Ben Wuollet joins Jerome Myers on the Myers Methods Presents Multifamily Missteps Podcast to discuss the missteps with managing property managers when going into "rougher" properties. We learn about the risk associated with Land Use Restricted Projects and high vacancy. Ben shares how the property manager stopped leasing new units while they were 50% vacant. He also shares how they were able to get big discounts by closing in 30 days or less with no financing contingency.
Ben believes that its better to have debt than equity.
In this weeks show we learn about:
- "pump and dump"
- difference between 506b and 506c
- what happens when your property has low activity
- how to get off market deals
- importance of underwriting to Year 1 rents
- how to buy 5 deals in 7 months
- what deals are "bankable"
- why he doesn't like cross-collateralization
- importance of exiting quickly when you have hard money loans
- why you would raise equity to pay down debt
If you are interested in getting more multifamily investing education go to www.myersmethods.com
Say hi to Jerome
Say hi to Ben
Ben Wuollet: 0:00
to date, we've always flip them. Um, our target was 18 to 24 months for these flips, but we are transitioning into what we call legacy ownership. We want to look at these deals by a little bit, newer deals and set up the 19 sixties and seventies. I want to start looking at 1918 1990 and do 10 to 30 year performers to see how these deals would look holding them long term. The reason for that is all of these people I know they're much, much older than I am that have had successful careers, whether they work in real estate their whole life or had another business and put their profits in real estate. People have the most stability and wealth have held
Jerome Myers: 0:44
as an operator. I know other investors are romanticizing multi family investing, and I'm looking to learn from other investors mistakes I know you are, too. You found the right place. Welcome to Myers Methods presents multi family missteps, everybody, and welcome to my his methods presents multi family missteps. I'm your host, your Rome, and have been well, let with me today. Ben, How are you?
Ben Wuollet: 1:21
Great man, How you doing today,
Jerome Myers: 1:23
and I'm so excited to hear from you guys. You're down in Arizona, right?
Ben Wuollet: 1:28
Yeah, we are. Beautiful weather. Actual. Just got back from mountain biking this morning. Bruce and I like to get out all the time. You know, we go use a two or three days a week.
Jerome Myers: 1:38
Wow. So if you would do me a favor and tell the guests a little bit about yourself on kind of your background on multi fan?
Ben Wuollet: 1:46
Yes. My name is Ben. Work at Bay Curson. Well, with my father, Bruce, and we have been in real, sir. He's been a real estate since 2002. I got in in 2012 and we started in single family homes buying the worst homes across South and west Phoenix. We're at the auctions are Eos, Short sales. You name it. We were trying to hit every avenue back in. Um, you know, from 2010 to 2015 after the crash, the market there was somebody foreclosed homes here and and the Phoenix market that we're having a blast wholesaling them. And then we got introduced into multi family. We're started hosting a couple apartment buildings And then we watched a couple guys were giggling. We would make 22 50 grand on a flip, and then the next guy would put a bunch of money into it. Um, re rent all the units put up for sale, and we're looking at this present. I think I just made, like, 1/2 $1,000,000. If you can do it, why can't we do that? And we partied with a couple of guys that they brought the deals. We brought the money and they brought the operations expertise. We got those two deals with what we can do this. So we went out and started finding deals ourselves. Business, the equity. And, uh, we've been doing that since 2015. Forward.
Jerome Myers: 3:07
Wow. So was it as easy as you guys thought it was gonna be what she got into it.
Ben Wuollet: 3:14
I mean, there was some deals that were, you know, pretty easy, but there are deals that started to go sideways. Um, the big thing that we had challenges with in the beginning is really finding a good property management company. Um, especially going into these rougher areas, if you will. We bought a lot of properties ahead. Crime and property management companies, in my opinion, are not really set up to make money during that transition phase. So they start to lose interest when you're emptying out units kicking out the crime. You know, they might be times that they're getting threats of people. I don't want to be kicked out because now we're disturbing the status quo. That how that building was managed for years. And, yeah, managers just they liketo managing easy building. You give him a B class building that's already running. You can do some quick value, add. They love that. But we love going into the rough neighborhoods and really serving the underserved. And it's taken us quite a while to find that property management company that's really been a match for us. Um, one of the deals that we bought was actually down in Tucson. I'll talk about that one for a little bit. It was a 52 unit building, and there was some rent controls. Half of the building, uh, was on what's called a lure. A land use restrictions, Riemann and so half the property was controlling the rent. We had a lot of paperwork that had to be sent to, um, the government agencies to make sure that we were in compliance. But the first management company we hired, they didn't really know that c. C plus class building Very well. We go in, we're not doing full rehabs. We are doing rehabs, but they're not brand new kitchens. You know, tile flooring, but it means we're going into doing white walls. Vinyl flooring repaint the cabinets, resurface the countertops, reroute the units because the rent in those units was pretty cheap around 506 $100 a month. And they were still safe, functional, durable, clean for our core values. They just weren't a class. And that property manager, they just sort of vacating. All the units were down to 50% vacant, and they were not leasing any new units. Um, that's when we said, Hold on, what's going on had to fire them. That 50% vacant you're building cannot cash flow. I don't care what anybody says. No, the owner is now making the debt payment, and we call that the value of death because every month you're paying out money and that manager didn't have a plan of action to fill it back up. They kept saying, Well, we need to renovate the units like you have 10 for 15 renovated units. Start leasing them, but they just we did not see idea.
Jerome Myers: 6:07
How big was the property?
Ben Wuollet: 6:08
52 units. Okay, so you can imagine having 26 bacon units. Um, in the challenges, that property did have a lot of crime. The previous management company that was there, what they did is they went and they filled up the properties with people that couldn't rent anywhere else. So a lot of felons, people who were just out of jail, um, sex offenders, you name it, they were all there. And the challenges that once you had all of those vacant units. Now the transient community, the homeless, started breaking into the units for a place to sleep at night because, you know, you have that many vacant units. The activity level, your property is down. So we would have weekly adores me and kicked in. And people sleeping in the units. Wow. So,
Jerome Myers: 6:57
uh, you said to So how far is that from where you guys are?
Ben Wuollet: 7:01
So Tucson is about two hours from Phoenix. It's It's a still a major metropolitan area. Here it's The essay is about just over a 1,000,000 in population. Um, we do a lot of investing into someone because that market was it was kind of the forgotten about market. Phoenix had so much activity people would come from, you know, the West Coast, where people come from Texas, the Midwest. They were all flocking to Phoenix because the growth curve here was amazing. The Brent growth was awesome. Um, that population growth is awesome. The job growth was awesome and the challenges every building that went up for sale had 10 to 30 offers on it. So you had to find Deal's off market. But the sellers are becoming more sophisticated. Why would they sell a deal off market when they could bring it to the market and get 10 to 30 offers? Well, the challenge with that for us is a buyer. As a bar, yours one is cheapest possible. It is a cellar. You always wanted to sell her, as you know, the highest price possible, and there are other buyers that we're willing to take the risk and pay a lot more for the property. Then we could pay way because the population and rent growth is so good They were banking on rent numbers 2 to 3 years from now. When we do our own writing, we underwrite. What can we for sure get your one? And then we might put a little bit of rent growth in there. We're not banking on us. See, the market rent is $1000 for unit. We're not saying Oh, yeah, three years from now, I can for sure get 1200. Well, if there's no other properties getting 1200 in that neighborhood, I'm not budging. 1200. I'm on a budget. If everybody's getting 1000 I'm about drinking 1000 I'm in a stress test of that Say 900 8 50 Just to see if, worst case scenario, we have to lower the rents to be the most competitive building in the neighborhood. We could do that temporarily, right? That's why you went out of Tucson. We went down there. We bought, um, five deals and seven months. Um, there was a deal of it was on the market and we noticed that a buyer backed out. So you immediately got in the car drove down there, looked at it, went to the restaurant, wrote an offer and headed to that cellar. Um, within an hour of touring the property and he accepted it that evening. So we just we saw the opportunity to Hey, summer, some reason somebody backed up, we have to buy this deal from there we bought. So I was a 32 unit and then about a 34 unit off market 74 unit 61 unit and a 12 unit always in, like, seven months.
Jerome Myers: 9:52
You guys buying this stuff in all cash?
Ben Wuollet: 9:55
So we were using her hard money. Most of these deals because of the No wonder why, um, something feels we purchased 50% vacant. Um, banks wouldn't touch that stuff. And we're going in and putting anywhere from, you know, 10 to 20,000 per unit in a lot of these buildings, banks like, hey, we don't want this or if they were to lend money, they were super low on leverage. And they want personal guarantees and cross collateralized and all this crazy stuff. And we said, no, we're buying this deal as a business. Each of these properties are in their own L. L C. We have to treat each property is a separate business. So hard money lenders really stepped up and they would go. Even though they're expensive on interest. They would go high on the loan proceeds. It's that we had to bring in less equity and we had a couple of guys here in town that we've worked with for years. We still continue to work with because they're willing to sometimes go 80 to 90% of cost. And if you refuse, I'm short term. It's not that bad, because there were some of these deals were able negotiate hundreds of thousands off because we would have no financing contingency in her offer. We would have fast inspection periods, fast closing periods. There was one deal we bought with, um, the 30 day clothes. Whoa! And we were able to get about 400,000 off from the highest offer because he was already in contract to purchase another building and I think it's a three or 400. It was anyways 100,000 off, but he needed a guaranteed clothes and he was willing Thio, you reduce the price that much from you go to an operator that he knew could close.
Jerome Myers: 11:46
So have you guys learned any hard lessons with dealing with, You know, these heart money lenders?
Ben Wuollet: 11:54
Um, for sure, the hard money where it gets expensive and I'll tie it back to the property. Management is if you have issues with the property management and your timelines keep getting extended. Well, some of these part might Lenders are between 9 to 12% interest, and we budget using them only for 1 to 1.5 years maximum. Well, if your property managers not performing and that you should go into two or three years using this hard money alone, it gets quite expensive, especially if you have a you know, $2 million Enough. Uh, yeah, a $2 million loan. 12%. That's 240,000 year for your interest. Well, if you go three years with that, you can see it's quite expensive quickly,
Jerome Myers: 12:41
no question. And so it's only payments.
Ben Wuollet: 12:45
Jerome Myers: 12:46
Are you making interest only payments with these loans?
Ben Wuollet: 12:49
Yes, these are all interest only, um, and a lot of them we are. Loan terms are usually around 18 months, but There are times when we've had those property management issues that we've had to go for extensions. And the nice thing about the lenders that we've worked with us. We have a long relationship with them, so they understand if we go to them, you know, we're on current Oliver payments. When we asked for an extension, we always get it. If we need it versus some of these, you know, banks that we don't have a relationship with, There might be a little bit different, more difficult to modify your learnt loan terms down the road. Um, and because of what the hard money lenders, what we've done as well as if we get into a property and we realized we can increase the value, even Maur by doing more rehab, we've re negotiated our construction loans with a couple of our lenders, said Hey, instead of having a $500,000 construction on can we upped that to say, you know, 800,000 or a 1,000,000 here's why, and we show that we're able to get higher rent than we had originally projected. I would rather use more leverage within reason than equity, because if we can have that huge value add scale availability to the property. It's cheaper to pay lender 9% than it is equity it 15 to 20%. It's that way if we can continue to maximize, leverage the investors and invest in that deal and end up making a higher return.
Jerome Myers: 14:22
Yeah, I always tell folks, Hey, look, if it doesn't matter if you have $100 in a duel over $100,000 in the deal, if you're playing with the equity piece of it, you still control the equity, right? So the more you can control with less money and Adele, the more you boost your cash cash return.
Ben Wuollet: 14:41
So, yeah, I mean, there is diminishing returns as well. There's a couple of properties that we've looked at that it actually made sense to have a little bit lower leverage and use a little more equity because of the Valley of Death, where there's a property we've had to vacate. It was a 32 unit. We had to vacate it down to four units occupied, so we were essentially 90% vacant during the renovation stage. Well, if you have too high of leverage during those times, you have to raise equity to make that payment and the challenges that is now, instead of just paying 12% interest on your loan or 9% whatever the loan is, we also have to pay a return to that equity. So there's times where it actually makes sense to have more equity in the deal, unless love. So when we run these numbers, we always, um, adjust on our performer. The loan amounts to see how it affects the return, but most times it makes sense to get a higher leverage long,
Jerome Myers: 15:40
better. You guys syndicating these deals are just using hard money and bring in your own capital like How are you financing?
Ben Wuollet: 15:48
So we are syndicating, um, in our capital stack. Um, first is alone. The loan is always in first position, and then we syndicate the rest of it. Most of our loans were able to get around 80% plus or minus loan to cost, and then that 20%. It's syndicated through friends and family. We've done two different funds. We have done a five or six B, which is no crowdfunding. That's existing relationships only, and we've done five of six C, which is a crowdfunding platform that you can go out and market to the world. The downside with a five or six C is all the investors have to be accredited. You are not able to take any non accredited. So when we're working with their friends and family, the five or six B could be nice. Is there some of the people I still like to put in your 50,000? 100,000 in our deals? But they might be accredited, but trust us, and they've done, uh, deal's time after time after time. And we like to continue to use them because they really helped launch the business. They were the first people to put up money when we got in, tow your houses and then multi family.
Jerome Myers: 16:59
What's so, guys? Is your host your own? I just want to let you know we lost my methods in the follow 2019 with ambition so inspiring. New breed of multi family, if you are interested in getting in a multi family, are scaling your current business up over to our Web site at my methods dot com grabbing free forceps guy how to get Now let's get back to the O. So when you get deep into the deals, are you guys where you financing and keeping them? Are you always flipping
Ben Wuollet: 17:31
to date? We've always flip them. Um, our target was 18 to 24 months for these flips, but we are transitioning into what we call legacy ownership. We want to look at these deals by a little bit, newer deals and set up the 19 sixties and seventies. I want to start looking at 1918 1990 and do 10 to 30 year performers to see how these deals would look holding them long term. The reason for that is all of these people I know that are much, much older than I am that have had successful careers, whether they work in real estate their whole life or had another business and put their profits in real estate. People have the most stability and wealth have filled. Um, flipping is fun. You can make cash put money in the bank, you know, within a few years you could make a decent income, but if you sell all of your buildings, you're essentially unemployed. You have no more cash coming in and with flipping, you're always chasing the next deal. You're addicted to that flip. But in a market like we are in today with this Corona virus going around, well, if you have enough deals in your portfolio, you don't have to buy or sell you to say, Do you know what I'm waiting? I'm just gonna pause. I'm gonna collect my rents and then you could be really patient, that sniper focusing Find that deal that you love because I believe right now there's gonna be some good deals popping out.
Jerome Myers: 18:58
Yeah, So let's take it back to the property managers. You kind of said, Hey, they lost interest. They weren't making money because they weren't collected much in rant. What process change did you guys make in order to prevent this from happening again? Because, you know, your back is against the wall when you got that hard money and you gotta execute your business.
Ben Wuollet: 19:20
So we have a manager, one that we use in Tucson. She's great. So she has a unique business model that a lot of lenders and other owners don't. I have never used it is a typical to the to property management We have a 75 unit that she manages right now with no onsite manager, and she manages it remotely well. She does have the property is something that gets reduced rent, just part of compensation. And what they do is they just open the doors for the manager. So our property manager fields all the calls, applications, background checks and then a few beers with the movie and move out so that we don't have to pay, you know, $18 an hour to about an onsite manager. We can pay $500 a month and reduce rent. Now you have something that still loves the property that size in the property. They're motivated because they live there very inexpensively, and it's part time for them. You know, they're not opening doors all day long, so it's just a couple times a day. Maybe it open it, open up doors and they get Brutus rent so that we find that, especially if there's a family where say the husband is working and the wife is a stay at home mom. What really motivates them for that wife to help out in the community like that because now it's less stress for that friend. Um, so when When we were looking around for manager Cos we started calling all the brokers in town and we're saying, Look on the 52 unit were like, Look, we need a new manager who is the right person? The challenge. With 52 units, it's an odd size. It's big enough where you can really do want somebody on site. But it's small enough where you can't budget somebody 40 hours a week either, and nobody I know wants to only work 15 or 20 hours a week. Everybody wants a full time job. So that's when we got introduced to this manager that has a unique system and see save their tail on that property. We did really well, actually. We bought that property for 1.56 million, 30,000 door this cheap and a year and 1/2 later we sold it for 2.5 1,000,000 we only had, like, 150,000 or 200,000 and run out.
Jerome Myers: 21:39
Ben Wuollet: 21:40
and so the property itself wasn't a bad property. It just needed a few $1000 per unit to clean it up. And so when she came in and she actually filled up the property got it to 90% occupied in a couple months. I
Jerome Myers: 21:55
went down to 26 right?
Ben Wuollet: 21:57
Yeah, went under 26 she said. She got back up to the high forties and in a couple months of 20 units, so she was feeling, you know, unit every other day or every three days.
Jerome Myers: 22:06
So who does the collections in this model?
Ben Wuollet: 22:09
So she does all the collections, and she's been transitioning all the people, even in Class C, to pay online to the port. If they can't pay online, they have to mail the check into the office or drop it off at the office. But she has been slowly transition all of our residents to pay online for two reasons, she tells him. Once he pay online, it's in. It's trackable for both people. It's trackable for the manager. It's trackable for the resident, and most people have smartphones now. It is, um, even the low income. We walk our properties and there's a lot of smart phones, so they both were people I actually preferring to pay online because they don't have to get in the car and drive, Maybe say, pick, pick up a money order and then drive to the manager's office and drop it off or mail it. They just hop on the phone and, um, that's through. I believe we use at Folio for that manager. So they have systems through their property management software to do that.
Jerome Myers: 23:10
Nice. I like the hybrid model. Um, so what is the one thing or some words of wisdom you would give to our listeners who were in the space and either during the first Dale or Scallon on their necks?
Ben Wuollet: 23:26
Be very conservative on all aspects of the deal? Um, Bruce had told he chatted about some of the construction costs. Put a contingency in there because when you walk a building, we all have our expectations on what we want to spend for renovation. But until you start getting into units, you don't really know exactly where you're going to spend, say, getting under the cabinets or there's units like a damaged. There's times you walk the property, and the unit might be in some what bad shape, but then six months a year a year later, when that person moves out, it might actually be in worse shape than he had originally budgeted. Because that's happened where people have moved out. Um, maybe they're upset us for some reason. And they've damaged the unit on the way up. Have a contingency in your construction for, you know, crap that the fans, you know, they had. The last thing you want is to be 70 or 80% through your project and run out of money. Um, the second thing is double check the rants A CZ. We all know this is an income and expense game. Make sure that you can get those rents today and not banking multiple years in the future. I get it. We all put rent growth in her performance, and we have to put those in there. But don't bank on, and the rent is completely out of market and saying, Oh, Aiken, rehab this building be the nicest one of neighborhood, and I'll get $300 higher than everybody else. Sometimes it works, but it really you really have to dive into each property in that specific neighborhood. Um, and meat conservative on timelines. If you say I'm gonna be in and out of this deal in 18 months. Stress tested. What happens if it's 24 months? What happens of his 30 months? Um, there's so many things that could happen. Once you get into a building, the market could shift. I mean, we're in the middle of that right now. What happens if you say that you wanted to sell it in May of this year? What if it's not a good time to sell it? Do you have the ability to hold it for another six or 12 months, toe wait for the opportune time?
Jerome Myers: 25:35
And that's what we're going through right now. We've got two that we either going to re fire. So and it's like, OK, what do we do? We go to market, really pull back and wait so that they
Ben Wuollet: 25:46
we have. We have two deals in escrow to sell right now in Tucson, and we have talked a lot internally about what happens if they don't close. And we we do have refi options for both of those properties. Um, they're both great properties, so we would like to sell them because we told our investors on those deals that this is a bi fix and sell, but I think they would understand if we would go back and say, Look, we're in escrow. The buyer didn't execute. Um, we're gonna refinance the property, hopefully get them some of their original capital back, if not a cz. Much of it, you're all of it are much as possible. That way they have less risk in the deal. You know, they're just at that point tying up their future profits and then tell them we're gonna hold it for 12 or 24 months from here. And then we'll see how it when we can exit the deal. Um, I still feel very confident in real estate in the long run. You know, I think there are certain cities in the US that we're gonna get hit really hard on this. Um, Arizona. You know, I'm not going to say I'm overly optimistic, but we are still such an undersupply market. We do not have enough inventory for the population growth here. That's why I think in the long run we might go through it the temporary, you know, period of struggle. But then I think we'll rebound. Um, but who knows? That's kind of the question that everybody's asking right now, and I don't think anybody for sure knows.
Jerome Myers: 27:18
Yeah, I agree with you, Ben. And I really appreciate you coming on the show. Um, how can the listeners get in contact with you if they have any questions,
Ben Wuollet: 27:27
they can always email me Ben at baker sin dot com. So Baker's Baker son has spelled B a k e r s o n And then my cell phone is for 803073313 And you can call me if I don't answer. I'm a fast texter, so you can text me at any time. Um, and if I don't answer, obviously, just leave me a voice. Miller sent me a text.
Jerome Myers: 27:50
Wow, that's really generous. Been? I appreciate you sharing that with the folks. If there comes a time where you want me to edit it out, let me know. It's on the next time we'll talk to you guys Soon you made it to this juncture. So you really love what we shared on this episode of Meyer's methods presents multi family. Mr Do us a favor. Give us a five star rating, give us a review and share this with somebody who's interested in things