In this episode, we're joined by Ellie Perlman, founder and CEO of Blue Lake Capital. Blue Lake Capital specializes in multifamily value-add investing.
On today's show, we discuss how Ellie approaches multifamily value-add in the COVID-19 era including underwriting, asset management, and rehab on demand.
Blue Lake Capital is a multifamily investing company that focuses on Texas, Florida, and Georgia. They find the deal and sign on the loan with capital from investors. After closing, the property is renovated to raise the value. The property is generally sold 3-5 years later.
Ellie always new real estate was the best way for her to be successful and provide for those close to her, but she didn't know where to start, especially without enough money to go solo. Education was the path she chose to get there, and after graduating law school, Ellie began working for a firm that specialized in real estate. After a couple years, she felt like she should take a more active approach to real estate so she got into property management. After 4 years in property management, Ellie moved to the U.S. to get her MBA at MIT. After graduating from MIT, she founded Blue Lake Capital.
Operating a Lean Business
Even with a big portfolio, it's still possible to operate a lean business with few employees. Using technologies to make sure you aren't over-hiring is important to Ellie. Ellie likes to go line by line to determine where costs can be cut and what investments can be made to justify rent increases.
COVID-19 Acquisition Strategy
For the first 45 days or so, Ellie hit pause on acquisitions to take the temperature of the market. After two months, Ellie and her team felt comfortable with the numbers, so they began searching again with some slight changes to criteria. One new change is that Ellie is now more focused on the area than ever before, including the industry breakdown of media household income, infection rates by area, and conservative underwriting.
Ellie already had very conservative underwriting, but there are some changes there. The value-add process now begins in month 6-12 instead of immediately and they don't project rent increases until year two. Ellie has now began doing "renovation on demand". This includes the tenants choice between renovation and a class/unrenovated unit. If/when the tenant says they want a renovated unit, Ellie and her team can do this in less than two weeks. (13:18)
This "renovation on demand" concept requires lots of planning and constant contact with contractors and property managers. It's necessary to systematize this process to be successful. At the end of the day, Ellie is looking at the demand of the markets as a whole to determine if renovation on demand would be a wise decision, versus just renovating the entire building immediately. Choosing between these two options does influence the NOI, because units that weren't renovated are going to pull down on the projected NOI.
Generally speaking, IRR is lowered the longer the property is held. However, sometimes these properties may need to be held longer to achieve the ideal sales price. The ROI on the renovation can be hurt, but holding for an additional 6 months can allow this to improve as the premium rents come in.
Coaching and Education
Ellie is a huge believer in continued education, especially when you're dealing with someone else's funds and savings. Rapid scale and success can be achieved without a coach, but costly mistakes can be made and the process would be very cumbersome in the beginning. These coaches can help take your business to the next level, surrounding yourself with experienced people.
Being focused on value-add, Ellie loves cost segregation. It's depreciation on steroids! Especially when combined with 100% bonus depreciation, this can be powerful for investors, generating a loss on the K-1.