JF2400: A Millennial’s Multifamily Success with John Stoeber
John Stoeber is the Principal at Kronos Investment Partners. At 26, he discovered his passion for real-estate investing. Experiencing the pain of rehabilitation, John scaled himself to multifamily. He is a “spreadsheet-driven guy,” who functions well in planning and finances. John is eager to expand his repertoire of investments to heavy-valued ads and venture into growing markets. In this episode, John gets into detail on transforming his failures into a multifamily success.
John Stoeber Real Estate Background:
- Full-time in corporate finance and Full-time in real estate
- 3 years of real estate experience
- Portfolio consists of 2 multifamilies totaling 34 units
- Based in Denver, CO
- Say hi to him at: www.kronosinvestmentpartners.com
Click here for more info on groundbreaker.co
Best Ever Tweet:
“When analyzing your numbers, verify everything.” -John Stoeber
Ash Patel: Hello, Best Ever listeners. Welcome to The Best Real Estate Investing Advice Ever Show. I’m Ash Patel and I’m here today with our guest, John Stoeber. John is joining us from Denver, Colorado. He’s got three years of real estate experience, owns two multifamily properties that consist of 34 units. John, before we get started, tell us a little bit more about your background and what you’re working on now.
John Stoeber: Ash, thanks so much for having me on the show today. I’m a huge fan. A little about me. I’m 26 years old right now, I graduated from college about four years ago (which I can’t believe), with degrees in finance and accounting. Like everyone else in college, I’m just trying to get a job, get good grades, just like going into the corporate world. So when I got my job offer right before I graduated, I saw the salary, the compensation package, and the PTO, which is paid time off for all the entrepreneurs out there, I was just like, “Yeah, this isn’t going to work.” It’s not enough money, it’s not enough time off. So I started searching for ways to make passive income, which led me down the real estate rabbit hole. And in the last three years, I started off with just a little two-unit which I house-hacked, I learned how to be a landlord, transitioned over to flipping, because I knew I was going to need to get some experience with rehabs and renovations… And after doing some of those smaller deals with a small group, and by myself, I kind of got exposed to multifamily. I was like “This is definitely the path I want to take.” It’s just a much better use of my strengths, analyze these big properties, as opposed to going after single-family BRRRRs and flips.
Ash Patel: What was your first property?
John Stoeber: It was a little two-unit that I house-hacked in Baltimore City. I had a tenant who lived upstairs in an apartment, and then I rented out my basement. I was living completely rent-free, mortgage-free and that’s how I caught the bug.
Ash Patel: What was your next deal?
John Stoeber: It was that flip I did. So a little background about me… I’m a spreadsheet jockey; I shouldn’t be allowed to touch a hammer, let alone swing one. And I feel like me and a couple of partners, we went off and bought the biggest, baddest flip in Baltimore City, where there are just like lots of shells and dilapidated houses… And we had to do everything on this house, from roofs, mechanicals, digging out the basement, and then, of course, new flooring, walls, paint, kitchen updates, the whole nine yards… Which was a great learning experience, but it was really, really painful. I was like, “Yeah, I need to scale up into multifamily. This is going to take too long and I need to be able to leverage the strengths of others.”
Ash Patel: What were the numbers on that deal?
John Stoeber: On the flip?
Ash Patel: On the flip.
John Stoeber: When we bought it, we originally anticipated it was going to be 89k purchase, 60k rehab, 235k sale, and the actual numbers were 89k purchase, about 80k rehab, and 200k sale.
Ash Patel: Oh… Your spreadsheet wasn’t accurate at that time, was it?
John Stoeber: Oh, the spreadsheet was accurate, but the inputs I put into the model were not. So garbage in, garbage out.
Ash Patel: Alright. So you put all this work into a flip that didn’t yield the results that you wanted, and then you decided you wanted to go into multifamily. So bring me on that journey.
John Stoeber: We’re in the middle of this flip, I think we’d have found out you’re going to have to replace our roof, which wasn’t originally in our budget… It was a small row home, so it was like $2500. But I’m talking with a partner and we’re just like, every time we miss something with our budget, we have to come out of pocket for the expense, and we’re hoping that we’re going to get it back at the end when we sell the property.
And I had this little two-unit here, he had a four-unit, and each of us had dealt with some problems. He had to deal with a six-month eviction while we’re doing this flip, and I had to evict the first time I ever had who lived above me, which was a little sketchy, because she knew exactly where I slept… But every time we make a mistake on one of these small multi-families, really our tenants end up paying for it. My partner didn’t cash flow for six months on his fourplex, but he’s like “My tenants paid for my eviction, they paid for the mortgage, and I still get these great tax write-offs.” And then with us just not having these great construction and renovation skills, our deal with the flip – we were anticipating a 30k profit, and it’s hard to bring on a partner and really incentivize them with a big carrot at the end of the day for 10k. Whereas if you start buying multimillion-dollar multifamily properties, there’s just a big enough pie where you can have someone do the finances, you can have someone do the management, you have someone find the deal, and all the other roles that it takes to take a multifamily deal down. So that’s when the light went off in our heads and we’re like, “Yeah, like we need to go into multifamily and bigger deals.”
Ash Patel: So you realized the benefit of having those economies of scale. What was your first multifamily, your larger one?
John Stoeber: I’m part of a joint venture in Little Rock, Arkansas. We have a portfolio consisting of an 18-unit and a 16-unit property in Little Rock. I guess I just really like big rehabs and big value-adds, even though that’s not my strength… Because it was a totally distressed property when we bought it; it was around 35% economically occupied, in the middle of COVID… And we’re going in there and we’re putting about five to 10k a door into rehab, and we’re taking rents that were 400 to 450 a month, and we’re getting them up to 650 to 700 with tenants who can actually pay the rent.
Ash Patel: Who’s we?
John Stoeber: It’s a joint venture partner. I have four other partners in on this deal. One of them found it. We were going to get a loan, but we ended up getting seller financing, so they’re kind of going to be the KP. Another one is a partner I work with at my company Kronos.
Ash Patel: Which one of them are the boots on the ground?
John Stoeber: It’s the couple who was going to be the KP.
Ash Patel: Okay. So they’re in Little Rock, Arkansas.
John Stoeber: Actually no, they’re in Dallas, which is about a four-hour drive away. Yeah. So they have some long road trips every couple of weeks.
Ash Patel: So they’re remotely managing this massive rehab. What are the challenges with that?
John Stoeber: So on one of our properties it’s cardinal construction. I don’t know if your listeners know what that is, but it’s kind of like these small rancher style apartments, kind of weird floor plans… And an example would be we have issues with getting the correct size appliances. On one of the units, we had to get a unique sized oven and range. When you’re not there, you can’t really rely on other contractors if your contractor is being slow, or he’s busy with other jobs. So at least in our experience, it’s taking a little longer than we would have liked. It’s still getting done, the numbers still look good, it’s just you don’t have as big of a network as if you’re local to the market and you’ve been doing deals there for years.
Ash Patel: Got it. What are you looking forward to in your next project?
John Stoeber: That’s a good question. I like these heavy value-adds, because there’s a lot of money to be made in them and there’s a huge spread. They’re definitely stressful though. So I would definitely take another one of these if the time was right. I’m also looking for more lighter value-add, like B class properties and more growing markets. So Little Rock’s a good stable market, it’s a state capital, but it’s not like Phoenix, Arizona, or Central Florida where the growth is just crazy.
Ash Patel: What were the numbers on that Little Rock property?
John Stoeber: This is my favorite part. So we bought 34 units for 800,000, which I think comes out to 23k or 24k a door. We’re putting between five and 10k/unit into renovations, which is interior and exterior. The sales comps for the cardinal construction are about 40k, and the sales comps for these small townhomes, they’re north of 50k. So all in we’re in for around 30k to 35k a unit, and the ARV per unit is from 40k to 53k.
Ash Patel: Are you going to hold on to this property or dispose of it?
John Stoeber: We’re still contemplating that. The way I view it is we’re in phases, and right now we’re still doing the rehab and the lease-up. Then when it’s time to either refinance or sell, we’ll have to make that decision. It’s kind of the cool thing about being on seller financing though, it gives us a little bit of flexibility. It’s not like a rehab loan where you have to refinance into a permanent loan… But given the types of properties they are – they’re smaller, our boots on the ground are farther away, and they’re lower income – it does make a lot of sense to just flip the properties and then redeploy the capital somewhere else.
Ash Patel: What were the terms of that seller financing? What did you have to put down?
John Stoeber: There are two different properties. So the one property we got 85% LTV, the other property we got 75% LTV, 3% interest, and then one property is amortized over 18 years and the other one is over 20 years. All in all, we had to put $215,000 down.
Ash Patel: What part did the seller finance? The entire loan?
John Stoeber: Yeah, they financed everything. We were trying to get a construction loan, but that fell through and it was just taking too long. So our partner who found the deal, her name’s Emma, she was able to negotiate really good seller financing terms.
Ash Patel: I’m sure you asked him, but does he own any more that he wants to get rid of for you?
John Stoeber: No, he doesn’t, unfortunately. I’d love to pick some up, because he completely mismanaged them.
Ash Patel: On your next deal, would you look for seller financing specifically? Or would you go the conventional route?
John Stoeber: I feel like seller financing. It’s a great tool to have in your tool belt. But if you’re only looking for seller financing deals, especially in today’s market, I feel like you’re really going to reduce your deal flow. We were trying to get bank financing, and the reason we ended up going with a seller carry is because the bank financing doesn’t work out. So yeah, I’m totally open to doing it, and it’s something that I ask every seller when we analyze properties. But if the deal works with the bank financing and bank debt, I’m definitely going to go that route, if it makes sense.
Ash Patel: In this case, why did the bank financing not work out?
John Stoeber: I think it was because it was in the middle of COVID, and they were requiring really high reserves and lower LTV. It’s funny, because they originally quoted us 80% LTC, and then they ended up bumping it down to 70%, so the numbers just don’t work, and he was willing to give us higher leverage with seller carry.
Ash Patel: Did you look for a bank that was local in Little Rock, or one where you’re at in Denver?
John Stoeber: No, we were talking with local community banks in Little Rock. It was too small of a property or purchase to get an agency loan on it.
Ash Patel: Okay. Were these small local lenders? Were they credit unions? Were they regional banks or big banks?
John Stoeber: It was all three, and we reached out to a ton of them. So every bank that we could find on Google, we were calling them to see if they would lend on the project. It was going to take too long to close on the loan.
Ash Patel: Were their terms okay, even though their time to close was not?
John Stoeber: They weren’t as good as the seller financing. I mean, we get 3% interest and 85% LTV on the one property.
Ash Patel: Do you have a relationship with a lender where you’re at now?
John Stoeber: I have relationships with national lenders. They’re like mortgage brokers and they broker agency loans. I have a couple of contacts in the Little Rock market for the community banks, but it’s always great to have more. Again, we’re not in the market, so it’s not like we know every lender there.
Ash Patel: Yeah. So now that this property’s on its way to becoming stabilized, if you had to refinance, would you use a lender in Little Rock or one where you’re at?
John Stoeber: I wouldn’t use one in Denver, unless they were an agency lender. If we could get an agency loan, that’s the route I would like to go, because it’s longer amortization, lower interest rates, and non-recourse. But if that didn’t work out because the portfolio was too small, then we would go with a community bank in Little Rock.
Ash Patel: Got it. So what’s next for you?
John Stoeber: We’re looking for deals with our team at Kronos; we’re hunting them down in Florida, because one of my partners is local to Jacksonville. We’re looking to partner with other sponsors to do more deals outside of our geographic range.
Ash Patel: Good. So you just want a partner that has boots on the ground, and you’re ready to take on a deal, and you would prefer properties that need significant rehab…
John Stoeber: I’m open to all deals, like light value-add, even core stabilized assets if the returns make sense. But yeah, I’m not afraid of doing a heavy value-add either, because the returns are potentially so good if you buy right.
Ash Patel: John, what’s your benchmark for pursuing a deal or not? Is it cash on cash return? Is it gut feeling?
John Stoeber: It’s kind of all of it. Yeah, I wish I could tell you it’s 8% cash on cash… But when I’m analyzing the deals, I’m looking for a story within the property. So signs of mismanagement, distressed owners who need to sell, and if there’s upside in the market. Like if I’m in Phoenix, Arizona, I might require lower returns than if I’m in Little Rock, because the market is so strong.
So if it’s like a light value-add B class property, I’m going to look for between a 15% to 17% IRR, at least 8% average cash on cash… And then as the properties get more distressed and older, I’m going to require a higher IRR, which stands for internal rate of return, and higher cash on cash.
Ash Patel: Got it. John, what’s your Best Ever real estate investing advice?
John Stoeber: When you’re crunching your numbers, make sure that you verify everything. That’s what I’ve learned when I did that flip. I made certain assumptions, and they were just wrong. So now when we analyze deals, we’re trying to get at least two or three other parties to verify our numbers. By parties, that’s like contractors, property managers, investors in the market who know how to operate the properties.
Ash Patel: And what assumptions were wrong. Was it specific rehab items?
John Stoeber: In the flip, it was the complete rehab budget. We just didn’t know what things cost at the time. Also, our ARV was way off. We pulled a comp that was next door that had gotten a higher ARV than we had sold it for, but we missed that the days on market were 120 days.
Ash Patel: Got it. John, are you ready for the lightning round?
John Stoeber: Yes, sir. Let’s do it.
Ash Patel: Awesome. First, a quick word from our partners.
Ash Patel: John, what’s the Best Ever book you recently read?
John Stoeber: There’s this book by Peter Linneman… I think it’s called Real Estate Finance and Investments: Risks and Opportunities. If you’re looking to really get in the weeds of analyzing deals and underwriting, I think that’s a fantastic book.
Ash Patel: Right up your alley with the spreadsheets, right?
John Stoeber: Yeah, exactly.
Ash Patel: Got it. John, what’s the Best Ever way you like to give back?
John Stoeber: I really like to create our own content, and one thing I really like to do is do these underwriting case studies and just help educate other people to learn how to analyze bigger properties.
Ash Patel: Do you post those anywhere?
John Stoeber: Yeah, I’m active in a couple of Facebook groups. We’ve done a few live events there. I think I’ve been on a couple of other podcasts or podcast-type things. I don’t really know what they’re called. We’ll do case studies there, too.
Ash Patel: Got it. John, how can the Best Ever listeners reach out to you?
John Stoeber: You can reach out to me on Facebook, which is just John Stoeber. Instagram, it’s @john_stoeber. We have our own podcast called The Millennials in Multifamily. So if you’re young, looking to break into multifamily, feel free to check us out there, too.
Ash Patel: Great. John, thank you so much for being on the show. You’ve given us some great advice. It turns out you knew in the beginning you are not set up or made for a job in corporate America, and you went out this real estate thing and you didn’t take the easy route. You took on some hard rehabs and you’ve made a lot of progress, remotely managing some decent-sized units… So good luck to you and thank you again for all of your advice, and have a Best Ever day.
John Stoeber: Thank you so much for having me, Ash. It’s great to meet you.
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