Episode 130: Active Duty Navy Operating over $100MM Multifamily Portfolio with Jonathan New - Apartments Operators Podcast

Welcome to the Apartment Operators Podcast, where you can learn from experienced operators what it really means to be an apartment operator. No fluff, no sugarcoating, just the raw, unfiltered truth of the ups and downs of operating multifamily communities.

Welcome everybody to the Apartments up with this podcast. Today we have Jonathan, you, Jonathan, welcome to the show. Hey, thanks for having me, man. It’s a, it’s an honor to be here. So I’m Jonathan New. I’m the director of Fairwinds Capital Invest. I am originally from Alabama. I’ve been in the Navy for the last 18 years. I’m a commander in the Navy.

I am on my last job in the Navy before I retire, and do this. Side hustle thing that, that I do it, it takes up way more time than the Navy ever hoped to do. But but it got my started in single family about 14 years ago at this point became accidental landlords when the housing crisis hit.

And we managed while I was in Japan and our own house. And then a few. Like five years ago at this point, I got into doing this on a more professional scaling type of business. Single family again did fix and flips until I realized that was just way too much work. I was doing like four or five houses every single month and I was doing it by myself, and so it weight on me a lot.

So then I teamed up with the f Partners that I have here at Fairwinds, we had done some deals together on the single family and we all came to the same conclusion at the same time to get into commercial real estate and syndications. So we’ve done 11 deals at this point. We have 768 units a little over a hundred million worth of management aum m and we operate mostly most of our footprints in Houston, Texas.

But we also own some stuff that’s in Hampton Roads here in Jacksonville, Florida, which is where I live now. And up in Annapolis, Maryland we do mostly value add. Apartment complexes, but we also have a boutique in that we’re operating up in at the Naval Academy Alumni House. And we’ve also got a brand new, I said brand new, but it’s built in 1900.

It’s a bed and breakfast here in the St. Historic section of St. Augustine. We also own some hotel conversions as well as a ground. Development that we just got into. So we are a little over the map, but we have two or three different things that we specialize in. Oh, it might have been easier to ask you what you don’t do so first of all, thank you for your service and it’s just to make sure I understood correctly, you are still in active duty. That’s correct, yes. All right. The fact that you can do all that and still active duty, that’s very impressive. Hour of the team and my my Navy job just really is not very heavy lift.

If you, I’m willing to take away just saying that you don’t sleep much either. No not with three kids, a wife, two jobs and trying to stay somewhat physically vet just a failing ac failing activity sometimes. Okay, so w I don’t even know where to start with everything that you guys do. Let’s get started with, you mentioned you have partners, right?

And you guys have properties in Florida, Texas, you said Maryland, right? Virginia Virginia. Very first question is, do you guys self-manage or do you have third party every. Third party everywhere, man, Kent. We dabbled in starting up our own property management company. But I think most everybody that does property management, they start it when they’re small.

They try to grow it out and then they. figure out very quickly that it is just way too much hassle. So they dump it and then they come back to it again when they get really big. So we just dumped our property management company and we are just doing third party right now. Gotcha. Okay. And then what we’ve learned from talking to our previous guest is that it requires a certain scale and definitely it requires density.

If you have a thousand units where it’s 50 in every single city in across the country, then having your own property management is zero value. But if you have six out of the 700 units or in one city, then now it makes more sense to have you have that scale to have the management in that city. How many property management companies do you work with?

Is it one that handles all your assets or is it multiple? We have a few actually we have one specifically in Houston that we’re using. Then we have another one here in Jacksonville. And then for our smaller stuff like the boutique, Kens, we have very specialized operators, managers. Gotcha.

Okay. And how did you go about finding, so you are from Florida right now, right? How do you go about finding a third party property management in Houston? Networking. It’s just all about network networking, figure out who other people use and it’s a trial and error type basis as well.

We’ve already had to fire a property manager out in Houston and we’re just started up with a new one to take over the entire portfolio out there. You’re not gonna get it right the first time. If you do, you get lucky. Yeah. There, there’s some would argue that the second and third and fourth are also gonna be challenging because third party will never care as much as you do about your properties, right?

So it’s just about finding the team that does the best for you, for your property in that market, right? . What is your criteria when you look? So it’s great that you just picked a new one. So tell us a little bit about the process. How do you go about selecting a new property management?

Other than said they’re using them. So it’s in my mind, in this new company that we are using, it’s leasing that the one that we just hired, they. They have the right fit. So there’s a culture fit well. So in the Navy we have fit and fill. So you fill just the fill of the spot with just anybody that will do the job.

Then you have fit, which is when you have the right skillset, the right cultural fit. And just all the nuances that you need for that job. With leasing, when we interview them, we interviewed four or five different management companies and we all sent them through the same process so you can get an idea of how they think you, you give ’em a test, you give everybody the same standardized test.

And you see how they all answer and you just go with whoever you think has the best fit for you. So with us, we had them mystery shop three different apartment complexes that we own and don’t own. And we judged the way they came back with the answers, including the subject property, which is our 121 unit.

In around, we. It’s an area of Houston, but they came back and they had this crystal clear vision of what they wanted to do with the property. We’re gonna take the awnings, we’re gonna change out the awnings, we’re going to change the. Of the walls and we’re going to market to a very targeted audience.

Cause our units are just so big. We’re gonna market to this millennial crowd like a hipster crowd is what they said. And they just came with this Really crystal clear vision of who they wanted the tenant base to look like. And I had never seen that before. Most everybody’s Hey, you’re gonna get this for rents.

You’re gonna get this is gonna be your expenses, this is gonna be your delinquency expected for this area. And it’s just very methodical, which is what you. But at the same time, they went above and beyond what we were expecting. So we hired ’em on the spot. There was a, there’s another property management group out in Houston that we’ll be using on another couple projects.

We call it dating. So you date the property management company, and then if you like the way, if you try ’em on and you like your first couple dates, then you can marry ’em. You can just give ’em the entire portfolio and go from there. Yeah. Okay. That’s interesting. So you have a few properties in the market.

You give a few properties or one property to a few different companies just to test the waters and figure out what’s the right cultural fit and who’s performing and who’s living up to the promises. Cuz making promises, it’s easy, right? Yeah. Did you bother to Mr. Shop them? Oh, of course.

That’s absolutely part of the due diligence, pre process. Figure out what other projects they run and what they look like on the outside, what they, you talk some of the tenants see how that’s doing. You can read reviews online. That’s a great thing about the online process is it’s.

Very open kimo for the most part. You can talk to the owners and see how they’re doing with all the acc, all the software that we have as analyzers. You can see who owns the properties, who’s managing the properties, and then you can speak above and below the property manager to see how successful they’re doing.

Yeah. Okay. That’s great. So that’s, it’s a whole process. It’s a whole due diligence process basically. Got it. So how do you work with them on once they take over a property? How do you work with your third party? Do you meet once a week? Once a quarter, once a month. Do you talk to the actual onsite manager or do you talk to.

Tell us a little bit about how your organization is built to interact with those managers. Sure. Our asset management comp, our wing of the Fairwinds is set up so that we have weekly meetings with the both regional and onsite managers. . We can up or decre, we can increase or decrease that depending on how the property’s performing.

If it’s performing very well, we’ve already stabilized it, then we can go down to a once every two weeks or maybe even once a month most likely just once every two weeks. But you really do have to stay on top of ’em to make sure that your vision is aligned with what they’re. And also when we go out to our properties physically probably once a quarter.

It’s it’s how it’s been shaking out, and then we’ll physically meet up with everybody that’s involved with the project too. Even the even not just the onsite manager, but the people that, you know your vendors your housekeeping, everybody that you employ is somebody you want to talk to physically.

. Okay. And then do you have how does that phone call looks like? Do you go over Matrix? Is it a report? That specific report? We’re looking for tips and tricks, right? What did you find that is working? What do you find that is not working? Help a new operator out. If they get started working with a party, a third party property management.

It. I hate to say it, but it depends. It really does. It depends on your KPIs. Just you want, you wanna identify the specific KPIs that are very project specific. Cause some projects you go in, they’re value ed cause you gotta do a whole construction management. Plan or they just need delinquency brought up or reduced.

So it depends on the project. So you identify your kpi, p i specific to the project, you identify your macro and micro goals. Micro goals obviously support the macro goals, so they build into that. Then you attack that system systemically with your property management and you design your meeting.

To support those KPI achievements. I know that’s very generalized and it’s hard to break it down further than that cause it really is all just dependent on your relationship. Give us example. Okay, so with Heritage, right? So we bought that Your heritage is our 121 unit that we just replaced with leasing.

So with that, we’re having some troubles with our. Delinquency, our economic vacancy right now, because the company that we just fired, they were having a very difficult time with tenant lead conversion. They were getting a lot of people to come in, but nobody was signing leases. So our vacancy slipped and we had to do a lot of concessions to try to comment at that.

And so now our economic vacancy is below what we really want it to be. , So now we set up our meetings such that we always talk about what our leads are, our lead magnets, what our conversion rate is, who’s doing it. Then we talk about. Specifically like evictions because we’re trying to get over that economic vacancy home.

Yeah. So we talk about who’s not paying, who’s paying who’s, I don’t know who’s behind. All those KPIs that are specific for what’s going on with heritage at the moment, we’re having some chiller problems. Would never recommend buying chillers. I don’t think I ever really get. Oh, wow. So I was about to say you have one of those.

Yeah. We’re we went in with with Gumption. , I’ll say. We went in with gumption and we had it we had it inspected, but it was and it passed the inspection on acquisition, but it quickly just broke down after that, so never again. Yeah, so just for the audience, in case they don’t know what a chiller is, cuz not everybody lives in an area where there is a chiller.

A chiller is basically when the entire property is being cooled or heated by one big machine that cools or heats water. And that water runs in pipe underground into the building through every unit and back into the machine circulating that water and. Those things are a ancient, and B, very big, very complicated, very expensive machines that finding people or companies that know how to fix them is very challenging.

And feel free to correct me if I say anything wrong here, but it’s very challenging to find someone that knows how to fix. And then if you have to replace it, God forbid it’s a six figure job. So that’s why properties with chillers are properties that are very high on expenses.

In the N O I ratios. And there are ways around it and I’ll share one with you in a second. But the other thing about the chiller system is because it is responsible for heating and cooling, there’s only one way the entire property can. So we either heat the entire property or we cool the entire property.

So if you are on heating mode and you have a hot day in the middle of, let’s say February, which is not rare in Texas. Then everybody, it sucks because everybody will complain because the system is on heat. But if you’ll switch it to cool, then again, welcome to Texas. The next day can be 26 degrees, and now your entire apartment community is on.

Cool. Instead of on heat. So it’s a very challenging situation. The machine also consumes a ton of energy and water. And this is where the trick I said, I’m gonna share with you, I had a one of the best operators we’ve interviewed on the show, Andrew Kushman, I believe is one of the first five, six episodes.

They had a chiller system in one of their properties and they went out and they hired a company and they dug a will on the property. And they used water to run the chill. It cost them about 50 k to dug, to dig the well, but the reduction in utility costs, water consumption because they don’t use city water anymore.

For that, that made it like 10 times worth it in the n no y and the CapEx and the increase of property value. So definitely something to look into if you have room or if you have the ability on your property. to dig it then that might save you a ton of money. It makes a lot of sense. It makes a lot of sense.

Yeah. But is it like a lot of things that makes a lot of sense. Sometimes you go huh, I didn’t think that’s even a possibility. Downtown Houston. Yeah. Welcome to Texas. Yeah, there’s a the, oh goodness. The water line. The, yeah. Water table’s pretty high there. Yep. Be outside the room possibly.

It makes a lot of sense. Yep. Okay, so that’s how you interact. You ask for KPIs, you push these things. You mentioned earlier, marketing. Do you have them come up with the plan and execute everything or do you have anything in-house that kind of help the properties out with any of those activities?

Everything that is done through the property management company for us. We did have our own marketing team, so if it came down to it, we could help out a little bit, but that is their bread and butter. Marketing core tenants is a big reason why they get hired in the first place. How well they manage a website, what like their apartments.com listing and their Zillow and all the other stuff that they have to use how they’re doing it.

That’s huge. Yeah. Absolutely. And one of the things that we’ve learned as operators ourselves is. Third party property management in today’s world are a little bit behind on technology, and they’re not very techy, not very sophisticated. So we found that when we brought in a team of VAs to help out with some of these things, we saw a big boost in lead generation and sometimes lead filtering.

We’ve used VAs to do follow up calls like on work orders. So you take a four or $5 an hour VA to make that follow up phone call. That saves time from your manager to do that. Right now it doesn’t completely takes it off a table cuz you still want the manager to be involved with it. But it allows you to take some of the load off the team onsite at a relatively low cost.

Sure. And that’s what I’m thinking about me is I’m not techy at all. You can ask any one of my teammates, any one of the board members that does Jonathan know anything about software at all? No. . So that’s why we have teams. Gotcha. That’s awesome. You mentioned that you guys focus on buying value add kind of stuff.

Other than the very standard let’s increase rent and let’s apply rubs right? Give us two, three ideas of increasing value. on the income side, cuz we’ll talk about the expense in a second, but increasing your income, creative stuff that you guys have been doing and that you found success. . There are a lot of things that you can do.

You can include short-term rentals. Short-term rentals are banks look at ’em weirdly. But at the same time, you usually get more income through short-term rentals. But you can do three months, four months, like. Traveling, nurses, things like that’ll increase how much you’re able to get for your market rent.

You can do washer dryer, bill back programs where you just rent them out to the tenants. You can do smart locks. We like to do low flow toilets, low flow things on the shower heads, , that’ll decrease your utilities. We usually like to put in new windows, which will decrease your electricity a little bit.

Plus there’s green loans out there that you can get specifically for that. . those are good ways to decrease what you can, what you’re expending. Then the amenities packages if you’ve got good amenities, you’re gonna attract higher class tenants who will pay at least in theory, you still gotta stay on ’em, so you’re able to get into a higher tenant class.

And then you can charge a little bit more if you are out performing your competitors, you can charge a little bit more. That’s wonderful. How does that look or your portfolio look like in today’s work? We’re recording this in mid-February of 2023. There is a lot of going, a lot of things going on in the market.

The economy is not so great. Inflation is pushing, the fed is increasing. . So a lot of people are hesitant. I know a lot of p people that told me we’re sitting on the sideline waiting to see what happens. We I have clients on the brokerage side that tell me, I still wanna buy. I’m still buying.

What do you guys feel on your end? Are you still in buying mode? Are you changing anything in the way you are operating the properties because of all. You have to but we’re always in bi mode. But you have to change up the, you have to, or else you’re gonna die. A adapt or die.

So what we are doing is we, so a year and a half ago you could buy off proforma. You can’t do that anymore. We only offer off of. in place, t twelves. But we’re also because the sellers haven’t caught up with what the economy demands right now. We. , we started exploring, create creative financing.

It’s hard to get done. But we have a couple sellers that are, we’re exploring OWS with us right now. Master lease options Okay. Allows you to meet in the middle when you don’t have to put as much up upfront and your interest rates low cause you’re not, it’s not driven by any kind of lending standards.

So you can do whatever They get their price or close to it, and they also cash flow a little bit. And then you’re getting a good asset for higher leverage. So that’s a big way that we have changed up the way we buy our Because of inflation, we have to assume that our expenses are gonna rise up faster than we were a year and a half ago.

So that’s how a big underwriting change we’ve done. It, so what do you write for, I’m sorry? What do you write? What do you write for inflation these days? Usually in mid fours per year. We were at like three a year and a half ago. Could look at going a little higher though. But that’s what we’re doing right now.

Okay. And then what about the actual, the existing properties? You already have any changes in the operations there? Any conversation with the third party about changing certain things or watching for payroll or watching for materials or, cuz everything, all the costs went up. Payroll. I dunno.

Yeah, no, you’re right. Payroll’s gone up a lot. It’s tough to, it’s tough to let people go and keep your payroll down and it sacrifices the way that the efficiency of your r and m and. Other items on your budget. But it’s project dependent. We’ve had, we let go one person to keep our payroll down at Heritage and then we had to look at, you gotta look at every single thing when, let me back up.

When the r and m, when. cost of materials are what they are, and they’re just rising and rising, then that’s something that you can somewhat control. You can control how aggressive you are into your r and m. Some things you can’t control, like insurance is going way up. Like in Houston, they just eclipsed a thousand dollars a door.

On average for your insurance. And that’s not something that you can really go out and affect. Cause everybody’s charging you that same rate. Taxes are the same rate. You can sue the city and the government, the local government to get your valuation redone. But it’s not something that you can go out and just say, oh, we’re gonna, we’re gonna not hire as many people to get our taxes down.

we’re fighting every year. We’re fighting the taxes. But some years you get better discounts. Some years you don’t. The insurance. Absolutely. We just got hit with like almost 30% increase on one of our properties. . And it’s just there’s nothing you can do about it.

Yeah. And that goes straight against your No. Why? And it’s not like he can turn around and raise rent by 30% just because your insurance went up 30%. Sorry guys. I dunno what to tell you. It rolls down. . So what do you see rent, growth going on in the next year or two? I think that rent’s gonna continue to go up.

A lot of people will think it’ll stall out but unemployment super low. The fed’s actually trying to get their unemployment numbers up. So they’re trying to get people without jobs. But with unemployment the way it is and people can work from home, I think that it’ll continue to.

Rise, not at the rate of inflation, but I think that we’ll continue to see rises. I don’t think we’ll see as much of a rise jumps as we did during the Covid years. But I do think that it’ll continue to rise at more of a historic trend. Okay. Yeah. In terms of, again, back to operations cuz that’s what our audience is looking for.

Do you do anything special for the residents on the properties, like events or anything else? Or a different way to ask that question is what do you do to increase retention? Because as we’re going into some challenging waters, retention is gonna be super critical for every operator out there to just keep the turnover to a.

Yeah, at least turnovers. I’ll get ya. Yeah, so we’ve done a few things. We’ve done we’ve seen, done like touch of trucks, have all the, like fire trucks and police trucks come in. You can do parties for the community. It is a community that you’ve got under your belt. It’s families.

Families are there. So you do like the little get togethers, you can give people Christmas gifts. You can give people like little concessions like that to let them know that you’re thinking about ’em during good times. Not say good times. I mean Christmas or New Year’s or something like that.

We like to put like little like decorations out on the on the on the apartment complexes so that people will feel at home when they come back to their homes. It’s a home. It’s not just an apartment, not just a unit. It’s a home. Yeah. What is that? What we want them to feel like, right?

Yeah. Absolutely. Absolutely. Okay how about some horror stories or funny stories or anything like that? Because what, there’s a lot of podcasts out there that tell everybody the nice stuff and the cool stuff and the rainbows lollipop stuff. And we believe in no sugar coating and no fluff, right?

So everybody has horror stories or a lesson. They learned their hard way, unfortunately. Share some of those with us. We already talked about one chiller systems. Yeah. It’s a hard lesson to learn. Yeah. That one sucks. Let’s see. We had, we did have a tenant die on property like two days after we took it over.

That’s always tough. How do you deal with that when a tenant dies? Cause he didn’t die by there wasn’t a shooting or anything like that. We’ve actually only had one shooting on, on our properties. So I’m pretty thankful about that. Having one or having only one. Only one. . It’s so tragic.

We were taking over a property a few months ago and they had six shootings during the time span that we were under contract and we ultimately had to let go. Cause I mean we contacted these jokers about the shootings to what was going on and they were too busy to take our phone call cause they were in Cabo just partying.

They’re a big operator too. But , I the shootings and the tenant safety the community safety is a big part for me. It it, like I said, this is a community. This is these people’s homes. They have to feel safe. And so that’s I’ll say that they, that story, even though it wasn’t.

A, something that we learned from our own mistake. We watched somebody else make that mistake. And those are the best kinds of lessons to learn is when you learn from other people’s mistakes. Yeah. But that really drove home that, that deal made us truly define into our mantra and our company philosophies that we’ve published and.

About having a tenant safety mindset, making sure that they’re there, it’s their homes and their communities, and that their families are safe. Yep. Clean and safe. That’s what the very first two things that everybody’s looking for when they’re looking for a home. It’s I want to, I want a safe, clean environment.

Yeah. You gotta treat everybody with dignity and respect, and your business plan will follow g. Yeah. Awesome. So it, they try to wrap these things up cuz I wanna be conscious of your time. If you could go back in time and give young Jonathan an advice and let’s say you can tell young Jonathan the 2009 was the bottom by everything you can’t.

Other than that, what would you tell your younger. Bypass, residential real estate and just go straight into commercial . Just go straight into it. Yep. That’s pretty much my answer. When I was asked that question, it’s kinda yeah, just don’t waste your time. Don’t waste your time on the singles.

Just go straight up to the big leagues. Yep. It’s possible. It’s doable and it’s more real than I ever thought It. Yeah. And I have a, so we’re brokers as well, right? We help buy and sell any commercial real estate, multifamily, single tenant, triple nets and so on. And I help investors like our slogan is commercial real estate is more headed, more zeros, less headaches.

Yeah that’s right. That’s just what it’s it’s more zeros, less headaches. Awesome. Jonathan, if our audience wants to reach out, ask some more questions, maybe invest in one of your deals how can they find you? So I’m jonathan@fwcinvestments.com and that’s also our website.

You can see everything about what we have going on offerings that we have. We don’t have many 5 0 6 speeds. Most everything we do is 5 0 6 Cs at the moment. And so you can get into our investor portal. Portal that way you can reach out to me or any of my partners and we’ll be happy to get on the phone with you, talk, just talk real estate.

It’s a people, it’s a people business and I just love talking to people. Yep. It’s not hard to trigger us to talk about real estate, right? All day long. Awesome. So we’ll make sure we put all those links in the show notes for everybody and I really appreciate it come, you coming on the show.

Thank you for having me. I hope you have a great day and a w great. Awesome. Thank you. And for you, the audience thank you for listening and please give us a review, one star, five stars, whatever you feel we deserve. It’s okay. Just put it on wherever you consume your podcast, whether it is iTunes, teachers SoundCloud, Amazon, and so on.

And until the next time, thank you so much for joining us.

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