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The 309 Units in El Paso built in 1964 is an old property made out of cement blocks that is worth $13 million to $14 million. Kenny Wolfe, the author of Investing In The Dream and the President of Wolfe Investments, speaks on how he recently closed this deal in El Paso, sharing the business plan for this specific deal and how long it took to execute, hold, and market the property. Kenny also walks us through how we can invest passively with the understanding that we could sign on the debt and the advantages of doing that.
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Closing The 309-Unit Deal In El Paso with Kenny Wolfe
Our guest is Kenny Wolfe. Thanks for being on the show, Kenny.
Thanks, Whitney. I appreciate it.
I’m honored to have you on. You’re extremely experienced in this business. You have 3,576 units across five different states. There are not many people I know who have done that, have that many units, and has been as successful as you are. Kenny is the author of Investing In The Dream. He is the cohost of the Commercial Cash Flow Show on YouTube and Facebook Live. Kenny, can you give the audience a little bit more about who you are and what you’re doing? Let’s jump into this deal that you purchase.
We’ve been buying multifamily real estate over the years. It started out here in DFW in Texas. We quickly branched out to Colorado Springs, Oklahoma City, Columbus, Ohio, and then in the various states in between. We’ve grown quickly and it was a great time to get started in real estate. Part of it is also learning the business and we’re starting to integrate as well vertically. That helped push our count up and get us more efficient at being a good operator.
You’re talking about vertically integrating. Elaborate on that a little bit. What does that mean?
I bought into an existing property management company. I owned 49% of Allied Property Management. There was a good existing third-party management company I would use on one of our projects and they’re looking to grow. I was frustrated with the other third-party management companies and they wouldn’t listen to my suggestions. I figured I would buy into one at least. That always helps when you get answers a little bit faster. We started doing that and then we’re looking to possibly bring in another management company as well from another state. That gets us to about 10,000 units under the third party.
That seems smart to me. I consider starting my own management company. Why not buy into one as you did? They have already got systems in place and you’ve already been working with them.
I figured that would be such a big headache to start my own. Why not start with the one that I like to work with and they are open to growing as well. It’s a much faster way to get that going.
I want to dive into this deal that you closed in El Paso, 309 units. It’s impressive. Can you give us, at a high level, a little more about the opportunity, about the deal, and then let’s dive into some more specifics?
This is a property that was a direct sale between myself and the seller. There was no broker involved. It’s nice once you get a reputation of someone who closes a deal. This is a $13 million to $14 million purchase on that property. 309 units and it’s eight minutes from the other property we have there. We bought 188 units about the end of August 2018. That puts us at about 500 units there in El Paso, which is going to be great to have them so close as we cross train maintenance guys and cross train leasing agents. It makes it so much smoother of a process for both our first property in a market and also after that as well.
What type of property? What class? What are some other specifics?
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It’s 309 units. It was built in 1964. It’s an older property but it’s all made out of cement blocks. It’s not going anywhere. The roof checked out pretty good. We’ve got some touch up there, but the seller gave us credit for that. It’s got a huge pool. The pool is Olympic-sized. It’s massive. I’ve never seen one as big. It’s partially covered. There was a lot of stuff that once we get in there and dress it up, it’s going to look nice, good looking property after that. I’d say it’s a C maybe a C-plus. We’ll probably take it to a C-plus B-minus. That’s about where we can take it, but our basis is good per door.
Three halves we’ve got already lined out. We started doing a pre-closed construction meeting with this asset, which is close. Once we’ve closed, we can hit the ground running and not wait for a week or two for everybody to start getting bids. We were already getting bids before we even closed. It’s got to Dyer Street. Dyer Street is a major thoroughfare in El Paso. A lot of the retailers are starting to come back on there, you can see it. There was a defunct Kmart. They have re-done the exterior. I’m not sure who’s moving in, but it looks like a Walmart to me from the outside. That’s good seeing some retail moved back into that area.
As far as why this deal and as opposed to probably many others you looked at, how many did you have to look at in this area before you found this one?
This asset came out of a lunch I had with the seller. I took him out to lunch and said, “If you’re interested in selling anything, let me know.” He said, “We have nothing for sale right now.” Two weeks later, he gives me a call and says, “Do you want to buy this asset?” We got to work out a fair price and went through there. That deal is a little strange. There are three other deals we will have closed buy. Those were “off-market” deals where four or five of us buyers are looking at it before it goes to the full market. We like those deals a lot better than the stuff that’s on the market. It gets us a leg up and first look, and hopefully, a discount on the price.
What is the business plan for this specific deal and how long will it take to execute it?
We plan to do a cash-out refi several months on the property. Since this is the second asset we bought from the seller, we know what we’re getting. The first asset we bought from him was classic units. There are no upgrades. Those units were getting an extra $60 a month more by doing new carpet in the unit and that’s it. Upgrades are getting extra $100 on top of that. We expect that to keep going at this property as well. We only underwrote an extra $30 to $35 more for the classic units and then an extra $50 for the upgrades to be conservative because it’s so close and in the same part of town, I expect it to have similar results as the first one. Maybe a little bit less because it’s at $5,000 median income a year on the demographics but it’s in the same side of the mountain there in El Paso.
A cash-out refi at several months. How long do you plan to hold this property?
This will be a longer-term hold. We do a cash-out refi. Our projections were getting back investors 40% to 50% of their initial equity back to them as tax-deferred deals. You get that back. You can go out and invest that again, hopefully, with us or with somebody else, that’s fine too. Put that back then hold that longer term. That’s going to be probably another few years and let it cashflow for us quarterly. Let the appreciation, tax shield, and all the benefits you get with owning rental real estate, enjoy those as long as we can. Probably we’ll sell it a few years after we buy it.
About the cash-out refi specifically, is that something you’ll do on most deals?
Yeah. Our goal is to give back as much cashflow and then initial equity back to investors as fast as possible. Seven of them, we’ve got 100% of their initial equity back in cashflow including the refinance proceeds in many months. It’s the average on those seven, which is great. That’s our goal. We can’t always do that but our goal is to get people’s initial equity back as fast as possible.
Would that be always a complete cash-out refi or is that also like a supplemental loan?
I use cash-out refi because some people don’t know the jargon. Those will be either a true cash-out refi or sometimes there will be a supplemental loan, depending on the debt we get going into the deal.
What kind of debt was placed on this deal initially?
We did a non-recourse bridge loan on this asset. It was a three-year initial term into one-year extension. That way we can write out any storm and if we get one through a recession, which is great, it gives you some leeway. It was interest-only for those few years as well. The lending was great. They gave us 78% of the purchase and 100% of the rehab. That was a phenomenal loan. We want to do our business plan and then move on to a Fannie Mae or Freddie Mac loan.
Getting that kind of debt, do you think that was because of your track record and experience?
That’s partly it. It’s also because we already have an asset in El Paso. We could point to the success we’ve had there. That’s part of it as well. The more of these things you do, the easier it gets going all around.
What’s going to be the most difficult part of this process for this specific asset being successful with this business plan?
This deal always hinges on to me on who’s your onsite manager and who’s your onsite maintenance. In our first deal there, we had to go through three different managers to finally find the right one. We finally found her. She’s doing great at Montana Agave there in El Paso. She was able to get us a contact for the second one as well. That’s going to be a big deal. It’s a 309 unit deal. It’s a big deal to keep track of everything. We’re going to have probably her and then two other leasing agents in the office as well. It’s almost 92% to 93% occupied. We can’t go in and just blitz a whole bunch of units. It’s going to be a slow progression of getting units upgraded. The first step we’ll do is to do the exterior. You’ve got to make that look pretty.
We’re going to rebrand it. It was called The Trails at Rancho Vista. We’re going to go to Agave Courtyards as the name and then change the colors a little bit. They painted the brick, which is always something I don’t like to happen, this great red earthy color. The other colors were yellow. It looks like McDonald’s. We’re going to change the yellow to something more up to date and more hip but we’ve got to keep the red because it’s everywhere. This one’s a bread and butter deal. It’s mostly occupied by residents. We’ll have some residents retention. We’re the new sheriff in town. We’ll lose some for sure. That always happens on these deals. One that we’re working on now is a 400 unit deal out in Shreveport. That deal is 70% occupied. That one’s going to be a completely different business plan. The business plan is always to increase analyzing to max it out. It’s going to be a little bit different how we get there because I got low occupancy on that one.
Of the 309 unit, what are you putting into rehab and what’s per unit or total?
The total rehab on that deal is about $3,000 a unit. It was light. This is the second that we bought from the seller, so we know what we’re getting on the air conditioning units, the flooring, all those things. He puts a lot of money back into the systems like the plumbing and the ACs. He did a lot of full-wood flooring as he did in our first one. It’s pretty light. The upgrade units are going to be a backsplash, cabinet fronts and some fixtures because he’s already done the full wood in most of the units. He’s already redone the entire bathrooms with a nice tile bathroom finish out on the shower. That’s an easy one.
How did you meet the seller and build this relationship with him?
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I bought a deal from him. I took him out to lunch. It was like having lunch with the Godfather. There were three people that came out to say hi to him. It’s fun to see that. He’s a good guy. He had been there for a long time. It was a good relationship to build. You should take people out to lunch and ask them if they’ve got anything to sell.
Are you rebranding every property or is it a case-by-case basis?
Mostly, yes. We bought an A-class deal that was built in 2018. That one, we didn’t change the name. That’s brand new. Most of the B and C deals we do to let people know there’s a new sheriff in town, we’re going to offer new amenities and breathe some new life into it.
If I’m looking at B and C class, the majority of the time I should consider rebranding.
I would, especially these days when you have all these online reviews that talk about your property, Google reviews, Yelp, and all those. If you can rebrand and rename it, that gives you a great tool to hit the reset button.
What about structuring this deal? How did you go about knowing the best way to structure it?
We’ve done this for a while now. We knew we want to do a bridge loan. We knew that the NOI was artificially low because the market rents could be pushed. This was our second asset in the market. We felt comfortable doing that. The reason why we did that was that we avoid the big prepayment penalty as you do on Fannie Mae or Freddie Mac loans. That’s what we want to avoid. That’s why we did the bridge loan aspect to it. Structure-wise, we didn’t change much from our typical structure. We don’t do acquisition fees upfront but we also don’t have a preferred return and no waterfalls. We do an 80/20 split of the cashflow and the refinance proceeds. Once the investors get 100% of their capital back from some capital event, either the refinance, supplemental loan, or the sale, after that then it gets to 80/20. That’s our typical deal structure. We’ve done that forever since the beginning.
It doesn’t start 80/20 until they get their capital back.
No, it’s 80/20 on the cashflow. From day one, if you sent out a check a few months after we buy it, then it’s 80/20 split. On cash-out refi, that’s 80/20 split again. 80% goes into the investors and then on a sale, that’s when the investors have to have 100% of their initial equity back through either the refinance or the sale before the 80/20 split kicks in.
Are investors onboard about that as opposed to when they hear that there’s no preferred return?
I’ve only had two people complain that there was no preferred return. They didn’t invest in this deal, which is fine and so far, we’ve had no issues raising money using that model. For new deal sponsors, it’s a better way to go because you’re not starving while you’re holding the property. If you do a pref and you’re getting some money above that 7% to 8% per pref a little bit while you hold the asset, it’s going to be tough for you to grow as a small business. The way we structure it, we forego those upfront fees. Ours is always based on performance. If it does well, then everybody does well. If it doesn’t, no one does well. With upfront fees, you’re rewarding them for buying the deal but then they don’t get paid until they sell it. They get a little bit but not much to run an office or anything off. Our way ensured that we have this cashflow coming in so we could build our office, build the staff, everything we need, and keep the lights going no matter what. It makes us always aligned with the investors.
Are there any other details about the way that you’re structuring deals outside of that’s a little different than normal or something we hadn’t heard of?
Not really. Our deals in Shreveport that were buying is a 506(c) so I can talk about it but we can only take accredited investors on it. We did a 7% pref on that deal, which is interesting. It was a $6 million raise. We brought in Rod Khleif and Robert Ritzenthaler to raise half the equity. We already raised the other half right now so I’m finishing that off, but that one was the first deal we ever did. It’s a three-point acquisition fee, then a 7% preferred return. Above that, it’s 70/30 until 17% IRR and then it goes to 50/50. It makes for a lot more math and a lot more explanation on how it all works. Probably 90% to 95% of the deal structures are typically like that though in the syndication world. The way we do it with 80/20 split is an odd thing to do.
Why 506(c) on this deal?
It’s such a large deal and we wanted to be able to solicit publicly. We can get a billboard in downtown Dallas or wherever to raise funds. I don’t know if I’ll do it again, but it’s something we tried out.
How do you plan to market that deal since you can push this out?
If you look on our LinkedIn or on our Facebook, it’s all over that for sure. We’re blasting out emails. We’ve been on podcasts talking about it. It’s interesting. It was good to try out. We offered a few of our investors that are far less sophisticated and not quite accredited. That’s the drawback. I don’t know if we’ll do it again because you miss those people.
Your other accredited investors will say they had been investing with you for a long time, but now they’ve got to go through some trouble to show proof of funds or that they’re accredited.
They’ve got to get a letter from their CPA saying they’re accredited or grow through this third party verification system. It’s $30 to $35 to do. It’s not a lot of hoops to jump through. It’s something that I don’t know if we’ll do it again. The 506(c) is fine. We’ve got enough of a following on our investor database that it’s not a problem.
When do you close on the deal in this report?
We’re closing on that soon.
What has been the hardest part of the syndication journey for you?
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A lot of it had to do with the third party management because that wasn’t in the house before. That was a lot of headaches because I didn’t like their accounting. I didn’t learn so much there. I’ve got an accounting background. Accounting to me is a big deal. If you don’t know the numbers you’re looking at are true and accurate, then you can’t take a pulse on the property. We do many deals that we’ve got to be able to look and trust the income statement and the balance sheet for that matter on each of these deals. To that, different third-party management companies have their pros and cons. To me, that was the biggest headache to deal with in the whole syndication process.
What is your buying criteria?
A lot of this stuff on the market, we’re looking at it and we’re underwriting it here in the office, but it’s something that usually we’re pretty far off. We’re looking at properties, a lot of off-market deals that come to us first. There’s a deal in Tulsa that we’re looking at. It’s 200 something units. We’re looking at that. We look at the new stuff that’s on the market as well. It’s usually those properties that we don’t care to pay that price. A big deal to me is a metric that we’ve used a lot in the past when we bought a property where the median income is about equal to the price per door. That’s usually been a home run for us.
That’s not rocket science. There’s a website called City-Data.com. We’ve been using it for a long time. You can type in the ZIP code and find your address. It breaks it down even further than that ZIP code to all the demographics and supplies too much information. To me, the biggest number to look at is that median income, because there was a deal that was brought to us in Shreveport. The median income was $26,000 a year. I said, “No, I’m going to run away from that one.” That’s way too low. I don’t care if I have to buy it for $24,000 per door, it’s not worth it. How are we going to collect rent at $26,000 median income? We’re looking for deals where whenever it’s a one-to-one ratio, it’s been a home run for us in the past. That tells me a few things. That tells me that the investor or the current owner is not running it efficiently. Otherwise, they would charge more rent or their expenses are too high. There’s something wrong with how they’re operating it.
What’s a way that you’ve improved your syndication business that we can apply to ours?
The biggest thing is we have IMS as our investor portal. That’s going to streamline things well. All the investors seem to like it so far. They can log in and see their K-1s, see their documents all in one spot. It will also help us with our ACHs and everything like that once you get that setup. That was a big addition that we did. We’re also making all of our PPM, our subscription documents digital through Adobe then going through IMS. It will be supposedly even easier with DocuSign in everything on the documents.
What’s the number one thing that’s contributed to your success in the syndication business?
A lot of it has been networking. That would be my biggest thing. I pointed to that lunch I had with the seller. It’s going out to lunch and saying, “If you’ve got anything, let me know.” We get up on stage. I speak at a lot of events. Keep building the brand through networking. We’re hosting our second multifamily conference in LA, in Santa Monica. We’re doing those things to bring value to folks through education and networking as a way to be a conduit and resource for that.
You’ve done well in this business. If somebody comes to you and you’ve got 30 seconds to talk to them and they say, “Kenny, how do I get started? What do I need to focus on?” What are you going to tell them?
I always start out with, “Do you want to be a passive or do you want to be a deal sponsor?” Those are two very different paths. If it’s passive, then network and find the deal sponsors that you like and that have done well, have a good track record. Ask for references, for people that have invested in their deals. Do that and do your homework. If they say deal sponsor, then I’d say how I got started was doing two passive deals because I knew I wanted to be a deal sponsor. I did that for a few reasons. One was to learn the ropes. One was a value play, one was a yield play.
Secondly, one of the yield play was a Fannie Mae loan. That counted as my track record when I went out to go get my own Fannie Mae loan for Lakeside Village, our first indication, 76 units. We got 81% leverage Fannie Mae loan from day one. I didn’t have to bring any other guarantors. That helped out too. It depends on what track they want to go. On the deal sponsor side, I have what we call passive-passive and active-passive. If someone wants to be an active-passive, that’s somebody who eventually is thinking about being a deal sponsor. They let me know when they come in, “I’m going to be on the site this day. I’m flying out to El Paso. One of the active passives is coming out from Massachusetts to be on site to walk the units.” It depends on making sure your sponsors will work with you if you’re someone who wants to learn the ropes.
You invested passively but with the understanding that you could also sign on the debt, right?
Yeah, you want to sign if you can on a non-recourse loan. That gives you a leg up when you go to syndicate your first deal. It’s much easier to get Fannie Mae financing or Freddie Mac doing that.
I haven’t had anybody say that before, go and invest passively but with the understanding that you also get to sign on the debt so you’re more prepared for your own deal.
It usually gives you a great leg up. We’ve done that. That allowed us to do non-recourse financing on 98% of all the loans we’ve done from day one. It was awesome.
Kenny, how do you like to give back?
We do a lot of stuff for our family. We do a lot of that on animals. My wife and daughter do a lot of work with Operation Kindness here in Dallas, Fort Worth. We do a lot with that. They mostly lead that out. I’m there more of a support role for that stuff. That’s typically how we do it. I’m mentoring college kids from Baylor University as well. We do those kinds of things. The active-passive ways to help coach where I can. I’m not a mentor. I don’t want to be a mentor but if I can coach someone else that wants to do what we do, then that’s a great thing to do.
Thank you so much for your time and for sharing your expertise and experience with the audience. Tell them how they can get in touch with you and learn more about your business.
Kenny, thank you again. I appreciate the audience for being with us. I hope you’ll connect with Kenny and I hope you’ll go to Life Bridge Capital and connect with me. I’m happy to help you in any way I can. Go to The Real Estate Syndication Show Facebook group where we can learn and grow our businesses together with experts like Kenny. We will talk to each of you again.
- Kenny Wolfe
- Investing In The Dream
- YouTube – Commercial Cash Flow Show
- Facebook – Commercial Cash Flow Show
- Allied Property Management
- Fannie Mae
- Freddie Mac
- The Trails at Rancho Vista
- Rod Khleif
- Robert Ritzenthaler
- LinkedIn – Wolfe Investments
- Facebook – Wolfe Investments
- Operation Kindness
- The Real Estate Syndication Show – Facebook group
About Kenny Wolfe
– 3,576 units across 5 different states
– Author of Investing In The Dream
– Co-host on The Commercial Cash Flow Show (YouTube and Facebook Live)