JF2524: When 150 Units at 100% Occupancy Becomes 14 Units with Andrew Cushman #SituationSaturday

When a natural disaster hit Panama City Beach, Andrew Cushman went from 150 units at 100% occupancy to 14 units in a matter of three hours. In today’s #SituationSaturday, Andrew tells us how he handled investor conversations before and after the hurricane, insurance best practices, and how to plan for natural disasters and actually benefit financially. 

 

Andrew Cushman Real Estate Background:

  • Full-time apartment syndicator
  • 13 years of real estate experience 
  • Previous guest on episode JF868 in 2017
  • Portfolio consists of 2,100 apartment syndications
  • Based in Orange County, CA
  • Say hi to him at: www.vpacq.com 

 

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TRANSCRIPTION

Theo Hicks: Hello, Best Ever listeners, and welcome to the Best Real Estate Investing Advice Ever Show. I’m Theo Hicks and today, we’ll be speaking with Andrew Cushman. Andrew, how are you doing today?

Andrew Cushman: I’m doing really well, Theo. Good to be talking with you.

Theo Hicks: Yes, and welcome back to the show. So we interviewed Andrew all the way back in 2017. His previous episode was Episode 868, aired early 2017, which means we probably talked to you in late 2016. So today is Saturday, and since Andrew is a repeat guest, we’re going to be doing a Situation Saturday; we’ll be talking about a sticky situation that our guest was in, and we will learn about it, and then how he got out of that sticky situation. And then obviously’, any lessons that we can extract from him so that you won’t enter that situation in your business. Or if you do, how you can quickly get out of it.

But before we dive into that situation, a little bit about Andrew – he is a full-time apartment syndicator with 13 years of real estate investing experience. He has a portfolio of 2,100 apartments that he’s done through the syndication model. He is based in Orange County, California, and his website is https://www.vpacq.com/.

So Andrew, before we dive into that situation, do you mind telling us some more about your background and what you’ve been up to since we last had you on the show?

Andrew Cushman: Yes, thanks, Theo. Background is, I took the traditional path into real estate and got a chemical engineering degree, because I knew I wanted to do my own business, but didn’t know what, so I figured engineering was a good placeholder until then. Quit that in 2007 to flip houses, and then in 2011 said, “You know what, this is something that is bigger, and build more lasting wealth and is supported by demographic trends.” So we went into apartments, syndicated; our first one was 92 units on the other side of the country in Macon, Georgia. And since then, I’ve been doing apartments full time. Like you said, we’ve done about 2100 units. We live in sunny california, but we invest in places like Georgia, North Florida, the Carolinas, and even in the past Texas. So we live where we like to live and invest where the returns are the best.

Theo Hicks: Perfect. Thank you for catching us up. So the situation today is, what happens when a natural disaster, and in this case a hurricane, hits your apartment, what do you do? So we’re going to give you the floor and let him explain to us the situation and give us a backstory on what happened at one of his properties in Florida.

Andrew Cushman: We closed on 150-unit apartment complex in Lynn Haven, Florida, which — it’s part of the Panama City Beach area where… It flops back and forth. It’s either the, or the second top Spring Break destination in the country every year. So it’s Gulf Coast, Florida Panhandle, right there kind of in hurricane alley.

So anyway, we closed November 2015 150 unit property. Lots of upside to it. We spent almost a full two years, renovating it, repositioning it, got the rents way up, it was performing beautifully… We had just gotten to that stabilized point where you’ve done all the hard work and now it’s time to sit back for a couple years and just manage it and enjoy the benefits.

And then, in October of 2018, Hurricane Michael came up to the Eastern part of the Gulf of Mexico and passed directly over our head with 155 mile an hour winds. And in three hours we went from nicely renovated and 100% occupancy, to being basically a pile of sticks and only having 14 units left by the time three hours of Hurricane Michael passing was done. And basically, a large part of what happened is we are a one-story property that had a lot of large beautiful pine trees, and as the hurricane came through, those pine trees basically sliced through our buildings like knife through bread as they fell. And fortunately, we had gotten most people out of there in advance. We did have one guy trapped in his unit for a couple of days. We had to get chainsaw crews out there to get them out. But by some miracle, no one was injured, no one was killed. Everybody”s health was okay.

But we had, needless to say, a very large mess to clean up and a lot of the best practices that we had learned in the past regarding insurance and contractors and public adjusters, we actually had to put those into practice and execute and navigate the world of massive insurance claims, and to get a property rebuilt and protect our investment and the investors’ investment, and the livelihoods of the residents who just suffered this tragedy as well.

So there’s quite a lot to unpack there, Theo, whatever direction you want me to go as far as how we handled it, or contractors or insurance, what do you think is the most interesting, we can dive right in.

Theo Hicks: Yes, I kind of want to go in like chronological order. So it sounds like you had advance notice of the hurricane and you got people out. I’m just curious, what did the conversations looked like from your end between you and your property management and your investors, and maybe even your residents before it actually hit? You know its coming, what are you saying to your management company? Are you warning your investors, “Hey, a hurricane is coming. Here is what kind of what we have in place, how we communicate”?

So maybe lets focus more on the investor part, how are you communicating with investors before the hurricane actually hits the property?

Andrew Cushman: One of my side hobbies is I double as a weather nerd, so I was watching this thing coming. I saw it a good four or five days in advance and was like, “Oh-oh, this is headed right for us.”

So candidly, before a hurricane, we don’t do a whole lot of advance notice to investors; every once in a while someone will reach out and be like, “Hey, is a hurricane coming?” And so really, our focus is on preventing damage to people and to property. So as the hurricane starts moving up, we say, “Okay, there’s a chance this thing is going to hit.” That’s when we get with a management company and say, “Alright, do we have a good supply of emergency water, generators, tarps?” We just name whatever emergency supplies you would need, after a significant hurricane. We make sure we have the plywood, we keep a large storage area full of plywood… Just double checking that we still have all those things on hand. And that’s usually 4-5 days out.

If you live in an area where this hurricane is coming through, at the start of every hurricane season in June, you should be going through that process. But then when one’s coming, we double-check.

Once it became clear that the storm was very likely to come directly through, that’s when we started notifying residents, “There’s a good chance you may have an evacuation order; make sure you’re ready.” And then what we also do is we contacted a good public adjuster and our contractors and sent them down there before the storm hit. Because if a significant storm comes through, it’s often very difficult to get into an area and get access. So we sent our people down before and had them stay at safe locations inland a little bit, so that they would be safe, but at the same time still able to immediately get on site. Because if you have a single fire at your apartment complex or whatever property you own, you file a claim, that’s one thing. But if an entire area gets devastated, there’s going to be thousands of claims, and you want to make absolute certain that you get at the front of that line, so that you’re not waiting months and months to get processed.

So we had an adjuster, we had a contractor down… We actually put our carrier on notice the day before the storm hit that we thought that we may have an issue coming. So we tried to line up everything before it actually hit. Once it did hit and it was confirmed that we had very significant damage, I think it was the next day, we put out a quick bulletin to investors and say, “Hey, yes, we did suffer a significant hurricane damage. We’re still trying to get a grasp on the full extent of it. But we do have proper insurance to cover this and we already have teams on-site to start working on everything.” And then basically, as each step progressed, we would send out an update and say, “Okay, we filed a claim, we got our first disbursement cheque,  everybody is safe and healthy.” As each one of those steps progressed, we would update the investors.

Break: [08:40] to [10:41]

Theo Hicks: What are the kind of things that investors were saying back to you once you told them that the property was gone?

Andrew Cushman: Most people were like, “Is everybody okay?” which I appreciated tjat that was top of mind. And then the other questions were like, “Okay, well, do we have the money to rebuild? What about distributions?” And those were the questions number two and three. And that’s where you get into your insurance.

So there’s two main types of insurance when it comes to this kind of situation. One is what’s called loss of rent, and then the other is your property insurance. So loss of rent is basically exactly what it sounds like. And that says, “Okay, a hurricane came through and you just lost 90% of your rental income.” What the loss of rent insurance does is it says, “Alright, your income based on the trailing the last 12 months or whatever, your income before the storm was, let’s just say, $100,000 a month. Your income after the storm is $15,000 a month.” So what that loss of rent insurance does it covers the gap; it gives you the $85,000 that you would have been collecting had you not had the catastrophe. And I know I’m simplifying, there’s some adjustments that go into that, but that’s the gist of it.

So what that did is that loss of rent insurance made sure that we could continue to pay the bills while the property was offline. Now, you’re not allowed to be making investor distributions during that time, so what we did is we just accumulated them in an account, and then once everything was done, we just got all caught up. But that loss of rent insurance ensures that you can pay your staff, that you can pay your utilities, that you can still pay the mortgage, right? So even though our property got wiped out, we were never late on the mortgage. Number one, we had our own reserves, but two, we had a loss of rent insurance.

And then the other is the property insurance. And there’s two really important pieces of that, that anyone who’s buying in places like Texas or the Gulf Coast or the East Coast, where you have hail storms, tornadoes, hurricanes or anything like that, is one, you want to make sure that your insurance is for full replacement value, not actual cash value or ACV, right? So if your property gets destroyed and you have ACV or cash value, the insurance carrier is going to come in and say, “Oh, well, all this stuff was 15 years old, so we’re going to depreciate it. And yes, it might cost you $1,500 to replace these appliances, but your actual cash value is 40% of that. So here’s 600 bucks, right?” All of a sudden, you don’t have anywhere near the money you need to rebuild your property.

So we always go with full replacement value, which is what it sounds like; they’re going to give us the funds that are required to actually replace and rebuild. And the second one that is critically important, that rarely comes up, and when you hear podcast interviews, you’re like, “Okay, what kind of questions should I ask a sponsor?” If anyone’s looking to invest with somebody, ask about the insurance deductible, what percentage it is for things like name storms, hurricanes or hail storms or tornados or any of that. Because how it works is the deductible is set at between 2% and 5% of the value of the building, which – okay, that doesn’t sound like much… 2%, 5%, no big deal, right? Well, if your value of your property is $10 million, and let’s say you’re in Texas, and a hailstorm comes through and destroys your roof, your deductible, if it’s 5%, it’s 5% of 10 million, meaning you have a $500,000 deductible to replace that roof. Well, the cost of the roof is probably going to be just a little over 500 grand. So in reality, you’re not properly insured.

So we always make sure that we have a 2% named storm deductible and then a reserve to cover that, so that, yeah, when the storm comes through, okay, there’s a couple $100,000 deductible, but compared to the scope of the damage, it’s small enough that it can easily be absorbed.

So those are two really, really important points when looking at insurance. Insurance isn’t sexy or exciting until you need it, and those are absolutely critical pieces to understand.

Theo Hicks: Thank you so much. That’s a lot of solid information. A lot of best practices, things to do beforehand. We talked about the insurance. We talked about the public adjusters beforehand, but what are some of the best practices for your contractors? That was something else that you mentioned, things that you’re doing beforehand with your contractors in order to set yourself up for success when a natural disaster hit.

Andrew Cushman: So when a natural disaster hits, everybody is reaching out to everybody to get all the work recovered. As we’re recording this, Texas just went through its big winter freeze, and you can’t find a plumber to save your life there. So the same thing happens when a hurricane comes through a town on the Gulf Coast or East Coast or something like that. So what we did is, a couple days before the storm, knowing that there was a possibility we were going to get hit and have needs, we reached out to contractors, number one, that we knew could handle the scope of the job. You might hire a local GC with three employees to renovate a unit, but not to do a top to bottom overhaul of an entire property.

So number one, we looked at, “Okay, what contractors can handle a significant renovation and do it quickly? And two, that we’ve already worked, with so we know that we don’t have to start from scratch with the relationship?” So we contacted a couple and just said, “We’re concerned that we’re about to get hit with a hurricane; if that happens we want to make sure that we are first in line and we’re already taking a look at this.”

So we already had those channels established, so that, unfortunately, once the hurricane did come through, we were already right in line, and anyone else who reached out to them had to wait feet behind us. And as I said, we literally had one of them come down and stay at a hotel a little further inland so that they could come in and assess the damage right away, and help get trees off of buildings and stuff like that.

And then when we actually hired the general contractor to do the work — now, interestingly enough, we did not end up going with the contractor that we brought down; his bid ended up not being quite as competitive, and he seemed a little too focused on, “Well, how much is the insurance payment?” And we’re like, “No, no, no, we’re focused on getting the job done, not insurance payments.” So we actually ended up going with a different contractor that our property management company had extensive experience with and recommended, and our public adjuster had extensive experience with and recommended.

And one of the reasons that’s important is anytime you have a natural disaster, you’ve got a lot of moving pieces and complications, and you want to make sure that each team member as much as is in your control has good working relationships, to help to smooth everything out. Because again, whether you’ve got three units offline or 300 units offline, you’re losing revenue and you’ve got people who are out of a home.

So we ended up picking a contractor that came highly referred, that our other team members had extensive working relationship with, that understood how to work with insurance companies and natural disasters, and we verified that they actually had the capacity to take on that size of a job. They brought down a crew of 30 people from out of state, fixed up a couple of units, they all stayed in those units, and then they just stayed on-site and cranked it out. And because of that, we were one of the first properties in the entire city to be back online.

So those are some of the really important things to consider when choosing contractor – one, can they truly handle the job? Two, are they used to dealing with those kinds of situations? And then three, that they’re verified that they’re good to work with and they understand how to work with the adjuster and insurance company and all of that.

Theo Hicks: How does something like this impact the overall returns to investor? Obviously, you had your projected returns and then you had your actual return, then I’m sure you could have extrapolate it out and determine how much they would have gotten based off how things were going… Does this is wiping out an entire property drastically reduce the returns to investors?

Andrew Cushman: Believe it or not, it’s actually the opposite. If you are properly insured, a natural disaster can financially be one of the biggest windfalls that you ever get when you own property. Now, I’m not saying it’s something you would strive for, because it certainly is a lot of headache and stress to work your way through it… But now — that property was built in 1986 and 1987 originally, so we had renovated it to some degree. But now it has been renovated from the studs and top to bottom; we effectively have a 2019 construction property, all paid for with insurance proceeds. So now that it’s restabilized, our collections are approximately 30% higher than they were before the storm. And then the NOI, net operating income, is at least 30% higher than before the hurricane.

So what we actually have now is a property that if we were to sell it today is valued at far more than it was before the storm; number one, because it has a higher net operating income, and because it’s in fantastic physical condition.

So while I wouldn’t ever want to go through the 18 months of headache and hassle and stress of rebuilding a property from scratch, in the end, it ended up being a financial windfall for us, because with the proper insurance, with proper reserves, we were able to catch up on all the missed distributions, and then now we’re cash flowing way more than we were before the storm, and our valuation is more than before the storm. So the effect was actually, financially speaking, a significant positive.

Theo Hicks: Alright Andrews, is there anything else that you want to mention about how to react to a hurricane or anything else about your business that you want to mention before we wrap up?

Andrew Cushman: Yes, the biggest thing is — when I talked to some people who were looking at a deal on the Gulf Coast, they’re like, “Oh, are you concerned about hurricanes?” Don’t let Dallas hail storms or Florida hurricanes prevent you from investing there. Just prepare in advance for it. That’s proper contacts, proper insurance, and just having your action plan laid out in advance, so that you’re not scrambling if something happens. That’s really the key, just have everything in place in advance. And make sure you have the right things and people in place, right? So going back to the right type of deductibles, the right types of insurance, the right types of contractors… If you have all of that laid out and planned in advance, it’s still probably going to be stressful, but you’ll come out good on the other side.

Theo Hicks: Perfect. And then where can people learn more about you and your company?

Andrew Cushman: If you Google Vantage Point Acquisitions, we will come up, we’ll be on the top listings, but that’s just vpacq.com/

Break: [21:15] to [23:21]

Theo Hicks: Andrew, thank you so much for joining us today. This is a very fascinating, very detailed conversation. I didn’t know where to even start with a takeaway. So many takeaways on, as you mentioned, overall, how to prepare in advance for a hurricane. So if you are investing in an area that you know is susceptible to natural disasters, you need to have that action plan in advance.

We talked about the best practices for insurance, when it comes that loss of rent coverage, that proper property insurance, making sure you’ve full replacement value, making sure you have that 2% deductible. You talked about making sure you have a team that works well together, because it’s a pretty stressful time. Making sure that they have the capabilities to handle a project of that size, bringing them to the area in advance, so they can get to your property immediately once the hurricane is gone.

Making sure you’re working with your management company beforehand, that all the emergency supplies are there, that they’re notifying residents to evacuate… And then something that was kind of surprising to me was that if you are setting yourself up properly and have that correct property insurance and team on the ground, then a natural disaster hitting your apartment could actually be financially a good thing.

For example, this property was built in the ’80s and now you got a basically a 2019 construction property that was paid for mostly with insurance, collections were up 30%, NOI was up 30%, so the value of the property is a lot higher. And so overall, if you’re listening to this, and I guess you kind of used the example of Texas, like, who would have thought that Texas would have had freezing temperatures and—

Andrew Cushman: Yes.

Theo Hicks: —you know, people would be without water. Just making sure that you’re prepared for these situations in advance, really no matter where you are in the country at this point, and having some plan for if there is some sort of emergency, what would we do? And Andrew gave us a lot of solid information on how to do that. So Andrew, again, thank you so much for joining us. I know you wanted to mention your mastermind really quickly before we signed off.

Andrew Cushman: Oh, yes, thanks. So we started a small mastermind for people who’ve already made some kind of real estate investment and are looking to scale and grow. It’s not a course, it’s not a big, expensive coaching program. It’s for those of you who have heard of Gobundance, it’s modeled after that, where – yes, we do some teaching, we share our experience, we facilitate, but it’s a group of people who are in multifamily, looking to grow and this leverage off each other’s experience and resources and partner with each other. And, Theo, what you and I just talked about, this is a perfect example of the type of discussion that we might have, except we would have a whole bunch of other people there to contribute their experiences as well.

So anyone who might be interested in that, there’s a little link on our website called Mastermind, and that’s what that refers to, and we would love to get to know some more people.

Theo Hicks: Awesome, Andrew. Well, again, thank you for joining us. Best Ever listeners, as always, thank you for listening, have a best ever day and we’ll talk to you tomorrow.

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