Kenny has an extensive real estate background, and is just now starting to get into development, working on his first build now. Joe and Kenny discuss the politics, funding, and logistics of going from talking about a development to actually doing it. Even if you don’t ever want to do a development, the lessons Kenny has learned in this process that can apply to any real estate investor. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!
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Kenny Wolfe Real Estate Background:
- Owner of Wolfe Investments, a private equity real estate firm in multifamily, commercial, hard money loans, and property development
- Been involved with $95M+ worth of transactions, 2,374 multifamily units, & multiple commercial acquisitions
- Working on our first development property now
- Based in Plano, Texas
- Say hi to him at http://wolfe-investments.com/
- Best Ever Book: Rich Dad, Poor Dad
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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, Kenny Wolfe. How are you doing, Kenny?
Kenny Wolfe: Hey, Joe. How are you today?
Joe Fairless: I am doing well, and nice to have you on the show. A little bit about Kenny - he is the owner of Wolfe Investments, a private equity real estate firm and multifamily commercial hard money loans and property development. He's been involved in almost 100 million dollars worth of transactions, which includes 2,374 multifamily units and multiple commercial acquisitions.
He's working on his first development property now, and we're gonna talk all about that. Based in Plano, Texas. With that being said, Kenny, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?
Kenny Wolfe: Sure. Thanks Joe, and thanks for having me. Just a quick background on me - I started in real estate about seven years ago. We began by investing passively twice in multifamily properties here in Dallas-Fort Worth. One was a yield play, one was a value play, so we were in there to learn and see what business model we like and didn't like for multifamily investing. Then in about 2012 we syndicated our first multifamily property; it was 76 units in Wylie, Texas. We still own it, and it's a good little property for us.
Then we continued to buy more properties here in DFW. We started to buy more here, and then prices got a little out of hand from what I saw, so I started thinking outside the box and looking at other markets, such as Oklahoma, Colorado, Ohio, just kind of opening it up.
So we eventually got into [unintelligible 00:02:33.18] Oklahoma City multifamily, and then we added Columbus, Ohio just a few years ago as well. Then we also branched out into other markets in Texas, such as Waco, Amarillo... Those markets as well.
So that's kind of how we got started in multifamily, and then from there our investors kept asking when is the next multifamily deal, and it's been harder and harder to find a true good deal these days, so we branched out to hard money lending 18 months ago. We've done multiple single-family and small multifamily loans on that.
Then about a year ago we branched out and started buying commercial properties, triple net leases, double net leases properties here in Texas and Oklahoma... And then yeah, you're right, we're about to break ground on our first development project here in Dallas-Fort Worth. It's small, but it gets us into the game. I've learned a lot, and we haven't even broken ground yet.
Joe Fairless: So we could talk about a whole lot of stuff based on that timeline and the different things that you've been doing... Let's start with where you're at now, and then if the other things become relevant, then we'll talk about some of the other things. The first development project - you're about to break ground, you've already learned some stuff... What are you developing and what have you learned?
Kenny Wolfe: Well, there are some townhome lots across the street from one of our existing multifamily properties we own, and I tried to get the city to change the zoning to multifamily... Because owning that property across the street, I know there is a need for it in that submarket of Dallas-Fort Worth, and the city wouldn't change their mind.
Joe Fairless: What submarket is it?
Kenny Wolfe: It's in Wylie, Texas.
Joe Fairless: Okay, in Wylie. Got it.
Kenny Wolfe: So we're not gonna fight the City Hall, we're gonna do exactly what they want there, so we're gonna build some townhomes there.
Joe Fairless: So you're building some townhomes... How long have you been working on the project since you decided that you're gonna go with the flow and not try and swim up current?
Kenny Wolfe: Probably about four months. We went ahead and bought the land, and then -- we had talked to the city before about the land, but we were trying to feel them out. I bought the land and then had it converted from four townhome lots to six.
Joe Fairless: And what process did you have to go through - time and money - to get it from four to six?
Kenny Wolfe: We had to buy the land. We've got a great local bank, and they gave us an 80% loan on the land, and then in about a week or two we'll get a construction loan where they lend us the full 80% of the cost to build it. So we're out 20% so far on all the land purchase and all the fees and architects and all that kind of stuff. So right now we're probably at 75k right now.
Joe Fairless: And the process for getting it from four to six, for someone - well, myself and anyone else who has not done that before... What does the process entail?
Kenny Wolfe: It's a lot of calls to the city and meetings up there at their office, and then really it's just making sure that your architect can read all the city requirements of the [unintelligible 00:05:15.03] So we kind of get it approved, and then we send it over to the city, have them look at it, mark it up... And all they really did is just made a small, minor change, and then from there we had to present that to the planning and zoning committee, and once that passed, we went to the city council and they passed it as well.
Joe Fairless: When you present t the planning and zoning committee what do you need to have with you and what questions do they ask?
Kenny Wolfe: It was actually pretty smooth, to be honest with you. If we're trying to rezone it, we'd have to really do a big sales pitch, with slideshows and all that kind of stuff. But we were using what the zoning was already in place, there really wasn't much to present. All they got was the new layout of the lots.
Joe Fairless: Okay. And basically from going from four to six, you're able to build two more than you would have before?
Kenny Wolfe: Right, yeah. We're able to build two more townhomes on that same price for the land. They were really some strangely cut up townhome lots to begin with; they were really big, so it made sense to make them smaller.
Joe Fairless: Okay. And the same with city council? Did anything stand out there?
Kenny Wolfe: Same thing. It was pretty easy. Like I said, we weren't gonna fight city hall, so it went pretty smoothly.
Joe Fairless: So what lessons have you learned? Because you said you're about to break ground, and you've learned a lot of lessons.
Kenny Wolfe: My experience has been in buying existing buildings, so I've learned a lot already... Especially here in Texas we don't have the best soil; we have expansive clay, so how much it costs to do a proper foundation, the steps involved in getting all the pricing and quotes working with an architect on not just the lay of the townhome lots, but actually what the townhomes look like on the inside too, the layouts there... So that's been a lot of fun.
Joe Fairless: With the foundation being expensive, since it's expansive clay, how much does it cost to lay a foundation for one townhome?
Kenny Wolfe: Well, I can tell you the dirt work... So the dirt work right now - our options were either to do 17-foot [unintelligible 00:07:10.07] or soak the dirt, pack it in, soak it again, do that multiple times to build up a nice solid dirt foundation underneath what we're about to pour. That's coming in right around 100k just there alone, the dirt work.
Joe Fairless: Wow. What are the economics of this deal, from a big picture?
Kenny Wolfe: I think we'll double our money in about 18 months on this deal. It's because we're just in a hot market here in DFW. We're building these for about $100/foot, maybe $105/foot, so that means that we're able to sell these for probably $165/foot. So there's a pretty big delta between what we can build it for and what we can sell them for.
Joe Fairless: As far as the other steps involved with working with an architect, what are some things that on the next development project, should you do one, that you would do differently?
Kenny Wolfe: I would engage them sooner. I probably brought them in maybe a few weeks too late. I would bring them in sooner from the get-go. It's really just getting used to the architect, and sitting down... I'd probably have more of a meaning as to kind what we're looking for, the interior layout and the exterior layout.
Joe Fairless: And when you say "engage them sooner", what point of the process is that?
Kenny Wolfe: On the next one we're gonna engage them probably before we buy the land.
Joe Fairless: Wow, really?
Kenny Wolfe: Yeah, I would. I think it would make it so much smoother if we had that plan already in place.
Joe Fairless: And what costs are associated to engaging them prior to even buying the land?
Kenny Wolfe: It depends on the size of the project really, but they'll start working if you pay about half... Typically, it's about $1/square foot on the building size.
Joe Fairless: So they receive approximately $1/square foot for the building that they're building?
Kenny Wolfe: Right, yeah.
Joe Fairless: And how many square feet are the six total townhomes?
Kenny Wolfe: Well, I guess they're getting $1,20. [laughter] I was just doing some quick math... Because the total (all six) are gonna be around 10,000 square feet.
Joe Fairless: Got it. So did I do that math right? 1.2 million?
Kenny Wolfe: Yeah, that's what it's gonna cost to build. Probably a little less than that. But the architect's fee is 12k on the deal.
Joe Fairless: Oh, right. Yeah. I shouldn't have multiplied. I was like, "Wait a second... I need an architect podcast and go back to school and be an architect." Okay, yeah, I got calculator happy. So there are clearly differences in developing something ground-up versus buying an apartment building or doing a triple net lease property, and you're in the middle of your first development... But do you anticipate it being worth the time and the money and the higher degree of risk that's involved with development?
Kenny Wolfe: Yes, I do, because like I said, just on this small project I think we're gonna double our money in probably about 18 months. What I like to do is be the guinea pig for a lot of our new investment offerings, so this is really gonna launch us into something bigger. We already have offers out on an acre and a half here in DFW, and then another 3.7 acres here in DFW as well.
Joe Fairless: What are some lessons that you learned when you went into different markets? You said you went to Colorado Springs, Oklahoma City, Columbus, Waco and Amarillo, after investing in your backyard.
Kenny Wolfe: Our first property was 76 units. We weren't there on site, we had to go probably every other month, every three months, once it was stabilized... So I realized that I could really do this from anywhere, and buy anywhere, as long as I have the right property management company. And I had just a personal rule, being able to get there and back in a day, from here in DFW. So those were kind of the things that got me started thinking, if you're only going every other month or so, it's easy to spread out to these other markets where there might not be as much competition.
Joe Fairless: As far as the other markets where there's not as much competition - specifically I'm thinking of Waco and Amarillo, just because I'm familiar with them pretty well... On the flip side, because when you entered there wasn't as much competition, when you exit there's not gonna be as many buyers looking to buy that property because of the markets that they're in... So have you sold those properties? And if so, did you experience that, or was that not the case?
Kenny Wolfe: We haven't sold those properties yet. I think Waco is about as hot as it has ever been right now. I've got so many people that like Waco right now. But we're more of a long-term hold investor. We like to go in, do our business plan, get a supplemental loan for cash-out and hold longer term. So yes, we may have fewer sellers, but people are getting more and more pushed out of DFW, at least at the moment, so we're starting to see more competition in those markets where we didn't see hem before.
Joe Fairless: Okay, it definitely makes sense with Waco, because it's just in the middle of all the action between the cities. Amarillo - we've got some time, I think... But when you say long-term, what is long-term specifically?
Kenny Wolfe: For me - I always tell our investors for our multifamily deals to prepare for a 5-7 year hold. I help them to think that way, because if we're getting a sweet offer, sure, we're gonna sell, but to me the better option is -- these are cash-out refi or a supplemental loan, hold it long-term, cash-flow, [unintelligible 00:12:18.21] as we hold it. So yeah, usually 5-7 years.
Joe Fairless: And for someone who might not be familiar with the difference between a supplemental and a refinance, will you explain that?
Kenny Wolfe: Sure. A supplemental loan is just a secondary lien. So we go and get a Fannie Mae loan, and we do our business plan... Usually, that's to upgrade half the units. Then once we do that, we'll go back to Fannie Mae and say "Our value is up here now, because our NOIs increased by x amount", so it gets reappraised, and then you get 70%-75%, depending on the market and the timing of the supplemental loan, of the new value minus the existing loan, and that's the secondary loan that you get at closing, on the proceeds of that. So it's a way to get your money out without having to take a tax hit.
Joe Fairless: And then what if someone says "That sounds great, but basically you're just adding more debt to the current property", what's your response?
Kenny Wolfe: In real estate, debt's your friend. I'd say that that is like having an insurance company and getting flow. We're getting money out of the property where we created value, but our residents are paying that loan down for us. So we get this money out in a tax-shielded format so we can reinvest it, and it's a way to really snowball your returns.
Joe Fairless: You started with multifamily, and that was a major focus of yours, and then you said you branched out to hard money lending. What did you have to do from a process or team standpoint to transition the focus?
Kenny Wolfe: What we did is we teamed up with a guy here in DFW. He had been doing maybe 4-5 hard money loans a year, so it was a way for us to learn from him, get the process down, and make sure we were doing everything correctly. We had our lawyer look over it, obviously, things like that... And we're pretty cautious on how we structure our loans as well.
Joe Fairless: By "teamed up with a guy in DFW", does that mean that you paid him as a consultant, or what was the arrangement?
Kenny Wolfe: He and I created a new LLC, so we run our hard money through that LLC.
Joe Fairless: Got it. And then the benefit that you brought to him was more deal flow, more loans, or was there some other benefit?
Kenny Wolfe: It was really investors. He was doing this out of his own pocket, and I said "Hey, I bet our investors will like them and will fun them, so we can do a lot more deals", so that's what I brought to the table.
Joe Fairless: And now that you've got the apartment communities -- and how many do you have currently in the portfolio that you're overseeing?
Kenny Wolfe: Currently we've got about 14.
Joe Fairless: 14, got it. So 14 apartment communities... And you've got the lending business, some double and triple net lease properties, and now a development project. Which of those areas makes you the most money?
Kenny Wolfe: Today it's probably gonna be our commercial properties right now, but that'll change... And really, a big reason to branching out was I also like having four different levers to pull. When it's hard to find a multifamily deal, we can focus on these other three, and when that changes - because it will - then we can be able to focus more on acquiring more multifamilies. So it's a way to kind of branch out like that, but right now commercial.
Joe Fairless: What are the commercial properties?
Kenny Wolfe: So far we've bought three Family Dollars; we've got a fourth one under contract now. The reason why I say that they make us the most money is because right now they've got the biggest spread between cap rate and the interest rate.
Joe Fairless: And where are those located?
Kenny Wolfe: They're in Texas and Oklahoma for now.
Joe Fairless: When you started out, how did you meet your first investors?
Kenny Wolfe: I started out with the Real Estate Investment Group here in DFW. That's really how I got started, and met investors and like-minded real estate folks.
Joe Fairless: And what are some lessons learned from working with investors?
Kenny Wolfe: It's easier to work with investors that are already sold on real estate as an investment. When I started out, I'd met a few through that group, but then I tried to bring in some investors that were from my old oil and gas days; I had to really sell them on real estate in general, and then multifamily as an option. So to me it was a little bit more work to get them to come over.
Joe Fairless: Based on your experience as a real estate investor in different areas, what is your best real estate investing advice ever?
Kenny Wolfe: The best advice I'd say is don't be afraid of new markets, don't be afraid to get on a plane, or new types of real estate. If there's a lot of fishermen in one part of the lake, you should probably go to the other side of the lake.
Joe Fairless: And as far as investors who already know they wanna invest in real estate - this is something I've come across, too... I always use the example of if I'm at a party and someone asks what do I do, I ask them "Do you want a chicken nugget?" and they say "What's a chicken nugget?" then me telling them I'm an owner of McDonald's won't mean much... Whereas if they already know what chicken nuggets are, then they're more likely to buy chicken nuggets and know what a McDonald's is... Or I use some sort of permutation of that example; I think I butchered it a little bit, but it's basically you've gotta fish where the fish already are.
But the flipside of what you just said is in terms of looking for different opportunities to invest in, then it's going to where other people are not fishing. So in that case, what market indicators do you look for to determine how you're going to evolve your investment approach?
Kenny Wolfe: When we're looking for new markets to break into for multifamily, the first box that needs to be checked is it has to be landlord-friendly. We're not gonna go to a state where it can take 6-9 months to evict, and all that. We wanna make sure the house always wins. So landlord-friendly is number one, and then from there we go to diverse economic drivers; we don't want one or two economic drivers to be the sole employment in that city. We wanna see diversity.
An example would be -- we'll pick on Columbus, Ohio. They're the state capital, and they've got a pretty big university in town, nationwide insurance is there... There's multiple employers there, whereas if you're going to, say, Killeen, Texas - that town is 100% military. So if there's a deployment, you're gonna have a rough go with it for the next few months. Or even if it's a town that's just focused on, say, just oil and gas. That would be tough, too.
Joe Fairless: What's a project that hasn't gone according to plan?
Kenny Wolfe: I was looking at that, and jokingly, one of our properties I was convinced to do crushed concrete instead of crushed granite, and there's a big difference between the two, because one floats and one doesn't. Anyway, that's kind of the joking part... But that was a real mistake, so don't make that. But really I guess in multifamily a thing I learned was when we got a pretty sized property under contract in Oklahoma City... There was a Starbucks right across the street, there was a medical facility that was just kind of refurbished, and all that... So the location was phenomenal. It was an older building ('70s), but it had an indoor pool and we could really turn it around pretty nice to get it to a much higher asset class. But it came with some baggage, and the seller partially upfront told me [unintelligible 00:19:04.10] across the street back in the '80s that leaked some really nasty chemicals, about 20 letters long. But anyway, supposedly it leaked onto this apartment complex.
And he told me that all that was taken care of, it wasn't a big deal... So I put it under contract, but that was something we were gonna really look at. So we looked at that, did our due diligence, and it turned out that Oklahoma City had okayed it, the state of Oklahoma had as well, but not the EPA. So he was two-thirds right, but he wasn't all the way right... So from that I learned a whole lot. Because that chemical was there, the EPA was gonna have them drill down (I think it was) eight feet, steam it, see if anything came out; if anything came out of that chemical, which has a really long life in the soil, we were gonna have to put in special fans, and obviously you'd have to let all the residents know as well... So we canceled the contract.
Joe Fairless: Oh, I bet.
Kenny Wolfe: It was just a mess. So that's something that I learned - do a little bit more upfront. It cost us legal fees, but... We make sure that we're looking at that environmental stuff pretty seriously.
Joe Fairless: Was it legal fees plus some of the due diligence to get that inspection done, that you also had to pay for?
Kenny Wolfe: We actually hadn't even gotten to the inspection part, because I wasn't gonna spend money on that, so we figured this environmental piece out and got that locked down. So it really was just legal fees.
Joe Fairless: Okay. We're gonna do a lightning round. Are you ready for the Best Ever Lightning Round?
Kenny Wolfe: I'm ready.
Joe Fairless: Alright, let's do it. First, a quick word from our Best Ever partners.
Break: [00:20:36.08] to [00:21:13.00]
Joe Fairless: Best ever book you've read?
Kenny Wolfe: Best ever book - I've gotta go with Rich Dad, Poor Dad, because that's the one that started us off.
Joe Fairless: Best ever deal you've done that wasn't your first and wasn't your last?
Kenny Wolfe: I'd say [unintelligible 00:21:23.02] apartments in Columbus. It was 216 units built in 2000. We doubled the investor's money in just over two years.
Joe Fairless: What's a mistake you've made in business that we haven't talked about?
Kenny Wolfe: The biggest mistake was really -- we kind of talked about one earlier, but it's gotta be not getting into real estate sooner.
Joe Fairless: On the 216-unit in Columbus - was that doubled via a sale?
Kenny Wolfe: No... We went in, upgraded half the units, got about $150-$175 rent increases per unit, so we could do the supplemental loan.
Joe Fairless: What's the best ever way you like to give back?
Kenny Wolfe: As a family, we usually focus on animal welfare.
Joe Fairless: And how can the Best Ever listeners get in touch with you?
Kenny Wolfe: Our website is www.wolfe-investments.com
Joe Fairless: Kenny, thank you so much for sharing your expertise and your experience and your story of how you've evolved your real estate company, lessons learned along the way, from multifamily to lending, to commercial properties, to now development, and where you see that headed. Some lessons learned working with architects on development, and just your overall thought process on the economics.
Thanks again for being on the show. I hope you have a best ever day, and we'll talk to you soon.
Kenny Wolfe: Thanks, Joe.