537: Building a Multifamily Portfolio One Door at a Time

SHOW NOTES FOR EPISODE 537: BUILDING A MULTIFAMILY PORTFOLIO ONE DOOR AT A TIME

He grew up in a small farming town in Texas and was inspired by his grandfather to be an investor.  He bought his first mutual funds at 12 but his true love was real estate.  Starting as a passive investor in syndications and then on to single family rentals, he grew his portfolio to over 749 units.  In today’s episode, real estate investor Sam Bates shares how he grew his real estate portfolio one door at a time!

What You Will Learn

• How to build a real estate portfolio while working full-time
• Investing in syndications: Tips for choosing wisely
• The added value of working with partners
• How to find and screen good potential partners
• Why he stopped investing in single family homes
• The pros and cons of starting your own property management firm
• Why building  from ground up can be cheaper than buying an existing apartment buikding

About Our Guest

Sam Bates

Sam Bates is the founder and CEO of Bates Capital Group and co-founder and managing partner of Trinity Capital Group.  Sam started his real estate journey in 2009 and has been directly involved in the acquisition, reposition, disposition, and asset management of over $100,000,000 in real estate. His portfolio currently has 749 units in Texas, Mississippi, and Georgia.  Sam and his partners have roughly another 250 units in the pipeline to be developed.  Sam has a Bachelor of Business Administration degree from Texas A&M University in Finance, an MS in Personal Financial Planning, and an MBA from Texas Tech University.

More About Sam

• He grew up in a small farming town outside of Lubbock, TX
• His dad was a farmer and both of his parents were teachers
• His grandfather helped him to understand the stock market
• By the time he was 11 or 12, he started investing in mutual funds
• He always wanted to do something in investments
• But also was really interested in real estate
• He went to Texas A&M and got a bachelors degree in Finance
• He wanted to get his Masters in Real Estate
• In between under grad and grad school, he got a job at UBS Financial in Los Angeles on an internship
• UBS gave him an offer to work fulltime
• He accepted the position as a financial analyst, putting together high net worth individual’s portfolios 2005-2006
• The job got to be monotonous and he wanted to go back to grad school
• He was in the equities market and thought that he could get his Masters in Personal Financial Planning
• He went to a school that had a joint MBA program and he could sit for the CFP
• The markets crashed during grad school
• He realized he didn’t want to go back to clients and high net individuals and try to convince them to invest in something he had absolutely no control over
• His own personal portfolio dropped 30-50%
• He went to work for a consulting firm after grad school but it didn’t work out how he had hoped
• So he looked back at real estate

Getting Into Real Estate

• While he was working full-time, he thought he would invest in syndications
• He started investing in passively as a LP (limited partner) and later as a GP (general partner)
• He invested in 2 apartment syndications and 1 hotel syndication
• The syndications never got off the ground
• When they were going through due diligence on the apartments, the operator saw things he didn’t like so he backed out
• The operator, unfortunately, kept 13% of what Sam invested and it rubbed him the wrong way
• The hotel syndication ended up going into litigation because it was a development that never got off the ground
• The third syndicate was a 208-unit apartment in Dallas and it went full-cycle
  • It did well overall
  • But there were issues with it
    • They had to remove the GP and bring in someone else to run it
• All three had issues that no one expected
• This motivated him to start investing in 18-20 single family homes from 2010-2014 on his own
  • He did fix ‘n flip, buy ‘n hold, a single family development or spec build and everything in-between
  • He learned a lot
  • Much of it was not transferable to multifamily
  • But it was a good way to start his investing career and to build a little nest egg
  • He knew it wasn’t scalable
  • In Texas, they have a lot of foundation issues and have severe weather issues as well
  • If you have a large cap-x expense, it can kill your cash flow for 2 or 3 years
  • From a risk mitigation standpoint, it made a lot of sense to go into multifamily
• When he built up enough capital, he decided in 2014 to invest in multifamily properties (acquisitions and development)
• He has sold off all but 8 of his single family homes

Moving Into Multifamily

• He initially thought he would buy a small apartment for himself
• But he ran into an old coworker who was also doing the same thing, so they decided to partner up
• They started looking in 2014
• They heard the market would correct in 2016 so they were looking to invest very conservatively
• Sam was in his late 20s and his partner was younger than him so, although they offered the best price on some deals, brokers turned them down for lack of experience
• After about a year and a half trying, without getting any deals, they brought in a third partner who had 20-30 years of construction experience
• Their first project was a mixed-use development – a 60 unit apartment complex with 10,000 feet of retail space
• It was his first syndication and as a GP

The Added Value of Partnerships

• Partnerships are like any relationships and marriage
• You need to only consider people who you know and trust thoroughly
• There will be times you will not always agree with each other and you’ll have to work through those times
• It’s important to have the same beliefs, work ethic and goals too
• One person he partnered with he had worked with over a year, knew his wife and knew what kind of a person he was
  • They didn’t jump into the partnership quickly
  • They had many discussions first on
    • What they thought the business should look like
    • How it should run
    • They got into the nuts and bolts of, if they got into a partnership…
      • How they would treat their investors
      • How they would steward the investors the best
• Then when they aligned with the builder
  • He also has the same values and morals
  • He had been in business for 20 plus years
  • He had multiple successful companies
  • He had a track record
  • They interviewed a guy who invested with him as an LP and it was a very successful investment
  • They had multiple conversations and dinners
  • It just felt right
  • They agreed to do one project together and, if it went well, they would do other projects together
    • Fortunately, the first project went well
    • They have since done many successful projects
    • And plan to do more projects in the future
• All 3 partners had full-time jobs when they started
  • Sam was at an energy company (he stayed there for 2-3 years before quitting to work full-time for the business)
  • His young partner owns a Chik-fil A and still does that today
  • The construction partner has his own development company and still does today
• The division of duties is as follows
  • Sam – acquisitions, underwriting, asset management, operations, working with banks, boots on the ground and fund raising
  • Younger partner – Is also a CPA, works with the CPA and tax accountants, relationship building, equity raises
  • The Developer – Development, construction issues and finding land
• Sam also has another partnership he’s involved with

Property Management

• They considered forming their own property management division/company
• They built it out but decided not to go with it
• All of their properties are throughout Texas and in some other states
• Because of the geographic distribution, it just didn’t make sense
• They may still in the future
• In surveying other investors, they said you need at least 1,500 units to make it a profitable company
• As it was, as he did his calculations, sure it could have increased their NOI, but it was still going to be a loss leader
• So they continue to work with third party property management
• He’s already spread pretty thin and he would be the one to oversee or run it and that
• It would have been too much for him personally
• It’s hard to fire yourself and if you are not doing it the right way, it’s not fair for your investors
• Besides, the current companies are doing a great job
• They do have an RV park that they self-manage

His Staff

• They operate pretty lean
• There are only two other people in their office that work part0time on accounting
• The RV park has an on-site manager that is staff as well
• He does outsource things to VAs (virtual assistants)

Finding Good Deals

• It’s Sam’s job to find good deals
• Some markets are better than others
• It’s very competitive
• Cap rates are more compressed than they have ever been
• Pricing is high
• There was a shift last September (2020) where people saw how Covid did not dramatically affect multifamily properties as much
• Since September, pricing has been on fire
• It is hard to get deals
• Deals in the larger markets that they are looking in have had 30 to 50 property tours
• He would get into the “best and final” stage but then, he would find out that he is only one of 20
• They got an “off-market” deal at the end of last year where they were one of 4 competitors
• They are under contract on a deal in Florida right now and they were able to preempt the marketing process
  • The broker took it out and was going to market it
  • But he was in Florida at that time and was able to talk the broker out of it because they had a good relationship with the broker
• If you get caught up in the marketing process, he’s seen apartments go $1-3 million over whisper price

When Building is Less Expensive Than Buying

• He has 250 units about to be developed from ground up
• It will have two phases
• They are about to do the the first phase (133 units) but it has been delayed because of all the rain
• They think they will start in July
• Phase two will have another 120-130 units
• He has other land in a Texas college town that they hope to put up another 120 units
• The massive increase in building materials has hit them pretty hard as well
• Pricing out those deals has been tricky
• They used to be able to develop apartments for really cheap
• They are developing class A properties outside of major markets
• One project is 30-60 west of Fort Worth
• They can build a brand new apartment for $110,00 to $115,000 per unit
• But now with the  prices skyrocketing building material, it takes $130,000 to $136,000 per unit
• Land has also got more expensive over the last few years
• In Dallas, a 1980s apartment asset in a decent part of town can go for $160,000 to $180,000 a door
• In secondary and tertiary markets they are still able to build cheaper than what you can buy 30-40 year old product

Your Biggest Mistakes

• Early on, his investing was way too conservative
  • He never thought he had analysis paralysis but…
  • When he underwrote deals, he used rules of thumb from an expense ration and income perspective that just weren’t realistic, especially in today’s market
  • If he kept underwriting the way he was, he would have never got a deal
  • If you keep striking out (like he was), he recommends you go to someone who has done it before and/or a mentor for advice
  • Go through your pain points to accelerate faster
• A tangible example of a mistake he did was a property he bought where they brought in a property manager that they had from another property they had, where he was doing a great job
  • He knew early on that the onsite manager wasn’t going to cut it
  • They were in a military town
  • They had thee deployments and their occupancy went from 90 to 70% over a 3 month time frame
  • He called other owners in the area and they said they were down to 80% but none as low as 70%
  • He fired his managers but he should have done it 3 months sooner

Your Biggest Success

• He likes to use strategic thinking and to think outside the box
• On thing he did on his last acquisition in Atlanta
  • His background in consulting and property tax played a major role
  • Atlanta is a disclosure state and they value real property on January 1
  • They were going to close at the end of December of last year (2020)
  • He knew that if they close before the end of December, the county would know what their purchase price was on the property
  • The price price was more than double what the appraised value was on the tax role
  • So his taxes for 2021 would have increased up to $150,000
  • He changed closing until after the first of the year and they saved anywhere from $80,000 to $100,000
  • It helped 2021 cash flow significantly

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

• Each person has to first look at what their goals and dreams are for their retirement
• There are so many types of real estate to invest in
• Invest in things that meet your goal
• For example, if you’re a passive investor and you invest in a syndication and you want to get your money back in three years, don’t invest in a project that will return it in 5 to 7 years
• There are a number of things you have to look at
• Not all investments are equal and they all have pros and cons

Current Business

• He is still a very young guy
• He feels he has found his passion and he loves real estate
• He loves going into the city and making an impact
  • Not just creating a nice asset
  • But also improving the lives of the tenants
  • Also helping investors reach their goals and help the leave a legacy for their
  • He loves the responsibility it brings
• He’s never really had a set goal like how many units he’d like to own by a certain date
• He just wants to continue growing his portfolio with assets he believes in
• He invests in all the assets they buy
• He just wants to create a good return for everyone involved

Rap-It-Up

• Favorite real estate book: Rich Dad Poor Dad by Robert Kiyosaki
• Favorite business book: The Compound Effect by Darren Hardy
• Most valuable web site for success (other than your own): Niche.com or CensusReporter.com
• Favorite app: Audible.com
• Favorite quote: “Go confidently in the way of your dreams and live the life that you’ve imagined”. – Henry David Theroux
• 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 launch your real estate investing business? I’ve been a big proponent of partnerships and like to say ‘your net worth is your network’. I would probably talk to people I’ve known previously and see how I could add value to them and bring them business.  Hopefully, they would reciprocate and I would be able to launch the business that way.

How to Reach Sam

• Website: BatesCapitalGroup.com

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