657: Flying CPA Soars Through Value-Add Investing

SHOW NOTES FOR EPISODE 657: FLYING CPA SOARS THOUGH VALUE-ADD INVESTING

There’s real estate investing and then there’s “value-add” real estate investing!  In today’s podcast, CPA, real estate investor, airplane pilot, entrepreneur and founder of KRI Partners Kenneth Gee shares how he discovered the amazing exponential profit power of value-add real estate investing.

What You Will Learn

• Why multifamily investing is better than single family home investing?
• How multifamily properties fares in difficult economies, inflationary periods and during a pandemic
• The importance of managing your debt properly
• Why reserves are critical to long and short-term real estate investing success
• The critical importance of spending more money upfront with a value-add play
• The three reasons passive syndication investing is so great for retirees

About Our Guest

Kenneth Gee

Kenneth is the founder and managing partner of KRI Partners and the KRI group of companies.  He has more than 24 years of significant real estate, banking, private equity transaction, and principal investing experience.  Throughout his career, he has been involved in transactions valued at more than $2.0 billion, much of which has included the acquisition, management, and financing of various multi-family real estate projects.

More About Ken

• Grew up in Toledo, Ohio
• Went to the University of Toledo and got a degree in finance
• Moved to Cleveland and got married
• Got his Masters degree in accounting through Case Western Reserve University
• Also worked for a local bank in the commercial lending department
• He ended up at Deloitte as a CPA, where he spent 7 years
  • Did a lot of private equity work
  • Mergers and Acquisitions
  • Tax planning
• One thing he realized was…
  • All of his successful customers at the bank he worked at were in real estate
  • At Deloitte, he was surrounded by people who were also successful in real estate
• He was now a husband and father of two young children
  • He was also working tons of hours – 12 to 14 hours a day – as a CPA
  • He began to think, “How am I ever going to send my kids to college, retire, etc. without going into massive debt?”
  • He wasn’t getting ahead financially in his CPA job
  • So, he thought of all the successful real estate people he knew and thought, “I’m going to learn real estate!”
  • So, when he saw a Carlton Sheets infomercial and enrolled in his real estate investing course
    • 2 years and a few thousand dollars later, he knew about real estate investing
    • The course focused, however, on single family homes and Ken didn’t think that would work very well with his work schedule (running off to unclog toilets at 3 in the morning, etc.)
    • He thought it would make more sense to buy an apartment building

Becoming a Multifamily Investor

• In 1997, Ken bought his first apartment – a 28-unit building in Cleveland
  • It was big enough that he could have someone on site who could show apartments and handle other things while Ken continued in hos CPA job
  • To buy the apartment, he took half the down payment from a home equity line of credit and he convinced his in-laws to invest in the other half
• He then bought second and third apartment buildings also in Cleveland
• Three years later, he sold the properties because he saw an opportunity to make a significant profit
  • He was right!  He walked away with $500,000 in profit!
• This was where Ken realized that real estate was his answer
• He now knew how he would finance his kids’ education and retire
• 25 years and 18 deals later, he is now a full-time real estate investor/syndicator
• He could retire today if he wanted to but he’s having too much fun

His Business Today

• The back office of his company is located in Cleveland
• His corporate offices are in Tampa, Florida
• Most of their activity is focused on the Southeast
• He spends about half his time in Florida
  • About 1,000 people are moving to Florida every day
    • There isn’t enough housing to meet that need
    • So, there focus is on value-add investing – taking older apartments and upgrading them to be better – increasing rents in the process

Learning to Fly

• He decided to buy a Cessna Pilot Center
• He wanted to learn to fly
• Deloitte’s office, where he worked, was located in downtown Cleveland and there is a small airport there called Burke Lakefront Airport
• He would literally, a couple of times a week, drive to airport on his lunch break, take a flying lesson and return to the office
• No one in the office knew what he was doing this
• He noticed that the guy who ran the flying school had a bunch of older planes and one newer plane
• Of course, Ken would only fly in the newer plane
• He saw this as a big business opportunity
• He bought the company from the guy who ran the school (he didn’t pay much for it)
• They got rid of all the old planes and brought in all new planes
• Of course, right afterwards, 9/11 and the Twin Towers tragedy happened
  • It was a tough time for the flight school business
  • They git through it, fortunately
• But it picked up later and they ended up teaching a lot of people how to fly
• They even became part of the Delta Connection Network
  • They would train pilots to go all the way up to the Delta regional system
• When he sold the company, he had expanded it into 3 airports
• He learned how to run a de-centralized business from that experience
• He no longer flies because he is blind in one eye

Charging Through Tough Times

• His real estate business did well though the Great Recession
• He attributes that to the fact that he was only in multifamily real estate, not single family homes
• Ken also learned a lot from that time period and, today, he uses what he learned to mitigate risk factors on every deal he does
  • For example, like debt maturities
  • The tough times need to accumulated so you can get through risks going forward
• With Covid
  • They were busier than they had ever been
  • Everyone was working from home
  • They needed to operationally adjust so that they could continue to provide the services their residents needed and keep everyone safe
  • Because his seasoned management team had been through a variety of tough times, they were well poised to respond
  • They did well financially
    • They bought properties in good areas with good diverse income streams
  • They had a few tenants who had lost their jobs and were trying to get through it
    • They worked with them
    • Tried to do everything they could
    • To help them through it
  • It was a lot of work but they got through it just fine
• Today’s Inflation Rates and Rising Interest Rates
  • The best place to put your money in these times is real estate
  • When you have inflation, it impacts the supply chain
  • When inflation increases, the fed increases interest rates
    • It makes it harder for people to buy homes
    • But people still need a place to live
    • The demand for apartments grows even more
    • Cap rates are increasing
    • Rents are increasing and offset cap rates, especially if you’re in a growth market (like Florida)

Biggest Mistakes

• He’s learned from numerous mistakes over the last 25 years
• One that stands out:
  • If you’re investing with someone, make sure they are managing their debt load properly
    • Make sure they aren’t propping up returns by increasing debt
    • He did it but found problems in it because you generate this massive fixed cost that could hurt you if you have issues with your debt
  • On the renovation side of things…
    • When you buy a property, you are excited to see the project get going
    • On day one, you start spending all of your renovation money
    • A long time ago, he spent his renovation budget early
      • Then he found out something about the property that he didn’t know
      • And he didn’t have the funds to deal with it (he had to spend his own money)
      • It’s better to hold back funds on reserve, just in case

Biggest Success

• When he bought his first apartment building, having been a lender and a CPA, he thought he knew lot
• But what he really didn’t understand was what a value-add concept really was
• His one-bedroom units were going for $415 (and that included heat)
  • They were trying to find a tenant for the apartment
  • But all of the applications had terrible credit reports
  • He couldn’t find good tenants and was worried
• He met this lady named Karen
  • She told him he had to make the apartments nicer.
  • She said, if you do that, good tenants will come
  • He told her, “I put everything I had into buying this thing. And now you want me to spend how much?”
  • She said it would cost $5,000 per unit
  • He said he didn’t have it
  • But she insisted – “If you do it, you won’t be sorry.”
  • So he took out his credit cards and bit the bullet and upgraded the apartments
  • Sure enough, he got $599 per month rent for the units AND they were from good tenants with good credit reports
• He learned a valuable lesson early from that experience and that is the business plan they use today
  • That is the plan that has made him and his investors millions of dollars in value-add deals

Advice for Old Dawgs Looking at Real Estate Investing to Help Them in Their Retirement Years

• By investing in value-add apartment syndications, you will generate both cash flow and appreciation – both of which are needed in retirement
  • Cash flow to live off of
  • Appreciation to boost your nest egg when the property is old
    • It’s not uncommon for people to double their money investing in value-add syndications – There are no guarantees but it has happen a lot
• In addition, the tax benefits further boost your yield
• For example, a current deal he has going right now is paying a 6% preferred return, which is paid quarterly as your cash flow
  • When the deal sells, the investor gets all his initial investment money back
  • And then, the investor gets an 80/20% split of the profit (with investors splitting the 80%)

Projecting Value

• Their deals are generally 3 to 5 year holds
• They also know that rents determine value
• When they buy a property, they project what they think the rents will be and they build it into their projections
  • They conduct a very detailed rent study to make sure that, on the day they close, they will get the rents that they are projecting
    • That’s always what they underwriting to on their deals
    • If they get higher rents, that will just be a bonus for the investors
    • They will look one level above where they are at and you can see where you are going to take your property
      • They act like they are a renter and they compare the properties in the market
        • They then look up to the nicer apartments in the area and you ask themselves, “Would a prospective renter choose my property over the much nicer one?” For whatever the difference is – then, they manage the difference to make sure that it’s enough so that people will still want to live in their property
        • That way, they know how they fit into the market TODAY – not in 3 years and not in 5 years
          • That’s where you project your rents to be
  • Then, they have reasonable rent increases with renewals (40% of the people move each year in the Tampa market)
    • In a year or two, you’ll see significant income growth
    • Usually, in year 3 it is obvious that you should sell
    • But it could also be year 4 or 5, depending
  • That’s what makes their deals successful so they’re not relying on future rent increases
  • After their value-add rent increases, their future increases are 2%
• So, for example, if you take a 100-unit property and increase all rents by $300 over the term of that hold, multiply it by 100 units for the month ($30,000) and then multiply that amount by 12 months, that’s a $360,000 boost in income a year. That equates to new value!
  • Divide that by a cap rate of, say, 5%, that property increased by $7 million in value!
  • And that’s why his business works so well

Current Business

• Why Ken is still running the business when he really doesn’t have to?  He could retire comfortably today!
  • It makes him happy to sell a property and write his investors big checks!
    • Then he hears stories about what an investor is able to do with the funds he receives
      • For example, a retired NFL referee was able to buy a second home in Florida as a result of an investment with Ken
  • He can now pour back into others who he can train to do the same thing he has done
• His company will continue to grow
• They are also putting packages together for their employees, as well, so they can benefit from the company’s success and reach their professional and financial goals

Rap-It-Up

• Favorite real estate book: Why Multifamily is a Total Gamechanger by Kenneth Gee
• Favorite business book: 7 Habits of Highly Effective People by Stephen Covey and The 10X Rule by Grant Cardone
• Most valuable web site for success (other than your own): YouTube
• Favorite app: Trello
• If you lost everything – all your assets – and had to start all over, knowing what you already know, and you only had $1,000, what would you do to re-launch your real estate investing business?  In my divorce, I had to deal with this kind of thing.  What I did was I went out to put deal after deal together with investors I knew. I would partner with the people who have cash and I would do all the work.  I would use real estate to recover.

How to Reach Ken

• Website: KRIPartners.com
• Get his free eBook at: https://info.kripartners.com/investors-d-7

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