JF1701: We Sold Another Deal! Lessons Learned From Taking Another Deal Full Cycle with Frank and Joe
Frank has been on before, both to share his Best Ever Advice, and also to discuss another deal that Ashcroft (Joe and Frank’s apartment syndication company) took full cycle. We’ll hear why they bought the property at a time most investors were not optimistic about the market the property was in. They tell us about the business plan, and how it actually unfolded. This was only Ashcroft’s second property purchase, so a lot of learning opportunities along the way! Take their lessons learned with this deal, and apply them to your business, without having to suffer through the trials yourself. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
Best Ever Tweet:
“We could have done a better job with our lease audit, unit walks, and really getting to know the extent of the demographic around us” – Frank
Frank Roessler Real Estate Background:
- Founder of Ashcroft Capital
- Has overseen the acquisition of over $700,000,000 of institutional quality multifamily investments
- Based in NYC
- Say hi to him at ashcroftcapital.com
- Previous case study:
- Frank’s Best Ever Advice:
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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, Frank Roessler. How are you doing, Frank?
Frank Roessler: Very good. How are you, Joe?
Joe Fairless: I am doing well, and welcome back to the show. Best Ever listeners, we’ve got a special segment for you – it is all about case studies, and most importantly, what we learned from those case studies. Today, Frank is gonna be leading the conversation about a deal that we took full cycle. Anytime you take a deal full cycle, you’re gonna learn some things along the way.
It was a successful deal for us and our investors, but we’re not really gonna be focused on that, as much as the lessons we learned, so that we can help you learn stuff as you go about doing your own deals. And by the way, if you wanna learn more about Frank – we won’t get into his background, because you’ve heard that on previous episodes. If you wanna learn more about Frank, just go to our website, ashcroftcapital.com, or investwithashcroft.com and you’ll learn more about Frank.
Frank, let’s go ahead and get right into it… What’s the deal and why did we like the deal?
Frank Roessler: Okay, so this property was called The Alara. It was located in Houston, and it was a smaller complex of 155 units. Why did we like the deal? We liked the deal, plain and simple, for two reasons. One – the basis. We were getting this deal at a tremendous cap rate, compared to where most multifamily was trading; most value-add 1980’s product in Houston at that time was trading for about a 6,5%, and we acquired the Alara for us at 7.7% cap rate. That’s a very, very strong basis to go into a property at. Right around 36k/door is what that translated to. Very low basis.
We liked that oil had crashed. We bought this deal in 2016, oil was down around $40 or so, and it used to be well above $110 a barrel… So as all of our fathers or uncles have told us, “Buy low, sell high”, and that is indeed what we did with the Alara.
I think what we did that was wise is we bought a deal that had a lot of value-add, had a great cap rate, and we also timed the cycle very well. We bought when there was not a lot of confidence in Houston; when there’s not a lot of confidence, there’s not a lot of buyers, so you can do well by holding on until confidence returns, buyers are in the market, and therefore cap rates go back down. So that was why we liked the deal – the economy and the timing of the cycle.
Joe Fairless: On the flipside of that, with most deals now I think it could be successfully argued that you’re not gonna get a great cap rate, and the timing of the market – not quite where you’ve just described… I don’t wanna get too off-track here, but how can you still be successful with really buying during the opposite of great cap rate and timing the market right?
Frank Roessler: It’s a great question, Joe. I wouldn’t advise anyone to make a business out of trying to time the markets right. No one has a crystal ball. Hedge funds usually don’t beat the S&P. There’s a lot of Ph.D. students that are focused on this that cannot do that… So I would not recommend that.
So short of that, well, just admit, “Hey, we don’t know what the future is gonna bring, so let’s make sure that we’re buying it at a good price right now, that we have a good business plan right now. If things don’t change too dramatically, let’s focus on the short-term return. What is our cash-on-cash most likely gonna be in years one and two and three?” and not “Where are we gonna sell this deal in five years from now?” So I would say focus on the fundamentals of investment; focus on the fundamentals of multifamily, and the actual demographics of this property, in that submarket, and what you can do based on your business plan. And if those returns are suitable for what you’re seeking, then move forward, and then try to buy that property at the lowest price possible. But for timing the market, focus on the fundamentals.
Joe Fairless: Yeah, I completely agree. Best Ever listeners, you can go to multifamilycorrection.com and you can read — I don’t wanna call it just a blog post, because we spent a whole lot more time and research on it than just a blog post… It basically is a blog post, but it’s a very in-depth analysis of why I’m confident multifamily is gonna do well after the correction, or even during the correction… So multifamilycorrection.com – you can read that analysis.
So those were the reasons why we liked the deal… And then how did the business plan unfold?
Frank Roessler: The business plan unfolded not in the way that we thought it would, and I love the story of this deal because there are a lot of learning lessons for listeners, and we had our learning lessons on this deal. This was the second property we had acquired. This property was actually bought at a price below six million dollars, so we bought it at a great basis. However, there were two things flying in the face of getting a good loan on this property. One is the submarket; as I’ve just mentioned, oil had crashed, and this was Houston… And when that happens – yeah, that’s great that there’s not a lot of buyers and you can get a property at a good price, but so too lenders are not going to be around, or as plentiful as they would have been in an area where there’s more confidence. So it’s gonna be more challenging for you to get a good loan on this property.
If you’re underwriting for a certain debt in a stable market and then you go look at a property in a very unstable economy, be prepared to have higher interest rates, lower loan-to-values. I don’t wanna say predatory lending, but you’re not gonna be with the who’s who of the debt market… So be very cautious.
Secondly, in any market, under ten million bucks, getting a loan, and really under 5-6 million on purchase price – there’s also not a lot of reputable lenders in that world either… So like I said, in a good market, if you need a loan for 4 million bucks or so, you’re not gonna attract the most reputable, stable lenders, who are gonna have the best spreads. You’re gonna attract lenders who are trying to grow their company, and they don’t want to make mistakes; they’re dealing with maybe smaller buyers, with not as good of a track record, and if they’re dealing with those buyers, in turn they’re gonna want to mitigate risk by charging higher interest rates to those buyers.
So we had two things going against us for debt. One was the economy itself was very unstable because of oil, and two, this was just a small property, so we weren’t gonna get the best lenders. That was a real challenge for us, and one that we didn’t anticipate things being such a challenge. I can talk for an hour about it, but we had lenders that gave us an offer, we accepted, we put a deposit down, and then the next week those lenders pulled out of the deal. It was very chaotic and very stressful.
At the end of the day, we did partner with a good group, but we got lucky to partner with that good group, because there were not a lot of other options out there. So we learned that lesson on debt.
I would say also — this was our second deal, and we knew the submarket was very challenging. We knew that there were properties around us that had renovated, and performed the way that we need this property to perform, but if I could speculate, I think we could have done a better job with our lease audit, our unit walks, and really getting to know the extent of the demographic around us. I think we walked into something saying, “Okay, we have a lot of non-paying residents”, but we weren’t aware of the extent of honestly the criminal element at this property, and then dealing with paying more for security to come to this property. We weren’t aware that the police did not like coming to this property, and when we had a problem they would not show up… And it gets worse. So I think we could have done better homework, making sure that we knew what we were getting into with the demographics.
And what I liked about it – we learned this lesson on a very small deal. We cannot be so naive and foolish and think “Okay, well, it’s heavylifting and we can do it”, but not to know really what that involves. And what it involved was us flying down to Houston very frequently and spending weeks on end with the property managers, making sure that they have the support that they need, that we’re running this property properly, that we’re getting good residents in there and not just recycling bad with bad… So it involved a lot more effort and time than what we thought we were going to give to this property. And it made us be more cautious on future deals.
Now we do all this research. We pull crime reports on every property, and we see all of the major crimes that have happened, any felonies that have happened; how often are the police being called to this property. We look at that and we pay attention to that… And we could have done a better job with that in the begging with this property.
What went on to make this project a success was 1) as I said, we did a fantastic job on the buy. In real estate sometimes you make all your money on the purchase; we did a good job there. But 2) the property would not have performed if we wouldn’t have broken our back to work with our property management company as diligent asset managers. Our investors trust us, and that matters a lot. My sister was invested in this, among many other investors, and we do what we say we’re gonna do. If that requires more time and effort for us, then so be it.
We were able to reposition this property. We took it all the way down to about 77% occupancy, and by the time we sold, about a year before then, we were back up to 93% occupancy. Our bad debt was sub 2% on this property, and collections were very strong, the expenses were stabilized and we wound up selling it to a group that was looking for a stable property. So in time, we got there… It just took more work than what we thought.
Joe Fairless: And you didn’t even mention the two hurricanes and one fire.
Frank Roessler: [laughs] That is correct, I didn’t even mention that.
Joe Fairless: Which probably aren’t necessarily lessons learned, but it just adds to it. We had two hurricanes come through; one was Hurricane Harvey, and I forget what the one before that was… And we had one fired that burned down one of our buildings. Fortunately, no one was injured on any of that, that I’m aware of… Right? We had no injuries…
Frank Roessler: No, no one was injured.
Joe Fairless: Yeah, no injuries there. But we had the property for — what was it, 2,5 years?
Frank Roessler: Yes.
Joe Fairless: Yeah, 2,5 years. So in 2,5 years we had two hurricanes, one fire, plus the lessons learned that Frank mentioned… And something that’s interesting to me is our largest investor invested in this deal, and it was the first time he had invested with us. He went into this deal, and then he saw how we approached things and how much attention we were putting towards it, and then ultimately seeing the results that we were getting, then he invested in another, and then another, and then he reached out to us and said, “Hey, I’d like to be the only limited partner with you all.” We have since partnered with him on three deals where he is the only LP.
As of yesterday, he just offered to be a reference to another group that is looking to invest with us and be the only LP on the deal. He’s bringing significant equity to our deals, and it all starts with 155 units, in a very challenging area, buying it during a very challenging time, and rolling up your sleeve and getting after it.
Thanks for sharing those lessons… Anything on the loan front, that as a listener, if they’re hearing “Okay, if I have a property under ten million, it’s gonna be tough to get some reputable lenders.” Any tip you’d have for them when they do find themselves buying a property under ten million, in order to get a reputable lender?
Frank Roessler: I would say underwrite accordingly. If you’re at under ten million, make sure you’re not buying at a 4,8% cap, and assuming that you’re gonna get some loan that’s at 3,8% interest. Assume that you are gonna get a loan that’s 300 basis points floating on top of the one-month Libor to come in at 70% of the purchase price, and then adjust your purchase price accordingly in order to get the returns that you’re seeking… So be cautious is what I’m saying.
I also don’t want our listeners to think that there are no lenders there. There certainly are, and it’s how many of us get our start – buying smaller deals and growing into larger deals. So it’s not to be avoided, it’s just meant to be used with caution.
Joe Fairless: Anything else we haven’t discussed that you think we should about Alara?
Frank Roessler: Just that we were able to sell this property at a 22 IRR. We increased the value from purchase price to sale price by 61%. We returned our investors over a 1.6 equity multiple in under three years, and it was a very satisfying project at the end of the day, because it showed us what type of owners we were; when the tough got going, we got going.
Joe Fairless: Oh, I love how you ended that. [laughter] And especially, it also showed us what type of deals we like to do more than others. This is a type of deal that we don’t like to do as much as other deals. We prefer larger deals, and we prefer submarkets that are stronger… And consequently, our investments after that have been in stronger submarkets, and this is the smallest deal we’ve ever done. Now it’s significantly smaller than all the deals we do.
Frank, thanks a lot for being on the show. Best Ever listeners, if you wanna learn more about us, then go to investwithashcroft.com, or ashcroftcapital.com, either one. Looking forward to more case study conversations.
Frank, thanks a lot for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.
Frank Roessler: Likewise. Thank you.