Episode 132: From Value-Add Multifamily to Hotel Conversions and New Construction with James Kandasamy - Apartments Operators Podcast

Episode 132: From Value-Add Multifamily to Hotel Conversions and New Construction with James Kandasamy – Apartments Operators Podcast

James Kandasamy Joins host Joseph Gozlan on the Apartments Operators Podcast to share his multifamily Journey. James has syndicated, purchased and sold thousands of units, self managing from day one(!). James shares the benefits and challenges that comes with self-managing thousands of units and why he chose to do a hotel conversion (spoiler: he made a LOT more money than conventional multifamily value-add) and why he now does a ground up new construction of a large-scale multifamily community. 

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Show Transcript

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 Operators podcast. I’m your host, Joseph Golan, and today I have a very special guest. I have Jason Canam. James, welcome to the show. Happy to be here.

Joseph, nice to be on your show. Finally, I think we tried to make this show a few times and finally we are able to finally doing it. Yeah, I’m glad we’ve been friends for a while. So it’s really an honor to have you on the show. Let’s just like we do in every show, let’s take the first minute or two to let you have the stage, introduce yourself, tell our audience a little bit about your background, how you got to multi-family, how, what did you do in the multi-family world and where you are today.

Sure. I started on the single family space. I’m basically used to be in a corporate world. I’m an electrical engineer, an mba, and all the. All the stuff there. And then after that I did C I M as well. But C M is something I did recently, not because of C I M, I’m in multi-family, but started doing single family flips in 2013 and I think 2015 is when I started buying my first apartment complex 40 units.

And we used to own like almost 3000 something units and then we sold half of it last year. And we also started doing a lot of landow and now we have a grownup construction as well on 300 plus units that already moved it. I’m gonna be pouring concrete right now and we are also doing a quite number of land entitlement right now for multifamily and P T R.

Right? So yeah, that’s very high level on my introduction. We have, asset under management doesn’t really matter a lot for me, but I know a lot of people look at that and get hype worried. We have almost what a 500 million in assets under management. Yeah that’s the high level introduction.

Awesome. That’s wonderful. And then I know you, so I know how impressive your background is and how you’ve done great deals for your investors. I’m gonna ask questions in this podcast that I know the answer for no problem. I’m still gonna ask them. So do you guys do third party or do you self-manage?

So we started self-management start right from day one. So we didn’t do third party so that is unusual, right? So we talk to a lot of operators and a lot of them, when they get to a certain scale, they go to the third party management because they realize that’s the best way to operate, right?

The most control the, you can operate surgically, you can make the decisions fast and be reactive enough to what needs to be reactive. How did you get to I’ve never managed anything like this. I’m still gonna go in and manage. How big ago was your first project? First one was 45 units. So how do you jump into, say, I’m gonna manage 45 units apartment complex?

Yeah it’s a good good point because not only 45 units a per, which is the first apartment, it was also in San Antonio. We are from Austin my wife and I from Austin. So it’s a battle between the husband and wife. And I was telling, let’s do third party property management, , and my wife was selling.

No. We are gonna manage it ourself, and I, when I look at the operations statement of the current property management, of that 45 units, this is one of the largest, in fact, they probably are the largest property management company in San Antonio, which of my understanding is third parties suppose super efficient, very less inefficiency.

And they should be doing a good job. But when I look at the finance statement, I say, wow, this is so much of wastage on the financial statement. And when I visited the manager, 45 minutes, they had a part-time manager. They did not know much about it. So we realized that third party management doesn’t mean they are better than what you think you can get from you self-managing.

You. Self-managing can be a lot of work. And I really was thinking maybe we should just do third party. But of course my wife was the wiser one, . She said have to do it ourself. Yeah. And she convinced me to do ourself. So I’m, I can’t brag about, me being so brainy about doing things on my own.

But we made the decision because it was first deal, it was a value add, and we think that, It’s gonna be a well oiled machine or very efficient operation if we run it because we can manage it ourself in terms of the contractors, in terms of rehab process, in terms of the, any leasing activities. So how bumpy was it at the beginning, right?

Because bumpy, bumpy, it’s absolutely it’s a monumental test to take on when you don’t have that experience and you don’t have the contact and so on. Tell us a little bit about the first few months, the first year of setting up your own management company. When you’d never done something like that before.

Yeah, it’s, it was hard. But we, one thing we had before we started managing that 45 units was we had that single family rentals. We had 13 rentals. So we were very well-versed with the leases. We were very well-versed with the tenant screening. We were very well-versed with the how to remodel the house.

But going into a Palma was completely different, right? So setting up was not that difficult because we already have the LLCs. We already know how to screen tenant hiring people. I have I used to be a manager and a large company and, all that is transferrable skill, right?

How to hire people. But also you’re hiring somebody at that level, right? As a manager it was a bit difficult. So the lucky part for us is the first manager we hired lives nearby the property and. And she stayed for two years, , right? So a lot of times it’s very hard to find people who stay in that position, so she stayed.

So we were very lucky with that. And and the difficult part was more on the remodeling because now we set up a budget to remodel apartments. But how do you get the right contractors? Because it’s hard to find contractors who you know is gonna work, right? Because this. Is a, it is a new city, new apartment, new part of town.

So we tried a few methods, right? One of the method that I can pass on to, your audience here is we start looking for contractors in Craig’s Lease, right? . And we took three contractors from Craigslist cause they’re the cheaper one or they are the one that doesn’t have the license.

Of course people say, everybody need to be licensed and bonded, but it doesn’t work that way all the time, right? Especially when you want to do at a very cost efficient part, right? . So we took three contractors and we gave them three different units and then we get them to do work, right?

And after that, after one month, we fired the other two and gave a lot of work for that one guy who really. . Even that after two, three months, they also left. Then we keep on hiring contractors. So contractors took us some time to really get the right contractors. That was really hard because, know, you’re losing money all the time , whenever they leave.

Cause they leave the job halfway too. Apart from hiring that one manager and contractor, the lease up and all that it was not that difficult. I Setting up the property management software, there’s a lot of easy to use property management software. We use some for our single family, and we moved that to multi-family and software we use like Rasman, which is very it’s like a Facebook, and some, as you understand leases and how occupancy works, leases expiring. How does, you know then it becomes super easy. Yeah. And you mentioned contractors that’s a challenge. , everybody in the industry has, right? It’s even when you find a good one, they don’t last or they move on to something else, or they increase their prices to the point where they basically price themselves out of the job.

I joke around but it’s of based on truth. In contractors world, you can get good. You can get reliable and I’m sorry. You can get reliable. You can get cheap and you can get fast, but you can only pick two outta three. Two outta three. Exactly. Exactly. Yeah. And a lot of times a lot of people like to get GCs.

right? And we have learned this no, don’t do higher GC at that level because from our single family experience, cause we used to do a lot of single family rental flips, and we have tried with the GC and without GCs and we realized that with the GCs become the worst because now the GCs holding your money and they’re not really good project managers, they’re not good money managers and they mess up the complete the whole deal.

So we said, no more GCs is all our subs. We are gonna be the GC . Yeah, even though it’s harder, but it’s a lot more cheaper and more efficient. So we did that in the, when we bought our first apartment complex, we said, no GCs, we are gonna just look for subs. And subs also is very there’s few things, right?

One is, there’s big subs and there’s some inter interrelated subs, right? So the big subs are the roof, the driveways, right? The exterior painting. So they’re the big stops, right? You can get like one guy. and they are really not related to any other subs. So they, you pay them the money and they do the job and they can go home.

, they don’t fight with another subs. But there’s another sub or contractor, what do I call, as a interrelated subs, which are the painters, the flooring guys, and the kitchen installers. The guys who work each other though, they have to talk among each other. Yeah. So maybe on that part, you can get us one guy to, to do everything, maybe like a sub GC kind of thing.

But that’s the more difficult part because they need to talk among each other. They have to coordinate very well. So we did that, right? We hire one guy who has, who can do everything inside and, multiple subs for outside big work. So that will be, that, that can really work in apartment business at a very efficient cost.

And Yeah. And one of the things that people that are looking into setting up their own property management company, one of the things that kind of scares them the most is all the bookkeeping, the accounting, the bank reconciliation. Because like I said people come from different worlds, still have experience with management, hiring, dealing with contractors, but not a lot of them have that experience dealing with the backend side of things.

And I know you guys did something unique in, in that space. So how did you handle that? Yeah, in the beginning we we, oh, so yeah that’s a really good point. accounting is really a mess. , we tried multiple routes. So the first route we tried, we hired A C P A, right? People who have who, take by hourly and then we send them all the bills and we get them to enter.

And that was so expensive. Cuz every time a C P A comes, it takes three months for them to really set up the whole system. . And and we are like fast runners. We are like, I guess I don’t know what’s happening. And at the end of the day we file three CPAs and it’s already nine months by the time we get all our books.

And every time a new C p A comes in they take like another two or three months to set up, right? So we are like so tired, right? But at end of the day, we hired we then we tried hiring a third party company just to do accounting. That also really didn’t work out very well.

We hired third party and we didn’t work out very well. And finally, once we have certain number of units, like thousand units, we hired our own accounting person. . So now we have our two accounting person doing all our properties. But we went through a multiple cycle of different people to do that books.

But you’re right, books is really hard to get it right in the beginning. Yeah. And a lot of it is because there is a disconnect between the people in the field and the people in the back office. . So the person in the back office can see an expense written, some one way and then another person entered an invoice and certain another way.

And somehow that person in the back office is supposed to know that it’s the same kind of experience and they’re both supposed to go to the same GL account. . And then sometimes picking the GL account is definitely an interesting roulette. Correct. We’ve had property management companies that we work with like third party and they would you would randomly find the same expense every month, different accounts randomly.

I swear to God. There’s no reason or rhymes around that. So that’s been definitely a challenge even with professional third party management. Even they have the same problem. Yeah. Even for us, even we have our own accounting team, we have to train them. Because the thing is you have property managers entering the invoice, right?

And then accounting team, they enter some invoices but not all of it, right? So accounting team is much easier to control, but the property managers with hard to control, right? Cause they will enter something and sometimes they don’t understand within capital and expense one-time expense.

They do not know, right? So we have to do a lot of training and that was, yeah, we have to keep on auditing our books, right? As I said in the beginning, you can do that. But as we grow bigger is just become hard. Even now we still find some mis categorization even in our own deals. So that’s something that is a challenge.

It’s not easily solvable. . Yeah. One of the things that we leveraged was VAs. . So instead of having the train to train, cuz we, in the offices, we have a lot of attrition, right? Ellucian agents go. Come and go. Managers come and go. Assistants come and go. So we found that it’ll be easier and more cost effective to tell them, you know what?

You get an invoice, just scan it and send it to this email address. Don’t worry about putting it in the system. And then we train the VA to be on the receiving end of that email address. Okay. And we trained the VA of how to categorize invoices. So we trained one person. That person’s been with us for a while now, and we don’t have to worry about a lot of these things now.

Is she perfect? No, nobody is. And sometimes it goes into the wrong place, but for the most part, it did save us a lot of of confusions. , it also takes a lot of the load, the admin load off the office people, which in turns let them do more leasing, more management, more interactions with the residents and that helps the whole operations of the property.

So we took that piece out of their hands and told ’em, just scan it and send it to these. Yeah. You’ll be surprised on how much va, there’s not much of attrition. They don’t live easily. And they’re more consistent. Yeah. And again we’ve found multiple interesting ways to leverage VAs in our in our management world.

Are you guys using any VAs? Yeah, we do. We do we do VAs mainly for KPIs for property management. . So the VAs usually they, they sit in Philippines or what? So they will basically look at our property management software. So they track our delinquency, our economic occupancy our make ready, our idling units and our, so we track a lot of KPIs and they sh they will visualize it for us and send it back to us. So that’s a really good value add in terms of the VAs, right? Yeah, absolutely. We had our VAs sent ’em a lot. We had our VA send a daily report basically with those KPIs we did the same thing. We’ve identified those things that we want to track, and they would send daily emails with the property manager, the supervisor and us with how those are moving, right?

So not only we can get to see a picture of you have xun vacant right now. It also we were also able to see the changes, right? So we would tell them, okay, show us the difference from today to yesterday or from this month to last month, and so on. So it really helps you kinda get a quick picture in your email every day.

So you can raise the flag and say, wait, that’s not moving in the right direction. Let’s go dig into. Yeah, absolutely. Yeah. All that KPIs is key, right? Because as asset manager operators, you have to monitor this and sometimes the property managers just doesn’t have time. They have to work on the onsite staffing at the same time.

Onsite leasing, they have a lot of other things. Sometimes they’re not able to visualize all these and we visualizing it and giving them feedback will be very beneficial in terms of improving. . Awesome. Let’s switch over and talk about value add, right? I know you’ve done a lot of turnarounds value add in your deals.

Everybody knows about rubs and everybody knows about coming in and raising rents. So other, these two, let’s talk about a few other ways that you guys coming to a property and increase income. And then we will turn the conversation into how do you decrease expenses, right? Because both Oh, sure. Both sides of the equation helps.

The n o i in the same way, every dollar I increase in income or dollar I decrease in expenses is an equal dollar to the N O I. Let’s start with the income and then we’ll switch to the expense in a second. Sure, sure. So I usually, when I, even when I underwrite my deals, I use something called a bum methodology, bu the rent kind of thing, right?

So rent is the ultimate thing. If a sponsor operator start talking about adding wash and dryer, adding parking and all that means that’s the bottom of the ball panel deal, right? . Yeah, so bump is basically, BU stands for building that means what is the rent upside without you doing any remodeling, right?

What is the base rent, right? That means outta 12 month leases, there could be some people who has not caught up to the market rent, right? Or they will never cut up, never caught up, or it may take a few years to go, right? So when you buy, we are assuming that we can get them, get everybody else to the market rent or to the rent that is possible in that property.

Yeah. So that is bu, right? The ma MP is basically, market ramp mark market rent, which is basically based on a comp. , right? If your comp is able to get higher end just because they need remodeling. So that’s another upside that we have. So we have two level of upside. So when we buy our deals, we don’t even touch the B U M P, we just make sure that we just do good management.

And you’ll be surprised on just by good management, you probably can just jump up $50 without doing anything. , right? So that’s our first strategy. The second strategy is now, okay, let’s get everybody to caught up to the average rent of the property, right? . So that’s the bu part of it. And then after that, we start looking at, this will be like every three months we start having some kind of tiered program, cuz we do not wanna over rehab any property.

Because any rehab money that you have is very valuable to be sitting in the bank, right? Than putting in You’re not getting the NOI that you want a project, you get your NOI without doing this, you should do that, right? It’s completely different from a lot of people who they said, first day, I wanna go and start remodeling.

Let’s start remodeling this, let’s start remodeling that, right? We try not to do that. We want to take first management upside. Second is the just get everybody caught up to the rent. And third is let’s start remodeling some units. See how much bump you’re getting? , because you do not wanna be remodeling five to maybe now it’s $10,000 unit and you get a $50 rent, right?

It’s a waste, right? Because you may not need to do that. And your performer, you probably are only have hundred units, a hundred dollars per unit increase. So the a hundred dollars ran increase, you can just get by good management and just getting everybody caught up and above that can be your future upside, right?

That’s your icing on the cake, right? . So we really wanna make sure we do the first two levels first before we do the remodeling. Otherwise I just keep the money in the bank account. But on the income side, yeah, of course remodeling with the nicer units will be much better. Of course, the kitchen is always the highest priority.

Kitchen and bathrooms. As long as you do that well, it’s selling point. Yeah. So important. But also how clean is your rehab is also important. Every contractor will do some work, but sometimes their work is not very clean. So when a prospect walk in, they can see, the door is a bit crooked the line is not straight.

And so all that matters. So you are really Yeah. As an operator, you really have to train your operator to do a good job. Yeah. Cuz if they see a half-assed renovation, they’ll say they manage everything half. . Yeah, I know they just, you just hard to lease up. Hard to really do a good lease up when the, during the job is not very well.

So remodeling, of course, we will do that to increase rent. That’ll be the primary income. On top of other things. We have a lot of Michelins income, right? But before I go to visuals, you wanna make sure you have the highest rubs percentage that you can get, right? And Texas is very tricky because, POC has different methodology of allocation of rubs, right?

They have square footage. By square footage plus occupant. Sometimes it’s just by occupants, sometimes it’s by square footage and there’s bedroom. Yeah. Which is called a ratio utility billing. Which is the, a ratio one, one person means it’s 1.6 and then 2% is, I think, sorry, 2% is 1.6. That’s a certain ratio.

So selecting which POC can also maximize your ups. So we always talk about POC number two, which is basically racial utility billing. And that’s usually the highest chances of you getting the highest collection, re collection back of your ups. . So that’s one tape. On the Michelin income, we implement a lot of other things other than petran pet.

We do a renters liability insurance, which we charge renters for, common area insurance. So we charge them like $11, but they pay us mean we charge ’em $11, we pay $6, we get $5 upside. Mm-hmm. .. on it. We have assigned parking, which is one of the cheapest way to, without doing any CapEx, right?

Just assign the parking to certain units. , $10 or $12 per unit. What else we do special? Other than car pods, all that’s pretty common, right? So pass control, we can recover the pass. That’s all not governed by poc, so you can have a reasonable one, right?

Water and sewer is governed by poc. . So you have a certain methodology you have to use, but pass control trash, you really don’t have to follow. So you can charge $10 or $11 on a trash, not knowing how much trash is being collected. How much is the expense? So you can go slightly above a hundred percent on that collection.

Not to be unreasonable, but that are some things that you can go a bit more than what you’re charging. So do you guys still do Robs because we’ve seen a trend in the industry of people moving. Back away from rubs because of the complexity. And switching into just fixed fee utilities. know we, yeah, we started doing that as well.

Yeah. I’m not fixed fee utilities. I mean cuz it’s, the problem is with high inflation, people wanna budget the expense, right? So they don’t wanna have a different number coming in every month. So we have one property, which we converted from hotel to multi-family, which we did all bills paid.

And people just living, people love all bills paid. Apart from the units are really nice because what are the other things? We live all bills paid because I pay X and I’m done. Yeah. And they’re happy with that. And fix the utilities gives them an opportunity to get. , right?

So that’s what we did. We took the average of what we’ve seen people pay on our property. And then we built matrix. So one bedroom, two bedroom, and how many people, you’re gonna have one person, two people, or more than two people. Okay? And then we did this little matrix and each box in the matrix has a dollar amount.

So when we lease, we tell them instead of allocating, this is the fixed fee for the utilities, here’s your base rent, here’s your utility fee, how many people are gonna live in the apartment? That’s what’s gonna be your fee. And got it. And it allows us to basically get to a few things. One they get the stability, they get the predictability of their bills, which they love and help us leasing.

It helps us eliminate the need for a third party company. Cuz we outsourced all the utility billing side of things because, you guys have the capacity to deal with all the regulation and the municipality headache. , we just didn’t want to deal with it. We, we saw that as a liability, so we didn’t want to deal with it.

So we actually had to pay a third party company to do all that work for us. And then at the end of the day you control the utility fee. So now it’s no longer fallen into the rubs and the regulations and the rules. You can charge whatever you feel is right and whatever the market will bear.

And that’s up to you. So we thought that trend seemed reasonable to us and we implemented it and I think next month will be our last month with the third party utility company because we converted everybody over. . Yeah. No, I think that’s a really good methodology to do that because if putting myself in a resident shoe, I would love a fixed pay , just pay this and be done, right?

Yep. And just avoid all kind of questions. Why is this minus is high? Did you all have a leak? Did you charge to me? And all kind of things. Yep. And yeah, I think that will be a very attractive amenity, I would say for a lot of people. Yeah. And we are seeing that in one, one apartment that we have that which is all bills paid and people just love it.

Yeah. Okay, great. Where are you guys in your property management practice today? How does that look like? How many people? You said you still run a lot of units. Yes. So we have 50 people working for us. , six assets. And we have some, a few corporate people, maybe eight to nine corporate people.

But the corporate is also, we are also doing ground up development and all that, right? , so plus accounting. So I would say maybe five in corporate. And then around 40 to 50 people on the property management side. And you have regional supervisors? Yes, I have regional manager reporting to us.

And who’s working with the regional? We, Shante and I, my wife and I are working with the regional, so we, we don’t have a VP of operation in between maybe it’s son to get one. . We tried, we had a few, we had two or three VP of operations but maybe in the future we’ll hire one.

But we tried and they don’t live up to the. Not to our standard , we are operators. If you see we, when we started, we know the every single detail of the business. Yeah. So that’s too dangerous for any VP of operation. So we will ask a lot of questions on why this, because we know how it, the whole thing works.

, like if a property doesn’t lease up on seven one, we can tell you why. Okay. Did you go look at the lease? Lease leads C rm Right? How many people did you apply? So we’ll ask a lot of questions and it’s just a very high expectation from us to that VP of operation. So whoever comes in need to be really good or better than us, which we really want them to be because we didn’t want to be doing this ourself because we are also owners of the asset.

It’s just too much of our time. . But, we had to find the right people. Yeah. And that’s one of the challenge that everybody’s having without party management is. when you get to the supervisors and the regionals and so on, all the way up to the VPs, 95 times out of a hundred, it’s people that started from the field.

They started as a leasing agent, then a manager, then a supervisor, then regional, and then they become a vp. But they don’t have necessarily the skillset or the mindset of an owner and especially not an owner operator. I’ve had the exact same experience as being able to be in the details and knowing everything and then asking my VP questions and they don’t have the answers.

And that’s because when they grow in the industry, they as a regional, in a large property management company, usually manage thousands of units. . So their ability and capacity to be in the details is not there. . So the, so that’s how they grow. So the VP doesn’t have the details because in a, again, third party property management, he has to be on top of five, six, 7,000 units plus and there’s no way you’ll be in the details in a corporate world when they dump so many units on you.

But I like the way you said it, and they need to be as good or better than us, and honestly, it, it’s gonna be very challenging to fill those shoes. Yes. Correct. And again, I’m pretty sure you’re not paying for your grade of person in the VP position. And that’s what a lot of us forget, is we will go and we’ll buy a four or 5 million property, a 10 million property, then we hand over the keys to a 50, $60,000 a year person.

Yeah, that’s true. And then we expect them to operate at a standard that is much higher than the pay grade. Yeah. So it’s true. That’s true. It’s just hard to find, as an entrepreneur, the A to Z of the business, and you are really, your heart and soul is in, in it, right?

Yeah. Because you wanna make sure he’s really successful. Whereas as an employee, they may not need to have that heart and soul, right? They’re just another person working. Same thing in any job, or, sorry, you’ll find employees who really, put their heart and soul into the job and their employees who are just gonna do minimal stuff just to get by, right?

, they’ll work a bit, but it’s not their, Yeah. So it’s hard to make them your baby even when they’re employee. So yeah, I don’t know what’s the answer to that, but , the answer is to do what? To keep doing what you’re doing and that’s, but the problem is we can’t grow.

But that’s how you bring value to your investors and that’s how you grow. Yeah. Yeah. I’ve seen like a lot of my, colleagues who are in the syndication, they start buying thousands. They keep on buying every month. So how are you guys doing it? They’re giving you third party, right?

You lose a lot of efficiency. You lose at least 10 to 15% efficiency, in No, I too, when you do that, because, third party is third party and you can do all that in a hard market in the past 10 years, right? Past 10 years, 2010 to 2020, 20 22, 20 22 things were hard, right?

You can just keep on buying because the market itself is carrying you up. You don’t have to really care about. what the property management company is doing. The asset manager can go for vacation. Nothing happens. Everybody makes money. But when the market turns, like during Covid market turn it was really difficult time and I don’t know.

, the first batch of syndicators disappeared during that time. And this time, the second batch of this syndicates are gonna disappear as well. These are the people who are not good operators. They bought it because the market is hot, they’re surviving it, but then it’s very hard to survive. You’re not a good operator during these times.

Yeah. And we of had that conversation before we started recording and you’re absolutely right. I think in the next few years what we’ll see is that only the top level operators are gonna survive. The guys that are your level of experience, your level of knowledge, your level of attention to details because, if you were a, if you’re a mediocre operator anywhere the last 10 years, the market could have could have compensated.

for your inefficiencies, right? It’s not necessarily that you’re a bad operator or you make mistakes, it’s just that you’re not as efficient as you can be. And then, but the market rent growth covers that inefficiency. I personally believe that this party is over, right? And now in the next few years, everything is gonna be tighter.

Anywhere between the fact that we’ve already seen rent growth flatten some certain pockets in the market have actually gone down. Some of them are still going up, but they’re not going up anywhere near the rate that we’re going up in the last 10 years. And at the same time, you we’re seeing a huge spike in expenses, and that’s inflation between labor costs because chick-Fil-A pay pays $18 an hour and it’s a lot easier work than being a maintenance guy or a me.

And Walmart, I just came back from an industrial summit and the Walmart distribution guys are paying $26 an hour plus benefits to work in the distribution center. Labor costs are just skyrocketing. Material costs are increasing a lot. And we’ll talk about you guys, you said you have new construction.

I’m sure you’ve seen the cost of cement exorbitantly growing day over day. So when you’re in the market where rent cannot outpace the cost of expenses growing, then you better be very tight on every dollar that gets spent and you better be a top notch operator. And unfortunately, not everybody can be top notch operators.

That’s just not it. And that’s where we’re gonna see some challenges coming into some of those operators in the next two years is. The markets are just gonna, the properties are just not gonna perform. And you compound that with debt that is coming due and bridge loans that are coming to you and we’re gonna see some interesting buying opportunities, let’s call it that way.

Yes. Yeah. We talked about increasing income. Anything interesting you guys do to reduce expenses when you take off expenses? I think apart from the operating expense make readys, you want to try to use your own in insight in internal people to do, make readys when you buy in volume, of course your material cost comes down.

And we usually like, Not only volume, we also have much better account position like with Lowe’s or Home Depot, right? We have special accounts with them, which they give you really good prices. , so you want to try to get that as well. In terms of water and sewer, you just wanna make sure you monitor your water and sewer so it doesn’t go out of whack.

And property tax, of course higher property tax consultant to protest your tax every year. Insurance, you wanna shop it as much as possible. Insurance is really getting hammered everywhere. We got hit 30% this year increase. Yeah. And I talked to some really large operators and some of their properties got hit, 50% increase.

Yeah. And when I got hit with 30%, I shopped it and I talked to a few brokers and they all told me it’s we can’t do any better. Take the 30% and be happy, . So that wasn’t fun. Correct. Mine went up 10% increase this year, which was much better than 30%. But Yeah. But may I, mine was already high from last year itself, so probably that’s why.

But but yeah, insurance went up, property tax hopefully this year is not going up, but cuz of the, all the economic situation. Apart from that what has payroll? We, I mean we don’t double payroll like what third party property management company will do. They hide a lot of charges into the payroll.

Yeah. That’s why they have payrolls like 1400 or 1300 per dollar or 1200. And our payrolls like almost thousand dollars per dollar. And because we pay everyone much better rate than everyone, but there’s no additional burden that was sneaked in by what third party does.

So they third party, there’s no way to make 3% third party property management. , it’s just too much of a work to get just 3%. So what the third party management company do is they sneak in all kind of fees into all the other expense codes. Yeah. And I’ve had that conversation with many operators.

The way we compensate third party companies makes no sense. Yeah. Unfortunately, I don’t have a better answer, and it is I couldn’t come up with a better model to compensate third party and our audience that watches our videos know that I keep talking about this with a lot of people.

It’s just, it makes no sense. And you’re right, they gotta find ways to increase their income somewhere else or cut in the amount of work they do for you for the same price, which at the end of the day might not mean a lot of difference for them, but could mean a lot of difference for us. For example, let’s say they, they don’t, Collect anything they can collect fees wise.

And it’s $25,000 a year for us as at a six cap, it’s almost half a million dollars. For them it’s $83 a month. So is it worth doing a lot more work? Cuz $83 a month for a property management company, it’s two hours of labor. Yeah, I know. Yeah. I was thinking on, at some point I was thinking of doing third party property management and I was thinking I cannot, I can never on my right conscious just charge 3%.

Just to be fair to the operator, I said, why not am I based compensation based on I know why. The more I know why you increase the more, we had that conversation. So all I have to do is a third party manager is deferred maintenance and I get your NOI goals and I get. Correct.

Yeah, right there. There’s ways to manipulate almost every number we have. So that’s why I couldn’t come up with a different model. The only way I could figure is jv. If I’m an investor in a jv with you, I know you are also the in-house management, and you are also a partner, so you have a vested interest.

This is the only way investor, the owner, and the property manager would have the same interest aligned. Otherwise, I don’t see a better model. I just couldn’t find one. Yeah. Yeah. I could not figure out. Because in expenses can change without their control, our control, and it’s just hard to compensate based on that.

So income is the best and Yeah. Income we just talked about insurance, right? 30% increase goes straight into your N O I. And the property management company has no control over that. So now they’re gonna get hit on their compensation because insurance went up all over the country. . Yeah. Now I was thinking more on the controllable operational income.

Expense. So not getting into gray area and then Yeah, but still there’s gray area, right? Minus the property tax insurance and the management fee, right? Everything else is controllable within them. So is there a way to do that or not? But end of the day I decided not to do third party because I know it’s how much a tankless job is that, or too little of a comp competition, right?

The headaches to returns ratio is not there. Yeah, exactly. Exactly. Some of the audience gonna ask us, right? Why is doing it? The reason why we do is because we do a lot of difficult projects. We do a lot of deep value ads where a lot of turnaround, and if I give it to third party property management, they can never do that.

You need to have your heart and soul in it. You have to be at the property very frequently and all that. They’re not gonna do it. It’s not their money. It’s not, we don’t make many, in fact, we lose money on property management, but I think that’s the reason why we make a lot more money on our assets compared to a lot of other operators.

Yeah. Who use exactly third party property management. And this is the same statement we hear from every operator that grew to a scale that allowed them to create their own management company. , it’s not a profit center, it’s more of a brain damage center. But but the control allows us to make more money on the ownership side and for our investors than not using a third party.

We just keep hearing the same statement over and over. I think from the 30 something episodes that we’ve already had. We maybe had two or three that said they like to stay with third party management. Yep. So that means the time versus effort versus uh, money. . Yeah. And I just wanna circle back for a second about a couple things that you said on saving money.

One was watch your water usage. And that is super critical. One trick that we used to do was to watch the meters and track the meters once a week. So always on a Tuesday at around 10:00 AM or so, you pick a day and you pick a time of the day and you have if you have digital meters that you can look online, then that’s great.

Your VA can pull the data and look at the numbers. Or if not, then we had our maintenance guys on the older properties go out and read the meter and send us the numbers. This way you can pick up a slab leak or a big shift in, in consumption within days. Cuz if you’re waiting for the water bill to come in, for you to know there is a big consumption, you’re about a month and a half too late.

Now you’ve been bleeding for two months. So that was one of the little tricks that we used on watching the water consumption. Because especially on the c class properties and you know that, right? Yeah. Seen 1980s and older, you would find lab leaks and sewer problems and all these kind of things that, that you could be literally flushing water down the toilet and nobody would even notice it.

Correct. Yeah. It’s hard on the older assets. Yeah. And I’m coming back to third party. I’m also on I mean since, we are used to, older assets and it makes sense for us to self-manage with this amount, but it may, things may be different on a newer asset, right?

A class A, maybe it’s, if you buy it maybe third party would makes a lot more better because they have less. Issues. But I’ve not tried it, but, so the question is it less issues or the numbers are big enough to hide inefficiencies? Could be, yeah, exactly. . But at the end of the day, we can’t be doing this forever.

We can’t be self managing forever. At some point we have to safeguard our time because time is the most important thing in our life, right? At some point you’ll make money more than you, you can forgive the inefficiencies of the third party, right? So at that point of time, you’d probably be okay.

Cause your time becomes more important. So let me ask you a different question or look at it from a different angle. , that VP of operations that you couldn’t hire , have you considered upgrading that pay grade to, let’s say, $150,000 a year, pay grade, or $200,000 a year pay grade to find that person that can.

Do things better than you. Oh, we tried all that. , we started increasing by 50,000 to, we think, we thought we are paying too low. . But I’ve realized no matter what you pay, it’s all about the, how much ownership they have in the asset, how much they how much passionate they are about the deal.

Do they really care but their baby? And if you don’t find that, you can find that even with the lower pay people. . So I don’t think so pay was the issue because we were like really paying very high interesting to get the best VP of operation. And now that’s the fact, the reason I’m asking is you gonna go third party, you’re gonna pay that money anyways, right?

Yes. Yes. Correct. You’re gonna give away hundreds of thousands of dollars across your portfolio. Can you take that amount of money to generate that person that you were looking for? Yeah, we have tried it, but it, it pay was not the issue. Okay. Interesting. . Yeah. Yeah. Realize that. Yeah. It’s, as I said, end of the day, anybody who’s doing this kind of difficult not say difficult class B and C I’m not sure about class A because I’m not really done class Anybody doing B and C, need to be, they have to be in the deal. They have to be part of the problem. They have to be passionate, they have to think of it as, as their baby and , that’s why it makes a difference. Yeah. That makes total sense. Yeah. And we have some employees, I who are like regional managers, senior managers who are like really, they really care about our properties and we don’t mind paying them more.

They’ll, if something happen, they’ll stay 24 7 on the property. Yeah. And they will put their a hundred and so they, that, that kind of people is highly more, highly valuable Yep. Than this highly paid. VPs because it’s just different. So I dunno, may maybe one day we have to think about, just promoting internally to people because, passion and ownership is more important than knowledge.

Yeah. Knowledge. You can’t teach talent. And you can’t teach work ethics, but you can teach every skill. Exactly. So that’s where our, my head is right now. Maybe we should just promote internally and teach them what they need to learn from a VP of operations or what, because people with VP of operations, they’re like 20, 30 years in the business, they come with their big baggage behind them.

I know this how to do it. Yeah. And we tell them differently. They say what are you talking about? Oh, this is how we do it. It’s not right. We can do things better. Yeah. Maybe it all depends on your owner, whether they’re dangerously knowledgeable in the apartment business. If they do not know anything.

Yeah. Any VP of operation can go to somewhere and, you can run around the owners, but when the owners know a lot of, a lot more than you, that’s where it’s very hard to just work . Yep. So let’s switch a little bit to where you are today. You mentioned you’re doing new construction. Yeah.

So what led you to let’s stop the B N C class value add and go to, I’m gonna build a brand new construction in Austin, which is probably very expensive and very painful to go through the red tape of Austin. Yeah, no, this is in San Antonio, so it’s slightly better than Austin. So still gonna go through a lot of rate tapes.

Yes. Correct. . So we have a lot of investors behind us and they always keep on pushing us to do deals. And because our criteria to do deals is high, we really want to do deals we really like, there’s a lot of upside in it. And all that just was so hard for me to find deals. And compared to some other operators some other owners who are like, keep on buying deals, they don’t mind buying any deals without upside or very little upside.

It’s all about how aggressive or how conservative you are. So it doesn’t mean you own 10,000 units. You are very good, right? . Yes. So I could not find a lot of deals at the same time. , one of my investor has this land and he keeps on telling me, if I wanna sell this land, I only sell to you. I say, why?

Because I trust you. I don’t trust anyone else. And that was a really good land. It’s an infield location in San Antonio, and he has been telling me for past five years. And I tried to bring in some developers to him and people don’t wanna do it. And finally I said, okay, I’m gonna do it, but it’s gonna take two years.

And I said, it’s a good skill for me to learn because I’ve realized, first, I cannot find deals. Even though I find deals, there’s a lot of pressure to close on deals. Whereas in grownup construction, you can plan your way, you can plan your land entitlement, you can plan, when are you gonna build it.

So it’s a lot more longer leave time. So if I want to raise money, I have a lot more time. . So I realize grownup has more planning work, whereas B N C is small. It’s very immediate. You have hard money, you have to close, you have to value it. You have a lot of investors asking when you’re gonna turn and all that.

So that’s why I realized that maybe I should try ground up construction. And since that investor had that very good, very nice land, and we went and did it, we did the zoning for two years, zoning and entitlement work, all the drawing, all with my own money every for two years. And after that we started building.

That was the reason. I want to do something else as well. And also I realized that you real estate has seven spectrum in it, right? Starting with the land banking after that land subdividing. . And after that got land entitlement, after that got land ground up construction after that got value add.

And after they got repositioning where you break down the entire building and build a new one, right? . So there’s seven spectrum on it. Yeah. And a lot of times a lot of gurus only teach the value add site, right? Yeah. Because that’s what they were thought, right? Yes. But every time I, you I, same thing every time we, I drive around, I see somebody’s doing that development, somebody’s that doing that ground, oh, somebody’s doing this land banking.

So somebody’s making money on all this seven spectrum. I was always wonder what is the other spectrum? Yeah. And I realized like there’s other spectrum which can make a lot more money even though it’s higher risk. Yeah, I was about to say new development is the ultimate game in real.

it’s the highest risk, highest reward game. And usually nobody starts at new construction. They get to new construction. . But the reason it’s the highest reward with the highest risk is on the risk side. The length of time it takes to get there is a risk factor. Anybody that bought a piece of land in, let’s say July of 2022, right before the world exploded.

Had a certain underwriting and now only six months later we’re, we live in a different world, we change. Yeah. So new construction, especially that size, we’re looking at 18 to 24 months before you can get people in the door. . What’s your time? Minus 26 months cuz it’s 324 units.

Yeah. So that, that’s a lot of time and the market and the environment can change a lot in that timeframe. So that’s why it’s the highest risk. But it is the highest reward because at the end of the day when you’re done, you have an A class property at the cost of a B class because you don’t have to pay the premium for the developer.

You don’t have to pay the premium for the person that laid their money and took the high risk. Correct. So it’s, it is the ultimate game of high risk, high reward in the real estate spectrum like you called it, right? Yeah. Yeah. Correct. Yeah. But I, yeah, that’s one true. There’s also like even beyond that, buying a raw.

and how do you get it to zone right. How do you get it entitled? That’s also a big play. There’s a lot of people playing in that space. . But it’s not very well thought. There’s no gurus teaching that, ? We have our friend Jack Bosch. . Jack Bosch is doing a lot of land flipping.

He buys it. He does flips right. He doesn’t develop. He’s not a developer by Correct. He’s playing one of the spectrum. He’s playing the, it’s the one step before the development. Yeah. Not in the Land King, but he buys it and quickly flip it. So he’s our friend, so just in case I audience wanna know and he was a guest on the show too.

Oh good. Yeah. But if you buy the land, and in fact I ask this Jack, so buy, why don’t you develop it? He said no, I’m not developing it. , he just, it’s not his business model. He, it’s too much race. It’s different skillset set. Yeah. It’s a skillset set. And sometimes you make more money on the fly, on the volume rather than developing it.

Even though, yeah. Development makes, end of the day makes a lot more money on one transaction. compared to FLA flipping, you do a lot of transaction to probably generate the same amount of money or slightly less money. Or maybe more money, I don’t know. But getting a raw land at a good price and titling it it’s a big value add.

On the whole ground up construction, a lot of developers will come after the land is entitled, but if you go beyond that, if you go beyond to the land, draw land, yeah. And you mitigate some risk and if you have enough money to mitigate all that risk and you hold it as yourself without bringing investors, that’s another value add that you’re doing.

Yeah. So anything in, in commercial, anything that changes the usage to a better usage is gonna make you a lot. Oh yeah, you can take a, a small industrial and somewhat con, somehow converted to retail. It’s change of usage to a better, more expensive, you make a lot of money if I don’t mistake.

You did a hotel conversion to apartments, right? Yeah. We make, and that’s what it is you convert, converted from one usage, which was destroyed with Covid, right? . And you turned it into an apartment, which is still in high demand. So now you took one asset usage change, changed the usage. Now it’s worth a lot more than it was as a hotel.

Yeah. Same thing with office to multi-family conversion that some people are doing right now, right? Yeah. Yeah, the profit on that one hotel, the multi-family conversion’s equal into almost 2000 apartment units. Wow. It’s, that’s mind blowing. Absolutely. It’s mind blowing. We made like 30 x in 12 months with that money, with that hotel

Yeah. So that’s like crazy deal. But you need that daringness to do that, right? Yes. And it’s not just Dar this it’s be willing to step into a world where you don’t know what you don’t know. You mentioned converting office buildings into apartment complexes. We have a joint friend, Kenny Wolf that is doing just that, right?

, they got a couple of projects in, I believe Kansas City right now. . And then I had a conversation with him before I even started doing that, while he was researching the thing, and I was looking at a similar project and he goes, We were looking at a 10 story building. It’s if you need Sheetrock on the eighth floor, you need to coordinate with the police to stop traffic at 2:00 AM Bring a crane, pop up a window so you can put the sheetrock with the crane into the eighth floor because the elevator is not big enough to get all the shit rock you need either.

So it’s okay. Things you don’t know that you don’t know. So that’s where the daring part comes in. It’s kinda like it, it’s, you take a risk going into a world where you don’t know what you don’t know. Yeah. So people who are daring to do that, they’ll make the most money.

Because. If you’re doing, as what Albert Einstein say, right? In insanity is doing same thing over and over again expecting different things. If you look at everybody’s just buying the normal apartments and doing, small value add and trying to make money, right? That’s what, yep.

That’s a e safer way. But when they take more risk, and if you’re able to maneuver through that risk, I it’s not easy. As I said, you have to be able to maneuver these unknown certainties, uncertainties and unknowns and try to make, come out as successful at the end. Yeah. Yeah, even the hotel conversion, the way we manage our risk was like, we took seller financing.

We asked the seller to not pay any mortgage for eight months, so we did multiple things, and then we’d work with the city when, before closing to get the zoning. So someone who can able to manage all this risk, , can come out with a, very good compensation end of the.

Yeah, absolutely. I wanna be conscious of your time. We’re going a little bit long here today. If you could go back in time and talk to 20 year old James , what would you tell him? What would be your advice to Young James? Young James? I would say get out of your network, right?

That would be my advice. I A lot of times, like when I started work, right? My first year of working on a WW job, someone gave me a Robert Kiosaki book, right? Reached that for that, and I took that book, I read it for three, four pages and I threw it away. I said, this book, it’s not for me, , right?

Because I’m not in that circle. I’m not in the business circle. I’m not in real estate. And, it just doesn’t make sense to me just because all my friends, all my network is all W2 employees. , we all think alike. We go to the coffee place where we mingle we talk about the same thing, right?

But once you out from your network to another industry, if say you go to meet up or you go to networking, let me go and try this business conference. You try this business then you get to know about something else that you do not know that’s commonly in your space, right? . So I didn’t do that early enough, right?

Until later on when I start, there was a reason why I need to get out of this W2 job, right? That’s where I started looking at other options, and that’s where I started finding. So I wouldn’t change anything from my experience. The while I think, we have been very successful and I’m not gonna change anything to be more successful than what we what we are right now, even though we can go from now onwards.

But I think what I would say for the younger ones or whoever listening to this podcast is Go out of your network. Don’t go to the same conference over and over again. I go to the multi-family conference. I see the same guys, right? And I go to another multi farmer conference. The same guys, no, go to a different conference.

Go to a Chamber of Commerce conference. Go to a doctor’s conference. Because you’ll be the only real estate guy there. People come to you . Yeah. That’s an interesting way to look at it. Yes. Yeah. Why you go to everyone. Everybody’s a real estate guy. And all the passive one is all this multi-family conference.

They already invested their money. Cause they already know who to invest with, right? Yeah. And they, if they’re coming for the conference, that means they’re not really passive. They’re more active passive investors. Yes. They’re not the best passive investors. The passive investors who are the best, are the one that busy doing other things.

Yep. And they only know you. So they’re gonna give you all your money to one person because they only know you. Whereas if you go to active in passive, they’re gonna take all the money and give to all the others. Syndicates. . Yep. So think differently. Think differently. Where, which con which, where you can go to get new information.

Yeah, no that’s a really good advice. And it’s funny how you mentioned the conferences and it is that’s the same reason why I didn’t go to the n h that nmh, I didn’t go to guys. You go to, it’s the National housing multifamily Housing Manager Council. So you go there and everybody there is property managers and brokers,

Oh, I’m a property manager and I’m a broker. And it’s what am I gonna do that talk to Yeah. The vendors, people that did the same thing. , they’re the vendors for principles, right? Yeah. So that was that’s, that, that was a great advice. Yeah. Yeah. Correct. And then, and right now, when in April I’m gonna go to a hotel owners conference.

Okay. . Yeah. Because I know a lot of hotel owners are accredited investors too. Yeah. And they’re also hurting right now. So you might find another conversion opportunity. That’s the other thing that we are trying to do, right? We’re gonna go and advertise any hotel to multi-family conversion. We’re willing to buy.

So just do something different. I didn’t go for a lot of conferences in the past six months and I’ve been one recently, and then I see the same people, but at least I meet my friends, I talk to them, but I have no hope of finding passive investors there. , I have no hope of finding deals there.

It’s more of catching up with friends and get to know what they’re doing and all that. It’s maybe if you can find partners, you probably can go for that kind of conference, but , it’s a different kind of networking. Absolutely. Okay. Yeah. Yeah. Great. Awesome.

James, I really appreciated you coming on the show. It’s been always a pleasure talking to you. Yeah. If our audience wants to reach out, if they want to invest with you, if they wanna make a deal with you, sell you, bye You. Hire you? How can they find you? ? They can hire me cause I’m not selling anything.

. Pat achieve investment group.com is our website. Or you can come there and register, and usually you’ll get like a, I think there’s a Invest with Us link there where you can get a calendarly link and you know it, you can set up some time and talk to me. And if you wanna get my book passive Investing in Commercial Real Estate, okay.

You can go to passive investing in real estate.com and get this book, you, this book’s 20 Bucks in Amazon. Perfect. And if you go to that website, it’s 4 95 or 4 95 for shipping. You have to wait for three or four weeks for it to come. But that’ll be a really good place for you to learn passive investing.

And the other book that I recently launched is called smarter Doctors. This book was written mainly for doctors. , because a lot of times they have this big wall around them. Because they get bombarded with so many financial advisors. Everybody wanna target them, right? So I said, I’m gonna write a book and they’re gonna pick up and read it because 20% of my investor base are doctors and every time I talk to them, they say, oh, I should have known this syndication thing a long time ago.

Yeah. No, absolutely. And we also have a lot dentists and physicians in, in our investors pool and one of my business partners a, is a dentist. And you’re absolutely right. Not only they’re bombarded by other people from outside, but they also don’t have a lot of financial education.

of Frowned upon to talk about the business side of medicine. So definitely I think a book like this would be a huge help for someone like that. So absolutely. We’ll put all those links in the show notes. And again, I thank you so much for coming on the show, James.

Absolutely. Nice giving as much value as to your audience. Perfect. Thank you so much. And for you, the audience, if you wanna see more shows like that with great people like James we are on YouTube, we are on iTunes, teachers, SoundCloud, wherever you can consume a podcast, you will find us over there.

Please subscribe, leave us a review. We appreciate it. And until next time, thank you so much.

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