JF1385: Evaluating Value-Add Apartment Syndications with Ben Risser
Ben has been building his real estate portfolio since 2010, and is here today to walk us through his process for evaluating and underwriting a value-add syndication. As an aerospace engineer, Ben is very thorough and methodical in his approach to underwriting, which is a fantastic as a listener looking to learn more about the value-add apartment syndication process. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
Ben Risser Real Estate Background:
- Syndicator of commercial real estate and business consultant
- Began building real estate business in 2010 and has syndicated $7 Million in commercial real estate
- Based in Lititz, PA
- Say hi to him on Facebook and LinkedIn as “Ben Risser”
- Best Ever Book: Rich Dad, Poor Dad
A couple of notes from Ben:
“One thing I stated that I would clarify, regarding being conservative on rental upside. I underwrite to a lower upside until I have more experience in a given market, or have collected a sufficient quantity and quality of data to increase the statistical confidence in the rental upside estimate.”
His revised “Biggest Mistake Ever in Real Estate” answer:
“Buying a fixer upper house, under the condition with your wife, that you’ll renovate it to what she wants, and then having two more kids.”
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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.
With us today, Ben Risser. How are you doing, Ben?
Ben Risser: Good! How are you doing?
Joe Fairless: I’m doing well, and nice to have you on the show. A little bit about Ben – he is a syndicator of commercial real estate and a business consultant. He began building a real estate business in 2010 and has syndicated seven million dollars in commercial real estate. He’s currently managing nearly 10 million dollars in projects, we’ll get specifics on that… And he’s based in Pennsylvania. How do you pronounce that town that you’re in?
Ben Risser: Lititz.
Joe Fairless: Lititz.
Ben Risser: Lancaster County.
Joe Fairless: Lancaster County, Pennsylvania. So with that being said, Ben, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Ben Risser: Sure. My background is aerospace engineering; it could be more different than commercial real estate. I went to school for it, I worked at Boeing for quite a while. I left aerospace engineering about a year or so ago, and went with my real estate business full-time, that I, as Joe mentioned earlier, started in 2010, and focused in earnest on multifamily syndication maybe a little over a year ago. So that’s my main focus right now – multifamily syndications, as well as we do underwriting for private equity folks, for other syndicators on a consulting basis, as well.
Joe Fairless: And when you say “we”, who’s we?
Ben Risser: I have a couple of gentlemen that I work with as independent contractors who kind of have the same background as I do; they have the same educational background, and also one of the things I like is I’m a chartered financial analyst candidate, so I managed to find a gentleman who also is pursuing that too, so we think alike, and he makes an awesome underwriter.
So I have about two underwriters helping me out with all the deals coming across my desk right now.
Joe Fairless: You all sound like a bunch of smart cookies, first off… [laughs] Secondly, one thing that I’ve seen in my business is it’s better – I’ll speak for my business – for me to have business partners who have complementary strengths, not necessarily the same background, same educational approach that I have, otherwise we’re replicating things and I’m not able to bring in others who can compliment me. You mentioned that you’ve got all the same stuff, so educate me on why that’s a good thing.
Ben Risser: Absolutely, that’s a great question. So I agree in terms of business partnerships we definitely want to have somebody who is a complement; a lot of the times it’s a polar opposite. My partner on the North Carolina deals, Matt Faircloth – we test out as polar opposites. Me and Matt are great partners, because he’s strong where I’m not, and I’m strong where he doesn’t care to be strong… So the two individuals that I have working for me are working as underwriters.
My background being in engineering, I’m just addicted to analysis. I can’t help but analyze things to the nth degree, and then my law for business and economics is a really good fit also. These guys are basically helping me scale up my capacity for acquisitions activity, and after I get more assets under management, I’ll probably scale up to support asset management activity… So I’m really trying to set myself up to scale, and not get overrun with working in the business and always give myself some bandwidth to work on the business.
Joe Fairless: That makes sense. Thanks for elaborating on that. The seven million dollar syndication – is that one deal, or is that multiple deals?
Ben Risser: That is one deal currently, and that would be the deal I’m doing a partnership with Matt Faircloth and [unintelligible [00:04:40].11] North Carolina, and then that’s also the ten-million-dollar project which we’re in the beginning phases of the value-add stage of the project… So we’re working very closely with the construction management, the property manager to really change the branding of that product on the market and make it competitive and everything it can be in the submarket it’s in.
Joe Fairless: Oh, wow. Alright, let’s talk about that. Just so I’m super clear – the seven million dollars is also the ten million dollars? Help me understand this.
Ben Risser: The purchase price was 6.65 million, and the project value, the all-in project cost is almost 10.
Joe Fairless: Got it. Alright, I’m with you. Cool. So what can you tell us about this project? I’d love to learn more and hear what you’ve got going on.
Ben Risser: Sure. This property consisted of two multifamily products that were adjacent to each other, and we’ve purchased them both together and rebranded them as a single property, [unintelligible [00:05:37].07] It was a very under-performing asset; it had very poor property management, so it basically checked all the boxes as far as what us value-add syndicators look for – the management was under distress, the property was under distress, and it was basically a D, C- property residing in a B market. It was just ripe for value-add.
So far, I’m the guy that crunches the financial performance numbers and all that, and it looks like we’re on track to exceed our expectations.
Joe Fairless: Wow, outstanding. How long ago did you all buy these properties?
Ben Risser: I started underwriting this June of last year, and we closed on it in January 2018, so it was quite the marathon to get through closing… But we did finally close on it in January of 2018. It took us a little while to get going, and I can speak to that in the best investing advice ever, about some of the lessons learned. Now we’re kind of in full swing on the value-add.
Joe Fairless: I would love to hear them in a bit when we talk about your best advice ever. As far as the two properties that you bought, you said they’re adjacent from each other, and you rebranded as one… Why rebrand them as one, versus keep them separate?
Ben Risser: Well, I think the products – they were originally built and owned by the same developer, and somewhere along the chain of title they got separated, they got into different ownership, and I think they came back together. So they were trying to operate it as a joint property, and they had a nasty barbed wire and razor fence going right through the middle of the property, but yet they still had this concrete pad that connected the two properties… And when you walked the property, it just made sense to join the two properties.
So we were ripping out all that nasty fencing, which is also a safety hazard – no insurance company wants to ensure a property with razor wire… But the properties are similar enough, and just the layout lends itself to market it as a single asset.
Joe Fairless: They’re similar enough in terms of unit mix as well?
Ben Risser: And the appearance. The shingle color, the brick, the structure… It all just seems like it was almost built as a single property, and for some reason it was parceled as two.
Joe Fairless: When you looked at the exit, and knowing you’re next-level aerospace engineering background in underwriting, when you looked at the exit I’m sure you modeled it based on two individual exits, versus combining the portfolio. One argument for keeping them separate would be you can sell one off and keep the other, versus if you consolidate, then you have one sell, and it doesn’t give you as much flexibility… How did you think about that from an underwriting standpoint?
Ben Risser: When we underwrote the property, we combined the financials and we just viewed it as a single asset, and really the upside in this particular value-add — actually adding the value is not from appreciation, so we did not model selling them out separately, although I can see what you’re saying, that it gives you a little bit more versatility to sell off half of it and keep the other. But the deal structure, the equity structure, the financing – all of that was done by viewing the two properties as one.
Joe Fairless: When you mentioned earlier underperforming and property under distress, management under distress – can you elaborate on that, just in case a Best Ever listener is not familiar with what that might mean?
Ben Risser: Sure. I think we had about 60k-70k in delinquency, which is unpaid rent. There were a lot of people — they’ve put a lot of warm bodies in units that pumped up the occupancy, but they really weren’t paying the rent.. So there was all that kind of tricks going on, and there were verbal, uncontracted agreements between the people in the office and the tenants, and there were just all kinds of shenanigans going on.
Joe Fairless: [laughs]
Ben Risser: And there was some drug activity, and I think the police were instructed by the prior owners to stay away… So it really allowed the property just to degrade, and the clientele in that property just got worse and worse. We rolled out the red carpet for the police department and they just had [unintelligible [00:09:48].18] for like a week or so.
Joe Fairless: The police were instructed to stay away from the property…
Ben Risser: Yeah. This is a place where — we didn’t really know this when we took ownership of it, but pizza shops didn’t deliver there, people just didn’t wanna go in there.
Joe Fairless: Do you remember the physical occupancy and the economic occupancy when you took over?
Ben Risser: Yes… It was better when we took over versus a month or so later, because those things got larger. So the occupancy I believe when we took over was right around 20% vacant, and then we had more on economic loss – I think it may have been like 30% economic loss… But after we took ownership and did the whole new sheriff in town, a bunch of people just kind of excused themselves, and when we’d file evictions, they’d skip… And we went to 40% economic loss, but that’s okay, because that’s not the tenant base we’re going for; we’re looking to build a safe, clean, family-friendly, workforce housing. That’s what we’re looking to bring to the market there, and I think the market is going to reward it.
Thus far, the interest that we’re getting on the renovated units and the rent surveys we’re taking – it’s all looking very good.
Joe Fairless: That is great to hear, especially for those residents who are living there and just looking for exactly what you’re providing, and would like some safety.
Ben Risser: Yeah, there’s the residents that are grumpy that things are changing because they don’t like change, and then there’s the residents that are grateful and happy that you’re doing what you’re doing.
Joe Fairless: Yup, absolutely… As with all things in life, right? [laughs] Okay, let’s talk a little bit about investor structure – how do you structure that with your investors?
Ben Risser: This particular deal was a 70/30 split, where the limited partnership (the investors) owned 70% of the asset, and the GP owned 30% of the asset. We have a 6% pref starting year two, and an 8% pref starting year three and thereafter. That was the general deal structure, and we purchased the property with a bridge loan, and all in all it involved about 3.2 million in equity raise, which my partner Matt Faircloth accomplished within his own network, and then I did all the underwriting and helped along the road to closing, and I also help with asset management now.
We kind of had a GP split worksheet where each person kind of takes ownership for various responsibilities in the GP, and it [unintelligible [00:12:05].22] That’s kind of how we operate.
Joe Fairless: On the investor structure, the 70/30 split makes sense. As far as the preferred returns – 6% in year two… So year one, because there’s so much heavylifting, there’s basically no returns, or no preferred returns either?
Ben Risser: Right, so for this particular deal, since it was such a heavy lift, we went out for our investors and basically said “Hey, year one, if we can bring you a return, we will, but don’t count on it, because this is the situation of the property. It’s truly a big value-add, so there’s not a lot of cashflow in year one because you’re reorganizing things and kicking out the tenants who aren’t paying, and spending a lot of money on various things to improve the property.”
Joe Fairless: Got it. And then year three and thereafter it’s 8% – is that correct?
Ben Risser: Correct. That’s how we structured it, just to pick it up, and then we’re looking to refi as soon as possible. We underwrote the refi into year three, but we might be able to refi before that.
Joe Fairless: I think you all will certainly do a refi before that. What is your best real estate investing advice ever?
Ben Risser: Well, I would say – and this is based on my lessons learned from this first syndication for me; Matt’s done several syndications already… But I would say underwrite conservatively; you’ll thank yourself. I have a few different bullet points here. I’d say validate the cap-ex estimates as soon as possible; have your cap-ex team ready to roll on day one. Have your marketing strategy ready to go day one. Work with the best property management company you can find. It’s super critical.
Joe Fairless: Yes. Amen to all of those things. Let’s dig in. Underwrite conservatively – what do you mean by that specifically?
Ben Risser: If you get emotional or start to find yourself rationalizing the rental upside, you need to step back and pour a cold bucket of water on yourself, because you’re gonna hate yourself if you underwrite to an upside that is too optimistic. And then expenses – we underwrote to expenses that are greater than the expenses we’re realizing right now, and it’s a good thing, because it’s giving us some breathing room because [unintelligible [00:14:16].06] So when you’re conservative on the income side and the expense side, you don’t know exactly how it’s gonna shake out once you’re in the deal, but you’ll be glad that you were conservative on both sides.
Joe Fairless: As far as underwriting to an upside that is too optimistic – optimism is subjective… So what specifically with your underwriting would be too optimistic versus just right? How can we quantify that?
Ben Risser: I would say there’s the upside that you’ll find in the OM. You kind of take that one with a grain of salt. Then what’s really important during your due diligence process is go out and do your actual boots on the ground rent surveys with your competitors, and do your online research and see what people are asking, and to the best of your ability find out where things are actually running, because what they’re asking for isn’t necessarily what they’re all getting. And then whatever you get, subtract $30-$50/month off of that.
Joe Fairless: Wow. How come?
Ben Risser: That was just out of conservatism. We underwrote pretty close to what we saw on the market, and thankfully, after we’ve taken ownership, we’ve realized that the market will rent for significantly more than what we underwrote to based on the product that we’ve been bringing to market. So it’s a double-edged sword, because if you underwrite too conservatively, you’ll never close on a deal… But there’s this line that you have to draw, and it comes from experience; the more experience you have, the tighter — or I should say the less personal error you can kind of assume in your underwriting, because you can be a little bit more sharp on it.
We underwrote to slightly less than we estimated the market to be, and it turns out it’s working out alright and we were able to close. I understand sometimes that eliminates a lot of deals.
Joe Fairless: Can you give an example of the expenses, where you were being conservative with expenses — maybe one particular line item…?
Ben Risser: When you get the financials from a broker, they all have things bucketed and broken out differently, and they’re not always clear. Sometimes service contracts are included in the RNM, sometimes they’re not, or sometimes some are and some aren’t… So to the best of your ability you’ve gotta parse things out. We actually underwrote with a lower RNM per door expense during the renovation period, and then we ramped up our RNM expense after the renovation period, and I think that’s in addition to a $250/door operating reserve we’ve put in there, and a lot of lenders like to see that anyway.
But I think the service contracts – we ended up underwriting to a little bit more than we were actually gonna get under contract, because after we took ownership, we have an amazing maintenance supervisor who is the best negotiator ever, and he’s talked down a lot of our initial contract estimates, so we’re actually doing better on service contracts than we underwrote to.
Joe Fairless: As far as validating cap-ex (capital expenditures), as far as getting the cap-ex started day one – what can you tell us about those two things?
Ben Risser: We had some challenges getting our bids assembled on time. We have a great construction management company, but they had some HR issues that slowed us up ahead of closing, and it kind of delayed our schedule on pooling together our budgets and getting all of our bids unsigned, so that right after closing we could get all of our contracts signed and get the boots on the ground as soon as possible. So we just kind of ran late on getting all the contracts signed… It just didn’t start as soon as we would have liked it to, and the same happened on the marketing end, where I had every intention of pulling together the marketing strategy, and having the signage, a good concept, where pretty much right after closing I could almost set a signage company to start building and get them on the calendar to install.
So the validation – after closing we found there were knicks and knacks, and this and that, that added to our per-unit cost on cap-ex… And I’m just thinking, was there something I could have done ahead of closing where we could have understood, like “Oh yeah, actually it’s gonna cost you $1,500 more a unit than you’re underwriting to.” The earlier you can discover those things, the better.
Joe Fairless: We’re gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Ben Risser: Sure.
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Ben Risser: Rich Dad, Poor Dad.
Joe Fairless: Best ever deal you’ve done that we haven’t talked about?
Ben Risser: That we haven’t talked about… This was my first real estate transaction, so I can’t tell you of another deal like this…
Joe Fairless: Fair enough, fair enough. What’s a mistake you’ve made on this transaction that you haven’t mentioned yet?
Ben Risser: I would say — I can’t think of one I haven’t mentioned yet, because I think I aired my laundry pretty–
Joe Fairless: [laughs] Fair enough. What is the best ever way you like to give back?
Ben Risser: I am passionate about fighting human trafficking and anything I can do to support organizations that combat that, I’m all ears.
Joe Fairless: Best ever way the Best Ever listeners can get in touch with you?
Ben Risser: My e-mail, firstname.lastname@example.org.
Joe Fairless: Ben, thank you so much for being on the show and giving us a very detailed analysis and overview — maybe not overview, but a detailed walkthrough of your property that you’re doing right now… The 6.6 million dollar purchase, overall when all said and done – looking at around a 10 million dollar property. The two properties that you bought adjacent from each other, why you all chose to group them as one versus leave them as individuals, and then the four lessons learned, and perhaps maybe not learned, but just lessons that are reinforced through the process, because it sounds like you are underwriting conservatively… So number one, underwrite conservatively. Two, validate cap-ex asap. Get the cap-ex stuff started day one, and get the marketing started day one. Those are the four things.
And just talking through how you structured it with your investors, and just the overall value-add play. Really grateful you were on the show. Lots of good stuff, especially for apartment investors, and then also just for real estate investors to hear how a big project is done.
Thanks again for being on the show. I hope you have a best ever day, and we’ll talk to you soon.
Ben Risser: Thank you so much, Joe.