WS502: In-depth Insights into Value-Add Properties with Jorge Abreu

[INTRODUCTION]

[00:00:00] ANNOUNCER: Welcome to The Real Estate Syndication Show. Whether you are a seasoned investor or building a new real estate business, this is the show for you. Whitney Sewell talks to top experts in the business. Our goal is to help you master real estate syndication.

And now your host, Whitney Sewell.

[INTERVIEW]

[0:00:24.1] WS: This is your daily Real Estate Syndication show. I’m your host Whitney Sewell. Today, our guest is Jorge Abreu. Thanks for being on the show, Jorge.

[0:00:32.9] JA: Thank you for having me, Whitney.

[0:00:34.8] WS: Yeah, I’m excited to have you on the show. You’re a perfect guest just from your experience and you are out there making it happen. I see you all over the place. Your company’s exploding. You’re doing some great things.

But a little about Jorge in case you haven’t heard of him before, he’s an active and passive full-time multi-family real estate investor with 1,720 doors on the GP side and over 1,400 plus doors on the LP side. Currently, he has another 850 doors under contract on the GP side as well. Also owns a construction company that focuses on helping multi-family investors with their full renovations.

His goal is to reach 10,000 doors by the end of 2021 by creating partnerships and implementing the proper systems for scalability. Jorge, thank you again for your time. It’s a pleasure to have you on the show, I know you and I got to meet in Texas at an event a few months back and I’m happy that you agreed to be on the show.

But tell the listeners a little more about who you are and maybe a little bit about your background and let’s jump in to some of your super powers in this business?

[0:01:38.8] JA: For sure. Thank you for that intro. couldn’t have said it better myself. As far as more of my background, I guess. I started with single-family investments, probably about 13 years ago now. this was in south Florida, emerging from Miami and got enough flips done with the single-family to quit my W-2 and started doing full time real estate investments. Then the crash happened, 2008 and I needed to decide to either go back to a W2 job or at least move because there wasn’t much you could do in south Florida at that time.

That’s where I decided to move to Dallas, Texas and we continue to do more fix and flips. I decided to open construction company to kind of scale up and ramp up the fix and flips. We’re probably up to about 45 or so a year. And then about three years ago, I kind of opened up my eyes and looked around and noticed that, “Sure, I had been building this company but it wasn’t really building the wealth I wanted.” It was very transactional.

And I started looking more into something that can produce more cash flow, I wasn’t holding much as a single family that I was doing, it was mostly fix and flips and then sell them for retail. I did a couple of holds. Didn’t like to manage the properties and collect rent. When I heard about multi-family and the fact that you can purchase these 200 plus unit buildings and whatnot, before that, I didn’t even know that was possible through a syndication. 

So, I really started turning my focus towards multi-family and that was about three years ago and about two and a half years ago I completely stopped doing single-family and just started focusing on multi-family. That’s with my investments as well as the construction company. Haven’t looked back since.

[0:03:39.9] WS: Awesome. You know, I hear a similar story of that often, you know, in myself. I’m very similarly start a small multi-family, single family and it’s like one day, you know, you realize there’s this other thing out there called syndication and you know, use your eyes or open to that possibility. I had no idea, you know? It’s so interesting.

But you, you started a construction business as well and tell us a little about that, what you were focusing on then because it’s so interesting, it’s such a useful skill going into multi-family. Elaborate a little bit on that construction business and how you moved in to a larger multi-family?

[0:04:15.4] JA: Yeah, it all started with like I said the fix and flips and in the single-family and we got burned several times by other general contractors, you know, not finishing the job and taking some of the funds that we had given them. I’d worked with – one of my uncles owns a construction company, I had worked with him in the past and also have an engineering degree and I didn’t actually – I guess further back, I’ve got a bachelor’s degree in electrical engineering but out of college, I didn’t quite go into that. I went into the engineering department at UPS which was more of building like we were taking care of the warehouses and also building additions, it was more of being an in-house general contractor really.

I thought I had that experience and I said, “You know what? We’re just going to be a general contractor.” My wife thought I was crazy, my business partner thought I was crazy. You know, at least here in Texas when you deliver on your promises, good things happen, still, the construction company started taking off as well as the investments. And so, we were doing our own fix and flips like I said, like up to 45 a year and then we also had investors that were working for doing their flips.

You know, we had a pretty good business but it was very time consuming. I now have three little daughters –

[0:05:37.5] WS: Congratulations.

[0:05:39.0] JA: Seven, six and five, thank you. I wanted to figure out a way to spend more time with them as well. So that’s kind of how I led back into multi-family. Yeah, as far as the construction company, I mean, it’s been pretty crucial, it’s to help me get into some of the multi-family deals I’m in as far as with the partners, they felt very comfortable with me bringing that piece to it. A lot of our investors are passive investors feel very comfortable with that as well, especially if it’s a heavy value-add and you know, we have that piece in house.

[0:06:06.5] WS: I know that would make me feel better. I mean, just your – the skill level, you’re going to have also just by having your own construction company and that experience you know, is extremely valuable. You know, I know you’ve become an expert in this value-add type multi-family deals that everybody talks about but in moving into that, I’d love for you to really elaborate on what value-add means and that term is used so often in our space.

I hear that all the time. ‘We got this value-add deal,’ and I see the pictures and it looks like this brand new property. You know? I would love to just know – maybe that’s okay. I’d love to know your feedback or feel on what that means. Just explain – because I get that question. ‘Whitney, what does value-add mean when we’re talking about these properties/’ And then let’s dive into just really your super power behind that?

[0:06:54.9] JA: Yeah, I mean, I think you know, what you’re saying is dead on. You know, everybody’s using value-add now. All the brokers are saying it and you know, I’m sorry but adding back splash or adding a fence to a yard to me is not a value-add. You know, that’s more – you’re pushing it. I think something above maybe 5,000 a door is when you start getting closer to that value-add and then heavy value-add is probably 10,000 a door. and it’s when you’re really going in there and you’re doing major upgrades and it’s an older building and it needs all new roofs or you know.

I guess we could talk about the difference between deferred maintenance and upgrades which I like to tell investors, if you’re going to invest into something that’s a heavy value-add, you want to make sure you ask your sponsors, how much of this let’s say it’s 10,000 a door, how much of that is going towards deferred maintenance and how much is going towards upgrades, that’s actually going to get you more income?

Because if they tell you, “well, 8,000 is going to deferred maintenance and only 2, 000 is going towards upgrades,” you want to dig in a little bit more there because there’s going to be a lot of money put towards just fixing up the building which is great, I mean, you definitely want to harden the building or the property but you also need to bring value and raise the income.

[0:08:18.2] WS: Okay, we need to ask, how much is going towards the upgrades versus the deferred maintenance? And if that is swayed the other way, would that tell us or help us to understand if I’m the passive investor, what should I be looking for, maybe on a little more detail?

[0:08:34.7] JA: Yeah, if it’s swayed the other way, you know, if they’re telling you barely anything’s being used towards deferred maintenance, the follow up question would probably be “well, you know, what’s been replaced? can you show me the CapEx schedule that’s been completed,” and you know, maybe they’ve – at that point, it’s probably not that big of a value-add but I don’t’ know. Maybe somebody came in and spent all that money in the deferred maintenance and didn’t do any of the upgrade stuff.

You know, that could be a good deal or we’re actually working on one like that no, it’s pretty similar.

[0:09:05.8] WS: Nice. I’d love for us to kind of walk through this – the value-add process a little bit and help us to be most prepared. When we have that property under contract or maybe we’re about to, we’re looking for that property, I’d love for us to know some key things to be prepared so we’re ready to hit the ground running or maybe some common mistakes that you see. But even as the listeners are – I hope they’re paying attention to that but also as a passive investor. You know, I want to know that my operator is ready to go, right? That they’re as prepared as possible.

You know, help walk us through that a little bit, ways that you’ve been so successful in the value-add, multi-family space and when we should start preparing.

[0:09:45.3] JA: Sure. I mean, I see this all the time where the investors or the sponsors during their due diligence and during the transaction of getting the property to the closing, they spend a lot of time raising the equity. Usually they do some type of due diligence. I personally think you should walk every single unit or at least have a team that’s walking all the units. Pay really close attention to your down units.

You should have professionals, checking out your roofs. Professionals checking out your foundation, drainage, plumbing, you should scope all your sewer lines or at least a good portion of them to get a good idea. Should also – depending on the electrical, maybe have an electrician to check it out as well.

And then, don’t forget about your upgrades. A lot of times, I see other investors where they get all deferred maintenance checked out which is great. But then, they don’t have numbers on their upgrades and they kind of leave it up to figure it all out when they close. So, what we like to do is we want to have our scope lined out before we close, we want to have a preconstruction meeting maybe the week before we close. And then, day one, we’re executing that plan.

No time is wasted, you know, I see months go by after a closing and nothing’s been done to the property yet. No upgrades, no deferred maintenance, the scope of work is still getting figured out and then you end up spending more money than you should have which affects your returns. To me, due diligence is more than just due diligence. I mean, to me, it’s a time to figure out what it’s going to cost you exactly, what your CapEx is going to be and we’ve been pretty good at doing that.

[0:11:24.7] WS: I just don’t understand like how you can close on a property and not know what this is going to cost you yet. Or like, have no plan. How do you even raise any equity, I don’t understand?

[0:11:33.7] JA: I don’t know/ I see it all the time though.

[0:11:36.2] WS: Yeah, I agree. It blows my mind you know? It blows my mind like how can we even underwrite properly if you don’t know what this stuff’s going to cost?

[0:11:46.0] JA: Correct. You know we do our high-level underwriting where we’re kind of like, we’re guessing, looking at pictures but I mean, at some point, you know, we really dig in.

[0:11:54.8] WS: Right. You know, in that process of the due diligence, you know, you mentioned like walking all the units and I think you made a great point of like okay, the down units are down for a reason, right? What are some things you found that maybe weren’t made so obvious to you? You know? But then like, these units were down for something that maybe you had to dig a little for to find out why.

[0:12:19.9] JA: I know one deal comes to mind where we walked away from it because we just kept uncovering so many things. You know, the seller wasn’t telling us how many down units there were and then when we were walking all the units, there were supposed to be – we didn’t have it under contract yet. We were touring it but there were supposed to be showing us all the down units and they were kind of keeping us away from a section and I was like, “What’s going on right over there?”

They took us over there and it was a bunch of units that had been flooded by some plumbing lines that had burst, they’re trying to hide that from us, that’s maybe 20,000 a unit, 15 to 20,000 a unit, four units, you know that adds up. So, these are the kinds of things you discover.

We have also discovered a ton of units being used for different things like for storage or for maintenance and usually those units are in pretty bad shape. You know the AC’s in those units are being used for parts and what not. So, I mean it starts adding up.

[0:13:19.9] WS: Yeah, so tell me a little about like how you’re preparing your team to begin that value-add process on day one. I mean that’s like, we want to know that our team is ready to go as soon as possible and we have a plan and I just wonder, how do you know that your team is ready even your management team as well?

[0:13:38.5] JA: Yeah, I mean so we get everything lined up for our crews. At that point our crew has been out there several times. The sellers are sick of us because we have asked to come on site who knows how many times. Usually they don’t give us a hard time about it. And everybody is on the same page, you know some things that may not be 100% figured out might be like exterior colors or I mean even the interior finish-outs we have a pretty standard interior finish-out that we do.

So, we’ve got all of that ready, we’ve got our materials lined up. You know the only thing that might take a couple of days on the interiors is really figuring out what’s vacant, what’s not. You know sometimes that’s not really accurate for what we are being shown. So, we give the management team a week or so to get that under control. But I mean everybody knows their place, everybody knows what they are doing and then we get to work.

[0:14:30.2] WS: Okay. Can you tell us maybe an example of a business plan on a recent deal or kind of painting us the picture that we need to expect from our operator that we are investing with or if we are an operator just kind of what does that timeline look like and the business plan say, “Okay we’ve closed,” now what should happen over the next 12 to 18 months?

[0:14:52.3] JA: Yeah, so I can give you – you know we just late November we closed on 1,275 units in Houston. It was a five-property portfolio.

[0:15:02.4] WS: Small property, small yeah.

[0:15:03.8] JA: Real small, yeah so on that one I can give you an idea of what we have done so far and how it’s looking. So, we started with what we call a deferred maintenance or hardening the property meaning we knocked out most of the roofs at this point so we don’t have any more roof leaks. We’ve taken care of all the major plumbing. We have some boilers to replace. We have some sewer lines that had to be replaced.

We’ve replaced AC units, not all of them but the AC units that we were going to replace, the ones not working and then we started on the first batch of interior units and we’ve got the paint colors picked out about a couple of weeks ago and we started with the exterior cosmetics. Two months in and we’ve completed most of the deferred maintenance and now is when we are starting to beautify the property.

[0:15:59.0] WS: Nice, yeah for sure. So, you really hit some of the bigger items first that are most important or I guess most time sensitive.

[0:16:08.0] JA: Yeah, they’re time sensitive. They show the tenants that are there that, “Hey, this new owner is here to take care of things.” These are things that are bothering the tenants. You got the roof leaks, you got the plumbing leaks, you know AC not working obviously. So, they feel much better where they live and then once they start seeing the upgrades. I mean that’s just yeah, turns everything around.

[0:16:30.5] WS: Yeah, so you know now that you’ve got those big items taken care of, obviously roof, plumbing, sewer, AC units, you’re two months in now. Now you started on the interior, is there a plan of like, “Okay, this many this month or we hope to renovate this many units per month or this many within six months.” What does that look like?

[0:16:49.0] JA: Yes, for sure. On other projects it is a lot easier to – so we’ve done projects where you’ve got 30 to 40 vacant units or more than that and then we come up with a plan of, “Okay we are going to knock out 15 a month or 20 a month.” On this one it is a little different because the occupancy is really high and we don’t have a lot of vacant units. So, we’re taking a little bit of a different approach. We are actually usually we fix when we have that many vacant units to 40 to 50.

We fix the easiest ones first to just get them out there and get them leased. On this one we are actually fixing the worst units first and letting the leasing team do some of the – not the leasing, sorry, the property management do some of the easier turns. So, we are doing a little bit less on this one.

[0:17:45.0] WS: That’s a large property though.

[0:17:47.2] JA: Yeah, right.

[0:17:48.1] WS: You know a little different probably than your average hundred unit by itself of course. So, you know, anything else as far as just being successful in the value-add process, any other ways that you recommend being prepared or just for that value-add component before we move on to a few final questions?

[0:18:07.4] JA: No, for sure I would say it comes down a lot to your team. You know make sure you have the right team and that you know exactly what you are getting into. You know I have heard some sponsors that they don’t look at flat roofs. Well, if you’ve got somebody on your team that is really good with flat roofs, I mean a flat roof can last you longer than a sloped roof. You just have to make sure you have those professionals on your side and that way you know what you are getting into.

[0:18:33.8] WS: I like that, I mean it is so much about your team isn’t it?

[0:18:37.2] JA: Yes. Big time.

[0:18:38.7] WS: So, you know in your case are you focused more on your construction team or the management team? I mean just personally at their own port but I just mean like what is your role amongst all of these things going on?

[0:18:51.7] JA: Yeah, I know that’s a great question. So, on the construction side I am working on putting the pieces together where I am not so involved in the day to day. And then on the investment side, a little more involved than day to day but I am also trying to put those pieces together where I am mostly kind of overseeing everything, you know easier said than done but I think you and I talked before we even gone on here about systems and a lot of it has to do with systems. Making sure to implement the right systems.

[0:19:23.6] WS: All right Jorge just a few final questions before we run out of time, what’s been the hardest part of this syndication journey or process for you?

[0:19:31.5] JA: The hardest part? You know it’s probably been I don’t want to say raising the equity because it hasn’t. It is the fear of raising the equity. You know I had never done that before when we were doing the single families. We had a couple private lenders but it wasn’t – we weren’t syndicating a deal. So that was pretty new to me. And then my first couple of syndications, I have partnered with somebody that that was their main role. So yeah, raising the capital has been different but now that I’ve jumped in and gotten into it, I mean it’s actually I enjoy it.

[0:20:09.4] WS: Good. Yeah what was key in overcoming that fear other than just getting in there and all of a sudden it is working now and it’s easier but what was key and learning to raise the capital initially?

[0:20:22.2] JA: I guess one of the things is just feeling comfortable speaking to somebody about how much money they have to invest and realizing that you know what we do is a good tool for them. And it can help them make their money work for them rather than keeping it in these retirement plans or wherever they have it. You know once I realized that I think that is what made it easy or easier.

[0:20:46.4] WS: Right, how are you prepared for this potential downturn that everybody is talking about?

[0:20:51.9] JA: Yes, so I mean obviously we’ve been on a great run with the market and you know it’s going to get soft at some point I think we all know that. So, we’re really careful on our purchase. You know we believe the money is made when you buy. So, we have not gotten into any of these bidding wars as far as pricing. You know once somebody – if something lists and then it is going to highest and best, we’re most likely not bidding on it.

We are working harder to find those pocket listings or to go straight to the seller to make sure we are coming in at a good price when the downturn does come that we good in at a good basis and that we can move things around and make it work. Also, the financing is pretty important. You know making sure we’ve got the financing to hold us through that.

[0:21:41.4] WS: What’s a way that you have recently improved your business that we could apply to ours?

[0:21:45.3] JA: Ooh man that’s a good question. You know I could say more systems but obviously that is not specific.

[0:21:51.9] WS: Maybe there’s a specific thing that’s helped you to create those systems or software or anything?

[0:21:57.5] JA: Yeah, I mean we just started implementing an investor portal and that’s been a lot of work on the front end. But I think it’s going to save us a lot of time. Yeah, I definitely think an investor portal is as we continue to grow, I mean I think we need it.

[0:22:10.6] WS: How do you stand out in your relationship with your investors?

[0:22:13.4] JA: We’re always thinking about ways to stand out. I mean I am very customer-service minded. And I will give you a simple example, you know on all of our deals we send hard binders to our investors with important information about the deal. It gives them somewhere to put their financials if they want to keep their K1’s and then it is something physical that they can touch and it makes it feel a little more real. And we try to do more things like that and always staying in contact with our investors so we can stand out, yeah.

[0:22:50.1] WS: Nice, is that an after closing or is that something –

[0:22:52.3] JA: Right after closing yeah.

[0:22:53.7] WS: Okay, nice I like that and what’s a way you’re finding investors right now?

[0:22:57.3] JA: You know a lot of social media. I am on Facebook, LinkedIn, Instagram, I go to – I lost count how many networking events a year but a lot of them and the majority of that, the majority of social media and networking.

[0:23:15.4] WS: What’s the number one thing that’s contributed to your success?

[0:23:19.2] JA: Focus, a 100% focus. If I would have continued to keep trying to do single family investments and multi-family investments and the construction company and trying to do all of it myself there is no way. So yeah, focusing.

[0:23:34.6] WS: There’d be no time for those little girls, then wouldn’t there?

[0:23:36.7] JA: No.

[0:23:37.2] WS: Not worth that.

[0:23:38.7] JA: Right.

[0:23:39.2] WS: So then tell us how you’d like to give back?

[0:23:41.6] JA: So yeah, this year we’ve made a commitment within our team that we are going to pick a philanthropy and start probably doing something quarterly. So, I can’t say that we have really done anything yet, I just know that it is on top of our goals for this year to really go out there and give back.

[0:24:04.5] WS: Cool. Well Jorge, I am grateful for your time and just sharing your experience and expertise and just in that the value-add component of this process and business that we hear that term all the time. So, I love diving into that and somebody that’s just an expert in that like you are. So, thank you for that, I appreciate that and tell the listeners how they can get in touch with you and learn more about you?

[0:24:26.9] JA: Yes, so you can find out more on our website, it’s elevatecig.com. That is Commercial Investment Group, CIG and then you can also email me at j[email protected]. I do have a checklist I can send you for due diligence and for CapEx. So, if you guys email me, I’ll send it over.

[END OF INTERVIEW]

[0:24:49.8] WS: Don’t go yet, thank you for listening to today’s episode. I would love it if you would go to iTunes right now and leave a rating and written review. I want to hear your feedback. It makes a big difference in getting the podcast out there. You can also go to the Real Estate Syndication Show on Facebook so you can connect with me and we can also receive feedback and your questions there that you want me to answer on the show.

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[OUTRO]

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