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SHOW NOTES FOR EPISODE 281: HOW TO SUCCESSFULLY UNDERWRITE A MULTIFAMILY DEAL
Multifamily investing is not only the key to an early retirement, it has other advantages – great tax write-offs, steady cash flow, forced appreciation and retirement longevity. In this episode, multifamily investor Omar Khan shares insider underwriting tips on how to find great properties, survive the upcoming recession, negotiate excellent loan terms and build a real estate legacy for your family.
What You Will Learn
- Why real estate is currently the most in-demand investment
- 3 investing strategies Omar learned from other real estate investors’ mistakes
- How being a sponsor on a multifamily deal can put you on the fast track to better deals
- Why his company is now buying deals for 7, 10 and 12 year holds
- How being slow, steady and consistent can help grow your business and attract new investors
- When saying “no” to lenders makes sense, resulting in the best terms
- Why the fact that people are living longer means real estate needs to be a key part of your retirement investment strategy
About Our Guest
Omar Khan
Omar is responsible for capital raising, strategic planning and investor relations for Boardwalk Wealth, a private equity firm located in Dallas, Texas. Boardwalk Wealth connects international investors with US-based multifamily real estate opportunities, with their unique focus on helping Canadians identify ideal commercial real estate opportunities in the Southern United States. They offer access to premier partners with a track record of large-scale investment, best-in-class property managers, and tax and law specialists in foreign investing. Omar has over 10 years of global investment experience across real estate and commodities and has advised high net-worth individuals and entrepreneurs on real estate portfolio allocations. He has participated in capital financing and M&A transactions valued at $3.7 billion dollars and syndicated multimillion dollar deals across the US. He is a CFA Charterholder and graduated with honors from the University of Toronto with a B.Com in Finance. Omar moved from Canada and now lives in Texas with his wife and newborn son.
More About Omar
- Born in Dubai
- Lived in Pakistan
- Wanted to go to school in Canada because they have more fresh water than any other country (80% of world’s fresh water supply)
- Grew up in Toronto, Canada
- Majored in finance in college. Although he had much experience in accounting, he did not want to go that direction
- Father was engineer but with a finance background, a businessman with Magnavox, worked with the Department of Defense
- Omar traveled back and forth from Pakistan to Canada
- His family owns a lot of commercial property (mostly in Pakistan and a few in the U.S.) – retail centers, low service motel/motels – not much residential real estate
- Grew up listening to dad and family discuss their real estate holdings, tenants, rehabs/refurbishing strip centers, etc.
- Would visit different properties, also learned about financing side of business
- Moved to Texas three years ago with his wife (who is a physician) and child
Early Involvement in Real Estate
- He learned real estate from his father’s real estate holdings and portfolio
- Name was on trusts, etc. for properties
- Managed money for people in Canada for private individuals, family and friends
- Involved with the asset management of family properties
- Wanted to invest in Texas
- Family friends had invested in Houston and, as they got older, he helped them to restructure properties for tax efficiency
- Started looking around for opportunities of his own
- Had experience with institutional investors (big broker dealers) through college
- His early experience was will Oil & Gas industries, asset management on institutional side
Investing in Multifamily
- His wife, who is a physician, and he make a good income and they were looking for investment vehicles to reduce their taxes
- He saw many tax advantages in multifamily investing (cost segregation, accelerated depreciation, 1031 exchanges, etc.)
- Also, with multifamily, he saw how they could leverage their experience and background and how they could scale up their operations
- They could have just started buying houses and scale up over a number of years but with their contacts, network and background, they wanted to start with multifamily
- They started investing in private equity along with other investors
- He has invested as a General Partner (GP)/Sponsor, guaranteeing the debt on the multifamily deals, but a portion of their funds is going through under a Limited Partner or LP structure
- What’s he’s found is that, as an investment, it is much easier to raise money for real estate than any other type of industry. He thinks it may have to do with the fact that real estate is a “tangible asset” that you can touch and feel. For example, with investing in technology, you can get a higher return, but most people don’t always understand it and it is intangible
- He prefers lower returns in exchange for lower risk investments
- He has invested in a property in Jacksonville, FL that is in such a high demand, fast growing area, that all they have to do is bring rents up to market to get their target return
- Some more mature, stabilized properties, that are at market rents, well positioned, and where there is a lot of development going on, they are doing 7, 10, 12 year holds
Biggest Mistakes
- Most mistakes that he learned were at other people’s expense, from his observations of their mistakes
- He lived through two major recessions at an early age
- 2008 recession
- Oil & Gas crisis in 2014
- He saw others suffer but he learned from what he saw
- He saw family friends he knew who had farm land that had been rezoned from commercial to residential, making them instant millionaires but when easy money comes quick, it also goes quickly as well. They bought fancy cars, buying houses they couldn’t afford, spending money like it was going out of style. They went bankrupt
- The experience taught him a few lessons
- Be cautious with your money
- Live modestly, below your means
- You always maintain ample liquidity at all times
Biggest Success
- Have been diligently building their network out
- They have been fixed on accomplishing the things they set out to do
- People want to see companies that are consistent, hard working and stable and that’s the key to their success
- They are doing things that most people only do on an institutional level, for all their clients
- As a result, broker relationships, investor database are improving
- As long as you keep doing the right thing, it will come back to you favorably
Multifamily Underwriting
- Local markets – Dallas, for example…
- Good economy
- Unemployment at record lows
- Great place to live
- Great place to raise a family
- Was a very hot market – it was so good, you could just pull growth numbers out of the air and actually achieve them
- Now, rent growth has slowed
- Nationally
- Good economy
- Unemployment at record lows
- The base of expanse growth is increasing
- Typically it would be at 2%
- The rate of inflation now is 2.5 to 3%, depending on where you are
- Your exit cap – When you look at the amount of basis points you’ve got to add the minimum to your purchase cap, you’ve got to be conservative. That has to increase
- Many are looking at adding 30, 40, 50 basis points but he feels you are better being conservative. You’re better to start off, for B and C class assets, at an exit cap of 75, 125, 150 points higher than your entry point just to temper down expectations
- No one’s going to have a problem if you give them more money
- They will have a problem if you say you are going to return 16% and you return 15.5%
- Take the temperature down. If you lose investors that’s OK. It’s better to promise low and over-deliver that to project too high and under-deliver
- Debt Service
- Currently, most deals are debt service constraint
- Agency – Currently, low to mid 60s – maybe 68-69%
- You can get better terms outside of agency money and it will work but you can’t get agency at better than the above rates
- The price sellers expect are different than the price lenders are willing to lend at don’t agree
- Limited good assets available
- Used to be that he would look at 30-50 properties to find a good one
- Today, you need to see 100-120 before you can find one good deal
- Working with lenders
- If they give you terms, even if they are good terms, just say “no!”
- Say, “Those are complete BS terms. I want to go line item by line item to explain why”
- But make sure you have a reason why you want then to be lenient on the line items you are contesting. You better have the knowledge and a good reason. If you do, it can result in great terms
- Example:
- He was buying an asset that had high payroll numbers (because it was owned by a large private equity firm and they were just unloading costs in this area) but the lender was underwriting on the T-12 cost
- Omar sat down with the lender and said, “The sub-market average is $200-300 below this amount. Just because the current owner has a ridiculous amount or are off-loading other costs here, doesn’t mean you have to underwrite it this way.”
- The result: The lender takes out a couple hundred there, a couple hundred in utilities, add 5-10% in RUBs, then suddenly, you start to see a very different picture
- The lender doesn’t want to say no. They want the loan so you work with them to get the result that both sides can agree works
- Is it going to be easy? No. But at least you can start getting better terms
- Where to identify costs for under-performing assets:
- Payroll
- Utilities
- You need to walk people through your vision for that asset
Advice for Old Dawgs Interested in Real Estate Investing
- He has to put on his Certified Financial Planner hat
- Not everyone should he as heavily invested in real estate
- In your retirement, there are three things you need to look at:
- If you make a mistake you don’t have a lot of time to recover from that mistake, like when you were younger
- You have to manage your expenses today with long-term growth of your assets – you don’t want a “longevity risk” – meaning, we are living longer now and the amount you have saved may not be enough
- Meeting fixed expenses isn’t enough – you need to build your nest egg
- You can invest in a combination of real estate – capital appreciation heavy, well-located asset – but also invest in high cash flowing assets
- You need to look at the long-term growth aspect
- Real estate assets that have cash flow AND appreciation are best!
The Future of His Company
- He’s looking forward to designing a life where he can have free time in the near future to spend with his family, go to his son’s ball games and enjoy time with his wife and family
- He wants to have the time to build a personal bond with his son
Rap-it-Up
- Favorite real estate book: The Real Estate Game by William Poorvu
- Favorite business book: The Black Swan by Nassim Nicholas Taleb
- Most valuable web site for success (other than your own): Google.com
- Favorite app: Slack
- Favorite quote: “It Ain’t What You Don’t Know That Gets You Into Trouble. It’s What You Know for Sure That Just Ain’t So.” and “If you tell the truth, you don’t have to remember anything.” – Mark Twain
- 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? Develop a marketing campaign. Use current lists and do a mailing/email/social media campaign.
How to Reach Omar
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