JF1538: Return Massive Portions of Investor Equity After Just 13 Months #SkillSetSunday with Jason Yarusi
Jason is back on the show to tell us about the execution of an apartment syndication deal in which he was able to return 75% of his investors’ capital in just 13 months. We have actually heard about this deal before, about 400 episodes ago when Jason purchased the property he came on and told us about how he was able to obtain the deal Now we’ll hear about his business plan execution on that same deal. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Jason Yarusi Real Estate Background:
- Managing Partner of Yarusi Holdings a full service real estate and construction company
- His companies Flip and wholesale properties in Northern Jersey while controlling over 100 units in the midwest
- Listen to his previous episode: JF1157: Case Study Of A First Time Apartment Syndication with Jason Yarusi
- Based in Greater NYC area
- Say hi to him at https://www.yarusiholdings.com/
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Best Ever Listeners:
Do you need debt, equity, or a loan guarantor for your deals?
Eastern Union Funding and Arbor Realty Trust are the companies to talk to, specifically Marc Belsky.
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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.
First off, I hope you’re having a best ever weekend. Because today is Sunday, we’re gonna do an episode called Skillset Sunday. The purpose of today’s episode is to help you acquire a skillset, so that you can then apply those skills towards your real estate ventures. We’re gonna be talking about a very specific skillset, and that is the skillset of performing on an apartment community, so that you can return 75% of the capital that was invested after 13 months. This isn’t hypothetical, this happened, and it happened with one of my friends, Jason Yarusi, who is back on the show to tell us how he did it. How are you doing, Jason?
Jason Yarusi: Doing great, Joe. Thanks for having me back.
Joe Fairless: My pleasure. You’re gonna add a lot of value to our community through this episode, so I’m grateful you’re on the show. A little bit about Jason, as a refresher – he’s the managing partner of Yarusi Holdings, which is a full-service real estate and construction company. He has syndicated multiple deals, and in fact, episode 1,157, titled “Case study of a first-time apartment syndication, with Jason Yarusi” – I recommend going to check out that episode and also hear his best ever advice… We’re gonna be talking about a 94-unit. That case study of the first apartment syndication that we talked about on that episode – do you know if that was the 94-unit that we’re talking about today?
Jason Yarusi: It sure is.
Joe Fairless: Beautiful! Okay, so this is great. Part one of this conversation – go listen to episode 1,157, where Jason talks about how he acquired it and the numbers on the deal, and then we have the benefit of being 13 months later now approximately, and you’ve executed on that deal, and you returned approximately 75% of the investor equity after 13 months… So let’s get into some specifics about that deal. But before we do, how about you give the Best Ever listeners a refresher, just to remind them about your background, and then we’ll roll right into this 94-unit and we’ll focus on the execution during this conversation.
Jason Yarusi: Sure. Thanks, Joe. Yes, Yarusi Holdings – full-service real estate construction company; we mainly focus on flips here locally in New Jersey, and wanted for a long time to move into more apartment buildings, so I’ve spent a lot of time learning the process, following others like yourself and just learning the steps to take. The opportunities here in New Jersey were not really hitting on the metrics standpoint from what we were looking for, so we started looking out of state in a few markets, one being Kentucky. We really honed down on Louisville, Kentucky and really just specifically some of the submarkets there.
It took us a long time to find a couple opportunities and then we started offering. The deal that we closed on back in 2017 was a deal that we first offered on about eight or nine months prior to it going under contract, because — basically, our offer was about a million dollars off or apart from what the seller asking price was. It was an off-market opportunity; motivated sellers where the father, or the matriarch, was in his nineties, and the kids who were in their fifties or sixties just at that point were not really involved in the company. They came back and said, “No, thank you”, offered right at their asking price, and we went away. We kept it on our tracking list that this was something that we’ve made note to to go on — anything we offer, we keep a list of it, so we can check back and see what the status was.
So months later we saw this was still having no transaction history; we went back and offered just $50,000 higher than our first offer, and they countered back $600,000 less, and we were able to get it down to close just about a million dollars off their original asking price back in May of 2017.
Joe Fairless: Okay, so that sets the stage for you acquiring the property… A refresher on the business plan, please.
Jason Yarusi: Sure. Class C property, 1972-1975; six buildings built in the South-Central submarket. Basically, it’s an all owners-paid with two of the buildings where the tenants do pay some utilities. It has two boilers on the property; all the original windows. It also had basically high-flush toilets, and from that there was many different avenues from an income standpoint that we could capitalize on… One from just putting in a process for actually screening tenants, application fees, pet fees etc. Then we had rent bumps that were basically anywhere between $75 to $100 under market.
So our strategy from the front part was to have a traffic light rent raise strategy. Now, the tenants that are in the building, just because they’re paying under market doesn’t necessarily mean that they’re bad tenants; they were just being offered less rent, and if I was offered less rent to live in an apartment complex, I wouldn’t say no.
We basically filtered based on their collection history, just a level of green, yellow and red on the tenants standpoint, basically saying that if they’ve been great actors, they’ve been paying on time, really steady in their performance for the prior owners, that we were just gonna do a nominal rent bump.
Joe Fairless: What’s a nominal?
Jason Yarusi: $50 for after, and then $50 after six months. After that, we had yellow, where it was something that we were going to go in there and do $65 for the yellow, and red – basically there were a few bad actors who were continually on the list of having to be filed on, where we’d give them one opportunity where we have to file and they have to pay for filing fees for an eviction; if they came through and paid it, the second time there would be no remorse, we would take it to the action and we would be bringing them to market rate.
So we had that across the board, and we wanted to do this for a point that although we wanted to make sure that we were providing value before we were really taking rents up, so for this we were making sure that we were going forward and improving it. One of the first things we did was go out there and do all the landscaping, completely new signage across the board. Then we started getting into doing other things that can make the property better. We redid the parking lots, other things that ultimately in a value from a bottom line standpoint don’t add in there, but from a performance standpoint to the property it really just makes it perform better, because you’re not having a number of issues just with insurance, or other things.
We started doing concrete flatwork, repainting the parking lots, as I said, and then we did replace two of the boilers to start helping on the utility bill. Past that, we went in and replaced all the toilets, faucets and showerheads across the entire buildings to low-flush toilets and aerators. That has been a tremendous hit. It actually cut our water bill based on the last three months (we’ve just tracked it again) we’re down 32% on our water bill… Noting that this is an all owners-paid property, that goes right to our bottom line; it’s been a huge step for us. It also allowed us that we were able to go back and — it’s not really an area where you can bill back… So building back is in some areas, if it is an all owners-paid property, you will bill back tenants for part of the utility bill; it doesn’t happen on the 600 surrounding units around us, so it wasn’t something we were gonna put into play.
We also implemented, of course, application fees, which they weren’t doing, believe it or not… And simple things — we have an office, a full-time resident manager on site, an office leasing person. The prior office was having trouble with collections, but silly enough, they weren’t allowing the office manager to actually take checks. So the person who was the office manager had to refer them to take the check either to the mail, or go down four miles away and hand it to the office. So just a bunch of things that were very easily correctable for this site.
We installed move-in fees, instead of a deposit. We were finding that the tenant base is always worried about the deposit, the level of possible damage they can make, so we got away with the deposit, took that away and put in a set move-in fee, based on preparing the unit. It’s a one-time move-in fee that’s less than their deposit, and we also–
Joe Fairless: How much?
Jason Yarusi: It’s a $400 move-in fee, and then we do a surety bond on top of that, which would cover us for any damages, up to one month’s rent, that may incur for the life of their stay… And I believe this surety bond is $75; I have to double-check on that. But that still comes under where they would be paying if it was a deposit. The deposit would be in the $525-$550 range.
Joe Fairless: And that covers how much worth of damage?
Jason Yarusi: It covers one month’s rent, depending on where their one month is.
Joe Fairless: Okay.
Jason Yarusi: Past that, we started using some of the programs in the area to our advantage. It was having an occupancy issue with the prior ownership; we took it to 92% within the first couple weeks. We had a number of people skip just because they were not happy with rules, which is fine; it allowed us to quickly turn units. We basically turned about 40% of units until today, and for that no we were able to get those units rented up quickly. It’s a very workforce-driven area, and we’ve used some programs — we have dedicated up to 15% of the building for Section 8 and other programs [unintelligible [00:12:11].14] a veterans program, things that can really help the neighborhood as well.
Joe Fairless: What percent was Section 8 when you took it over?
Jason Yarusi: It was about 7% to 10%. There’s been some — let’s not say difficulties with Section 8, but there’s been some change in the process they’ve done in Louisville where the inspections have changed their protocol and the payment structure has certain delays based on the government’s dynamic there. I know some other owners who have a very heavy Section 8 where payments are coming in three or four months behind. It’s been very difficult for them. We wanted to keep it at a low rate, no more than 15% of units, just so it’s a dynamic we can use there, but it wasn’t something that was going to cause issues for cashflow if we had to wait 3-4 months.
Joe Fairless: Okay. Just so I am recapping this properly, all the different ways that you ultimately added value, whether it’s from an income or expense standpoint… What I’ve got written down based on what you’ve said, in no particular order – app fees… And how much are the app fees?
Jason Yarusi: App fees is $35.
Joe Fairless: So one, the added application fees of $35. Two, move-in fees instead of a deposit, and the move-in fee is $400, plus on top of that they pay $75 for a surety bond… Did I hear that correctly?
Jason Yarusi: That I have to check, but I’m pretty sure that’s it.
Joe Fairless: Roughly… Okay, got it. No big deal. Okay, let’s see – so that was app fees (1), move-in fees (2), three, better collections; previously it was cumbersome to accept checks, or they did not at all, but now you just accept checks, so there’s better collections… Is that correct?
Jason Yarusi: That is. And that’s a fine line, we find, with this tenant base… Sometimes based on payment – if they get paid Friday, which is maybe the seventh, well that may incur a late fee, and lots of times people happily pay a late fee every month along with their check, just so they can have the availability to pay. So collections – we wanna make sure we’re collecting, but also we’re not always pushing to get rid of late fees, because that can be a great step to increase income as well, if you’re getting $3,000-$4,000 in late fees across a 100-unit building… Well, not $3,000-$4,000, but let’s say $500 in late fees a month, and that’s $6,000/year that’s basically going to your bottom line.
So we’ve improved collections, but we still have late fees and other fees that are coming across the board, just based on cycles for payment.
Joe Fairless: And then the huge thing – at least from what I’ve heard – is getting that water bill down 32%. This is not an area, according to you, where you can bill back residents, so you found a different way or an additional way (if you could do both) to decrease that bill. How did you decrease the bill 32%?
Jason Yarusi: We changed all the toilets out, we made sure that we did a full unit inspection, and we’ve been continuing to do full unit inspections to check on any leaks, because there were a number of leaks going into the building just within some toilets or just leaking showerheads. We changed out also faucets and shower heads for aerator etc. just to really limit on the water use… So changing over to low-flush [unintelligible [00:15:27].01] just from the massive toilets that were installed, most of them from day one – it’s really reduced the water bill, and that’s been a huge hit.
Joe Fairless: Got it. And what was the investment to do that process?
Jason Yarusi: Honestly, oddly, if you think of the big run overrun, I think it was about $250/toilet across, somewhere in that range. We were able to buy them in bulk, so you do $250 times 94 and you’re talking about $20,000 or so.
Joe Fairless: Cool. And do you off the top of your head know how much value that decrease of 32% of the water bill added to your property, based on a certain cap rate that you use?
Jason Yarusi: We haven’t annualized it yet. I will say if we’re taking 30%, about $450,000.
Joe Fairless: [laughs] Would you do that deal all day long, again and again?
Jason Yarusi: All day long, all day long. We’re actually carrying it over to the next property that we’re rolling the investors into, so yes…
Joe Fairless: What cap rate did you assume there?
Jason Yarusi: Same thing. We actually were at a 7.5%, and I’m using this cap rate 1) based on the area, but 2) based on where the lender put us for the loan, and basically where they put us for the refi as well.
Joe Fairless: Okay. So that was the fourth thing. One, app fees, two, move-in fees, three, better collections by taking checks, four is doing a green program where you decreased the water bill by 32%, and the fourth thing… Holy cow! Did that have the biggest impact on your bottom line?
Jason Yarusi: That definitely had a huge impact. We’ve been able to get a good amount for rent increases as well, slowly pushing ourselves back up to market. We’ve also put in pet fees; we were the only complex, of 600 units in the area, that wasn’t allowing pets, and when we did our inspection, there was actually eight units with pets… So it was a simple thing to put in what was trending right with even the building across the street, $250 non-refundable pet fee, and $25/month for pets.
Of course, these little additions – they don’t seem a lot, but those are things that if you’re not going to be bullish trying to push on rents, where we do syndicate… So we have to be careful, we don’t wanna push on rents and have an occupancy problem. We wanna offer moderate rent increases, but then now perform better by offering these other opportunities where we can bring in other income and decrease expenses.
Joe Fairless: So five would be rent increases, six are pet fees… And then you mentioned you did other things, like concrete flatwork… What is that, for anyone who is not familiar with it?
Jason Yarusi: Sure. The first floor is a floating slab, and the second floor is a slab… So there were some cracks in the slab that were not structural, they just needed to be patched. There were also patches in the sidewalk that needed to be made, and on some of the steps going up some of the railings had some railing issues… Basically concrete where it needed [unintelligible [00:18:21].06] These were things we would have done, but also basically the lender required a repair checklist that we had to make. So we had our game plan, and we also had 6 and 12-month repair items that were required by the lender. And we basically just went in there and knocked all the items out within five months. We were performing very well at five months, continuing to do our turns, continuing to do — basically, our units turns and our rent raise strategy, but we did have a one-year blackout period on the loan, so we had to wait till month 13, or at least right at that 12-month mark to really start going into the refi process to do the next step here of the business plan.
Joe Fairless: Yeah, and on that next step with the refi process – walk us through that, please.
Jason Yarusi: Sure. So we were performing very well, of course; we did push everything forward, as I said. By month five we had all the construction out of the way and now we could really focus, where — being that this was our first deal, we slammed everything at the same time. We were doing the rent raise strategy while we were doing all the corrections to the property, while we were trying to work on collections, and then do all the lender required repairs. So we put a lot on the plate, and it worked out great. We have a great management partner there, that had been in house construction, and had made the process — of course, with learning experience in there; not everything is always perfect… But it had a lot of the opportunities for us to really just capitalize very quickly.
So once we got to month five, we started to really just push on the rent raise strategy, and then once we got through the blackout period, which was year one, we wanted to go into a permanent loan. We had a Fannie 7-6 ARM product which allowed us to roll into cap-ex, and from there we transitioned to a Freddie 10-year loan product that was basically a fixed rate. For that now we went in and just at the same cap rate we appraised out for over a million dollars more in value, and for that when we did the refi we were able to pull out, with returns for year one, we’ve been able to pull out over 75% of equity and return it to our members, which has been great, and they’ve been very surprised, very happy. It’s been a huge win, and we actually have another opportunity that we have coming up, and they’re all eagerly waiting for that one as well.
Joe Fairless: It appraised for a million dollars more than you bought it for, so basically it appraised for the amount they originally wanted to sell it to you for.
Jason Yarusi: Pretty much, yeah. It’s funny, right?
Joe Fairless: But you had to bunch of stuff to get there, so you were right on the valuation, right?
Jason Yarusi: We were spot on on the valuation, and one of the tidbits for us buying in is that you may feel funny putting an offer so low, but sometimes it just becomes that there’s the expectation of the seller, and then there’s the actual realization of the seller; he can finally realize that the property is not worth their expectation, and for us, after months of negotiation at a lower price point, we ended up basically showing our underwriting to him and saying, “Guys, it’s not that we’re trying to beat you up here… This is just what we can offer based on just the way the property is performing, and this is where we are. We do bring investors to the deal, and this is where we have to be.” That got us across the finish line at that lower price point, to where we really implemented our plan… And with our improvements to where it is, it is now worth where their expectation happened to be (way off) over 24 months ago or so.
Joe Fairless: What’s one thing that went wrong with this property?
Jason Yarusi: We’ve had a couple [unintelligible [00:21:30].22] neighboring building. And the neighboring building is owned by the city; it had tenants, or let’s say not even tenants, but there were people in there that were — basically, there was a shooting there, and drug activity… And it’s not an area where there’s shootings; there’s maybe been two shootings in the last 15 years. So we have one building that’s right by there that was scaring the tenants, and we had a couple tenants move, and wanted to move in other buildings, so we were worried it was gonna 1) create a really big safety issue for our tenants, and 2) that of course, we’re gonna start to [unintelligible [00:22:00].03] because tenants wanna move.
The city really was not very helpful at first, but then I was able to get in contact with the housing authority and go forward to actually get a detective from a local [unintelligible [00:22:12].26] and they were able to arrest a number of the bad actors over there and really clean up the neighborhood, which has been great. So they’re now performing some kind of rehab on that building where a number of the units were down, in some distress, and that building has come back online, which is gonna rather help the community a lot better than that.
Past that, being that it was an older building, we had an electrical issue, which at first they could have been something of a major issue. There was an electrical wire that somehow they got a [unintelligible [00:22:40].12] into the wire, and it was one of the buildings (23 units) shut down the power of that building for a portion of the day. Luckily, we have a great electrical company that works with the management company and was able to get on site right away, and by 7 PM that night all the power was back on. That could have been a much bigger thing, so they went through the whole building and checked everything, There were three other spots, they fixed them as well.
For us, we wanted tenants there to like where they live and feel safe, first and foremost, and with that, it’s also provided something on a positive note – we’re finding that we wanted to get our tenant base improved just to the point that we have a great tenant base… And past that, we’ve started to offer referrals for them, where they can bring in other tenants. So we’re now having about 30%-40% of our new tenants coming in are coming from referrals, where we offer the tenants who are bringing in the new tenant a $250 referral fee. And that’s good, because you figure if you have a good tenant, they’re bringing in another good person to them, and that’s been very helpful as we continue to make this a better community for people to live.
Joe Fairless: Was that a process that you implemented, or was that existing already, the referral fee?
Jason Yarusi: No, we implemented it. We implemented it and we wanted this to happen. As we were continuing to clean it up, we wanted to give basically guidance to the tenants that we want this to be a great place for them to live… And of course, tenants love when they have friends or cousins or whoever it is live there, so it’s been a win/win from both sides.
Joe Fairless: So to summarize the top three value-add components or tactics that you implemented, in order of the value they created, were what?
Jason Yarusi: So it would be the water savings, and then it would be the rent raise strategy, which at some point will take over the water savings process, but at this point we’re still continuing to have our moderate rent raise strategy. We’re now at about 98% occupancy, so we’ve started to be a little more bullish, but for that point, we’ve basically for year one into year two, we’re just doing the moderate rent raise strategy.
And then lastly was just putting in a proper management process; that adds in the little fees that come with the application fees, move-in fees. That would be third.
Joe Fairless: How can the Best Ever listeners learn more about what you’ve got going on?
Jason Yarusi: Sure. You can check out our website, www.yarusiholdings.com. My e-mail is firstname.lastname@example.org.
Joe Fairless: You’ve just educated us on how to manage a project effectively, so that it returns approximately 75% back to investors within 13 months… Thank you so much for doing so, and I’m sure the Best Ever listeners are thanking you, as well. I hope you have a best ever day, and we’ll talk to you soon.
Jason Yarusi: Thanks, Joe.