351: Finding the Best Off-Market Value-Add Apartments

SHOW NOTES FOR EPISODE 351: FINDING THE BEST OFF-MARKET VALUE-ADD APARTMENTS

Josh Eitington learned multifamily investing through the school of hard knocks.  Starting with C minus properties in tough areas and moving to upscale B properties in hot downtown markets, he has refined and improved his investing strategy one step at a time.  In today’s podcast, Josh shares how his business is now thriving and how he is now finding great off-market deals in great markets for long-term value and strong returns.

What You Will Learn

• Why you can buy the wrong property in the wrong area and still make a great profit
• How a property manager can be a good “first contact” person to help you find deals in a new market
• Tapping into local banks to find multifamily foreclosures for a good source for off-market deals
• The power of the right partnerships
• Why it makes sense to develop “investor-driven” investment strategies
• Finding and targeting dynamic markets for the long term
• What to look for in a good market
• Why you must move quickly with off-market deals
• How to differentiate yourself from other investors

About Our Guest

Josh Eitingon

Josh Eitingon is the co-founder of DXE Properties. DXE is a value-oriented boutique real estate investment firm providing commercial acquisition and asset management services to their clients. Focused primarily in the Southeast, Josh brings a keen eye to each acquisition, identifying opportunities for growth. With a focus on optimizing property performance, he works closely with management to drive each business plan. Prior to DXE, Josh founded JAE Property Group.  JAE was born with his first real estate investment, a 20-unit distressed property in Cincinnati, OH.  Josh oversaw all major operations of the company and was instrumental in all phases of acquisition, asset management, and investor relations.  Through JAE, Mr. Eitingon and partners established a portfolio of multifamily investment properties clearly fitting into a well-defined investment strategy. Prior to JAE, Josh was one of a two member acquisition team at URS Capital Partners, a real estate investment company located in Huntington, NY.  Josh was an integral part of the company’s growth from its infancy to the purchase of over $100 million dollars worth of multifamily real estate.  Josh is a Chamber of Commerce award recipient.  He is a graduate of the University at Albany and resides in Long Island, NY.

More About Josh

• Since college, he was always drawn to real estate
• Read Robert Kiyosaki’s Rich Dad Poor Dad
• Real estate was very practical, whether house hacking or owning multifamily properties
• It made a lot of sense
• Exited college in the middle of the recession
• He took the first job he could get and it was in the software industry
• Then, later. he started working with a mentor in a real estate investment firm (URS Capital Partners), first as an analyst, then as an acquisition guy
• While still working full-time for URS, he founded his own company, JAE Property Group, a real estate investment firm

Building His Real Estate Portfolio

• His first deal was a 20 unit apartment
• It was 2011-2012, and he was 25 years old
• He was still working full-time when he acquired his first property
• Through his mentor, he was connected to a property manager in the Cincinnati area that was actively doing deals in that area
• The property manager was a good resource on both the management and deal sourcing sides
• The property manager was working with a bank on a distressed asset (the 20-unit apartment), a C- class property, which the bank was taking back
• The property manager was able to approach the bank and position Josh as the right buyer for the property
• They negotiated a short sale and the bank financed the deal
• They were also able to negotiate another deal on a property worth $550,000 for only $175,000 a few years later
• They learned a lot from the first purchase
• It was in a bad, rougher part of town in College Hill area
• It never consistently cash flowed for them
• Held it for only about 2 years
• Sold it for $500,000
• They look at it like a “multifamily flip”
• It was a good learning experience, good for the investors, but tough to manage
• He was still, however, very interested in the Cincinnati market – diverse employers, higher CAP rates than other markets
• The next 2 acquisitions were in Cincinnati – a 44-unit deal and a 62-unit property
• URS Capital Partners was focused a lot on the Southeastern portion of the US and he learned a lot about that region as well
• As he saw Midwest cap rates decline, they shifted focus to the Southeast (6 or 7 cities)

DXE Properties

• DXE was founded when he pulled his current partner out of Oxford Properties, a Canadian pension fund, where he was working
• His partner bought into Josh’s current assets, giving them start-up capital
• They currently have acquired about 500 apartment units and 25,000 in retail space
• 10 out of 12 projects are multifamily
• A year ago, they entered the retail side but is that is not their primary focus

Investor-Driven Strategies

• Some deals have more investors.  Others have just a few, however the few tend to be more active investors
• Sometimes the investors shape the investment strategy
• Usually do 5 to 7 years old
• However, Josh fells if the asset is doing fine in 5 to 7 years, he would prefer to just hold on to it
• The value compounds with longer term ownership
• With syndication, people tend to want their money back in a reasonable time-frame (5 to 7 years)
• If they do a cash-out re-fi, they give investors their money back but still keep them in the deal

Property Criteria

• Depends on where they are in the market cycle
• Very location sensitive
• Current target cities
  • Charleston, SC
  • Charlotte, NC
  • Atlanta, GA
  • Greensboro, NC
  • Tampa. FL
  • Jacksonville. FL
  • Greenville, NC
• Looking at only B Class areas
• If there is an economic downturn, they will fair better in a B area
• Garden style buildings
• 70s – 80s and newer
• More focused on price vs. number of units
  • Range: $5 to 20 million
  • On units, it’s more a function of the property manager to manage that properly
• Recent deals
  • 30-unit deal in uptown area of Charlotte
• Lesson Learned on smaller unit management:
  • When he had his 20-unit property, having scattered management, not located onsite, was very difficult to manage
  • A lot depends on having the right manager

Biggest Mistake

• Second deal
• Shortly after the first
• East Cincinnati
• Bought at decent price
• 44-units
• Too small for full-time staff
• Location issue
• Thought he could manage it more consistently
• Never really cash flowed with any consistency
• Didn’t hold to long
• What he learned:
  • Get out of the C- Class space
  • Focus more on location
    • Look for areas with:
      • Less crime
      • Less chance of turn-over
      • Tenant disputes
      • Nicer, upper-scale amenities
        • Starbucks
        • Publix
      • Less:
        • Food Lion
        • Check-cashing places
  • Don’t be afraid to pay more for a property to get less headaches

Biggest Success

• Panama City Beach, Florida
• Investment group bought a big portfolio of distressed properties coming out of the recession
• They wanted to flip out of a multifamily deal because it wasn’t really their focus
• Were making over a million dollars in less than a year
• Had a lot of reservations
• Not multifamily operators
• Well-located property
• Made sense on paper
• Bought right
• Bought at $35K per unit
• 2 years later – Sold for over $50K per unit
• Took a leap of faith because he had the right property management and right team that could identify issues and implement the needed improvements

Succeeding in New Markets

• You never know how management will be until they are working for you
• Best guidance on good property managers for an area has come from referrals from
  • Other owners
  • Brokers
• Carefully interviews candidates, asks the right questions

Off-Market Deals

• Most of his deals have been off-market
• Does best on off-market deals
• Has to have a pulse on the market
• Continue to grow relationships with brokers
• It’s difficult to compete with other investors on “on-market” deals
• Try to do 2-3 good deals per year
• He is very selective
• When they find a good off-market deal, they get very aggressive to lock-down those deals
• Most of their off-market deals are coming from brokers
• Underwriting guidelines:
  • Wants to be able to increase rents, through a value-add strategy, at least $150-200 per unit

Advice for Old Dawgs looking at Real Estate Investing

• The earlier you start, the better
• The first few years there’s a lot of unknowns
• Making 10% the first year is probably not going to happen
• Be patient
• You’re looking at the cash flow coming out of your investment
• Focus on well-located deals
• Look what your normalized operations will be in the second or third year
• Don’t be too excited about the 12 CAP property — it’s not reality
• You don’t want to take the gamble later in life
• Go for the consistent, realistic return
• Diversification
• Tax efficient

Current Business

• How DXE differentiates itself:
  • Renovation (his partner comes from the development side)
    • Really particular on their improvements – down to the door handles
    • Maintain consistency
    • To a higher level of quality at completion
    • Over time, this will be a differentiator
  • Technology
    • Downtown project in Charlotte
      • Offering unique amenities
        • Every unit comes with an Amazon ECHO
          • Tenants can just speak directly to the ECHO to submit a maintenance request
            • No longer need to call and/or be put on hold
            • No longer need to go online with your computer to submit requests
• Goals for DXE
  • Would like to manage $100 million worth of real estate in the next 3 years
  • Wants to continue to stay true to their investment methodology and belief
    • Continue to focus on location
    • Buy with a longer term thought process, even if there is an opportunity for a short term exit
    • Stress test every deal in anticipation of market changes and fluctuations
    • Really feel good about the two to three acquisitions they make per year
      • That they can weather any storm because their break even occupancy is 78%
        • Even if they flat-lined rents, that they would be fine for 2-3 years

Rap-It-Up

• Favorite real estate book:  Powerhouse Principles by Jorge Perez
• Favorite business book: Think and Grow Rich by Napoleon Hill
• Most valuable web site for success (other than your own): BiggerPockets.com
• Favorite app: AirTable
• Favorite quote: “Money never sleeps.” – Gordon Gekko
• If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business?  I would take my best contacts out to lunch or dinner.  Focus on the range of contacts he has from either an investment or advice perspective. Get them all in one room or one-on-one.

How to Reach Josh

• His website: DXE Properties

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