Apartment Building Investing – Michael Blank Podcast with Ira Singer
MB 170: MAXIMIZING ROI IN VALUE-ADD MULTIFAMILY DEALS – WITH IRA SINGER
Announcer: This is the Apartment Building Investing Podcast, with Michael Blank, episode 170. Let’s do this.
Announcer: You’re listening to the Apartment Building Investing Podcast, where we’ll talk about all aspects of buying apartment buildings with a special focus on raising money from others.
Announcer: And now, your host, Michael Blank.
Michael Blank: Hey everyone, and welcome to the show. I am your host, Michael Blank. I’m super excited that you’re here to learn more about apartment building investing. The best way to become financially free with real estate.
Michael Blank: Excited about today’s show. We’re going to talk about construction today, and the different ways that we can build value.
Michael Blank: So actually I have two guests. A construction expert, and someone who’s very, very intimately familiar with ROI based on amenities, and other improvements. So we’re going to really drill in on how to manage a construction company, and different ways you can add value to a value-add deal.
Michael Blank: I also want you to know, I’m being really, really active, or trying to be, on social media. Actually on the Facebook page, and Instagram, the handle is themichaelblank, that’s T-H-E- Michael B-L-A-N-K. So hang out with me there. Say hello.
Michael Blank: I also have a new Facebook group called Apartment Investor Networks. I’ve got several thousand people on there, and so myself, and our mentors, and our advisors, are active there. It’s a great place for you to ask questions. So make sure you check us out.
Michael Blank: Hey, in a couple of weeks, we’re going to be at Deal Maker Live. That’s July 26, 27, in Dallas. We still have a few tickets left. We’re expecting well over 500 people there, and we just added a few more tickets to that. So head over to dealmakerliveevent.com, or just google Deal Maker Live, and try to grab your tickets before they’re all gone. So we’re going to have a huge lineup of multifamily experts there, including Robert Helms, real estate guys Joe Fairless, Michael Becker, Adam Adams, Corey Peterson, and our keynote is Hal Elrod, the author of The Miracle Morning. Super excited to get to know him a little bit more, as well.
Michael Blank: All right. So with that, let’s get right into the show here, to learn about construction and ROI.
Michael Blank: Ira, welcome to the show today.
Ira Singer: Thank you. How are you?
Michael Blank: Very good. Very good. So we’re going to get all into construction, and ROI to get out of that construction. So I’m really excited to get into it.
Michael Blank: Before we get started, just give us a quick background on you and your company.
Ira Singer: Thank you. My name is Ira Singer. I am one of the principals at Mosaic Construction. We are a general contractors in Northbrook, Illinois, with a construction management practice that prefers the design build methodology, where we are at the table, helping with selection of finishes, scope of work, pre-budgeting.
Ira Singer: But we are experienced and adept at working in the multifamily industry, both in asset classes from market rate, to affordable, into senior housing. We’ve worked in student housing. We’ve done, in our geographic, and adjacent to our state, we’ve had value-add. We’ve had repairs, exterior work. There’s a lot of things that we have experience in, from both an exterior, and an interior point of view. We’ve worked in units. We’ve made accessibility choices with our clients. So it runs the gamut.
Ira Singer: I’m looking forward to our discussion, and what I can help your listeners with. So let’s get going.
Michael Blank: Well, your company has obviously lots of experience. Not just multifamily, other asset classes, and not just from one city, but multiple cities, so. And you also have an expanded view of the importance of construction, which sometimes we under appreciate that. And also, sometimes we tend to over delegate that to our property manager.
Michael Blank: One of the things that you were talking to me off the air was, what role should the construction company really play in helping owners acquire the properties, even before they own it?
Ira Singer: So that’s an excellent question. Certainly any client of mine that gets involved in a new asset, they are planning to come in and spend money to make the asset perform better, so we will go with our clients to the physical site.
Ira Singer: If it’s going to have a major overhaul, we will bring an architect with us, so we can provide them with the architect’s eye and training, as well.
Ira Singer: We will ask them about scope of work, and what they think the building needs, because they know. They’re buying a building that, if it needs a fresh face, if it needs major repairs in systems like boilers, or roof, or masonry repairs if it’s crumbling, if the units are old and tired, they have an idea, because that’s their business. I’m there to add color, and help them decide, based on some pre-budgeting, my experience, and all of the sudden they can run the kind of investment that I’m possibly considering. A wholesale window replacement. All the decks and balconies getting replaced. All the areas of the common areas getting carpeting, and painting, and lighting, and exit and emergency lighting.
Ira Singer: So, whatever it is, put together some helpful information. Have my eyes show them things that they may not otherwise see, so also where the role about building inspector, based on my understanding, and building assembly, the envelope, the structure. So we provide that as a way to help our clients take a step closer to us, as we’re a relationship building firm. We’re giving that time, our expertise. They value it. I hope that helps.
Michael Blank: It certainly does. And again, I think we tend to delegate the construction process to our property manager, even though I think what you were arguing earlier is that this may be a mistake in some cases, especially when you’re doing a heavy value-add.
Michael Blank: What do you think, should the owner’s role be, in a construction process? And in that process, what should the property manager’s role be?
Ira Singer: So, many of the projects that we do in multifamily, the owner is not the person who we are dealing with. They are seeing daily updates, because we have a daily update photo, and a written explanation, so they will know what’s going on in the project. They will receive the billing, or maybe the property manager and the owner receive the invoice. But it all depends on what the owner wants to accomplish, in terms of their role.
Ira Singer: I would think they’re better served sourcing deals, looking at their team environment, they’re brand, building their multifamily empire, and letting my construction company, and my construction team, with their expertise, and our trade partners, do the work, so they can do what they do best.
Ira Singer: The property manager is a more centric person on the job. She’s typically the one notify, or he, notifying the residents. We work very closely with the on-site engineer, building maintenance, janitorial, the people who have the most access around the building, because of their master key, they’re always there. They may not be the person best suited for, but we work very closely with the on-site team. So I would say property manager is for access into the unit, and letting the community know if there’s common area things that are going to be in the way.
Ira Singer: Otherwise, we have an on-site project manager that is going to be seen regularly, gotten to known by the community, and he will direct the flow of construction, and deal with the on-site communications between the trades, your residents, and the property manager. So he’s really the central figure.
Michael Blank: Do you typically engage with the owner directly, or with the property manager, who then brings you into a particular opportunity, or deal?
Ira Singer: Both. We have been successful in developing long-standing owner relationships, people that have dozens, hundreds, in some case, thousands, of properties. Some are individual owners that own separate LLCs, and they built 500 units under their belt, and some are big institutional money, 500 unit, class A assets on Lake Michigan, in Chicago. You know? So that’s a different asset than some of the beginning assets.
Ira Singer: But the point is that we manage it. The owner is off-site, on those big ones. With people that I’ve worked with that are more hands-on, they come by. It’s their baby. I get it. That’s okay. But running the project, communicating progress of the project, that’s our job. Making sure that you’re informed with anything that’s coming up, specific to change orders. The owner makes those decisions. The property manager is a facilitator. The property manager is a key, key piece in the success of a multifamily project. Even if they’re only the communicator, that is a key, key piece, so people know if they’re getting windows replaced in their units, when that is happening, if their hallway is being re-carpeted, or painted, the residents know that that’s happening.
Ira Singer: We’ll put wet paint signs up, but the communication piece is the property manager. It’s a key piece.
Michael Blank: What do you see working with a regards to implementing a large scale, value-add project? So on the extreme case, you throw everybody out, and you renovate everything, and you start from scratch. Which is, very few people do that, because, well, there’s no income coming in during that time.
Michael Blank: The other, I guess not extreme, but the other end of it, is that you just do it on when someone moves out, you renovate the units at that point.
Michael Blank: Kind of, what have you seen working, with regards to, especially when you’re implementing large scale, value-add opportunities?
Ira Singer: Both ways, again. We have been the benefactor of a building being emptied, and we have full access to do full, full unit makeovers. Those are not refreshes. Those are walls are coming out. Systems are changing. Drywall is being replaced. Flooring is patching in where walls were removed. So the person can’t live through that. So we’ve done where there’s three or six of them empty, and we’re working in a very production-based run of we’re doing three, then we’re starting three more. So we’ve got six under construction. And then as soon as we give back the first three, we take another three, and it’s a production.
Ira Singer: Or, we’ve come into units that are occupied, done very fast, quick kitchen refreshes with a vanity, and a mirror, and a strip light, and a floor overlay, with a sheet good. We do that. That’s a day or two, and the people are living in their kitchen while they get new cabinets. They keep their fridge on plug. They get help from the building to move some stuff into their living room. We put up plastic, and they don’t have their kitchen for two days, but when they get it back, they’ve got a beautiful kitchen, and they’re living there.
Ira Singer: When you’re talking about common area things like hallways, obviously the people are within the building. Window replacements, we’re coming into units every day. There’s a schedule. They have a certain amount of preparation. They’re participating in the changeover in their unit, whether they own it, or they’re a renter.
Ira Singer: In multifamily, I work in both association living, where there’s a property manager who is hired by the association, and, of course, your type of property manager, where you own the asset, and the property manager works for the owner, versus the property manager working for the unit owner.
Ira Singer: So I’ve worked in both sites.
Michael Blank: Typically we work with third-party managers, and we defer to them on a lot of things. But when there’s a very heavy lift, it may make sense to bring in a construction like yours, and at least get another bid to what the property manager company is quoting.
Michael Blank: So let’s say I want to hire a construction company. What’s kind of your advice about how to hire, and then kind of manage the contractor, from an owner perspective?
Ira Singer: Well, so thankfully, we are a referral business, so we continue to be fortunate in developing relationships where people are calling us. We do a good job of outbound marketing, but they find us. And when they find us, and they understand, or we understand better what they want to do, it helps us present the construction proposal, either as design build, if they literally have a dream, but they don’t really know where to start. We can walk them through pre-budgeting, preliminary schematic design, ultimately permit drawings that can, and bid it out, and manage it every day, and see it from design, through construction, to punch list, and done. That is obviously our preferred methodology, because we’re adept at that.
Ira Singer: When you’re talking about third-party management, it’s just the communication piece. We have to be good at communicating. We have to be good at setting expectations. We have to be good at closing the loop. Construction has open items. Even though we’ve finished the window in the unit, and we’re on to the next one, there might be a screen that was torn. We have to go back into that unit, and repair that screen that came off the truck that way. Those are important, little tidbits of information.
Ira Singer: The more that you can shift, I think, to a construction partner, the more that we can run the project, understanding the people are living there, understanding that there’s inconvenience. But also understanding the flow of construction, and what good communication, both with us to your property manager for the residents’ sake, but also from us to the property manager and the owner, specific to the project progress, so you really feel like you’re informed, and you know what’s going on there every day. That’s really important.
Michael Blank: What are some examples of construction gone wrong? Do you have any stories you can share?
Ira Singer: You know, I would say that construction gone wrong is all about planning. You’ve heard the expression, people don’t plan to fail, they fail to plan. So we have been brought in to rescue situations, if you will, where our clients bid us against somebody, chose another contractor who was less expensive, and called us in three weeks to six weeks after they had started, and of course, it was construction gone wrong by the person that we replaced, the company we replaced.
Ira Singer: We’ve had that happen in three different types of assets. So we know that it’s going to be more expensive. There was failed inspections. There was bad communication. There was poor execution of work, and all of that.
Ira Singer: One of those things is terrible. Three of those things happening is the project is off the rails, and the G.C. needs to be let go. It’s a hard decision for the owner, but I would say that’s construction gone wrong.
Ira Singer: I’m a planner, so I put things in place every day. Trade partners being where they’re supposed to be. Project managers managing. There’s lots of things that happen in construction that can move the schedule because of material defects, weather, the person wouldn’t let us in the unit, the property manager forgot to send out the notices. There are things beyond my control that would all be under the umbrella of it didn’t go as planned.
Ira Singer: Thankfully, Mosaic Construction is not involved in any type of disaster construction. We have a wide swath of project types, and they’re for a bunch of different brands of construction, and a bunch of different states of construction. There’s a punch list running throughout the project, to clip it down, and make sure that we are closing the loop on open items, but let’s call construction for a major multifamily heavy lift, that is like a circus. If you think that it’s going to go on without a few accidents, things hap … Not accidents like people got hurt, but the schedule is affected. That’s for sure.
Ira Singer: What I would say is, the communication piece, if you’re not communicating, that’s where the schedule goes off the rails.
Michael Blank: Yeah. Communication is key. You keep mentioning it. I think that’s so, so important. The reason we even contemplate construction, is we want to do a value-add deal, meaning we want to create value. We want to do that by effectively increasing the net operating income, which we can do by increasing rents, and/or decreasing costs, in so doing will increase the value of the property. What we love to do, is then do a cash out refinance, return either all, or a part, of the investor capital, and then hold the building kind of forever.
Michael Blank: So I want to kind of talk about different ways that we can do that. What are some of the major ways, the biggest ways, to achieve ROI with a multifamily project, from a construction perspective?
Ira Singer: I wish there was one answer where I could tell you that there is one thing that is the sure thing. I think a matter of the actual condition of the asset you’re buying. So if the siding is terrible, but it’s watertight, but it’s old, and faded, and dented because it’s aluminum siding, that should be replaced. That is a major, major piece of your asset’s performance, is how it looks on the outside.
Ira Singer: So the nerd in me says it’s about the building envelope, and the water tightness. The fact that you’ve got a solid roof. Good guttering. Windows and doors that operate, and don’t leak, that are efficient. Maintenance-free exterior. And then, if you have that, certainly the inside is where everyone focuses. But if the building is not good from its foundation to its roof, your multifamily asset is not a healthy asset.
Ira Singer: So we have to pay attention to that. And although those have good return on investments down the road, and you get to sell the property better because your complex has new roofs, or your building has new windows, or a new door system, that’s certainly not the sexy ROI that you want to talk about, when you’re talking about the pretty stuff, which has higher ROI, and more impact to the renter resident.
Michael Blank: What are some of the ways, before we get to increasing rents, but what are some of the ways that we can decrease expenses? For example, I don’t know, reducing some of the maintenance, or even maintenance-free. What are some of the upgrades you’re seeing that actually help with the expenses?
Ira Singer: So on the exterior, even if you’re in a Florida climate, you still have challenging weather. So the wall, whether it’s siding, maintenance-free vinyl, or cement board siding, trim boards that are not really wood, but are a composite product, vinyl-clad, aluminum, or vinyl replacement windows, for maintenance-free. All of these things are lowering your operating costs, increasing the performance and the efficiency. So those are two good things to do.
Ira Singer: As far as HVAC, the other main components of operating within a building, so you’ve got energy and heat loss through the windows and doors. You can increase the efficiency, of course, through your HVAC systems. And then insulation in attics is a third piece that will help. That’s also not sexy, but it helps lower your operating costs over the long term investment.
Ira Singer: But HVAC is common. Whether it’s an older building, and it’s got a boiler, and it’s not efficient, it’s not high efficiency. Whether you have small units within each apartment. You know, a little AC chiller in a closet, if they’re not efficient.
Ira Singer: Yes, you’re always going to spend money to save money, because you have to replace older stock that isn’t performing well. I think you can’t just broad-brush and say you replaced the furnace, that’s a smart return on investment. If you’re doing a short term hold, and you’re flipping, you’re not going to necessarily replace all the systems. You’d be more on the pretty stuff, versus the guts of the stuff. Because you can’t spend that kind of money if you’re going to be looking to re-position the asset, to dispose of it, after you make your construction.
Michael Blank: Another way that we were able to reduce expenses, we’ve been working with a company called Save Water Co, which basically, if you’ve heard of those, as well. They will basically go through and install water-saving equipment. And not only that, but they’ll monitor everything, on a quarterly basis.
Michael Blank: So we’ve had some pretty good success with them, as well. Just ways where you can, and this is an example of this, you’re putting money into a project with an expected ROI.
Ira Singer: Yes.
Michael Blank: And we talked about that. So you’re saying focus on the outside, because a lot of times, it’s a first impression. When we go into a property, and we have a heavy value-add, we’ll focus first on the outside. Make the outside, just the whole place, look great. And then we’ll start focusing on the inside. The units.
Michael Blank: So I want to talk about the inside of the units, a little bit. I want to bring a guest on the show. This is Marc Rutzen, CO of Enodo. And Enodo, he’s the CO of Enodo, and they’ve really kind of made, I guess a science project out of studying the analysis of what kind of amenities equal what kind of rent. Right?
Michael Blank: So we’re talking about going in there, and we’re doing a bunch of stuff. We’re upgrading the cabinets. We’re doing this, that, and the other thing. It all seems like, intuitively, it makes a lot of sense. But I want to get a kind of feedback for Marc to kind of go through some of those increase in amenities, and kind of tell us, hey, if I do this, it would result in a rent increase of that.
Michael Blank: Hey, Marc. Welcome to the show today.
Marc Rutzen: Hey, thanks for having me.
Michael Blank: So give us a little bit of outline of some of the amenities, and kind of what you’re seeing in increase in rents, and maybe some differences between markets, and things of that nature.
Marc Rutzen: Absolutely. And just to provide a little bit of background of what our platform is doing for statistical analysis of amenities, and amenity pricing. What we do is, we look at listing data across every different market across the U.S. And holding everything else constant, except one amenity at a time, it’s basically like a souped up regression analysis, tells you, what is this amenity going to do, if I add just that to my building? Nothing else, but just change it. Like do the granite counter-tops. I do the hardwood floors. I do the roof deck. What are those things incrementally going to add?
Marc Rutzen: The question’s a little bit more complex than just, okay, this adds $34 everywhere, across the country, because markets are very different. You go into a C market, with a C property, you’re definitely not going to do the granite counter-tops, because you’re never going to get the ROI for that.
Marc Rutzen: So it’s impossible to say, on a blanket statement, that these things will add value absolutely everywhere. I think what’s interesting about it, is how things do vary on a national basis, and between markets.
Marc Rutzen: So, for example, look at the premium for a rooftop deck. Nationally, it’s about $32, across the entire country. So if you have a property, and got an obtuse roof, you’re going to add a rooftop deck for residents to access, $32 is what you’d expect nationwide.
Marc Rutzen: But if you did this in Miami, it’s actually closer to $45. That’s because, well obviously it’s a pretty nice area to be outside. Sunny, and they expect to do a bit of partying in Miami, so I can imagine there’s a bit more of a premium for that.
Marc Rutzen: But then you look at stuff like a pool, right? Having a pool on your property in a place like Miami, nice climate, everyone expects to have a pool. And, sure enough, you look at the listing data, 65% of buildings in Miami actually offer a pool to their residents. It’s more expected. But statistically, the premium for that is actually only $30.
Marc Rutzen: Whereas you look in Chicago, where only a quarter of properties have a pool, the premium’s actually closer to $50. It’s very much a supply and demand thing, and something that is a function of renter preferences. Where, a lot of cases, things are a prerequisite, rather than a premium.
Marc Rutzen: Ira was talking about making sure the building envelope is actually secure, and there’s no water seeping in. I mean, these are prerequisite items. In some markets, things that you would think of as a premium, like having a pool, are more prerequisite than they are an actually premium. Miami being one example.
Marc Rutzen: Some of the things that have kind of jumped out as trending in amenities, we’ve seen a lot more services being offered. So things like pet daycare, or dog walking service. Absolutely anything that deals with animals can command a decent premium.
Marc Rutzen: Car sharing and rentals, in big markets, that’s starting to be more and more prevalent. We saw recently, we polled … So we do these studies with the National Apartment Association, where we provide them some of our data from our listings, and our algorithms. We polled in Denver recently. We saw from just the first time we worked with the National Apartment Association back in 2017, between 2016 and ’17, bike storage, 18% frequency among properties in Denver. Now, it’s up to about 33% frequency in the same market.
Marc Rutzen: So it’s the prevalence of these amenities being advertised in listings, and offered, that talk.
Marc Rutzen: Similar with credit card payments. Accepting credit card payments. That’s something that an immediate value-add, and actually doesn’t cost you very much at all to do. 18% was the prevalence, in Denver again, before when we did the last study, which was 2017. Now today, it’s 26% of properties are offering that.
Marc Rutzen: So a lot of times, it’s not always physical things you have to do to the property, it’s service oriented. It’s creating a better experience for residents. And a lot of the premiums come from those things.
Ira Singer: Can I chime in, for a second, on that? Because we have, I agree with you, Marc. That’s excellent points about the service. We have built pet areas. We have built out bike rooms. We have built more storage in the building. We have installed the guts for a package locker amenity room that is installed with the locker company’s product, and they handle the voice data connection. But there still is a construction to ultimately have them look nice, where they get placed. So we have built out real deal package rooms, where there’s 50 packages coming in the building every day, and it’s chaos.
Marc Rutzen: Right.
Ira Singer: So that’s a trend that is only going to continue to have more value, as more people shop online, and buy more that comes to their apartments.
Marc Rutzen: Absolutely.
Michael Blank: Yeah. I mean, my key takeaway is a couple fold. I think, even for us working with someone like you guys, Ira, Mosaic, and getting you guys involved, and at least, at a minimum, having our property manager take a look at an outside construction company, is key.
Michael Blank: And again, that’s something that we just have deferred to the property manager. But when you’re deploying two, three million dollars, man. I mean, you really have to have someone take a look at it. So I want to thank you for coming on here, and talking to us about the importance of paying attention to the construction.
Michael Blank: Ira, where can people connect with you, and find out more about Mosaic?
Ira Singer: The easiest way is online. Our website is mosaicconstruction.net. I can’t tell you how I wish it could just be mosaic.net, but it’s mosaicconstruction.net. Or Ira, I-R-A, @mosaicconstruction.net.
Ira Singer: That’s the easiest way, the best way, to reach me, and I’d love to talk with your audience, and your listeners, about projects that are not a hundred thousand dollars. You’re going to hire a local tradesman. You’re talking about a makeover to the community. A major investment. Interior, exterior, common areas, amenity areas, building envelope.
Ira Singer: It doesn’t have to be with architecture, because you can do window replacement without that. And, if it’s a big enough asset, that is a large-scale replacement.
Ira Singer: But we’d love to meet some of your listeners, and really appreciate the opportunity to talk about something that I’m passionate about, which is multifamily construction, and the value of what we bring to the owners, and to the renters, and the residents who get to live there, who get to use some of the amenity spaces that we create.
Ira Singer: Marc, I’d love to connect with you on a local level.
Marc Rutzen: Yes.
Ira Singer: To get that done. Just really enjoyed myself. Thank you so much.
Michael Blank: Yeah. And Marc, thank you for being on the show, here. One of the things I love about Enodo, and it’s spelled E-N-O-D-O, it’s a software system that we use, as well. Data analytic software system.
Michael Blank: And like you said, the amenities really vary widely, not only by city, but by sub-market, as well. So one of the things we can do, is we can take a property, and we can say, and then we can meet with someone like an Ira, saying, okay, is it worth putting in granite counter-top, or are we not going to get an increased rent? What else can we do? And you’re getting the data from other properties in the market. It kind of breaks down, hey, we’re going to put $5000 per unit in, and we think we’re going to get $100 rent bump, but how does that break down? Oh, it’s $15 for the cabinets, $25 for the … And so, I just love what you guys have done with that.
Michael Blank: How can people find you, or connect with you?
Marc Rutzen: Yeah. Check us out. There’s actually a free trial available if you go to E-N-O-D-O-I-N-C.com, Enodoinc.com. Check out our free trial, or email me, Marc, M-A-R-C, @enodoinc.com, and I’m happy to set you up with a demo with our team. Walk you through what the software’s capable of, and go from there.
Michael Blank: That’s awesome. Thank you both for being on the show.
Marc Rutzen: Thank you.
Ira Singer: Thank you, Michael.
Michael Blank: So key takeaways for me is focus more on the construction. And again, even for ourselves, we tend to delegate that to the property manager, and honestly, a good property manager makes construction their core competency. It’s what the value that they provide.
Michael Blank: But not every property managing company can do that. And there are great property management companies out there who can really manage a stable property very well, but they don’t really have a knack for construction. In that case, manage the construction yourself. Hire someone like Ira, at Mosaic Construction, and really be more involved in that.
Michael Blank: And when you’re deploying 500, a million dollars, 1.5 million dollars, you have to be engaged during a value-add process. It’s not a passive investment. It’s very much an active investment, and you have to be involved. Even if you’re using a property manager, you need to get regular reports. Where are you with project plan, with time, and with money?
Michael Blank: So certainly reach out to Ira. Any kind of construction project over $500 thousand in the U.S., he’ll take a look at. He’ll tell you if there’s a fit or not, quickly. So reach out to Mosaic Construction.
Michael Blank: With regards to the amenities, okay. So definitely work with your property manager on determining what should we do? Because, for example, there are certain markets where replacing cabinets, or putting in stainless steel appliances, will not get you more rent. So you’ve got to be really careful about not over-improving the asset.
Michael Blank: Your property manager is going to be the best bet, but definitely look at Enodo, that’s E-N-O-D-O. We’ve used it on several of our properties, and cross-referenced it a lot with what the property manager is telling you. If it’s the same, that’s great. Sometimes, Enodo will uncover other things. Like a lot of the services that you just heard about, that you might get another 15, $20 rent bump.
Michael Blank: Now here’s why this is important, okay? This is a fundamental way that value is being created. Let me just go through a simple example. Okay? And I’m going to have to wave my hand a little bit, because this is a podcast, and if you’re watching this in video, then, by all means, you can follow along in the spreadsheet that we have here.
Michael Blank: But let’s say 100 units. Okay? I want to give you an example of what a relatively minor increase from rents, the value that can create is actually staggering.
Michael Blank: So let’s say you have 100 units, and your improvements per unit is $5000 per unit. That’s a total renovation budget of $500 thousand. Okay? So it’s just a medium value-add deal. It’s not super heavy, not super light.
Michael Blank: And let’s say, in order to do that, your property manager, and maybe Enodo, tell you that you can get, cumulatively, a rent bump of $100 per month. So if you have 100 units, that’s $10 thousands per month, $120 thousand per year. That’s your increase in net operating income, is 120 grand.
Michael Blank: Now, there’s different ways to look at this RIO analysis. Kind of three ways. You can do a cash -low ROI. You can do a break-even, and you can do a value based ROI, as well. Take a look at all three of them.
Michael Blank: So for example, a cash-flow ROI. I can take the NOI, the increase, the $120 thousand, I can divide it by my construction budget of 500 grand, and I get 24% ROI. That’s not bad. Right? And that’s just kind of the first year. That NOI stays with the property, even after you’ve paid that construction off. So that’s pretty amazing.
Michael Blank: The break-even is 4.2 years. Okay? In other words, 4.2 years, I will get that entire $500 thousand that I paid in construction back.
Michael Blank: Increase in value. If the cap rate is, let’s say, 6%, so the increase in value is the net increase in NOI, which was $120 thousand, divided by the cap rate. In this case, 6%. So NOI is $120 thousand divided by 6%. That’s an increase of value of $2 million of this property, which is amazing. It’s a 400% return on that $500 thousand investment.
Michael Blank: So you have to decide for yourself what kind of ROI parameters you’re looking at. In this particular example, I don’t care what kind of metrics you use, it’s a good deal. Right? If you can spend five grand a unit, and you get $100 of rent bump out of that, clearly, by any kind of measure, this is a great ROI. And that’s the way you’ve got to think about this.
Michael Blank: So the key components of this is make sure you have someone who can manage the construction on time, and on budget. That’s important, because if you can’t do that, you’re not going to realize the ROI.
Michael Blank: And number two, you really need to understand, you have to make the increase in rent real. And we do that by looking at rent comparables. By talking to the property manager who helps us with the rent comparables, we actually drive those rent comparables. We’ll look at CoStar reports. We’ll drive them. We’ll secret shop those. We want to know, if someone’s getting $100 more in rent, what do they have that our property does not have? If they have a pool and a tennis court, and we can’t build a pool and tennis court, and everything else is the same, we might not be able to get that $100. Right? So how does that $100 break down?
Michael Blank: And using a data analytics tool like Enodo, to really get a handle on that, so that a $100 increase becomes real. We get a lot of people that submit deals to us, even our own students, sometimes, or outsiders, who say, “Hey, why don’t you partner with us?” And we say, “Great. We have this great Deal Desk program where we partner with people.” You can find out about that at themichaelblank.com/partner. But one of the key questions we ask is, “How do you know you can get $100 rent bump?” Okay? And so you better have spoken with one, if not two, property managers. You should have looked at rental comps. Okay? And if you’re using something like Enodo to kind of substantiate your claim, the better yet.
Michael Blank: There’s nothing worse than getting into a deal with a $5000 per unit renovation budget, and then, by the time you’re done, you can only get a $40 rent bump. That will really, really kill your numbers.
Michael Blank: So, again, so those are the kind of … There’s a lot of, for these value-add deals, they look great on paper. You can create a lot of value through them, but the risk is also much higher. Right? And so you really want to try to avoid making these major mistakes.
Michael Blank: So if you want to really avoid major mistakes, and you want to accel your process, consider looking at our mentoring program. It’s at themichaelblank.com/mentor. You can schedule a free appointment with us to see if it’s right for you. But it’s really meant for people who want to accelerate their goals, and they want to do bigger deals faster, and they want to avoid the expensive mistakes.
Michael Blank: Anyway, I hope that was valuable for you guys. Manage your construction. Don’t make it passive, and really substantiate your rent increase, and your ROI.
Michael Blank: Hope you enjoyed that. Hope to see you at Deal Maker Live. Catch you next time.
Announcer: Thanks for listening to the Apartment Building Investing Podcast, with Michael Blank. For more free podcasts, articles, and videos, go to themichaelblank.com. There you can also download the free E-book, The Secret to Raising Money to Buy Your First Apartment Building. Until next time.