JF2576: Hard Lessons Learned After 5 Months & $50K with Venkat Avasarala
Former tech engineer Venkat Avasarala left it all to pursue real estate. After maxing out on single-family homes, he moved on to his first syndication. Today, Venkat is talking with us about how he found investors for his first syndication even without a proven track record, why he decided to move on to development, and the main difference between cash flow investors and long-term investors.
Venkat Avasarala Real Estate Background:
- Full-time real estate developer and syndicator
- Experience with multifamily, ground-up multifamily and retail development, and land development
- Portfolio consists of 3,500 multifamily unit value add, 500 multifamily units under construction, and 1,000 units in the pipeline
- Based in Dallas, TX
- Say hi to him at: www.strykerproperties.com
- Best Ever Book: How to Win Friends & Influence People
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Ash Patel: Hello, Best Ever listeners. Welcome to the Best Real Estate Investing Advice Ever Show. I’m Ash Patel and with today’s guest, Venkat Avasarala. Venkat is joining us from Dallas, Texas. He’s a full-time real estate developer and syndicator. Venkat’s portfolio consists of 3,500 multifamily units, with 500 under development and 1000 more in the pipeline.
Venkat, thanks for joining us, and how are you today?
Venkat Avasarala: Doing well. Thanks for having me, Ash.
Ash Patel: It’s our pleasure. Before we get started, can you give the Best Ever listeners a little bit more about your background and what you’re focused on now?
Venkat Avasarala: Absolutely. By education, I’m an analytical engineer, and then I went and worked in IT in several Fortune 500 companies for 14 years, before I just left that for real estate. So starting in 2016, I started syndicating apartments. That is when I entered into commercial real estate. And I have done about 14 deals; these are existing B and C class apartments, buying them to add value by rehabbing interiors, exteriors, raising the rents and hold it for cash flow and sell it for profit. So that’s pretty much the business plan. We’re mostly in Dallas, but lately I’ve been buying in Arizona and Denver markets, too.
And then just before COVID hit, early 2020 is when I started ground-up development deals, and lately I have added land development deals to my portfolio as well. So that’s pretty much what we do here at Stryker.
Ash Patel: Alright, so 2016 was your first syndication. Did you have any real estate experience before your syndication?
Venkat Avasarala: Just some single-family that I’ve been buying and holding in my portfolio. Other than that, I didn’t have any other education.
Ash Patel: And what was your first syndication deal? What did that look like?
Venkat Avasarala: Oh, it was a small 100-unit deal in a town called Norman, Oklahoma; it’s a college town, Oklahoma University is there. It’s a C class property built-in 1963. We paid 35k per door, and in two years exited at 45k per door, so netted about [unintelligible [00:02:47].00] It’s not a great return, but a great learning experience for me working on the property.
Ash Patel: And why did you do that? Why did you go into syndication?
Venkat Avasarala: I was very happy doing these single-family homes; I started buying them back in 2012. Once I felt that we are done with this recession, I started to see that the home prices start appreciating. So that is when I started buying these homes, single-family homes. And once I hit the 20, Fannie Mae cut me off. They said that, “Look, there are no more loans for you”, and I couldn’t find great deals out there in single-family which makes it worthwhile to keep buying those with the portfolio bank loans or things like that. So that is when I — to scale. So pretty much to scale, I set my sights on commercial real estate and I chose apartments, to be specific.
Ash Patel: And how did you learn about syndication?
Venkat Avasarala: I joined a local investment club here in Dallas. I’m a big believer of starting anything new with education, because there’s a lot of learning curve, and everybody makes mistakes when they’re starting with something new that they have never done before. And I’m not ready to do all those mistakes, right? Still, mistakes happen, but I wanted to avoid as much as possible.
So I joined a local investment mentor club, and that is where I met with other people. I didn’t learn a whole lot from the mentor per se, but it’s the whole ecosystem where people are there. So we learned from each other, partnered and learned that way.
Ash Patel: And Venkat, who are were investors on your first indication?
Venkat Avasarala: So some of these investors are from the investment club, but the majority of these people are, like everybody, friends and family and the people that I met with over the years, mostly in my technology background.
Ash Patel: Okay, well what was next after that 100 unit deal?
Venkat Avasarala: I actually live in Dallas, but I couldn’t land a 60 unit deal back then, because nobody would want to take a risk on me, because I was an unproven [unintelligible [00:04:33].07] and Dallas is red hot market; even today it is. So nobody would give me a 60-unit. So I chose to go outside Dallas, prove myself and buy my way back in.
So the second deal was actually in Phoenix. A 120 unit off-market property, and I do really well on that one. It’s 120 unit in a city called Glendale, Arizona, which is a suburb of Phoenix.
Ash Patel: And what were the numbers on that?
Venkat Avasarala: The raise was about $1.8 million on that, and we paid around 65k per door and in about two years, we sold it for 95k per door, and our investors did really well on that one.
Ash Patel: What was returned to investors.
Venkat Avasarala: 145%. I try not to say these numbers because as you know, those days are long gone.
Ash Patel: Yeah, the good old days.
Venkat Avasarala: Yeah, those are the good old days, where you can actually just buy something and wait, and then the market will take you forward. It was 145% return to investors in a little over two years.
Ash Patel: So Venkat, you got a good thing going with the syndication. Why get into development?
Venkat Avasarala: So like I was just saying, back then we were able to buy these properties at 30k a door or 40k a door or 60k a door, which was completely underpriced. If you especially compare with the replacement value, those properties were trading on pennies on the dollar here. But that changed quickly since 2016, since when I started, till now 2020-2021. These prices have appreciated quite a bit, but the rents did not appreciate that much; not as much as the purchase price of the property. We were able to buy something at 7.5 cap rate. Now we’re talking about 4-4.5 and A, B, C all sitting on top of each other, right? No matter what kind of property it is, it’s a 4-5 cap in any major market. And these are hard to pencil. Now, in order for you to keep doing deals, now you have to really get out of your comfort zone, take risks that you would not otherwise take.
But on the flip side, if you are a developer, up until now, whoever were developing the properties, they were selling them at 6 cap, maybe 4.5-6.5 cap, right? But the first time since the beginning of the universe, right now, a developer can sell a property as soon as he’s done building, without even people inside it, on a projected income, at 4.5-5 cap. That never happened before. So this is specifically a great opportune time, and it’s a confluence of so many things, right? We have this domestic migration into these sunbelt markets, spiking rents, and then we have very low-interest rates, and the leverage is there. One property, I’m building in Austin; I’m getting 86% leverage. This never happened before. This is new.
Ash Patel: Not even in 2007?
Venkat Avasarala: No… Probably, maybe. I wasn’t around that time. But right now, with the way the construction prices are and all that, we could use that leverage, right? 86% leverage. But see, it looks like a high leverage, Ash, but if you look at loan-to-value, it might be 86% loan-to-cost on the construction deal. But on loan-to-value, you’re at 70% loan-to-value.
Ash Patel: Yeah. How did you—
Venkat Avasarala: So anyway, that’s pretty much it. It’s a confluence of all these nice things which propelled me towards development.
Ash Patel: How did you get educated about development?
Venkat Avasarala: There’s a lot of learning that you’ve got to do, whatever you can online, and by talking to the people in that industry, but then I decided that, “Look, there’s so many more unknowns, so much is fluid. So many loose ends to tie all the time.” And banks are not writing those checks; they are giving leverages, but not for somebody who haven’t done a lot of projects. So I went ahead and partnered, a strategic partnership with local developers who have the know-how. But let’s say, one of my partner has built 9,000 units in this, he worked for REIT as an employee. But after he retired, him and I, we partnered and we started building these apartments. I bring the equity, I bring the balance sheet, I bring the muscle… I’m a little bit younger than my partner, so I bring on the muscle to do the work and all that, but my partner brings the contacts, the deals, the off-market land deals that we would need to do something like this. So you have to make a strategic partnership, because again, life is too short to just blindly go into something else all by myself, make a ton of mistakes. I’m not into that.
Ash Patel: And how do you convince your investors to come on board with this?
Venkat Avasarala: You know what? The very first deal, I wasn’t sure if my investors would write the checks. But my very first deal was 156 units in Princeton, Texas. It was just a $3 million raise, and I wasn’t sure. That’s why I wanted to start small. And guess what? In two days, it got filled up, and in the middle of COVID! In the middle of COVID! So that shows that our investors, who have traditionally invested in value-add – they know what is happening here; they see these prices going up and hard to produce a yield. So you can underwrite whatever you want, especially in the high property tax and high insurance state like Texas, where the expense ratios are north of 60%; it’s hard to produce a yield. So they’re seeing the writing on the wall, that it’s hard to produce any kind of decent yield, maybe 2-3 percent yield, in this value-add… So why not just invest in construction? They’re able to put two and two together and get to where I need them to be. So I was pleasantly surprised.
Ash Patel: What kinds of returns will investors get on this deal?
Venkat Avasarala: Again, development deals vary widely, depending on what you’re developing and all that. For me, my benchmark is, I want to produce a rate of 21% IRR for my investors, at least a three-year minimum. So 21 IRR on a 3.5 year basis is double your money. And that is where I want to be. If I cannot hit that benchmark, I don’t want to do the deal. I want to be very choosy. I want to do less deals, but more profitable deals, for both my investors and myself.
Ash Patel: And this is a different type of investor, because there’s no monthly or quarterly payouts.
Venkat Avasarala: There you go.
Ash Patel: Do they only get paid at the very end?
Venkat Avasarala: That is exactly what’s going to happen. And again, like I said, I thought that I need a totally different set of investors, who don’t care about cash flow. But to my surprise, the same exact investors who invested with me all these years for cash flow didn’t bat an eye; they just wrote checks for these development deals. They like them.
Ash Patel: What profile is your typical investor?
Venkat Avasarala: These are high net worth individuals, accredited investors who have very busy jobs… Mostly in technology background, because that’s where I’m from. Again, one thing I learned is people who are like you can relate the most with you. So I’m from a technology background. I still have some doctors, lawyers and service restauranteers in my investor database, but a disproportionate amount of my investor database is technology. Because when they look at me, they can relate to me. “Look, this guy thinks like me, he has education like me, he has work experience like me.” So I think they can relate more with me in that way.
Ash Patel: Can you identify any differences between investors who want the monthly cash flow, versus investors that are in it for the long run and don’t care about monthly or quarterly returns?
Venkat Avasarala: Got it. So everybody, including me, if we can go back in time for 2-3 years back, I didn’t even think of doing any construction deals. So everybody wants cash flow, including me. The problem is, the whole world wants that. So they’re bidding these properties to these insane levels. If you go to Phoenix and see it, they’re trading at two caps. Who buys in two caps when your interest rate is North of 3.5%? Now, you’re asking for trouble. So a small hiccup… Maybe this Delta variant blows up – that’s it, you’re going to lose your capital. You’re playing with fire at this point. So that is why I chose to pivot to construction. Because if somebody is going to pay me two cap to build, guess what, I’m going to build it all day long. Yes, it might be a little harder for you to raise capital.
But again, just to directly answer your question – I see that especially elder investors who are retired already, who depends on this income, they continue to look for these cash flow properties. I’m not saying that they’re not there. It’s just there, so far and few between; the real ones, the real cash flow ones. I bought a deal last October in Lakewood, Colorado. We were doing 8% to 10% cash flow day one. So they do exist, it’s just that they’re far and few between.
Ash Patel: Okay, so you found that the older population is looking for cash flow, whereas maybe the younger people are looking for more home runs?
Venkat Avasarala: Absolutely. Yeah, the younger you are, the more time you have to actually significantly grow your net worth, while you don’t depend on the cash flow, right? Because you are bringing in the money from your day job.
Ash Patel: What’s the hardest lesson you’ve learned in real estate so far?
Venkat Avasarala: The hardest lesson is that you’ve got to watch what whales are doing. And let me qualify what I just said… So in 2018, was the last good year in Texas market. Again, this is a very personal opinion of what I’m seeing. 2018 was the right time to actually pivot out of this value-add B and C, especially in Texas market, and into the development; that is when the switch happened. I’m two years late to that. I missed a big homerun, because people were buying land at $5000 a unit, $10,000 a unit. That’s land, where you are getting $1,50, $1,70 rents. Well, guess what? I didn’t see it sooner.
So my learning from this thing is you’ve got to watch whales; these big investors on what they’re doing, how they’re pivoting – you always have to watch them. The market will teach you more than any mentor can ever can. So I was a little late to get to that mindset where I closely watch all these big companies, what they’re doing, why they’re doing, how profitable they are, what are their business plans. So yeah, that is a big learning, two years late, but I paid a heavy price for that. Now I’m paying what? $18,000 to $20,000 per unit, and the construction costs are way higher than what they used to be two years back.
Ash Patel: So I’m going to take that answer as, what’s your best real estate investing advice ever?
Ash Patel: Give me a lesson that cost you money and that was a difficult lesson to learn.
Venkat Avasarala: Absolutely. So I did 20 single-family homes with my own money, never lost a dime, so that’s good, and I sold three properties so far; didn’t lose money, we made really good on those. Didn’t lose money on those. I’m selling nine properties in a week in Dallas and exiting Texas value-add market; will not lose money on that one, we’ll do very good. So I haven’t lost any money on existing assets, let’s say that.
I did lose money recently on a property that I’m trying to develop right next to Galleria Mall in Dallas. It’s a small 2.5 acre site; I spent five months and $50,000 on it before deciding that this deal is not feasible. And it stung quite a bit. But in that particular deal, what happened was it’s an infill site, $2.20 rents; great site to develop. It’s just that site is too damn small, and the city insisted that we put a retention area to hold all the stormwater, because there’s some kind of bottleneck down the line… And this happened even after working with somebody very experienced. And this is what infill site is. So that’s my lesson learned. You’ve got to be twice and thrice as careful with infill sites, because you don’t know what will come and bite your end. But this is my money, this is not my investors.
Ash Patel: Were you in due diligence or did you actually acquire the land?
Venkat Avasarala: No, I was in due diligence, but still due diligence costs money, the legal fees and then you have to hire the architect and you have to hire the civil engineer, you have to order environmental soil report to—several things. That’s the other side of the development, right? Yes, you can generate higher yields for your investors, but personally, if you are a syndicator and if you are a developer, you are taking a lot of personal risk, because you won’t show the deal to your investors until you iron out everything, until you are ready to actually show it, already as close as possible to show already. So that is the flip side of development.
Ash Patel: How did you follow through and build the retention pond? Do you think you could have made something work there?
Venkat Avasarala: I could have made, but I wouldn’t be able to hit my 21 IRR benchmark that I set myself. So this is what happened – I started with an idea of building 200 units in that site. But once you put the retention on, you can build maybe 120. I just lost 80 units. So I no longer can hit a 21 IRR. And this is my thought process; if you don’t hit that 21 IRR, why even bother investing in development deals? I’m sure that there are deals worth 12, 13, 14 to 15 IRR – you can invest in existing multifamily, right?
Ash Patel: Right.
Venkat Avasarala: So in development, the returns have to be higher, because the investor is waiting for 2-3 years to see that money back, and that return in lump sum, but the return has to be worthwhile for them. So since I realized that I can’t do 21 IRR with 120 units, I bailed, even at $50,000 personal loans.
Ash Patel: Venkat, are you ready for the best ever lightning round?
Venkat Avasarala: Sure.
Ash Patel: Let’s do it. Venkat, what’s the best ever book you’ve recently read?
Venkat Avasarala: How to Win Friends and Influence People by Dale Carnegie. It was written in 1920s, but I’m telling you, you don’t need any real estate work if you want to be successful in this business. Whatever you need, people have it. It’s just that we need to know how to work with people and put together deals to make them a success. So I would say that’s my favorite book,
Ash Patel: What’s the best ever way you like to give back?
Venkat Avasarala: When I started, I got a lot of help. So to date, I raised $90 million; never spent $1 on advertising. These are the people that just trusted me and gave me money. And I manage $400 million worth of assets right now, and I didn’t get there all by myself. I got a lot of help. I called so many people for advice and they gave it to me, and I give that same exact thing back. You can’t put a monetary value on a critical piece of advice given to somebody at the right time, which can just change the course for them. So I do that. I definitely help everybody who reaches out to me with advice, and if there is anything in particular they would need.
Ash Patel: That’s great. Venkat, how can the Best Ever listeners reach out to you?
Venkat Avasarala: Well, they can email me at firstname.lastname@example.org, or they can reach me via cell at 281-727-9238.
Ash Patel: Venkat, thank you so much for joining us today and sharing your story. Hopefully, you could inspire some other syndicators to go into development, instead of buying those two cap deals in the South-West. So thank you for joining us today.
Venkat Avasarala: Alright. Thank you so much, Ash.
Ash Patel: Best Ever listeners, thank you for joining us and have a best ever day.
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