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SHOW NOTES FOR EPISODE 371: HUSBAND AND WIFE TURN $50K EQUITY LOAN INTO $56 MILLION REAL ESTATE PORTFOLIO IN JUST 5 YEARS
When James Kandasamy and his wife took out a $50,000 home equity loan to invest in real estate, they never dreamed the loan would turn into over 800 units and $56 million in real estate assets 5 years later. In this podcast, James shares how he discovered the power of leverage, multifamily re-positioning and effective asset management to quickly build his real estate empire.
What You Will Learn
- How using leverage and direct-to-seller marketing you can quickly grow your investment portfolio
- What is the BRRRR investment strategy and how can you apply it to multifamily?
- What is a double-closing deal strategy?
- How to find off-market deals – his top five strategies?
- What is a value-add investment strategy?
- What is the best approach that balances cash flow and generates high IRR?
- How to invest in multifamily with almost zero “0” down?
- The five things to look at first to determine if you have a good deal
About Our Guest
James Kandasamy
James Kandasamy is a real estate investor, sponsor and syndicator who has been in multifamily acquisitions and asset management since 2015. He has special expertise in finding value-add multifamily opportunities. He has identified, underwrote and overseen the acquisition process of over 800 multifamily units worth over $56 million and also ran the execution of each business plan in the portfolio, averaging 20% IRR. James has a Bachelor of Science in Electrical Engineering from Science University of Malaysia and an MBA from the University of South Adelaide in Australia.
More About James
- Lives in Austin, TX with his wife Shanti
- James started investing in real estate part-time
- James had a full-time engineering job up until 2 months ago
- Buy deals in San Antonio, TX and is starting to look for deals in other markets
- Currently owns 800 units across 5 different properties
How did James Got Involved in Real Estate?
- James and his wife had tried a lot of businesses before going into real estate investing
- They tried various online education programs, sold books that he wrote online, tried stocks, but nothing really worked
- James was drawn into real estate by someone he knew who was buying one rental property a year and getting a good 9% cash-on-cash return
- He heard over the radio about someone putting only $5,000 down payment and to buy a house
- So he started researching various investing methodologies and found out about the “BRRRR” and “Double-Closing” strategies
- In 2013, James and his wife started buying single family properties in San Antonio, TX as rentals
- He bought in San Antonio because it looked like a “slow and steady” real estate market
- Recent stats from the US Census bureau show that San Antonio has the highest “in-migration” numbers in the country
- He bought 13 homes. 2 out of the 13 single family rentals he purchased were flips. However, after the flipping experience, he promised not to do anymore flips because it was too much work
- From the 11 rental properties he acquired, 5 required $8,000 – $10,000 “cash out of pocket.” But the last 6 were almost $0 cash out of pocket
- Their primary buying strategy for both single family and multifamily properties was a famous method from BiggerPockets called BRRRR- “Buy, Rehab, Reposition, Refinance, and Repeat (BRRRR)”
- They started with Single Family BRRRRs and learned from there
- Moved onto Multifamily BRRRR with exact same strategy 3 years ago
- James had a full-time job as an engineer (up until 2 months ago), having acquired 340 units and closing on another 460 units
- He resigned from his full-time job because he needed to give a lot more time and attention to the real estate business
- His REI business is him and his wife only – no partners (plus 18 on the property management side in San Antonio).
Strengths
- Very analytical and MBA degree (James)
- Good at finding off-market deals – analyzws 4-5 deals a week (James)
- Does his own acquisition financing (James)
- Has own property management company (run by his wife)
- Rehabs (his wife oversees)
- He tries to do everything so he can control the entire pipeline
- Has strong investor base
Transition to Multi-Family
- When he started in Multifamily, he got educated in 2 programs:
- One was with a group in Texas, who taught him the nitty gritty part of multifamily. The key thing that he learned from this group was: “Make sure that you do a really good job in property management”
- The 2nd was from a person from New York who taught him how the Wall Street Commercial Real Estate business works and how they execute deals
- The above trainings, combined with his experience with single family homes and finding deals, helped him come up with his own unique approach to acquire and re-position multifamily properties
- They did not have capital in the beginning, so he refinanced his personal home, taking out a $50,000 equity loan, to invest in single family homes
- He only had $50,000 to start his real estate investing in single family homes
- He flipped 2 houses and kept 11 as rental properties
- The 11 rental properties increased almost $400,000 in equity within 2 years
- He refinanced all of the SFRs almost 3 times to take out money to purchase multifamily properties
- Basically the $50,000 brought him to real estate holdings over $56 million in just 3 years
- In the beginning, he pulled out $125k from his accumulated $400k equity (from the 11 single family homes) to buy his first multifamily – a 45-unit apartment. He got the 45-unit deal through text-blasting to 600 prospects
- One thing he realized, even if you buy a normal rental, and when you buy right, it can cash flow 7%- 9% without doing anything
- But if you do “double closing,” then it becomes almost zero “0” money down. Your cash-on-cash return can go infinite
- But in multifamily or any real estate, you are at the top of the chain, and you can make a lot of money
- They are currently selling off their SFRs whenever a tenant moves out. Currently, they have only 4 left out of the original 11 single family rentals
- Multifamily is more scalable and much easier when you have established your system and processes. They have 18 staff (in the field managing properties) right now and no partners
- They have no full-time construction team but because they budget well and are good job at paying them on time, they have a loyal construction team
Double-Closing Deal
- James is a long-term buy and hold guy and the best strategy, which balances between cash flow and high IRR, is basically to refinance your invested capital as quickly as possible and let it cash flow for the long term
- A Double-Closing deal is basically buying properties with investors, but instead of selling the property after your hold, you do a cash-out refinance, pay investors back and hold onto the property
- First, you buy a property with 20% – 25% down payment and a hard-money loan or through private money
- After that, you refinance it into a conventional Fannie-Mae housing loan
- Basically, you will have a delta, like 5% between the hard-money lender and the normal conventional housing loan
- This 5% will pay you back a lot of your down payment that you put in
- And that’s how it results in a zero down money effect
- Some of the houses will even pay money back directly to him because of this strategy
- But you have to be careful with refinance, because if you refinance too much, your mortgage payment will erase your cash flow later on. Most banks and loan agencies, will not allow refinance sooner than 12 months
- He seeks to target a percentage of cash out so as not to set the mortgage too high — he shoots for 75% LTV
- His presentation to the banks is to justify why they increased the value through their efforts, rather than just a market increase
- Investors generally get 30% – 40% IRR
- On all their deals, they have to put in money
Reasons Why Most People Will Not do Double-Closing deals
- They want to sell and get the money out -they want a big chunk of money back and full equity out. However, they also have to pay taxes on that cash
- They don’t have money to rehab
- The way the syndicators structure the deal is back-end loaded or front-end loaded – so when they sell, the get the fees
- James and his wife primarily focus and specialize on value-add deals:
- They do not generally buy deals that are cash-flowing on day one with no upside
- They only buy cash-flowing day one deals if there is an upside deal wherein they can put in capital and improve operations and increase the ROI of that property
Strategy in Finding Off-Market Multifamily Deals
- He currently gets most of his deals from brokers
- But, in the beginning, he had to do more direct marketing to find his deals – however it takes a lot more work
- Top off-market strategies
- Started with “yellow letter” direct mail marketing – Would get 5 responses out of 1,000 mailed, and hopefully would close 1 out of the 5
- Text blasting – same strategy that he used for Single Family
- Letter Marketing – same strategy that he used for Single Family
- Cold Calling – not widely used, it could take some time, but it still works. He uses this for multifamily only
- To get phone numbers for text-blasting and cold calls, he has to do skip tracing
- The first multifamily deal that he bought was through text blasting directly to sellers wherein he sent 600 text messages in a single day
- He got the owner’s name and mobile phone numbers through 2 skip tracing tools
- LexisNexis
- TLO
- Both are fairly expensive services
Every Deal Should Solve a Problem
- Because he understands about the entire pipeline, he can look at the Profit & Loss (P&L) and can figure out quickly what is wrong with a propective property
- He tries to help sellers to solve a problem
- Effectively dissecting P&Ls becomes a critical skill that any good value-add syndicator should have
- Most of his time is spent in finding and analyzing deals, while his wife focuses on turning around the property – doing rehab and the property management
- He will analyze 3-4 deals per week and will only look into properties that will pass his “smell test” with the following key factors:
- Value-add of the property, for example, if the property has been rehab for 50%-60%, you are basically coming in for another 50%, which is not much of a value add
- Probable loan amount, look at when was the property last bought and sold, for example, if somebody was selling the property which was bought 2 years ago, the guy is basically flipping the property, then this will have a high loan amount and less equity, the chances of getting good price is low.
- Asking price per unit in relation to unit mix on the square footage of the unit – if it is too high compared to average property on the market, he won’t touch it
- Location – look into Trulia.com, to see if not it is in a high-crime area
Typical Buying Criteria
- Focuses on value-add deals
- Doesn’t buy cash-flowing, day one, deals with no upside – there must be an upside
- Wants to put in capital, improve the operations and increase NOI
- Any deals with upside in it. He doesn’t mind buying any deal with low cap rates but he needs to analyze the deal and figure out why the cap rate is low – management is bad, financials are wrong, did they add all kinds of capital into P & L and make the cap rate low
- Knowing how to carefully analyze the P&L is a critical skill to finding good properties
- What he looks at first for potential acquisitions:
- If the property was already rehabbed 50%, that does not leave enough for a significant value-add
- When was the property last bought? If they are flipping it, chances are not good you will get it at a good price
- What is the resell price?
- Looks at price-per door to unit mix and square footage – if too high to the average property in that market, then a no go
- Location – looks at local crime rate. Wants good location with low crime rate,
- 95% of the deals are done off-market. The remaining 5% are not even worth looking at!
- James buys consistent with the market price, consistent with the market cap rate. If the market is 6% cap rate, but their is upside in that deal, you can bring it to 8 cap rate in 2 years – that is the upside, but you need to put in the work – rehab, increase rents, reduce expenses. That’s what you see in the spread – pre-improved as opposed to post-improved cap rate
- Looks for properties built in 1980’s and above, but he can still do 1960-70’s properties if they have a good upside and he can fix it and turn it around
- Targets B & C class properties – the main criteria is that the property has an upside. He needs to see upside in 2 years by putting in capital
Biggest Mistakes
- Arrogance – With his ego as an engineer, he figured that it would be easy to calculate and analyze deals
- He made a lot of mistakes early on with his single family homes
- On one deal, he did not lose big money but he lost around $3-$4k. The appraisal came in so low, the wholesaler was trying to sell, James realized that he was not well-educated enough to handle that kind of deal
- His biggest mistake was not running his rent comps and sales comps properly
- Another mistake is using the wrong contractors. He didn’t take the time to weed out the bad contractors. While he was trying to reduce his rehab cost, the whole budget was off because the work had to be re-done
- Now, he has learned how to do contractor management more effectively and how to do the sales comps better
Biggest Success
- His first 2 deals – were bought at a really good price and turned them around in less than one year
- Refinanced at 117% on bought deals within 12 months
- Investors put in $100k and after 12 months, they got their back $100k back but they still owned the property and continue earning interest
- This means commercial real estate with zero down
- He likes to cash-out re-fi but is cautious because if you cash out too much, your mortgage payment will erase a lot of your cash flow later on (most Fannie and Freddie loans don’t allow a cash-out in less than 12 months but James writes a lot of information and PowerPoints to show the banks all the work he is doing to justify increased price). He buys at 60-70 LTV and does re-fi at 75
- 30-40% IRR for investors
- The main reasons why most people sell instead of re-fi:
- People like the big return (although they have to pay taxes on the capital gains)
- They run out of money to rehab so they sell
- He buys for the long term
Advice for Old Dawg’s Looking at Real Estate Investing
James categorizes investors according to needs versus the deal types:
- Investors who needs to multiply the small amount of money they have
- Look for syndicators who do value-add deals. Value–add deals may not cash flow on day one but it will cash flow in 1 -2 years but it multiplies their equity
- Investors who have lots of cash and just want to generate passive income/cash flow and do not want to take risk.
- Look for syndicators who are doing low-risk cash-flowing-day-one types of investment
- Investors looking at passively buying rental properties
- Market is hot but inventory is low
- Start networking with people, find motivated seller
- Do syndication and raise capital from investors
- 50 plus investors have an advantage because they are the same age of most sellers
Where He Sees His Business in the Future
- Looking at how to scaleability
- He wants to hire staff to scale gracefully into a larger deal. Who to hire first?
- Hire acquisition manager?
- Hire operation manager?
- He would like to grow much larger in quicker way but he wants to make sure that he can still do good due diligence in his buying criteria and underwriting
- He has done analysis of different real estate asset classes over the last 15 years (has studied Integral Realty Reports) – his New York mentor taught him how to do this
- He looked at data for Austin, TX (asset classes – office, industrial, multifamily, self-storage, mobile home parks, etc.) and he saw that office is doing much better than other asset classes but he knows multifamily very well. Therefore, he is sticking with what he knows best
Rap-It-Up
- Favorite Real Estate book: Rich Dad Poor Dad by Robert Kiyosaki
- Favorite business book: The Magic of Thinking Big by David Schwartz
- Most valuable web site for success (other than your own): BiggerPockets
- Favorite app: DropBox
- Favorite quote: “Whether you think there is deal out there, whether you think there is no deal out there, you are right”
- If you had to start all over, knowing what you know, and you only had $1,000 cash, what would you do to launch your real estate investing business? Start letter marketing again. Market direct to sellers.
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