you know you have something to add, please do contact Andrew.
If you are looking to invest with us in the deal I talked about earlier in Fort Walton, we are still raising money for that. You can go investwithdavidgreene.com, register. Unfortunately, this is only for accredited investors. People always get mad at me when I say that. That’s not my rule. I would prefer if it didn’t have to be that way. That’s the SEC’s rule, and this is me trying to stay out of prison by saying that, so don’t get mad at me. Get mad at the SEC or whoever it is that makes those rules.
Then, you can find me online at davidgreene24 on LinkedIn, Twitter, Instagram, pretty much everything other than TikTok, where I am official davidgreene because somebody stole davidgreene24, and maybe they stole davidgreene one through 23 while they were at it. I’m not sure.
Hey, we want to hear from you, so if you’d like to be featured on a podcast like this, you want to come in and ask your questions, whatever it is, please go to biggerpockets.com/david. Leave your questions there. We will get you one of these Seeing Greene episodes. We need good questions, and we had great questions today from people like Jake, so please, we want to hear from you as well.
Last thing is, please leave us a comment if you’re watching this on YouTube. It’s really easy. You can hit the like and the subscribe button at the same time, and then go down there and tell us what you liked about the show, what you liked about what Andrew said, if you’d like to have Andrew on more, what type of stuff you’d like us to talk about. We look at those comments, so does our producer, and we make shows based on what we see people saying, so please don’t be shy. Get in there and let us know. Andrew, any last words before we get out of here?

Andrew Cushman:
No, I really enjoyed this. This was fun. I feel like I should be asking some of these guys questions myself, especially Jake here, but this was a good time. I enjoy it.

David Greene:
All right. Well, thank you. Everybody listening, go listen to another episode if you’ve got some spare time. If not, stay tuned for the next BiggerPockets show. This is David Greene for Andrew Hawkeye Cushman signing off.

Andrew Cushman:
You went down the donut hole metaphor. I love it, yeah.

David Greene:
I can make an analogy out of anything. It’s literally the only reason I’m on this podcast. I don’t think I really know anything about real estate.

Jake Harris:
I want to compliment, you were rubbing off on Andrew, by the way,

David Greene:
“Happier than a four-year-old in a Batman t-shirt.” Not bad, not bad.

Andrew Cushman:
Thank you. Thank you.

Jake Harris:
That was awesome, but up there with, “Some things age like wine, other things like milk.” That was awesome too. I wrote both of those down because I’m stealing both of them.

Andrew Cushman:
Isn’t a block of cheese really just a loaf of milk, if you think about it?

David Greene:
All right. We’re way off topic.

 

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In This Episode We Cover:

  • The five most important factors to understand when looking at a multifamily deal
  • Multifamily debt and equity, plus how they dramatically differ from single family rentals
  • How to use pro forma calculations when underwriting a deal and protecting yourself from overinflated profit numbers
  • Whether or not today’s rising interest rates will cause a sell-off of multifamily properties
  • The easiest improvements that will dramatically boost your ROI on a multifamily property
  • What rookie investors get wrong about finding good deals in today’s market
  • And So Much More!

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