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SHOW NOTES FOR EPISODE 677: TAKING MULTIFAMILY TO THE NEXT LEVEL
The difference between stumbling blocks and stepping stones is how you use them. In today’s podcast, successful multifamily real estate investors, authors and entrepreneurs J. Scott and Ashley Wilson share how they are taking challenging projects, within a challenging economy, and successfully transforming them up to the next level.
What You Will Learn
- Why multifamily investing is the best place to invest during a recession
- The value of partnerships when they complement each other
- How to find a project no one wants and turn it into a prize that everyone wants
- Why it’s important to find and master a niche strategy within a competitive marketplace
- The evolving shift in value-add investing
- Unique management strategies that cut costs and boost ROI
About Our Guests
J. Scott
Previous interviews with J. Scott:
297: Recession-Proof Real Estate Investing – April 1, 2019
Jay Scott is an accomplished entrepreneur, investor Best Selling Author and respected advisor. He has bought, built, rehabbed, sold, syndicated, and held over $70 million in residential property and currently owns several hundred units as a managing partner at Bar Down Investments. His diverse experience and unmatched knowledge of economic cycles and market trends, makes his coaching valuable to the success of aspiring Multifamily investors.
Ashley Wilson
Ashley Wilson is the co-founder of Bar Down Investments LLC, and HouseItLook, LLC, co-host of the Passive Investing Show. Best Selling Author of the Only Woman in the Room – Knowledge and Inspiration From 20 Women Real estate Investors, and a BiggerPockets series host. She started investing in real estate in 2009 has been involved in over $100 million and transactions within both single and multifamily real estate across over 1,500 units. When Ashley is not working on her businesses, she enjoys spending time with her family, including her husband and their two daughters. Additionally, Ashley enjoys competing with her horses Diacara and Wow!
More About Our Guests
- In 2018, J. Scott’s first appearance on the Old Dawg’s REI Network Podcast, he was already thing about getting into multifamily
- J. and Ashley have know each other since 2015
- J. sought out Ashley to help him get into multifamily as she had already been in multifamily for a few years
- He offered his expertise, time, network, etc. and she jumped in to help
- She is the best multifamily operator he has ever met
- Their skills complemented each other
- A few years later, in 2020, they realized they worked well together and they partnered to form Bar Down Investments. LLC
- Today, they are buying properties in the Southeastern US
- They own about 1,000 units in Texas
- Ashley had been involved in the syndication side of multifamily
- Prior to that, she had a lot of experience with flipping
- She also did single family rentals, both long- and short-term rentals
- She was in business with her father with HouseItLook, LLC and she progressed up to higher price point homes
- He had been a general contractor for over 40 years
- He handled residential and commercial projects
- After Ashley completed her education, she went into the pharmaceutical industry in clinical research & development
- She was part of the Ambient team
- Major depression disorder, insomnia, schizophrenia
- Went to 2 other pharma companies
- End up with GlaxoSmithKlein
- Global director of project management for vaccine development
- She learned how to manage remotely
- Santa Fe Adventist
- Worked at Pfizer
- She transitioned into commercial real estate
- A partnership group was under contract and one of the buildings in an apartment complex had burned to the ground
- The seller did not want to do the renovation
- They wanted to forward the proceeds from the insurance company to the buyer
- There wasn’t anyone on that team with construction experience or knowledge
- So they partnered with Ashley’s team
- She started just overseeing the construction side of things but evolved into her doing doing asset and construction management
- She completed the ground-up project in an impressive time period of only 5 months
- That was her first foray into multifamily ownership as a General Partner (GP)
- Then she partnered in a similar deal in a similar situation
- She also consulted on several different projects for different ownership groups that were in distressed situations
- She realized, at that time, that the asset manager gets the reputation of how the project does
- But, really, the underwriter is writing the playbook on how the asset manager is to execute
- If that playbook is not even feasible, the asset manager can’t deliver
- That is when she decided to launch Bar Down Investments
- Shortly, thereafter, she and J. started working together
- They now focus on operations and construction because of their backgrounds
- They work well together
- They have different complimentary skillsets
- They definitely value the same ethics, morals and conduct of how they want to run the business and want to be know for
- Shortly, thereafter, she and J. started working together
- That is when she decided to launch Bar Down Investments
- If that playbook is not even feasible, the asset manager can’t deliver
- But, really, the underwriter is writing the playbook on how the asset manager is to execute
- A partnership group was under contract and one of the buildings in an apartment complex had burned to the ground
- She was part of the Ambient team
Finding Their Niche
- Both J and Ashley played to their own strengths and didn’t try to learn new things where they had no experience
- They both have a lot of construction experience
- They both came from the corporate world with a lot of strong management experience
- They have formed a business that is tightly run from a management standpoint
- They also intentionally sought out properties that met their “wheelhouse” – distressed properties that need a lot of value-add, renovation, weak management (burnt down buildings or those in need of a heavy management overhaul)
- With less buyers in the buyer pool for these types of assets and with their experience, the upside is significantly better, meaning ‘ more “meat on the bone” for investors
- There has been a big change in the market in the way people were evaluating distressed assets historically vs. today
- With less buyers in the buyer pool, the add-in cushion that we see today for upside on value-add wasn’t factored in
- They were really paying off of NOI – current NOI, in-place NOI, as opposed to proforma NOI
- We see a huge departure from that around 2018
- All of a sudden, people started adding-in the upside potential in value-add assets
- The reason behind that is that, with value-add, there is still meat on the bone
- Traditionally, multifamily properties are primarily evaluated by the NOI approach, income minus your losses, annualized
- Historically, multifamily was evaluated off of in-place NOI, divided by the CAP rate in that market but, since 2018, as the multifamily market got flooded, that people were over-paying or looking for the upside potential
- For example, let’s say the NOI was $100,000 for an asset, you change the management, you do some renovations, so you can push it to $180,000 within 2-3 years time
- People were underwriting that and then buying it off of proforma NOI – of what the future could have
- They were paying for the greatest and best use for that property as opposed to what it was being used for today
- That’s why some people were saying that it was over-paying, because that current owner wasn’t producing that return but there was that return that was able to be achieved
- That’s why multifamily has had such a run-off in the last few years – because people have looked at value-add and packed in that upside potential, which, in turn, has compressed CAP rates
- In fact, value-adds were rewarded for poor operations because they, all of a sudden, had more upside
- This is the struggle we see all the time in this industry
- Buyers want to pay what a property is worth today and sellers want to pay what a property will be worth after they buy it and renovate it
- The buy sees the potential and says, “I want to pay, knowing what the potential is but I don’t want to pay for that potential having been achieved.
- The sellers want the price that will be achieve after all that potential has been achieved
- Negotiations flip flopped up until 2017/2018 – it was a buyers market!
- 2018-2022, it flipped and it became a sellers’ market
- Buyers were paying what the property was going to be worth AFTER the work was to be done
- Now, we’re in this crazy economy
- Things are slowing down
- Interest rates are going up
- There’s a lot fewer transactions going on
- We’re in a slow trend to return to a buyers’ market again
- In the next 6-12 months, we’re likely to see prices return to what they are today – a buyer’s price
- Buyers want to pay what a property is worth today and sellers want to pay what a property will be worth after they buy it and renovate it
- For example, let’s say the NOI was $100,000 for an asset, you change the management, you do some renovations, so you can push it to $180,000 within 2-3 years time
- All of a sudden, people started adding-in the upside potential in value-add assets
- With less buyers in the buyer pool, the add-in cushion that we see today for upside on value-add wasn’t factored in
Preparing for Economic Changes
- On a ground level, J and Ashley just emailed their asset manager regarding instructions to conduct a line item by line item audit of every single expense item (and income as well)
- The point is to see how creative they can get with their expenses
- to see what alternatives they have to work with
- For example, payroll is creeping up
- On larger properties, you can bring in virtual leasing to span multiple properties
- You can have a call center to do virtual touring
- You can spread these expenses over multiple properties
- During Covid, they had self-guided tours that they can return to
- They are also not letting impatience get to them
- On underwriting, they have stayed very consistent
- They have remained very conservative in their assessments of…
- What interest rates will look like in 3 or 5 years
- What are CAP rates going to look like
- Maybe it’s not like 10 basis points are held
- Maybe they will look at 15 basis points
- They are always looking at and monitoring the data
- How specific markets are performing
- Comparing to the national and global markets
- Foreign investors coming into U.S. markets
- Looking at things on both a micro and macro level
- How specific markets are performing
- J focuses on capital raising and underwriting
- He believes these things should be factored in very early — before the project is purchased
- He does sensitivity analysis, looking at things like…
- If inflation stays high, how will that affect the business plan vs. if inflation comes down?
- If interest rates go up, how will that impact the business plan vs. if the interest rates stay the same or go down
- If the costs of labor and materials goes up or down, how will that affect things
- It’s important in the underwriting to not just make raw assumptions but to make multiple assumptions and model out the business plan throughout the deal using a set of assumptions instead of just one
- They know that no one really knows what is going to happen
- They always look at worse case scenarios and insure that they have risk mitigation plans in place
How They Differentiate Themselves
- One of the reasons they got into multifamily in the first place was because they had a lot of cash on hand that they were looking to place or invest
- They were investing with other syndicators
- But, both being “control freaks,” they thought they could do things better
- They wanted to control things to make for a better investment
- Investors like that they put a lot of their money in these deals
- In the 2 deals they did this year, the three GPs (J., Ashley and a third partner) invested $3 million
- They invest money on the LP side as well
- This shows that they really believe in the deals
- They are viewed as seasoned investors by industry leaders
- J has been investing for 15 years
- Ashley has also been investing for 15 years
- They both have strong business management and corporate management experience
- They also have an obsession of excellence
- Property management is very important to them
- They have hired someone who oversees property management who also has an obsession with excellence
- They are very community focused
- They run social programs at their apartment communities
Multifamily Investing in Today’s Economy
- This is an excellent time to invest in multifamily properties
- Multifamily properties do well during recessions
- Supply restraints bring demand surges
- Prospective homebuyers are extending rental leases (it’s up to 57% – usually runs at 50%)
- More people rent during recessions
- Rents can go up during a recession – this is common
- When rents go up, property values increase
- If you want to be an active multifamily investor, this is an excellent time to get started
- Begin with building your network
- Partners
- Lenders
- Vendors
- Brokers
- Get educated
- Don’t just wait!
- Use this time to get educated and prepared to move!
- Begin with building your network
- In the next 6 to 12 months, J. expects to see some great deals popping up
- Be prepared
- If you want to be a passive investor
- Look for good partners to invest with
How to Contact J and Ashley
- Website: BarDownInvestments.com
- Social media: JScottInvestor
- J’s Personal Website: ConnectWithJScott.com
- Coaching Program: ApartmentAddicts.com
- Ashley’s Personal Website: www.badashinvestor.com
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