People say that great things in business are never done by one person, and it is better to do partnerships than doing things separately. Syndicators Ben Leybovich and Sam Grooms have been successfully doing partnership in real estate for a year now, complementing their expertise with the way they process things, trust each other, and focus on finding great deals. Ben and Sam attribute their success to one another, agreeing that they could not do the things alone and that their partnership is a blessing.
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Ben Leybovich and Sam Grooms on The Advantages Of A Partnership In Real Estate Business
Thanks for having us Whitney.
Thanks for having us. This is going to be fun.
I’m excited to have you all and I know you are the guys making it happen.
We do a few things here and there.
These guys have been investing in multifamily for a long time. They’re great syndicators, they’re making it happen and we’re looking forward to getting into this conversation. Ben and Sam, give us a little update on what you’re working on and maybe briefly tell us what you’ve done up to this point in the syndication business and then let’s dive right in.
In the last few months, we bought 215 units between two properties. It’s about an $11 million purchase price. We raised about $8 million for those two deals.
The purchase price is about $20 million. One of them was $11 million.
We raised $4.5 million or $3.5 million on the other one. Good deals.
What is your model, your structure of your partnership between Ben and Sam? What are your roles?
We both underwrite. We get a deal from brokers. We both handle most of the underwriting. We sit down with brokers of the property together and then at that point is where we diverge in our roles. It happened gradually between the first and the second deal. I’ll handle mostly the debt and Ben will handle the equity. We both manage the property pretty equally, meet with other contractor appointments and deal with the renovation.
Reporting and things like that. I’ve been buying multifamily since 2006. This partnership is fairly new. I’ve been doing this for a long time.
How did the partnership change from when you first started to now?
I don’t think it has. We like each other. We trust each other. Our areas of expertise are complementary in the way we look at things and with the way we process things. It fell in good and there hasn’t been a need to change.
At the beginning we are both trying to do everything and we naturally stepped on the areas we were strongest at. We did our segregation of duties organically over the last few months.
How did you all determine who would be paid what? At the beginning of your partnership, I’ve heard people ask, “We’re looking at partnering. How do we structure that? What should that look like? How do we do that?”
I’ll give you a simple answer. If people are concerned out of the gate about who’s going to get paid for what, they’re not looking at the right thing. What they should be doing is figuring out how to underwrite deals, how to get taken seriously by brokers, how to get some deal flow and how to raise some money. Sam and I never even had a conversation about who gets paid for what and why. It makes sense. Once things make sense, they make sense. They don’t require a conversation. I don’t know, Sam, if you disagree with me or what but we never ever talk. I want a great deal. He wants a great deal. That’s where our focus is to find a great deal. Everything else is going to fall in place if we have a great deal. All of this other nonsense is nonsense. If you’re going to focus on how much you get paid, how does that help you get a deal?
To be more specific, we split everything 50/50. There wasn’t much discussion early on about how we were going to structure it. We started looking for the deal before we were worried about anything else. If we don’t have a deal, what does it matter?
I appreciate both answers. I’ll get that question out and I’ve heard it myself since you all are in this partnership.
That’s a silly question. The reason most people don’t make the money we make and don’t buy the apartments we buy is that that’s the kind of thing they focus on. That’s exactly the wrong thing to be focused on if you want to be a player. That’s what we’re trying to tell you. Yes, you hear this question a lot. Guess what? Only a few of the people you talk to are actually doing deals. How do those two things line up? The people doing deals aren’t worried about stuff like that.
If you both have that relationship that you’re going to partner, then it’s not a big concern anyway. You know it’s going to work out. You can focus more on defining the deal and underwriting. Tell us a little bit about a deal that you have closed on. Tell us why you bought the property. What looked good about it? Did it meet your buying criteria or not?
We bought it a few months ago. It was 98 units. We purchased it for $8.2 million, raised about $3.6 million of equity. The rents were $600 unblended.
A little under $600. We’re spending about $12,000 per unit to fix up the property and $7,300 of that is on interiors but that’s giving us a $340 rent bump per unit. We’re getting rents up to over $900. That’s what you have to see in the Phoenix area is about a $300 increase.
[bctt tweet=”Start looking for the deal before worrying about anything else.” username=””]
Mathematically, let’s back it up and explain to folks why you have to see what you have to see. Whitney, most of your value-add is a function of filling up vacancy. In most municipalities, you go to Houston, you go to Ohio, Columbus, you find a, “Mismanaged property,” that’s what we all want. What does it mean mismanaged? Mismanaged means you’ve got some vacancy because the owner doesn’t want to deploy capital to bring units up to par. They’re running at 78% occupancy, 73% occupancy, 84% whatever. When you take that over, majority of your value-add is a function of going in, fixing what needs to be fixed and filling up the vacancy, bringing it to 94% or 95% whatever the physical vacancy in the market. That’s the majority of your value-add in most value-add plays, then you put some lipstick on the pig and raise the rent $50 or $60 and you call it a day. The problem in Phoenix that grows 1.5% in one year is that there’s such a population explosion here and such a lack of inventory in $800 to $1,200-apartments that there’s no vacancy.
Even the most horribly run property is generally speaking operating at market occupancy. What does that mean to buy value ad in a place like Phoenix that’s an extremely high growth market in a county that is the number one growth county in America? What does it look like? What it looks like is you have to do the value-add. You have to create additional revenue. There is no vacancy. When we took over Silver Tree, there were two vacant units out of 98. When we took over South Mountain, there was one vacant unit out of 117. There are no vacancies because there’s a lot of demand because of population growth.
We can’t underwrite any vacancy.
You need value-add to get the South Mountain that we closed. The entire submarket is annualizing at 2.6% vacancy. What do you do with that? You underwrite 5% or 6% vacancy because that’s what is sustainable historically but then you need value-add to compensate for the difference between the 6% and the 2.4% in the marketplace which is not sustainable. You have to assume if that’s all right. You need the value to compensate for that and break even and then you need a bunch more value-add in order to make returns. What it looks like is $300 per door plus and that’s the only thing that works in Phoenix because of the rebates.
I heard your reaction when I said $12,000 per unit and we’re spending $7,500 on the interior and we’re touching everything in the interior of the units. We have a completely new kitchen from cabinets, granite countertops, stainless steel appliances, plumbing fixtures, lighting fixtures, new flooring as well as the bathrooms.
You get the $300 rent bump. Give me your timeline as far as how many units is it and getting it all renovated.
Let’s talk about the Canyon, Sam.
We’re on lease renewals. We are bumping rents quite significantly. With a $250 rent bump, that naturally gives you people who are going to move out and not renew them. We did that enough. We figured out how much we would get so we can get five to six units available per month that won’t renew and then we go in and fix those up. That helped us where we had 39 lease renewals between those two months. 39 out of 98 units in two months. We heavily weighted on those two months. We couldn’t renovate all of those units. We went in and increased rents. We turned it in at $50 and a lot of people were willing to accept that but we had five or six people said, “We’re not going to accept that,” and that was perfect. We got our hands on those units. We were able to renovate and then we still got a ton of lease that we captured on the classic renewals.
Would this property be A class property when you’re done with it?
It’s not going to be A class property.
It’s still an ‘86 construction but they hadn’t been touched since 1986. It is right near Grand Canyon University. They’re growing significantly in the last several years. They went from a few thousand students up to over 20,000 now and they want to be up to 30,000 in another few years. They don’t have the housing for that many students. There’s quite a shortage. Our biggest goal in there was pulling in some students and getting our rents up. Surprisingly, we haven’t had to even market to students yet. It’s been our current tenant base that has appreciated a higher class of living and is willing to pay the $350 increase in rents. We’ve had some people that were low in their rents that they’ve doubled their rent from $500 to $1,100.
There are still deals. There is still a value-add. There are still opportunities. All of this nonsense I keep hearing all over the place that everything is traded five times since 2010, this was true for most things but not everything. If you’re willing to do one deal a year, two deals a year or three deals a year and you’re willing to wait and look, there are still opportunities.
What helped us get those increased rents on their current lease renewals and we’re not touching an interior of the unit is they see what’s happening elsewhere. Right when we took over, we painted the property, we rebranded it and had new signage. We spent $70,000 on landscaping. They see that we’re redoing the pool area. We’re adding a gym, we’re redoing the laundry and they see all that. Even though their unit is not getting renovated, they’re fine paying an extra $250. A year from now when their lease comes up again, we’ll have to take over their unit to finish our business plan and renovate their unit. In the meantime, they’re okay with paying the extra because of the amenities they are receiving.
What is a business plan? How did you all structure this deal? What’s the hold period? What’s your plan?
I’m going to send you a bill when we get off of those things. It’s going to have a big number on it. Not just a little. I’ll put the gurus to shame in the bill.
Three to five years is where we usually tell people to expect. We underwrite to ten years, though. We are hiring a cycle. We’re going to wait in a cycle. Nobody knows how long that cycle is going to last. We underwrite to ten years in case we have to hold through another cycle and that way we can get exit when we want to and not when we’re forced to.
The exit is a moving target because the exit is a function of a relationship of the return to risk. How much can I maximize the return and at the same time take the risk off the table? We would consider selling and it would be an attractive proposition for somebody, not for us because we’re a different kind of investor. For somebody with an attractive proposition to take this property over in a few months, we’re going to have 50% of the units done. We’re going to have the rents proven and there’s going to be a good amount of meat on the bone still for somebody who is looking for a long-term hold for a cashflow play. The reason I’m telling you this is because in another few months, we’re going to consider an exit. Our multiple is going to be lower but obviously our returns in terms of cash and cash IRR are all going to be higher because they’re timed a lot sooner than anybody anticipated.
The advantage to doing that is you get an investor. They have meat on the bone and you’re doing a proven value-add and they’re willing to pay a lower cap rate. You have to weigh that lower cap rate versus the higher cap rate with additional income if I’m finishing the renovation and the longer time frame and weigh those two and see what your better exit is. We’re in constant communication with the broker who sold us the property on when we should time this exit, testing out the market and how many we should renovate if we should complete the renovation ourselves.
The exit is a moving target and it’s not like, “It’s a few years from now.” No, it’s a moving target. I like how you said that. It’s keeping your options open because you don’t know what the market is going to be a few years from now and up to several years. How did you structure it? What type of split? What projections did you have in the beginning? What does that look like?
We don’t touch anything that doesn’t underwrite to mid-double digit IRR on a ten-year hold. It’s not because we intend to hold for several years but in case if we have to, we still want to be able to underwrite about fourteen, fourteen-and-a half somewhere in there on the IRR. On a ten-year hold, that’s about 2.5, 2.6 or 2.7 multiple. On a five-year, that same deal will produce somewhere between sixteen and sixteen-and-a-half IRR and it’ll give you about a two multiple in a five-year. The preferred exit is from three to five. Underwriting incorporates ten. Preferred exit three to five means we’re going to stabilize the property, we’re going to show several months of stabilized annualized financials, teach wealth that’s stabilized, then we’ll get out on a stabilized number. An exit is possible on a proven value-add strategy. If there’s enough meat on the bone for the next guy, this can work well and that’s something that shorter than a few years we would also consider.
The biggest reason we also want to consider that is there is a lot larger pool of buyers in this cycle of value-add buyers and there are stabilized asset value buyers.
Understand who your buyer is before you get to your exit.
Regarding split on your question, it’s a 70/30 split on that one after an 8% preferred. It’s standard what you see in a class C value-add multifamily syndications.
What’s been the hardest part of the syndication business for you all up to this point?
[bctt tweet=”Once things make sense, they don’t require a conversation.” username=””]
It’s fiduciary. I’ve worked with private money, private loans for over a decade. I was always okay with it. I trusted myself. I felt I understood what I had to do. I borrowed people’s money. At times I lost money but other people didn’t lose money. All those dynamics, be it as they may. The syndication, you start millions of people’s money, that’s no joke. I had to get over myself a bit to get comfortable with that idea and the only reason I can get over myself is that it’s simply I’m good at this. It’s my highest and best use. If I wasn’t doing this as a man, I’d look at myself in the mirror and I’d say, “What is it you’re supposed to do in thy life?” I wouldn’t have any other answer because this is the thing. This is my thing. I’ve done it for so long. It’s what I know. Before this, I was a violin player. It wasn’t who I was or what I was. It was also who I was. It’s the same thing. What else am I going to do? This is my thing. That’s how I make a difference, how I move things around. You can’t have both. You got to sit on this chair and sit in this chair. If you’re going to do this, you got to accept those responsibilities with the money somehow but it’s a heavy load to carry. That to me was the hardest thing to wrap my head around.
What about you, Sam? Besides partnering with Ben, what’s been the hardest part of this business?
I think it’s by sticking with your guns especially where there are not a whole lot of good deals. We get sent a lot of deals that brokers will try to convince you to meet your expectations and it’s continually saying to them, “No, I’m not going to lower my standards on what are my buying criteria.” We don’t have that hard of a time. Ben takes the responsibility seriously but there are times where a broker is telling you, “This is a nicer area. You can spend a little bit more because your exit is going to be a little bit more. People are paying a lower cap rate in this area but the exit isn’t cloudier in certain situations.” This is a conversation Ben and I had with a broker. When you started getting closer to new construction prices, you have to draw the line somewhere. I’m not going to be able to exit. I’m going to have to hold on for a lot longer when I’m starting to approach the new construction prices. Nobody’s going to buy 80% of new construction now on class C property.
It’s tricky though Whitney because it’s one of the few instances I agree with Cardone. Cardone says, “Don’t buy if there are cranes in the air.” He also says $800 to $1,200 rent. He’s right. This is what most Americans can afford and this is the case in Phoenix as well as anywhere else. There’s a lot of new construction coming online but that needs to be between $1,400 and $1,800 a month to begin to make sense and then it goes up from there. In dealing in C class, you’re dealing in a scarce commodity because it’s not easily replaceable, which is why we like C class. I don’t want a B class that competes with A class. What do I need that for? I want C class that is never going to be as nice as B class but it’s going to be nice enough for those people who can afford it. The majority of people are in that category but the rationale because in real estate everything is convoluted to a certain extent. The rationale for the brokers is easy to make the argument that because it’s not easily replaceable, it’s almost fair to look at it as new construction because if you were going to replace it, you would have to replace it with new construction. I see how the rationale backward and upside down can work but the numbers don’t work.
That doesn’t help you does it?
It doesn’t help me. Maybe it helps somebody else. Maybe it helps a newbie somewhere but it doesn’t help me. One of the criteria for us is to keep an eye on our all-in per square foot pricing and to know what our delta is between that and the new construction because that’s in the downturn where your safety margins are.
What is a way that you all improved your business that we could all apply to ours? Maybe lay out a couple of key things in the syndication business that we should all be doing.
One thing that I can think of is we’re trying to system time it we can handle a lot of properties at once. We were doing asset level accounting on top of the property management accounting that the property manager does. I’m working with the finance reporting people at our property manager to push that accounting asset level accounting to them where they have access to our bank accounts at the investment level. They see all those transactions and then they go ahead and add them into their financials and there are not two levels of financial reporting. Simple things like that are the best thing that we can do now so we can grow our business as dealing with stuff like that on a monthly basis is not the highest and best use of our time.
You’re outsourcing. You’re giving those jobs to other people that can specialize in those things so you can focus on something else.
At the same time, we’re not growing a business. Sam and I agree on this. We see this as an opportunistic thing because once you start systematizing it, a system is a machine and you have to feed that machine in order for gears to continue to turn. If you don’t feed it and the gears stop and then they get rusted out and then you start it up again and it doesn’t work right. There are few good deals but we don’t want any of that moral hazard of doing a deal because we got to keep the gears moving so they don’t seize up.
To give you concrete of what Ben is saying is, say I have five employees and I hire someone to do that accounting for me. I have to have deals coming through to support back those employees that I hired to do this. We don’t want that moral hazard of saying, “I need to get a deal to have employees.” We were looking for ways to have a third-party do that and our property manager then offered this to us. We approached them to see if there’s something they’d be willing to do and luckily there were.
When you said property manager, the guys manage 20,000 units. These guys are as professional as professional gets. They have a legal department. They have an accounting department. They have a construction arm. This isn’t your mom and pop around the corner that has 300 units on their management and we’re going to trust them to do this. It’s not like that. That point I was making is an important point. This isn’t a business. It’s an opportunity to play. Here’s a deal that’s good. Let’s do it. When’s the next one going to be? I don’t know. If it never happens again this year, I’m good with it. We do the deals that we’re comfortable doing and we won’t do anything else. From that sense, we don’t want to be vertically integrated. We don’t want to have all these stations of people that have to get paid.
If you had to, you could start doing the accounting again or doing that task again if you had to. What’s the number one thing that’s contributed to your success?
I would say finding a partner. I think Ben and I both agree we could not be doing this alone.
I tried. It sucked badly. I couldn’t even tell you. Doing this on your own with everything that has to be done, absolutely. In this case, the partnership is a blessing.
I’ve heard that time and time again. Some people are afraid of giving away part of their business. Others say, “No, it’s quadrupled my business by having one partner.” How do you all like to get back?
We did PSW. In 2019, we’re doing again in 2020, we donated 20% off the top. It’s a nonprofit which was cool. It was a good gratifying feeling. It all goes back to my wife and I donate quite a bit to begin with and she donates her time, volunteers and things like that. You never feel like you do enough. No matter how much you do, it never feels like enough. One day I sat down and I said, “How can I incorporate that charitable giving inside of a business infrastructure? The more money I make, the more money the charity makes so there’s no conflict of interest.” Everybody wins and I’m motivated to do better because I will do better but also the charitable giving will do better.
That’s when I called Sam and I said, “What do you think about this idea? Everybody’s asking how do we learn? What do you guys do? How do we learn the underwriting? How we’ll do this? Why don’t we do an event and we’ll donate a portion of the income on that event,” and it worked out perfectly. We had a good time and we made some money. We didn’t make as much money as the charity. The charity made more money than we did. I got a margin of 100% actually. That was good but we met a lot of good people. We did a lot of good. We made a donation and it was good.
Do you all know when the next event is?
It will be January of 2020. We’re going to do an annual event on the last week of January.
Tell us what that event is and what they’re going to learn at that event.
We did a two-day event. I’m considering a three-day event in this case but the first day we spent the entire day in the classroom. We projected the spreadsheets up on the screen. We charged a considerable amount, $3,000 to $4,000 for people to be there but there was no upsell. We had nothing else to sell. We had no other mentorship program. We had nothing. You want to come to learn, learn. For this knowledge you’re going to have to pay a little bit. I’m not getting this out for $200. The first day was the whole day of underwriting, line item by line item, going through everything and discussing. Both Sam and I are on stage and different perspective on each number in every line item. Day two with property site visits. Once they understand the numbers, they understand what we saw before we bought the thing, where the thing is, you can go touch and feel it and see what it looks like in reality for those numbers to be dynamic in people’s perception.
On the second day we also heard from some professionals. We had our team members out there. We had our property manager, we had our broker, we had our mortgage broker, we had our SEC attorney who is the popular Jillian Sidoti. She came out and spoke to the group. Hearing about those professionals how to build up that team was one of the more useful things at that event.
I wish I could have made it to the event. I hope the audience is paying attention and will be looking for that as well. Tell the audience a little more about how they can learn about you all and what you’re doing in this event, how they can know about those things in the future.
[bctt tweet=”Understand who your buyer is before you get to your exit.” username=””]
You can reach me at a WhiteHavenCapital.com. For the event, it’s PhoenixSyndicationWorkshop.com. We have a podcast basically walking through everything with multifamily syndications called Multifamily Syndication Unscripted.
Follow us on Facebook. My email is Ben@JustAskBenWhy.com. My website is JustAskBenWhy.com. It’s been that for several years. If you’ve been on BiggerPockets, you know probably what my website is. Our podcast is different for most podcasts. It doesn’t have guests. It’s a roundtable. Things are in-depth and cool. You’re still not going to get to internalize everything until you see those spreadsheets and we have a 30-minute discussion on every number. It’s difficult to teach all of that information but the podcast is meant to teach a deep dive on everything to do with what we do.
Ben and Sam, I appreciate your time, the value you provided and being on the show. I hope the audience will reach out to you and I hope they’ll go to Life Bridge Capital and connect with me and go to the Facebook group, The Real Estate Syndication Show, where we can all learn from experts and grow our business together. We’ll talk to each of you.
Thanks for having us, Whitney.
- Ben Leybovich
- Sam Grooms
- Jillian Sidoti
- Multifamily Syndication Unscripted
- Facebook – Just Ask Ben Why’s page
- BiggerPockets – Ben Leybovich’s page
- Life Bridge Capital
- The Real Estate Syndication Show
About Ben Leybovich
Ben has been investing in multifamily residential real estate for over a decade. He has been a guest on numerous real estate related podcasts, including the BiggerPockets Podcast on episodes #14, #61 and #152.
Ben was featured on the cover of REI Wealth Monthly and is a public speaker at events across the country. Ben is also the creator of Cash Flow Freedom University and the author of House Hacking. Learn more about Ben at www.JustAskBenWhy.com
About Sam Grooms
Prior to Whitehaven Capital, Sam invested in hundreds of multifamily units passively. He began his career at Deloitte, where he assisted public companies with their SEC filings. Sam went on to manage the SEC reporting for Amkor, a $3 billion public company.
Sam graduated summa cum laude from Arizona State University with a bachelor’s and master’s degree in Accounting and is a Certified Public Accountant. Learn more about Sam at www.WhiteHavenCapital.com