JF975: Hotels and Multifamily Investing on a PASSIVE LEVEL
He has cash in over 1000 units as of right now and began when he was 22 years old. Hear his story and how he prefers to passively inject his capital into large multifamily syndications and hotels. He makes it seem very simple, in fact it’s not too difficult to grasp… Start investing passively into multi family today!
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Mark Kenney Real Estate Background:
– Co-founder of Think Multifamily and full time real estate investor
– Purchased first rental property at the age of 22 and now has investments in 1750 units
– Over 20 years experience in real estate investing and educating
– Prior to real estate, Mark was a CPA and IT Consultant that founded Simplifying-IT in 2008
– Based in Allen, Texas
– Say hi to him at http://thinkmultifamily.com/
– Best Ever Book: Rich Dad, Poor Dad by Robert Kiyosaki
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Joe Fairless: Best Ever listeners, 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’ve only talked about the best advice ever, we don’t get into any fluff.
With us today, Mark Kenney. How are you doing, Mark?
Mark Kenney: I’m good. How are you, Joe?
Joe Fairless: I’m doing well, nice to have you on the show. A little bit about Mark – he’s the co-founder of Think Multifamily, and he’s a full-time real estate investor. He purchased his first rental property at the age of 22, and now owns 1,750 units. He’s got over 20 years of experience in real estate investing and education. Prior to real estate, he was a CPA and IT consultant. Based in Allen, Texas. With that being said, Mark, do you wanna give the Best Ever listeners a little bit more about your background and your focus?
Mark Kenney: First of all, I appreciate having me on the podcast, Joe, and hello to the Best Ever listeners. The background – I kind of grew up where we didn’t have a lot growing up, and always had a mindset for entrepreneurship. I started buying properties when I was 22, some smaller ones. Then I unfortunately got caught up in the corporate world, making some pretty good money and traveling a lot.
I kind of got in real estate a little bit from a perspective of buying new assets. In 2008 I started my own IT company, did well with that, had some pretty big customers like T-Mobile, Marathon Oil, [unintelligible [00:03:33].17]. That was going well, but I had two kids and a wife, and I didn’t have enough passive income coming in if I was to die, so I figured I’d need to start looking for other avenues to get a higher level of passive income, and that’s when I made the decision about three years ago to start buying larger multi-family assets.
About two years ago is when I stopped doing IT consulting and became a full-time real estate investor.
Joe Fairless: Okay. What was the first purchase two years ago into the multifamily arena?
Mark Kenney: It was a 64-unit in Mesquite, Texas.
Joe Fairless: How did you fund it?
Mark Kenney: We syndicated where we had a group of people that we brought together, and brought money together to purchase it. That’s kind of what we’ve been doing on our subsequent deals. Before it was [unintelligible [00:04:18].27] my brother and myself and my sister buying 1, 2, 3, 4-unit deals, but when we got larger, we actually put money together from other investors and bought larger properties. We pulled down one in January of this year, which was a 400-unit deal in Atlanta.
Joe Fairless: Okay, cool. So you’ve got 1,750 units that your company controls with some ownership in, along with other investors, correct?
Mark Kenney: That’s correct. We’ve syndicated a little over a thousand of those. The other stuff are more passive investments.
Joe Fairless: Okay, so 750 are properties that you own outright, with no other investors?
Mark Kenney: No, sorry… Basically, we passively invest in some deals ourselves, so we’re not [unintelligible [00:05:04].01] and then we syndicated about six deals on our own. But at those deals we’ve syndicated, we have other investors investing with us.
Joe Fairless: Okay, got it. So of the 1,750 units, you are passively investing in 750 of those, so you’re a passive investor in deals, and then about 1,000 of those 1,750 you have syndicated, so you’re an active investor, you’re on the general partnership side, is that right?
Mark Kenney: That’s correct.
Joe Fairless: Okay, cool. Now I understand the lay of the land… This is interesting. Let’s talk about — are you still passively investing in deals?
Mark Kenney: We do. I do a SEP IRA every year, so every year I’ll invest in a deal.
Joe Fairless: And what do you look for when you invest in a deal passively, and is it multi-family that you’re investing in?
Mark Kenney: Primarily multifamily. We’ve invested in two hotels, but we’re probably not gonna be doing that going forward. So mostly multifamily… The first thing I look for really is the operator. Probably before I used to be more concerned with the projected returns and what the sponsor or lead thought they could do. Now I actually have a lot of people that I know quite well that syndicate deals and I have developed some relationships with them. I trust them, so [unintelligible [00:06:24].03] deals secondary. Both are critical, but you can have a very good deal with a bad operator, and the deal can still be bad.
We look at the market, job growth, population growth, easy to evict – kind of your standard type attributes. If the city’s making an investment… So we’re heavily in Atlanta right now; a lot of city investment dollars going in there, and there’s also a lot of development dollars going in there, which is a good combination.
I know you grew up in [unintelligible [00:06:53].22] I was just stopping in Michigan about a week and a half ago, and there was a lot of activity going up there, and I’ve been telling people for years you can probably make a lot of money up in Michigan right now, but I’m not one of the people investing up there. I don’t think the fundamentals are there. You can make money, but there’s no population growth or job growth or things like that. So we’ll look at all the key indicators, but the operator is critical.
Joe Fairless: Why no hotels? What happened on those two deals?
Mark Kenney: One is doing quite well. The other one was actually a good property; it was out of state, but the people operating it, the leads, the sponsors in that deal [unintelligible [00:07:39].05] gone through in a business plan where they were gonna put in a third-party operator, and they didn’t do that, so the deal kind of went South pretty much to the point where it wasn’t recoverable.
So I don’t necessarily have anything against hotels, but my personal perspective is there’s a lot more to running a hotel than there is multifamily properties… So if I’m not gonna be involved in the running of the day-to-day at a hotel, I probably wouldn’t be involved. There’s a lot cash that gets paid and it’s a lot easier, in my opinion, for fraud, theft, things like that, which is something that actually happened at one of our hotels that we were passively invested in.
Joe Fairless: I’m curious, as a passive investor, how did you become aware that people were skimming off the top, or whatever they were doing. Passively I wouldn’t have probably known, but the guy that was working there actually went to jail, so I believe he actually informed us that he actually went to jail for like six months, and then… The story gets better; without getting into too many details, even after that [unintelligible [00:08:43].02] to work the front desk that was convicted of money laundering. [laughter] So yeah, not a great situation… I’m not saying people can’t make a lot of money in hotels, but I’m a little tainted right now.
Joe Fairless: [laughs] Oh, man… I’m not looking for you to call out anyone, but I am looking for the lesson here, so I do need to ask a follow-up question – how did you get in touch with this group? And again, I’m not looking for you to call out a particular group, I’m just wondering the lesson here. How did you initially get introduced to this group?
Mark Kenney: They were part of another multi-family group; they were having an issue finding multifamily, so they went off and got trained by a so-called guru in hotels, and gotten into a deal. The deal itself was good, it’s just that they had done some fairly silly things that resulted in a bad situation for all the investors, unfortunately. That goes back to the point around the operators…
Joe Fairless: Yeah, just tying that scenario up, how do you approach your conversations with operators who have opportunities, knowing what you know now, when you screen operators?
Mark Kenney: One, I wouldn’t invest with anyone — this is really the first hotel deal, and they had a mentor that was supposed to work with them side by side, and that didn’t happen. So I personally would never invest in somebody’s first deal unless they have a strong partner that’s part of the deal and has skin in the game as well, both from a time perspective and a financial perspective. I would make sure that any deal has someone that’s strong, that’s done it before, has been through some issues… Everything is not always hunky-dory, things do happen. Then we will just ask questions more around the prior experiences.
This is just one of the situations where I don’t say we are misled, but someone was probably misled on what reality was versus what was portrayed to be the business plan and the execution of the business plan.
Joe Fairless: Okay, let’s shake that off and let’s move on to some fun stuff for you… A 64-unit was your first syndicated deal; was your most recent that 400+ unit in Atlanta?
Mark Kenney: Yes, it was. Then we had one right before that, a 255-unit in North Dallas.
Joe Fairless: Alright, so 64, 255, 400 — there’s a lot of ways I can go with this, but let’s do this: from a due diligence standpoint with your 64-unit to your 400+, what have you improved on as an operator?
Mark Kenney: A couple things, I guess. One is improved upon this, because we did it on our first one too, but always hire someone that does this professionally, or at least in the physical asset perspective hire someone that does it for a living; make sure they gave you quotes… So we had due diligence done before where they give you a 500-page document and there are not quotes associated with any of the rehab requirements, which is kind of a bad thing, right? You wanna know what’s gonna cost to actually fix things…
We also learned on — we didn’t have this originally, but language in the contract around city inspections and who has to pay for that… That saved us literally about $200,000 in our deal in the Dallas area, where our contract called for that the seller has to pay for any open city violations, and that one had several hundred city violations. It sounds bad, but it actually worked out good for us, because it all got fixed.
Joe Fairless: You said over $200,000, right?
Mark Kenney: They had like 700 city violations on a 250-something unit.
Joe Fairless: Wow… And what was the dollar amount, roughly?
Mark Kenney: I’m just purely guessing about $200,000… That was something the seller had to pay. We have verbiage in our contract for that; we also have verbiage about walking vacant units before closing. We got caught on that before where there was only one vacancy, and then lo and behold, the day we close there are now five vacancies… One of those things.
Joe Fairless: Yup.
Mark Kenney: So the physical asset piece is pretty easy… You’ll hire people to do that. It’s more about making sure the numbers are what they are, and just don’t skimp and don’t hire someone that doesn’t do this on a daily basis to do your due diligence. People learn a lot about the contract [unintelligible [00:12:51].21] and any things of that nature as well.
Joe Fairless: As far as the violations go that the seller had to pay for, you said there were around 700 violations… When did that come up? Are you able to identify those violations prior to going under contract?
Mark Kenney: Fortunately for us, we were. We had an early access agreement which allowed us to get into the property while the contract was being worked with the attorney. We were in there, and we were delayed a few days by that, because of the city inspection. So we had an idea that the city inspections were going on during that time… But even just going in the city, you can see some of those attributes too, but we were kind of first-hand here; we actually had the report sent to us from the seller, and also had a conversation with the city. They weren’t willing to share that much quite frankly, the city, because we weren’t the current owners, but at least we could get an idea about the reputation of that property, with the existing property owner.
Joe Fairless: Okay. That was the evolution or things you’ve improved on or make sure you included throughout the three deals on the due diligence… What about your investor structure, how you structure the limited partnership, your passive investors and the general partnership, you and your team?
Mark Kenney: This is something we’ve changed a fair bit more recently… We kind of stuck with the typical — we’ve been doing the 80/20 split, 75/25 split, where 75%-80% goes to the investors. We haven’t been doing preferred returns that much… Preferred return meaning just that the investor gets the return before the sponsor lead gets their return.
The last couple deals we’ve looked at, we’ve actually looked at each deal individually and uniquely, and now we’re structuring each deal differently. Some may have a pref return, some may not; some may have a percentage we have to hit over a five-year period and we don’t get any returns as sponsors or not. So we’ve kind of done a lot more recently on deals, but prior to that we were pretty much standard, some sort of split, but we really weren’t doing pref returns that much at all.
Joe Fairless: And what are a couple variables that would push a project to have a pref return, versus no pref?
Mark Kenney: The cash flow… We should have confidence in our business plan, but the cash flow is super strong in this deal; we have another deal in Atlanta that we are on a contract with and the cash flow is just killer on it. So we feel very comfortable paying that, and we’re paying a 10% pref return on that, which is pretty high… But we feel comfortable doing that, and then we have a split after that.
So I think it depends on the deal, if it’s a value play, meaning you’re gonna come in and increase the rents and put rehab dollars in, how far into the future do you push that? If it’s a real big value add deal and it’s gonna take you a year to get it rehabbed and you have an 8%-10% pref return but you pay zero in year one, that means in year two you’re gonna pay potentially 16%-20%, right? So if there’s no cash flow, then the pref return becomes harder.
We do have a value add deal on the one in Atlanta; it’s kind of a unique deal… Our partner already owns it, it’s a little bit different situation, but the rehab’s already ongoing, it will be done in twelve months, so that makes us more comfortable paying that pref return. But if there’s no cash flow and it doesn’t make up that pref return, it can be hard, because you have to be able to accrue all that as you go… And things happen. Perfect example – that property had seven months delay on the rehab because it crossed two city lines, and the cities were fighting back and forth which unit each home owned. So if you have a business plan in place and you have to wait seven months to rehab something you plan on doing virtually day one, that’s gonna have an impact on your business model, for sure.
Joe Fairless: How did that get resolved?
Mark Kenney: The cities had to resolve. My partner there, Paul, he was hounding them non-stop on things, but it still took months and months to resolve. He had to go to several Council meetings and things like that… I think him hounding them helped, but ultimately it came down to the two cities fighting over which [unintelligible [00:17:06].06] owned.
Joe Fairless: Let’s talk about the approach that you take with the on-the-ground management… Because you’re in Allen, Texas, but this property is in Atlanta, the largest deal. I believe you said your business partner owned it already… One, how did you buy it, and two, how are you doing the management?
Mark Kenney: Right… So we have a current deal that he owns, but the one we closed down in January, the 454-unit deal, that as an off-market deal. Paul, our partner, has been there in Atlanta for a long time and has been doing multifamily for 28 years; it so happens he has his own third-party management company [unintelligible [00:17:47].27] I don’t have any desire to have my own third-party management company or work day-to-day in operations…
I’ll asset manage, meaning I’ll oversee the investment and making sure that Paul is doing what he should do, but he kind of already had his relationships with the brokers, and that’s kind of where we ran into issues. When we looked for properties in Atlanta, we didn’t have any boots on the ground initially, and we were having a hard time getting traction. But as soon as we hooked up with Paul there, that kind of opened the floodgates and it was kind of a perfect marriage, because he doesn’t really raise money, but he actually has a lot of deals, while we raise money, and he likes the third-party management and we don’t do that… So it’s a good relationship. But that was one through a broker relationship that he had worked, and he had bought other properties from him in the past, and that’s how he got that deal.
Joe Fairless: On your first deal, the 64-unit deal, how much money did you raise?
Mark Kenney: About a million.
Joe Fairless: And how did you come across those investors?
Mark Kenney: Meet-ups… We’ve been involved in different groups, and then I have an IT background – I did IT for about 20 years – and there’s been a lot of people that have money and are looking for places to put it. I would say raising money is not as easy as people think it is just starting out, but once you kind of get in the groove and you get a track record, it becomes a lot easier.
We raised about 6.2 on this last one that we closed on in January. It’s kind of obvious, but it’s not the people getting your brand out there, and building your network… Your brand meaning — we bought properties for a number of years, but it wasn’t until about six months ago that we even started the company Think Multifamily, and using social media and things like that. Things I kind of ignored, quite frankly… I thought some of it was a little silly actually, but it’s not. It works, people use it, and fortunately for me and wife Tammy is all into the marketing aspects of it and things like that.
So whether you’re a passive investor or a lead investor, you still have to have visibility in front of people. If you’re a passive investor and nobody knows who you are, or you’re not attending meet-ups or events, nobody’s gonna send you deals. If you’re a lead on a different deal, you need to have passive investors.
We go to different events, we go to meet-ups; we hold two meet-ups ourselves as well. We started one in Atlanta that we’re gonna be kicking off here in the next month or so as well. But getting yourself visible and being active on social media – it’s probably the two main things that are gonna get you visibility with investors.
Joe Fairless: What is your best real estate investing advice ever?
Mark Kenney: I would say partner with people you trust. It sounds cliché, but partner with people you trust and have the same values as you. Don’t chase money… I don’t care if the deal looks fantastic; if you don’t trust the person or something in your gut tells you something doesn’t seem right about them or the deal, then don’t do it. Be patient, find the right partners and fight the right deal. You’ll get frustrated probably… I get frustrated on a daily basis, because I wanna go faster and faster, but be patient. We see people overbidding a lot on deals right now, you’ve probably seen that as well.
Just making sure you’re having a relationship with people that are gonna be conservative; they will be conservative on the underwriting, and then you trust their values and their integrity and character. While everybody says that, at the end of the day it’s not as common unfortunately as it should be, having integrity in character.
Joe Fairless: Are you ready for the Best Ever Lightning Round?
Mark Kenney: Yes, sir!
Joe Fairless: Alright, let’s do it. First, a quick word from our Best Ever partners.
Joe Fairless: Best ever book you’ve read?
Mark Kenney: Rich Dad, Poor Dad probably, for me… Even though a lot of people would say that, that literally opened my eyes. I’ve always had an entrepreneur background. It wasn’t [unintelligible [00:22:12].09] and it helped me realize that in order to run a business, I don’t wanna be the only person that can run the business; it needs to survive and sustain with me not being there, and that’s kind of been eye-opening for me.
Joe Fairless: Best ever deal you’ve done?
Mark Kenney: The one we closed on September 2016 in North Dallas. We already raised rents twice, already passed our year two projections, and it’s only been since September. That one I think is gonna really be our best deal ever.
Joe Fairless: What’s the best ever way you like to give back?
Mark Kenney: We help educate people. We actually do some events here and there as well, and starting to do more of that. Anything we know, we’ll share; we don’t hold anything back, we don’t have any hidden agendas. And then outside of real estate, we have a big passion for orphanages. My wife and I both support orphanages in Africa [unintelligible [00:23:03].29]. We also had a big passion and support people of sex traffic industry.
Joe Fairless: If you can think about a mistake you’ve made on a deal, what mistake comes to mind?
Mark Kenney: The one we’ve kind of alluded to earlier. It’s really looking at the deal before the operator, maybe trusting the operator a little too much and not having an operator on the hotel example that really was experienced. Looking back on it, I would not have invested in it, the reason being that they didn’t have anyone else that had skin in the game with them. They had a so-called mentor that later we found out really was not a mentor and unfortunately has a lot of litigation against him.
But anyway, having somebody that’s side by side with the operator, with the lead, has done it before, has been there and can help them would probably be the biggest thing. Look for that first and foremost, and then look at the deal and see how it looks.
Joe Fairless: Where can the Best Ever listeners get in touch with you, Mark?
Mark Kenney: My e-mail is email@example.com. The website is thinkmultifamily.com, and that’s a good way to get a hold of us.
Joe Fairless: Lessons learned that we can apply if we’re passive investors as well as active investors, from passively speaking, where we should look at the operator and then the deal, and a little bit more granular than that, make sure that there is alignment of interest, as well as an experience level. And then also from an active investor, someone putting the deal together, as far as raising money goes – meet-ups… You hold a couple meet-ups, you’re starting another meet-up; your professional background, so people who are already within your sphere of influence, as well as constant visibility… Although you said – which is interesting and I hadn’t thought of this before – that also applies to passive investors, that constant visibility, so that you can get access to more deals. And then the due diligence evolution or things that you have continued to do over time, like walking vacant units right before closing; having the seller pay for any open city violations saved you about $200,000, and getting quotes for rehab requirements in addition to the inspection report.
Thanks so much for being on the show. I hope you have a best ever day, Mark, and we’ll talk to you soon!
Mark Kenney: You too, Joe. I appreciate it, thank you.