064: $71,000,000 a Day: Lessons Learned
Hello and welcome back to the Cashflow Multipliers podcast! It’s summertime ☀️, and we are feeling the heat, am I right Palm?!
Yes, very much so! Between family vacations, booking those weekend getaways, and spending time with fur babies, summer 2022 has been one for the books already!
And we’ve had some pretty monumental moments ourselves this year. In fact, July marks one of the biggest months in Kitti Kingdom history! We, along with our passive investors, closed on The Ranch at Sienna, a $71 million dollar, 32-unit, Class A property built in 2016 located in Houston Texas. 🥳️🥳️
If you’ve listened to the past few episodes we kind of touch on it, and how super thrilled we are. there were so many lessons that have led to this $71 million dollar moment.
Very, very true. Of course, we can’t keep these lessons to ourselves so we’re dedicating today’s episode to all the little, and big lessons learned leading up to this moment. We definitely didn’t do this ourselves and even more importantly, this opportunity is available to anyone who’s ready to live their best life– financially free.
Are you ready?! You know what they say, you can’t move into the future without honoring the past, so let’s remember our humble beginnings in apartment syndication.
Prior to this, our biggest deal to date was a $40.5 million dollar property in Atlanta, Georgia that we closed back in February 2022. Just a few short months ago!
The first lesson learned right out the gate is that when an investment opportunity comes knocking, with the right team, the right opportunity will still remain the right opportunity, no matter the time of year. 😊😊 This is especially true of our latest win, the $71 million dollar deal.
You see we’re living in the high inflationary period, where the interest rate hike is real, yet what people fail to remember is that with conservative and solid underwriting, and a simple and sound business plan, you can make the most out of an investment opportunity.
This is what happened to us and the $33+ million dollar raise we received.
During the thick of the deal, a $33+ million dollar raise for a $71 million dollar asset sounded like a big deal– and it was! However, if this is a normal scenario where the LTC is at 80%, this will mean we are buying a $165-166 million dollar property.
With a lower LTC means lower risk which translates to there being enough cashflow to pay down the monthly mortgage. And this is just lesson one!
Flying (First) Class A
If you’ve been listening for a while then you know we have nothing but heart 😍 eyes for class A apartments. We started in Class C where a lot of working-class families live and we have done nothing but aim upwards ⬆️ when it comes to moving up to the next class.
I am so glad we had our eyes set on Class A from the beginning because this became a proven investment strategy in the long run with our $71 million dollar deal. Not only because it’s a newer asset, but also because of the strong NOI growth potential Class A apartments have with less deferred maintenance and multiple exit strategies.
During these volatile times, the capital markets are not lending on Class C and certain Class B apartments at all. For lenders, they are looking at these older asset classes to be a little too risky for what they’re willing to lend out.
However, with a Class A property in a strong sub-market meaning a strong population, job opportunities, rent growth, absorption rate, and limited construction pipeline, means we can potentially increase rent income organically with no need to break out the hammer. Just look at your surroundings and do a little research about the location. 🤓🤓
And during the time we had the property under contract, the property income continued in a strong uptrend, as the new leases are getting 14% rent increases on returns.
DTR, Define the Relationships
The next lesson we learned is to never underestimate the power of relationships. Relationships all over the spectrum of the human experience we call life can make or break us. Cue any love song you’ve heard ever. 🤝
But the reason for these powerful emotions transcends even beyond a romantic relationship. Friends, family, co-workers, and business partners– like in the story we’re about to share– all play a significant role in our lives. To not nurture the relationship in your life will cost you– and in our case– that price was almost $71 million dollars.
Now for a little story time. During these unpredictable times, our lender, Arbor, decided to cut its lending budget from $1 billion to $300 million monthly. It was definitely a conservative approach, but we had already done 5 loan transactions with Arbor. So the proof was in the pudding, they know we were good for what we borrowed.
And this played out in a major way, Arbor worked with us and did everything shy of breaking their own backs to cut down their commission to make lending with them make more sense for us to close. On top of that, they declined a loan for 2 family offices who had $60 million dollars cold in the bank in the primetime location of Jacksonville Florida to allocate capital to us instead of them.
Why? Because relationships matter. It’s more than paying back what we owed, we were intentional with the lenders we chose because we knew we would work closely with these people. Every phone call, email, and meeting wasn’t just business for us, we viewed Arbor as an extension of our team and treated them as such. 🙌🙌
Relationships matter to them. Execution certainly matters to them. And if there’s one thing they knew the Kitti Sisters could do, it’s execute a deal. Due to our track record, they never asked us for any proof of funds even though we had $33+ million dollars waiting to deploy to close the deal. That’s the power of relationships.
Leadership is Needed
The next lesson that came to us throughout this process of the $71 million dollar deal is that leadership is needed. From the first webinar, to the very last signature.This investment opportunity could have gone sideways 8 times over.
Everything was a risk, from the interest rate hike, to raising the necessary equity needed to complete the raise, to the Docusign malfunction that happened the day the subscription doors were opened… 😅😅
Yes, that happened, and yes we were in full panic mode!
You have to view multifamily apartment investing like a team sport. No doubt we have one of the best teams in the game but the truth is, when it comes down to it, being the lead general partners of an apartment syndication deal means you’re the one who has to step up to the plate when the team needs you. And that call can happen at any time. 🙌
We had to step up when it became evident there were unnecessary rising gaps that other co-general partners couldn’t fill. This taught us a valuable lesson, all along we were underestimating ourselves. We thought we could only raise X amount, but we ended up raising two times the amount.
Truth be told, we surprised ourselves! The lesson here is when you build a reputation of being a solid lead sponsor, who works hard and makes serious money for your passive investors it shows you’re investing in them. And they in return will invest in you.
Due to our extensive asset management resumes, we’ve negotiated terms with our property management team in the past and the same is true with this deal. While we do work with the best team, that doesn’t mean we cut corners– we always verify work because we have a legal and ethical standard to maintain for our passive investors. A fiduciary duty. 😘😘
The property management team came back to us and proposed we pay $1800 dollars for the staffing of the building which was higher than the original proposed $1600 dollarsper unit per month.
Something about that number felt a little off to us and seemed too high.
So we pushed back and asked our property manager to mathematically justify the $1800 dollar amount. We had previously budgeted to have 1 maintenance lead and 2 assistants, so there was no need to hire extra part-timers. There clearly had to be some negotiating that needed to be done.
Aaaand then through more lenders’ delays, we officially closed on July 15th! But we never let our passive investors out of the loop. The trust factor was everything.
Don’t Underestimate the Power of You
Moving on, retrading was never a term we wanted to use. While other sponsorship teams asked for a retrade–aka discount– because they think it’s status quo, we never ever wanted to get to that point with our team because we didn’t want to put our reputation in jeopardy.
Buuuut when we got that call from our lender, they adjusted our LTC and we had no choice but to call the seller and negotiate a retrade. And here is where things took a turn. In negotiating the retrade, we were able to get a $3 million dollar discount from the seller. This means we purchased a $78 million appraised value property for $68 million- achieving $10 million built-in equity from day 1!
Actually, technically even before we closed the property it went up by $10 mil! While the seller we were working with is great, he’s a businessman too. For him to give us the $3 million dollar discount, the seller wanted us to drop $1-2 million in additional earnest deposit, on top of the $1 million hard-earned deposit we already wired him on day 1 of this contract.
We looked at that $1-2 million additional deposit and deemed it too risky for our investors because if the deal goes south, we would not only be losing out on $1 million, but an additional $2-3 million earnest deposit. So instead of going with the sellers’ flow, we hatched our own plan and gave reasons why we were declining his request.
At the end of the day, sometimes it really is just business and nothing personal! Obviously, the seller wasn’t too happy but the trick up our sleeve is that we knew his motivation– he wanted to close this deal ASAP and secure the bag.
The other trick we were savvy to is knowing that if this seller was to bring the property back to the market right now, he had a higher chance of not selling at all!
This brings us here today happy to report that instead of an additional $1-2 million hard-earned deposit it was only $290,000 that we wired out to him plus we got an additional 14 days extension just in case we needed them from the seller.
Remember, everything is negotiable! Know the motives, play to your advantage, and don’t underestimate the power of what you can do when you’re toe to toe with a seller.
Right Strategy is Everything
Our next lesson has everything to do with knowing and choosing the right strategy. The first right strategy is private equity vs. raising capital. Choosing the right capital stack is very important. We chose to not go through with PE money (though we were approached with a few options) meaning we way more money. 😉😉
However, during this volatile period, the deal would have evaporated anyway because some PE shops are shutting down. Instead, we went with the tried and true method we know will close, and that’s raising capital from our incredible team.
Secondly, you know the phrase “save your money for a rainy 🌧 day”? Similar rules apply in apartment investing– have a hefty reserve for unforeseen days. Being healthy means no capital call.
Our third strategy is to plan for the worst and hope for the best. We perform a lot of stress tests in case of worst-case scenarios. It’s the responsible thing to do! Palm is our data cookie cruncher here, so on this deal, we performed several sensitivity or stress tests that were specific to increasing interest rates.
What the interest rate stress test showed us was that even as the interest rate increases, it barely impacted the overall return of the property, thus even if the interest rate hits 6% for example, the property will still return close to the original projected overall return close to in 5 years.
This definitely helps reassure our investors the doom and gloom news they’re hearing on a regular basis isn’t true. Turns out, it’s not as dire as they want you to believe– it’s just another scare tactic to get people glued to their phones and screens.
Our concluding lesson about the $71 million dollar deal is to have a strong squad. You want A players for those A-grade assets. We had Arbor as our lender who slashed their commission to work with us and a strong property management team who worked with our budget. We also had our law team expedited revised PSA in a few hours which is completely unheard of!
Having a strong squad, building on those relationships, and having trust at the center will get you further than you can imagine. The African proverb “If you want to go fast, go alone, but if you want to go far, go together” is so true here.
Two days before our planned closing date, the seller decided he was not ready to close although our internal lender deadline was July 13– or else the lender wouldn’t close the deal! As you can imagine, this caused some commotion but we had the ultimate secret weapon to get us through– an incredible The Hogwarts Squad squad that could rival the death eaters.
Or in this case, the lender who allowed us to fund on July 14th and then close the deal on July 15th. Cue a huge sigh of relief, champagne popping celebration, and booking a well-deserved vacay to clear our minds and reset for the next deal that we know is just around the corner.
To say we’ve been through a lot this summer is an understatement… but boy are we thankful for what our passive investors and the overall team have been able to bring to the table during these times. The right strategy, mindset, and tapping into our own power have paid off big time and we know there is more to come, and with that, more lessons to be learned! ✨✨
As always, thank you Cashflow Multipliers Team for being here and showing up week after week. We love sharing these wins with you and we hope it inspires you to bring out what’s possible in your own passive investing journey.
Talk soon, Cashflow Multipliers! 🙏🙏
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